Regarding the Rangers capital raise, post the debate with
@TwinTurboCelica I finally managed to get some clarity regarding the free option issue after a conversation with David.
These a some points to consider.
Firstly, the pricing of a capital raise is typically done using the 30 day Volume Weighted Average Price (VWAP) as a starting point. Despite the fact that the stock was trading in the high 3's prior, the 30 day VWAP for BRK was 2.8 cents.
Secondly, there is usually a discount applied to that 30 day VWAP for a placement which in this case was 15%, bringing the placement price to ~2.4 cents.
The call was made to do the capital raise as a 3 cent placement with a 1:3 option ( the option value calculated at 0.6 as per pricing at the time) to price the package at ~ 2.4 cents per share.
My interpretation of the points above is:
1)For BRK to raise at that time the price was always going to be 2.4 cents to get the deal done. The board determined this was the best path. BRK actually received a heads price ABOVE the 30 day VWAP, the other option would have been no free option issue and raising the $9 million at 2.4 cents. Would that be a more palatable decision for shareholders? ... I am not so sure.
2) There is no question that there was a need for a capital raise to fund the Rangers well after SHE decided for whatever reason, they were not going to participate. In that regard, the other points of contention are that as the placement was for 708 investors only, other current shareholders were denied the chance to participate, BRK should have waited for the Jewell results to come in and do a rights issue based on that, and there was NO reason for the urgency that BRK stated in .
The problem with that point of view, while it may have been fairer for ALL holders.
1) Waiting for the Jewell results to come in means waiting till mid September at the earliest . BRK first announced the Jewell was in production on 14 September, but it wasn't until 24 Sept they BRK announced a flow rate. The latest ASX requirements for pro-rata rights issues determine business 19 days for an issue . I am not sure how many business days are a the requirement for the underwriter (14 I think) and any issue BRK would have done would have been underwritten to guarantee the full $9 million. That would mean up to 6 weeks ( early mid November) before BRK would be able to just contract the rig and who knows when the rig would be available to spud.
IMO, one reason for the urgency in booking the rig was based on the fact that BRK received an emergency order in early 2021 to extend the Rangers DSU period by a further 12 months from Dec 2020 , to Dec 2021, due to the delays caused by the Covid outbreak. The OCC granted any operator a 12 month extension on the DSU's that requested it due to Covid.
The Rangers well spud date projected to be 13 Dec by the company just gets it into the window before the order runs out. It would have been highly unlikely had they proceeded down the rights issue path having waited for the Jewell results, that the well would have been spudded before" time ran out"... They may have received an extension on the extension, but could have exposed themselves to protests, ( like the Camino protest of the Rangers well which BRK recently won the emergency order for) which they may have lost on the basis that BRK created the problem for themselves by not raising the necessary funding in time.
I agree the " optics" surrounding the raise were not good, but I am now satisfied with the rational behind the options, the fact that the issue was a placement, rather than a rights issue was the right way for the company to proceed. I suspect even some of those decrying the fact they didn't get an opportunity to participate in the raise , will be thinking they are glad they didn't , considering the current sentiment not only towards BRK but the small E&P sector atm.
Now lets consider if BRK rather than a placement , did a rights issue on the same terms, would the share price be much different from now? Whilst there certainly will be validity to the point there is potentially some downward pressure caused by selling heads to exercise options, that may be sold again, considering ( and please check ) that ~ 77 million options have been converted in the 3 +months since the Rangers raise on 8th August, does anyone seriously stipulate that has been the cause of the share price fall?
Hopefully, the above puts some context to the mechanics of the Rangers CR, and the need for a fast placement raise of the $9 million. Understanding the context surrounding the issue of the free in the money options has put that issue to bed for me, once and for all.
Hope the above helps, it certainly has for me.
Cheers
Dan
(20min delay)