[Author's Note 2/9/12 - The transaction described below closed on Wednesday 8 February 2012.
As part of the transaction, RAM Energy Resources changed its name to Halcon Resources Corporation, and its ticker symbol is HK.]
On 22 December RAM Energy Resources (RAM) announced a highly dilutive capital raising.
Since that date, RAM shares have soared from an intraday low of $1.65 to an intraday high of $4.13 on 19 January. Although shares have since retreated to a closing price of $3.82 on 3 February, they remain at a level more than triple the capital-raising price of $1.25.
This article reviews the transaction details, including the substantial dilution that will be imposed upon shareholders as early as Wednesday 8 February. RAM shares are significantly overvalued given the dilution caused by the capital raising.
RAM will receive $550 million from Halcon Resources LLC, in exchange for:
- 220 million shares of common stock at $1.25 per share
- $275 million senior convertible note, convertible into common stock at $1.50 per share after 2 years (275 / 1.50 = 183.33 million shares)
- warrants to purchase another 110 million shares of common stock at $1.50 (exercisable after 5 years)
RAM currently has 78.809 million shares outstanding.
The following table outlines the increases to the company's share count following the three components of the Halcon transaction:
Addition to share count
Shares outstanding as per 10-Q
8 February 2012
220 million at $1.25
8 February 2014
183.33 million at $1.50
8 February 2017
110 million at $1.50
The transaction is scheduled to close on 8 February. Given recent share prices well in excess of $1.50, we'll assume that the convertible note will be converted into common stock, and that the warrants will be exercised.
Although the company's market capitalisation is now only $301 million, the company's pro-forma market capitalisation will rise to
482.142 million * 3.82 = $1,841 million upon closing of the transaction.
As the company warned about this dilution in its information statement:
"Our stockholders will experience substantial dilution. The consummation of the Halcon transaction will have an immediate dilutive effect on the ownership interests and voting power of our existing stockholders."
"Conversion of the note into common stock or exercise of the warrants will further dilute the ownership interests and voting rights of existing stockholders."
"The warrants and the conversion rights under the note could result in significant "market overhang" which could restrain or limit increases in the market value of our stock."
Benefits of transaction
As a result of the transaction, RAM will change its name to Halcon Resources Corporation, and Floyd C Wilson will become CEO of renamed company. Wilson has had success previously at Petrohawk Energy (NYSE:HK), and RAM will benefit from his expertise.
Excessive "Floyd Wilson premium"
However at a share price of $3.82 the market is placing an extreme "Floyd Wilson premium" on RAM shares. As the company warned:
"We may not be able to profitably deploy the funds that we will receive."
"Our growth and profitability will be largely dependent upon our ability to deploy the $550.0 million in new capital that we will receive."
Pro-forma balance sheet
RAM published pro forma financial statements to demonstrate the effects of the transaction on the company.
Selected data as at 30 September 2011, in thousands
Other current assets
Oil and gas properties
Asset retirement obligations
Total liabilities and shareholders' equity
As described earlier, upon transaction closing, RAM's pro-forma market capitalisation at a share price of $3.82 will be $1,841 million. Yet for this increased valuation, shareholders will only receive a company whose assets are largely $327.6 million in cash and $203.8 million in oil and gas properties.
Assuming that the warrants will be exercised, we then have a pro-forma market capitalisation of 592.142 million * 3.82 = $2,261.98 million, for a company with $492.6 million in cash (increase of $165 million warrant proceeds) and $203.8 million in oil and gas properties.
Rather than continuing to describe the excessive valuation placed on the company, we encourage readers to review the company's information statement for further descriptions of the valuation placed on the company by Jeffries in its advice to RAM. The company also describes in detail the risks associated with the dilution that is a result of the capital raising.
RAM is trading at an extremely high "Floyd Wilson premium." While we understand that he has been successful in previous oil and gas ventures, a pro-forma market capitalisation of $2,261 million for the company is excessive. Until shareholders (whose number will rise from 78.8 million to 592.1 million pro-forma) can see that the cash infusion has been used to generate substantial profits, there seems to be little reason for the stock to trade this far above the capital raising prices of $1.25 and $1.50.
Disclosure: I am short RAM.
Disclaimer: The above commentary is provided for informational purposes only. This article does not take into account your personal circumstances, and as such, you should consider whether its content is relevant to your situation. Before buying or selling any security you should conduct your own research and analysis, and seek advice from an independent financial adviser.