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The recent run-up to the 1,000 mark on the S&P 500 has proved too juicy to pass up. At least three oil and gas firms have stepped up this week and offered fresh shares to investors who suddenly seem to have regained their risk appetite. I find it all rather unappetizing.
Petropuke is more like it
Petrohawk Energy (NYSE: HK ) is certainly no stranger to anyone following the sickening swell of dilutive equity financings this year. In what I can only describe as a pathetic move, the company raised its estimate of ultimately recoverable reserves from its Haynesville wells to a level exceeding that of peers like XTO Energy (NYSE: XTO ) , and immediately hit shareholders with a 22-million-share placement.
Now, in conjunction with the release of its second-quarter results, Petrohawk is out selling an additional 25 million shares. That takes the share count over 300 million, compared to 171 million at the end of 2007. Management must like a challenge. It's tough to create significant per-share value when you increase your share count by 75% in 18 months.
I'm reminded of the Monty Python character Mr. Creosote, who vomited all over a fine dining establishment in a classic scene from The Meaning of Life. In response to the offering, shareholders spewed the shares everywhere, taking them down 9%. In other words: Enough is enough.
The pain at Plains
Another uncomfortable situation has long been simmering over at Plains Exploration & Production (NYSE: PXP ) .
A bit over a year ago, the Houston-based firm jumped into a joint venture with Chesapeake Energy (NYSE: CHK ) in the Haynesville shale. In a deal similar to the ones Chesapeake later hammered out with BP (NYSE: BP ) in the Fayetteville and StatoilHydro (NYSE: STO ) in the Marcellus, Plains agreed to carry $1.65 billion worth of Chesapeake's share of drilling costs across a multi-year campaign. The market for oil and gas began to implode almost immediately thereafter.
With conditions as rough as they've been, Plains has been busily working out a way to dial back on its funding obligations in the Haynesville.
First, the firm negotiated a backout clause back in March, which would allow Plains to cut both its drilling carry and interest in the play in half. At the time, that seemed like a pretty extreme option, with little likelihood of being exercised.
Plains has now scrapped that agreement, and amended its deal with Chesapeake yet again. The firm has now agreed to accelerate its cash payments to Chesapeake in exchange for a 12% reduction in the balance due. That means Plains needs to cough up $1.1 billion by late September, hence the offering of 15 million freshly minted shares.
I'm somewhat perplexed that Plains, just as it resolved its funding overreach, simultaneously elected to increase its capital budget from $1.05 to $1.4 billion, representing a 33% bump. It looks like I'm not the only one, either. Shares got hammered yesterday.
Like a Swift kick to the groin
Swift Energy (NYSE: SFY ) rounds out the trio of dilutive offerings. You may remember this E&P as the one that dropped its rig count to zero earlier this year. That is just unheard of for an oil and gas company of any size. As someone who believes that doing nothing is a hugely underrated capital allocation tactic, I applaud the decision to defer all drilling until market fundamentals improve.
I also note that Swift isn't exactly a model E&P, judging by the firm's excessive debt levels and staff layoffs. This share offering represents an attempt to address that leverage issue. Given Swift's very modest share dilution over the years, I'm not going to lump the company in with serial offenders like Petropuke -- er, Petrohawk. Let's hope management learns from this painful experience and keeps debt levels at a more conservative level in the future.