Petropavlovsk PLC rights issue explained: why are the shares down 65% and what are the nil-paid rights worth?

If you’re a Petropavlovsk PLC (LON:POG) shareholder, you have noticed the value of your shares fall from around 15p to 5p when markets opened today.

What’s happened?

Yesterday (26 Feb) Petropavlovsk shareholders voted to approve a rights issue, which will raise $235m that will be used to repay some of the firm’s $1bn net debt.

The rights issue is a 157 for 10 issue at 5p per share, which means that for every 10 shares you already own, you have the right to buy 157 newly-issued Petropavlovsk shares at a price of 5p per share.

The reason the existing shares fell in value today is that the nil-paid rights were admitted to trading and the existing shares started to trade ‘ex-rights’ — i.e. buyers of the shares from today do not have the right to buy new shares in the rights issue.

What are my choices?

In a rights issue, you have the right, but not the obligation, to buy new shares. So there are two choices:

1. Take up your rights

If you are happy to put new money into Petropavlovsk in order to maintain the size of your shareholding (as a percentage of the total share count) then you can buy some or all of the shares you are entitled to.

Your have the right to buy 157 new shares at 5p for every 10 Petropavlovsk shares you own. You don’t have to buy the full allocation, however — you can just buy part of it if you wish.

For every right you don’t take up, you will be entitled to receive payment for the value of your ‘nil paid right’ — the unusued right to buy a new share, which someone else can then buy instead.

2. Sell your nil-paid rights

Nil-paid rights are, as the name suggest, rights for which you have not paid. However, these do have a value and if you don’t want to take them up yourself to buy new shares, you can sell them. (This is normally handled automatically by your broker if you don’t take up your nil-paid rights within the specified timeframe — phone and ask them if you’re unsure of the details.)

My calculations suggest that the value of each nil-paid right in this rights issue is approximately 0.6p.

That equates to around 9.4p for each Petropavlovsk share.

This is only an estimate — here’s a quick explanation of how I calculated these figures:

As far as I can tell, Petropavlovsk shares closed at 15p yesterday. The price of the rights issue shares is 5p.

Value of 10 old shares @ £0.15 = £1.50

Value of 157 new shares @ £0.05 = £7.85

The ex-rights share price is simply the average of the new and old share prices:

Ex-rights share price = (£7.85+£1.50)/167 = £0.056 or 5.6p

The value of each nil-paid right is the difference between the ex-rights price and the rights issue price:

Value of nil-paid rights = 5.6p – 5p = 0.6p per right or 9.4p per Petropavlovsk share (each old share gives rise to 15.7 nil-paid rights)

What next?

If you’re a Petropavlovsk shareholder, you now need to decide whether to take part in the rights issue and buy some new shares, or whether to simply sell your nil-paid rights.

If you don’t take up your rights, most brokers will usually sell your nil-paid rights for you automatically, but it may be worth checking this with your broker, to ensure you don’t miss out.

I hope this is of some use — fell free to leave a comment below if you have any questions.

Disclaimer: This article is provided for information only and is not intended as investment advice. The author has no financial interest in any company mentioned. Do your own research or seek qualified professional advice before making any investment decisions.

Gulf Keystone Petroleum Limited bid hopes: what are the shares really worth?

Onshore oil installationGulf Keystone Petroleum Limited (LON:GKP) got private investors all hot and flustered yesterday, after announcing that the firm was reviewing the options for a possible sale or asset sale.

I don’t know what the buyers who bid the shares up to 55% were expecting, but yesterday’s RNS made it clear that despite incoming cash (of which more in a moment) of $20.8m, Gulf is still on the rocks, financially speaking:

Concurrently, and in view of strategic discussions and its current liquidity position, and with the intention of meeting its existing debt payment obligations, the Company is undertaking a review of its financing options and in that context will engage in discussions with its key stakeholders.

In other words, any sale at the moment would effectively be a distressed sale to a buyer in a very strong negotiating position.

What about the $20.8m?

Here’s another mystery: this morning (Thursday) Gulf confirmed that the US$26 million gross payment (US$20.8 million net to Gulf Keystone) for Shaikan crude oil sales referred to in Wednesday statement had arrived successfully in the firm’s bank account. Good stuff.

Except that the the firm has now revealed that the payment is a pre-payment for oil sales from a third-party buyer. Not — as I’m sure most investors assumed — part of the backlog of payments that’s due to the firm from the Kurdistan Regional Government.

What have we learned?

Firstly, given Gulf’s current situation, a pre-payment deal of this kind is material. Investors might expect the RNS to have revealed a little more about what’s been agreed — is it for export or domestic sales, who is the buyer, and how much oil has been sold forward?

To me, this lack of information suggests that the terms of the deal are not especially favourable to Gulf.

Secondly, it’s a timely reminder that the Kurdish authorities have no reason to clear the backlog that’s owed to Gulf — which I estimate at around $150m — anytime soon. Here’s why.

Gulf has stopped exporting oil, so is no longer generating income for the Kurds, whose finances have presumably been battered by the impact of the fall in oil prices and the cost of doing battle with ISIS.

The arrears owed to Gulf were accumulated when oil prices were much higher, so clearing these arrears would cost more than the income that would be generated if Gulf did start exporting oil again. Thus there is no logical reason for the Kurds to pay Gulf in the near future — I’d suggest a year or twos’ delay is likely.

The debt issue + a realistic valuation

The pressing question of Gulf’s $520m net debt is the other big reason that any hopes for a premium takeover bid are naive and futile.

I’ve also completed a ballpark valuation of Gulf’s shares which suggest that the 55p peak reached yesterday may be as good as it gets — and substantial downside is possible.

I haven’t touched on these issues in this article, as I have covered both topics in some detail in a new article for the Motley Fool, which you can read here.

Disclaimer: This article is provided for information only and is not intended as investment advice. The author has no financial interest in Gulf Keystone Petroleum. Do your own research or seek qualified professional advice before making any investment decisions.

AO World slumps as reality strikes: is there worse to come?

Should you catch a falling knife?Back in January, I highlighted AO World PLC (LON:AO) as a plausible short, based on the combination of a significant founder share sale, a ludricous post-IPO valuation, and borderline profitability.

At the time, I disclosed my short position, which remains in place.

The shares went on to rise above 300p, putting my short into the red for a while, but as with Ocado Group previously, I had faith in my judgement and have now been vindicated.

AO World shares fell by almost 50% when markets opened this morning, and are down by around 30% as I write.

In a new article for the Motley Fool, I explain why I believe the shares are still significantly overvalued, despite today’s decline. Leaving aside the fact that profit warnings often come in threes — a stock market truism that is, surprisingly often, true — the valuation still looks crazy, while AO’s outlook and profitability are uncertain, at best.

You can read the full article here.

Disclaimer: This article is provided for information only and is not intended as investment advice. The author has a short position in AO World. Do your own research or seek qualified professional advice before making any investment decisions.

Petropavlovsk PLC refinancing: what’s happening, and how can you vote?

Scales of justiceFinal update 26/02/2015: Peter Hambro’s publicity campaign to persuade private investors to vote succeeded, and the resolutions needed to undertake the 157 for 10 rights issue, and bond exchange were passed at a general meeting today.

The rights issue shares are being issued at 5p. For anyone who isn’t clear on the dilution implications this has for existing shareholders, I explain what will happen now — and why your shares are almost worthless — here.

Debt-ridden Russia-based gold miner Petropavlovsk PLC (LON:POG) has been much in the headlines this week.

This high profile has mainly been due to founder Peter Hambro’s press campaign to encourage private shareholders to vote in favour of the firm’s restructuring proposal — and to the efforts of Sapinda Holdings, a privately-held fund which now commands a 10.7% voting stake in the Petropavlovsk, and is trying to gain backing for an alternative restructuring deal.

In this article, I’ll make a comment on the Sapinda proposal (updated 24/02/2015, see below) — which has been rejected by Petropavlovsk and is not available for shareholders to vote on — and I will look at the actual mechanics of how private shareholders can vote at company general meetings.

Much as I disagree with most of what Peter Hambro has to say — his attempt to blame short sellers for his problems is laughable — he is right to point out that many shareholders are not even aware of the need to vote, let alone how they might accomplish this feat.

Sapinda vs Petropavlovsk

As I explained in this article, Petropavlovsk’s current refinancing deal is essentially designed to wipe out existing shareholders, unless they are willing to stump up more money that will principally be used to make bondholders whole — that is, prevent them taking a loss on the $310m of bonds which are due for repayment in this month (February 2015).

Sapinda’s position appears to be that this is unduly harsh on shareholders, who will be very heavily diluted if they don’t choose to take part in the rights issue. To address this, Sapinda’s proposal appears to be that bondholders should take a partial loss on some bonds, in order to preserve more value for shareholders.

The details of this proposal aren’t entirely clear (update 24/02/2015: the situation has changed, see below), but while it will undoubtedly be attractive to some shareholders, it does seem a little odd — I’d always accepted that it was normal for shareholders to be wiped out before bondholders could be forced to take a loss. Frankly, I can’t see much chance of the firm’s bondholders accepting such a deal.

It’s possible that Sapinda’s plan is to derail the refinancing vote and force Petropavlovsk into administration — a near cert if the rights issue isn’t approved. After this, Sapinda might be able to buy up Petropavlovsk’s debt at distressed prices and take control of the company in this way.

We don’t know — yet — and shareholders should remember that this isn’t up for the vote next Thursday — the only deal on the table that’s certain to prevent the firm going into administration is the one that’s on offer from Petropavlovsk.

Update 24/02/2015: Sapinda released full details of a modified proposal today, saying that it will back Petropavlovsk’s refinancing proposals if the firm agrees to certain of its conditions, principally that Sapinda and current shareholders will be able to participate in a further $100m placing at 3p following the restructuring (remember, the planned rights issue, which would still take place, is at 5p per share).

However, without commenting on the proposal, Petropavlovsk bondholders went ahead and voted convincingly to back the original debt-for-equity swap and rights issue today. Sapinda then issued a further statement expressing its disappointment that “The bondholders are resorting to threats, rather than analysis.”

Sapinda’s proposal appears to be structured so as to prevent shareholders facing quite such a total wipe-out as they do at present — although for shareholders who paid 100p+ plus for their shares, the difference may be academic.

As I write, after the close on Tuesday, there is still time for things to change, but at the moment it still looks like the original plan, which Sapinda opposes, will still be going ahead unless shareholders vote against it on Thursday (26/02/2015).

How to vote

Petropavlovsk needs 75% of shareholders to vote in favour of the restructuring for the deal to go through.

Given that Sapinda says it controls 10.6% of the votes and will vote against the restructuring, and that around a third of Petropavlovsk shares are held by private investors, this is a rare occasion where private shareholders’ votes could actually be significant.

The problem is that almost all private investors hold their shares through nominee accounts, and can’t vote directly as the shares are technically owned by their brokers. Voting isn’t always simple — or even possible, in some cases.

I have accounts with two popular retail brokers, AJ Bell Youinvest (formerly SIPPDeal) and TD Direct Investing. Generally speaking, I’m happy with both, but when it comes to voting at general meetings, there’s a big difference between them.

Here’s how voting works for Youinvest customers:

AJ Bell Youinvest voting

You can’t vote online with AJ Bell Youinvest — you have to request it through customer services.

Not great — although I understand that the firm is in the process of updating the secure areas of its website. Perhaps new functionality will be added later this year.

Now here’s how it should be done — voting at general meetings is simplicity itself for TD Direct customers:

Voting for TD Direct Investing customers

Select the ‘Voting & Information’ option on the eServices menu

You will be shown a list of currently schedule meetings at which you can vote:

List of general meetings at which you can vote

Finally, simply click on the ‘Vote’ link for the meeting at which you wish to vote, and you will be shown a list of the resolutions on which shareholders are being asked to vote, with the choice to vote for, against or to abstain from each resolution.

Voting is likely to work differently at each of the big brokers, so if you’re not sure then it’s worth logging in to your online account or telephoning your broker to find out more now, before it’s too late.

This vote could matter

Petropavlovsk’s general meeting, at which shareholders will vote on whether to approve the rights issue that’s key to the deal going through, is next Thursday, 26 February.

Mr Hambro has gone to some lengths to convince investors that the firm will go into administration immediately if this refinancing deal isn’t approved, so Petropavlovsk shares could potentially be suspended immediately following the meeting.

Remember: voting for the refinancing does not commit you to any investment — if the deal goes through, you can choose to take part in the rights issue and buy new shares, or you can sell your rights into the market  — most brokers will do this automatically if you don’t take up your rights.

There’s no reason to have no opinion — you may as well vote either way and know that you have played your part in the final decision.

Disclaimer: This article is provided for information only and is not intended as investment advice. The author has no financial interest in any company mentioned. Do your own research or seek qualified professional advice before making any investment decisions.

As Trap Oil Group PLC collapses, is loss-making production threatening North Sea operators?

Oil platform in North SeaIn any market crash, the first companies to suffer are the smallest, and those with unmanageable debt loads.

We’ve already seen the effects of ill-judged debt loads:

After watching oil rise by nearly 20% since the end of January, oil bulls might believe this is as bad as it’s going to get.

However, today’s news from AIM tiddler Trap Oil Group PLC (LON:TRAP) — and by proxy its much larger partner, Ithaca Energy Inc. (LON:IAE)  has convinced me there is almost certainly much worse to come.

Pumping cash down the drain

In case you missed it this morning, Trapoil admitted that although its sole producing asset, Athena, is now pumping oil again, it isn’t economic at $58 per barrel. Here’s what Trapoil had to say:

“… at the currently depressed oil price of approximately US$58/barrel the field is significantly loss making and the Company is currently incurring a cash outflow of approximately £380,000 per month after absorption of its share of the field’s operating costs.”

In other  words, the operating costs of this well are considerably higher than $58 per barrel. Trapoil had net cash of £7m at the end of 2014, but clearly this is fast disappearing down the drain — one year’s losses at $58 per barrel would be £4.6m.

In fact, based on Trapoil’s working interest production of 720bopd, my calculation suggest that the break-even price for this well could be as high as $85 per barrel.

Ouch. I had wondered whether Athena was profitable sub-$60, but I didn’t expect things to be this bad.

In my view, Trapoil is clearly toast: back in early December, I warned that the risks were high and suggested that I should already have sold. Subsequently, I did sell, and at the end of January, I replied to another investor on Twitter highlighting why:

Who’s next?

Athena is operated by Ithaca, which is presumably losing money at the same rate as Trapoil. However, Ithaca also benefits from having around half of its production hedged at $102/bbl until the end of June 2016, which should help to offset these losses, assuming that all of Ithaca’s production isn’t losing money at a similar rate.

Ithaca is a much larger business, and Athena isn’t one of its biggest assets, but today’s news has sent Ithaca shares down by around 6%, and begs the question: how much more North Sea production is currently losing money?

In an interesting piece of timing, OPEC’s monthly oil market report for February, which was published yesterday, claimed that 15% of current UK North Sea production was uneconomic at current oil prices.

Today’s news has given that claim rather more credibility, in my view — there’s nothing like cold, hard figures to make reality hit home.

Alongside Ithaca, other mid-cap LSE-listed North Sea operators whose shares have slid by around 5% today include:

  • Enquest
  • Premier Oil
  • The Parkmead Group
  • Xcite Energy
  • Cairn Energy

Interestingly, Faroe Petroleum – which is noted for its quality assets and mostly operates in the Norwegian North Sea, where the tax regime is more generous — did not lose ground today, closing broadly flat despite the 2% decline in Brent crude, which is now back down to $55/bbl for March delivery.

Are the firms above losing money on their North Sea production (or likely to when it starts up)? Are other operators, who I missed from the list, losing money?

Time permitting, I hope to take a more detailed look at London-listed North Sea operators later this week, to try and determine what their North Sea breakeven price might be, and who might be hemorrhaging cash at today’s prices.

Update 18/02/2015: I’ve not had a chance to take this further yet, but this article by experienced oil man Steve Brown on Share Prophets provides a detailed insight into the rough breakeven costs for a number of key North Sea fields, including Catcher (Premier Oil), Kraken (Enquest), and Clair Ridge (BP). Well worth a read (you can also see an updated version of the main chart on Steve’s website, here).

Disclaimer: This article is provided for information only and is not intended as investment advice. The author has no financial interest in any company mentioned. Do your own research or seek qualified professional advice before making any investment decisions.