How often does a stock with a huge secondary offering go UP?

by Travis Johnson, Stock Gumshoe | October 17, 2013 12:20 pm

Surprise jump from a personal holding

Not so often.

But that’s what happened this morning for Africa Oil (AOI.V in Canada, where I think it’s probably the largest company on the Venture exchange, and AOIFF on the pink sheets). AOI is roughly a $2 billion company and they just did a brokered private placement of $450 million at C$8.25, which was about a 10-15 cent discount to the price before they halted it to announce this secondary offering.

Normally, when a stock dilutes ownership this dramatically — that’s increasing the share count by 20-25% — it means the shares will go down since we now each own a smaller piece of the company (albeit a company that now has more cash on the books). Not always, but usually. And not this time — as soon as the stock reopened for trading it jumped up a dollar, so those placed shares will be scooped up energetically by anyone who can get ’em at $8.25 since the shares are now jumping around near $9.50.

Why? Well, as I mentioned back in September when I said the stock was getting really compelling and value priced again[1] at between $7-8, their exploration campaign in Kenya with Tullow Oil is going phenomenally well — they keep hitting oil, and their most recent discovery tipped them over the edge into pushing for real infrastructure development and faster field development … now that they know there are hundreds of millions of barrels, they’re getting serious and the Kenyan government appears to be getting serious along with them.

I still suspect that AOI will end up being bought out or selling a huge chunk of their Kenyan operations to a larger operator, whether it’s Tullow or someone bigger, but it’s certainly possible that they could keep going as they are and build themselves up into the next Tullow — this $450 million is an endorsement of that to some degree, it means investors are convinced the discoveries are going to be produced, and they think that the company having now enough cash to dramatically speed up exploration is only going to help shareholders. I tend to agree — AOI is on its way to growing into being my largest single position again, as it was before I took some profits after their first oil discovery, so I’m not adding to my position, but if we get a dip back down after this rush of enthusiasm I think it’s still a very reasonable speculation on East African oil … and they are not going to have any financing issues in the near future thanks to this huge cash raise, so even if we get a real market “dislocation” or a crash in oil prices they should be able to keep exploring and (hopefully) expanding their reserves.


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Endnotes:
  1. as I mentioned back in September when I said the stock was getting really compelling and value priced again: http://stockgumshoe.com/2013/09/catching-up-on-cvd-equipment-the-sandstorms-and-some-other-favorites/

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