Money, Money, Money …

There has been a lot of chatter today about one of Cuadrilla’s parent companies fund raising on the Australian Stock Exchange. I thought it might be useful to try to summarise the main points.

The fund raising is split into an “offer” to existing institutional and retail shareholders to invest in more shares and a “placement” with institutional investors.

The idea of the offer is pretty straightforward – you are offered a number of shares for each share you currently own and you can either buy them or not. You can also ask for a higher allocation subject to eligible
retail shareholders not taking up their full entitlement. There is a sting in the tail here though for existing shareholders who do not participate in the new equity round proportionate to their shareholding, as that shareholding percentage will now be diluted.

A “placement”, for those not familiar with financial jargon is one way of raising capital in the markets which maintains an element of control over who is allowed to buy the shares.

A company can use a placing, or placement, to sell shares directly to third party investors. In common with other means of issuing shares, the main purpose of a placing is to raise equity capital for the company. However, in contrast to the other ways of issuing shares, the company will have a significant amount of control over who purchases its shares.

Any company that wants to make a placing will appoint a broker or an investment bank (or banks) to ‘place’ its shares with selected institutional investors. … In effect, the broker or bank(s) will identify institutional investors that are likely to want to purchase shares in the company and will, at the time of the placing, invite those institutional investors to purchase a quantity of that company’s shares. –

OK, now we have got that out of the way, what is happening?

Well the “offer” is expected to raise AUD$ 31,200,000 from the sale of shares at AUD$ 0.32 each. This constitutes a new tranche of 97,500,000 shares.

The Institutional (non-retail) part of the offer is already 75% subscribed with both Kerogen Investments No.1 (UK) Limited and OCP Asia (Singapore) Pte. Limited agreeing to take up their entitlement in full.

The Offer will therefore raise between AUD$ 23.4 Million and AUD$ 31.2 Million.

The Placement to Institutional Investors has commitments for 70,500,000 shares at AUD$ 0.32 a share so will raise at least AUD$ 22.6 Million.

40,500,000 of these shares will be bought by a new investor – RodDCO Property Holdings. We have been unable to find any information at all about this company on Google, and it seems we are not alone

A few hours on, nobody has been able to answer that question.

So the Capital raising will generate a sizeable tranche of cash

How will it be used?

Well The entire proceeds of the Offer will go towards reducing existing debt.

$18,300,000 proceeds from Kerogen’s participation in the Offer will reduce Kerogen subordinated debt. It seems therefore that Kerogen won’t actually be parting with any real cash but will simply be writing off debt in exchange for shares.

$8,800,000 will go to partially pay off Senior Loan Notes (currently standing at $51.5 million)

This will reduce AJL’s annual interest payments by AUD$ 4.6 million.

This leaves the projected AUD$ 21.6 million proceeds from the Placement ( about £12.5 million) which will go on:

  • Funding work on 4 wells at PNR
  • Fund working capital in the Australian operating businesses
  • To further reduce debt as appropriate

Note 1: The £12.5 million proceeds compares to Cuadrilla’s losses in 2016 of AUD$ 11,542,000 (£6.6 million) and 2015 of AUD$ 17,671,000 (£10.2 million)

Note 2: Our calculations, based on the data provided in the presentation suggest that this Capital Raising must have costs of around AUD$ 1.36 million (£0.8 million). If this is not accurate we’ll be happy to correct this assumption if they let us know.

The remaining funding for PNR will presumably come from the Centrica carry agreements.

£40,000,000 Paid Up front
£60,000,000 Initial Carry (of which there is just £4.7 million left)
£46,700,000 Contingent Carry payable after the flow testing of gas for six months

So we can see that Cuadrilla have already taken up £95.3 million of the Centrica Farm-In cash in addition to any other funding they may also have used, have $US 4.7 million  (~ £3.5 million) still to call on but probably won’t get any more from that source until they have gas flowing for 6 months.

They are most likely relying on the £12.5 million in cash expected from this to tide them over the next nine months to a year of development costs.

There are a couple of other interesting things to come out of this presentation.

Firstly, in spite of the positive PR spin Cuadrilla have been putting on their exploration (e.g this presentation makes only a passing mention of the core samples and makes no claim at all for any positive interpretation of them. Instead we just read “extensive cores have been successfully recovered from both the Upper and Lower Bowland shales“.

As one retail investor asked on the Australian Hot Copper board

Secondly in the key risks section AJ Lucas state:

Cuadrilla’s ability to develop its concessions for unconventional hydrocarbons depends upon the presence of significant in-place hydrocarbon resources in Cuadrilla’s concession areas and the ability of Cuadrilla to recover those resources in a commercially viable manner. There can be no guarantee that Cuadrilla will be able to recover any hydrocarbons in its concession areas or that it will be able to do so at a cost that makes production commercially feasible, in which eventuality may lead to the loss of the Contingent Carry from Centrica.

Quite – we could hardly have put it better ourselves

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