Here at the Fool, we pay plenty of attention to share repurchases. Buyback baron Loews (NYSE: L ) , for example, has shown how a disciplined and opportunistic approach to repurchases can create real value for shareholders. But what about share issuances?
Companies issue new shares to raise cash all the time. This equity financing mechanism is one of the benefits of being a public company. The downside to raising equity is that all shareowners have their interests diluted, meaning that each holder suddenly has a smaller claim to the firm's future cash flows.
It would be a mistake to broadly characterize buybacks as shareholder-friendly, and share offerings as shareholder-hostile. Scotts Miracle-Gro arguably dug itself a hole by issuing debt to repurchase shares at much higher prices last year. However, Chesapeake Energy (NYSE: CHK ) has a history of creating massive shareholder value while raising additional equity along the way.
On Monday afternoon, two proposed share raises prompted me to raise an eyebrow or two. Let's look at each offering.
A high Haynesville hurdle
First up, we have GMX Resources (Nasdaq: GMXR ) . Before the Haynesville shale started heating up, GMX was a relatively unknown oil and gas company targeting the Cotton Valley play in East Texas. Like Atlas Energy Resources (NYSE: ATN ) in Pennsylvania's Marcellus play, GMX suddenly finds itself sitting on premium ground.
That's the theory, anyway. GMX is just beginning its Haynesville/Bossier drilling program this quarter, with four rigs going to work. Early next year, the company plans on adding two Flex rigs, courtesy of horizontal drilling dynamo Helmerich & Payne (NYSE: HP ) .
I've never had much of a taste for GMX's aggressive drilling programs. In 2006 and 2007, the company spent more than three times operating cash flow, and 2008 is not looking much different. Discretionary cash flow is projected to come in around $100 million, while the budget calls for $271 million of capital expenditures.
As a direct result of this funding gap, the share count has ballooned since 2003, and debt as a percentage of total capital has run up to a multiyear high. Whereas low-cost leader EOG Resources' (NYSE: EOG ) debt-to-capital stood around 14% at the end of the first quarter, GMX's had hit 45%.
One might think that the share offering would be used to moderate that leveraged capital structure, but GMX states that it intends to only "temporarily repay outstanding indebtedness," and then to reborrow periodically for future capital spending purposes. I don't see GMX getting any less aggressive going forward, so long as investor appetite for Haynesville players holds up.
The new equity raise of 2 million shares (plus over-allotments) will dilute shareholders by more than 12%. This sets a significant hurdle for value creation on a per-share basis. GMX got lucky once by landing on a hot shale play. The company now appears to be pressing its luck by continuing to spend far more than is coming in the front door.
Is it just me, or does Canadian Solar (Nasdaq: CSIQ ) have one of the most unfortunate stock tickers around? Shareholders are definitely feeling a bit of a lurch today. Yesterday morning, the firm put its best foot forward, raising the midrange of revenue guidance by 13%, and reiterating 2008 and 2009 guidance. Shares rocketed higher on the news. Then, after hours, the company took advantage of investors' fresh enthusiasm by launching an offering of at least 3.5 million shares.
Unlike GMX, I believe Canadian Solar is well-known among my readers, but if not, you can get caught up via my past coverage here, here, and here. While I'm cautiously optimistic about the firm's progress in the realm of upgraded metallurgical grade silicon -- a means of sidestepping the polysilicon supply shortage -- I'm also concerned about the firm's dependence on continual capital infusions. This has nothing to do with Canadian Solar specifically, and everything to do with the cash squeeze that solar middlemen find themselves in today.
Just like the GMX equity raise, this is a double-digit dilution. More importantly, I don't believe the company is done raising money this year. Canadian Solar acknowledges as much in its new prospectus. The firm is cash flow-poor, but still pursuing ambitious growth, so you should expect it to keep tapping American investors for cash. There may be a whole bunch of money currently chasing all things green, but I'm personally not interested in chasing this particular opportunity.