A Share-Raising Experience

I'm glad I'm not the only one exasperated by these endless equity raises.

Here are some of my Foolish colleagues' responses to Valero Energy's (NYSE: VLO  ) follow-on offering last week:

  • Chris Barker: "Wall Street is living it up, but I fear shareholders will suffer the hangover."  
  • Matt Koppenheffer: "The timing and price of the stock offering is just awful, particularly when we consider the massive amount of stock the company bought back at much higher prices over the past few years. Buy high and sell low? Sounds like management has no idea how much Valero's equity is worth"
  • Joe Magyer (via instant message): "Why don't they just kick my dog while they're at it?"

So it's not just me. Phew.

Time, then, to highlight a few of the week's lowlights from within the energy sector.

On Tuesday, Stone Energy (NYSE: SGY  ) offered up a pile of shares to help pare its bank debt. This offering, which will expand the share base by up to 20%, is a direct outgrowth of the debt dilemma I outlined here.

The following day, owners of ATP Oil & Gas (Nasdaq: ATPG  ) , which I've championed as an underdog of the deepwater, were treated to another share top-up to the tune of 23% or so initially. The offering size was increased Thursday night, spelling maximum dilution of 28%.

You can hardly accuse ATP of being unimaginative in its approach to deleveraging. The E&P has sold a chunk of reserves to France's EDF, and monetized some infrastructure by partnering with GE (NYSE: GE  ) . The firm's even worked out a deal with Diamond Offshore (NYSE: DO  ) in which the driller will take an overriding royalty interest in lieu of cash. Despite these moves, the company still felt compelled to issue a big slug of shares at these low prices.

If this stock's asset value is nearly as high as some on our dedicated ATP message board believe it to be, then the offering is really a terrible blow. It doesn't give one much comfort with regard to the company's ongoing monetization efforts, either. I'm holding onto my outperform rating in Motley Fool CAPS, but I'm not happy.

Last but not least, EV Energy Partners (Nasdaq: EVEP  ) offered up some fresh units Wednesday in order to pay down debt and help fund a small acquisition. Assuming a full over-allotment exercise, unitholders of this master limited partnership are looking at a greater than 30% dilution. I don't follow EV, and certainly don't plan to.

Fool contributor Toby Shute doesn't have a position in any company mentioned. Check out his CAPS profile or follow his articles using Twitter or RSS. The Motley Fool has a disclosure policy.


Read/Post Comments (3) | Recommend This Article (12)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 12, 2009, at 2:44 PM, Swizzled wrote:

    Thanks for the article.

    One thing that I think you should mention is that while the dilution is unfortunate, it was already more than reflected in the share prices of these companies.

    So yes, the value per share has decreased by the amount of the dilution. But that value per share in many cases is still many multiples of the current share price even with the dilution factored in.

    I am an ATP shareholder and do a lot of the writing on the ATP board that you refer to. I thought the company could manage without having to issue new shares, but I far prefer this to having them risk the company.

    In the case of ATP, the company founder still runs the company and owns 20% of it so I'm sure this decision was made carefully.

    I would also say that I believe that this signals that ATP intends to keep a 100% working interest in the very significant Telemark property rather than sell off a piece of it. Enjoying all of the future cash flows from this will make up for some of the dilution. You will notice that Capital One has upgraded ATP on the news.

    I believe that after this dilution, that the net asset value per share at today's commodity prices is around $70 per share vs today's share price of $8.25. I expect this value to grow going forward as commodity prices increase over time. If the dilution makes sure ATP is around to enjoy this increase then it is worth it.

    My details on the valuation are on the ATP Fool board if anyone would like to challenge them. I welcome the discussion.

  • Report this Comment On June 12, 2009, at 3:27 PM, audaciter wrote:

    Of course you guys want me to hold on. That way you can all get out while some value remains in the stock. Since nothing bars the ATP princes from pulling the same stunt tomorrow, I'm bailing.

  • Report this Comment On June 12, 2009, at 4:14 PM, Seano67 wrote:

    It's a drag. Prospect Capital has had three shareholder dilutions in the past 8 months. Now I love the company, love the management (and the fact that all they do is buy in to their company, they never sell), I feel they've got a fantastic future ahead of themselves, and many people who are much, much smarter than me seem to share in that assessment....however I've got to say that these dilutive offerings are really beginning to tick me off.

    I mean once? Ok. That's totally understandable. Twice? Well, that's beginning to push it. Three times? I'm sorry, but that's just over the top.

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