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Summary

  • Contains a brief history of Argent and their DRIP programs.
  • Why Argent indicated they might change their program.
  • Impact to investors.

Argent Energy Trust (OTC:ANGYF) recently announced the elimination of their Premium DRIP payment.

Essentially for those not familiar with DRIPs, they allow the investor to take the dividend payment in the form of additional shares of the company that would be priced at a discount to the average share price. This of course means to the extent that investors chose this option, the company becomes diluted by that much each payout period.

Argent IPOd in August of 2012 so it hasn't been around for that long. It was a CDN $10 issuance and they offered to pay CDN $0.0875 each month as a dividend or $1.05 per annum.

Argents Premium Drip payment allowed for a 5% discount to average share pricing for issuance of their shares compared to the normal 3%.

So if 100% of the investors opted for the Premium Drip program, it would result in dilution of approximately 11%. However, according to the conference call, the percentage of shareholders who opted to take their payment in the form of additional shares was only 70%. So effectively, 30% were happy receiving cash.

Now, if the share price drops below $10, with this type of program, the dilution increases because the distribution doesn't change. And the more the stock goes down, the greater the dilution.

As the chart shows, without getting into the whys, this is what happened to Argent.

(click to enlarge)Argent Energy Trust

Source Yahoo

So with this announcement, they have theoretically stopped the dilution, except that if you listen to their conference call for April 11th, maybe they haven't?

The CFO confirmed that approximately 70% of investors were on the Premium DRIP program and another 5-7% on the DRIP program which for what I could discern was similar to the Premium DRIP program except the discount rate is 3%.

I do wonder if it is now possible for investors who were in the cancelled Premium DRIP to switch over to the normal DRIP program?

So why the change?

Argent gave the following explanation for their halting of the Premium DRIP program:

Argent's unit price has severely declined over the past few weeks, from close to a Net Asset Value (NAV) trading valuation to the current significantly lower unit price level. At present unit price levels, the Premium Dividend Reinvestment Program ("Premium DRIP") has become significantly dilutive to unit-holders.

Now does this make sense?

If 70% of the company (the Premium DRIP holders) decide that they want to suffer the same dilution, then the only group that is put at risk is the 30% that wants to take cash. Given that Argent had disclosed how the Premium DRIP program works, the shareholders electing to receive cash should have known the dilution risk they were taking. Eventually they would become less and less of the float assuming the Premium DRIP shareholders percentage held constant.

However, with the significant pick up in share trading volume in February of this year, one wonders whether the board was also worried that the new shareholders were more interested in yield, and as such would rather have the cash payment than additional shares. If that was the case, then Argent's program for growth wasn't going to work, as the existing cash distribution and planned Capital Expenditure program only worked as long as a good percentage of the investors opted for the Premium DRIP option.

As the company has explains in their April 10th press release:

The Premium DRIP program provided significant additional cash flow to the Trust to fund both the distribution and capital program, and as such, the suspension of the Premium DRIP program creates a substantial change in the Trust's financial structure and financing capabilities.

Ironically, from what I can tell, the risks of this type of business model weren't really disclosed in the Initial Offering Prospectus nor in the most recent MD&A, but then again I'm not a lawyer so maybe they were?

The new business model (assuming it doesn't allow Premium DRIP holders to switch over to DRIP) forces all investors to now receive a lower yield with the company delivering a much lower growth profile - quite a different scenario than what the company was promising mere days ago.

Disclosure: I am long ANGYF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Examining Argent's Urgent Changes