Goodrich Petroleum (GDP) declared dividends on their Series B, C and D preferred stocks Tuesday morning. As I mentioned in my column Friday, I had been buying GDP's Series C preferreds last week with the idea that GDP's board would declare the regularly scheduled dividends this week.
The markets have roared with approval today as GDP-C is, as of this writing, up 25% on the day, and the other two preferred series have posted similar gains. Yet again, as with Miller Energy (MILL; see previous column), the mere declaration of a dividend has convinced the market of an E&P company's short-term creditworthiness.
I can't lie ... it feels good. The record date for the Series C and D payments is March 13, and so the last day to buy and receive the dividend is next Tuesday.
But what's underlying the move in the preferreds is the company's decision Monday to offer 12 million common shares to JPMorgan (JPM) in a bought deal. Net of commissions and expenses, this brought GDP $47.5 million. So GDP management was willing to take less than $4/share to shore up the balance sheet.
I consider this a particularly gutsy move on management's part, owing to their combined ownership (as of GDP's last proxy statement filing) of 22.8% of the common shares.
The offering diluted that holding -- assuming there was not pro-rata participation; there's nothing in the prospectus to suggest that. Also, predictably, adding 12 million shares to the market has pressured GDP shares. I'm seeing them quoted at $3.78, and, really, supply and demand would dictate that adding 27% to a company's base of shares outstanding would send the price down. Especially in E&P, an industry that has been crushed by the precipitous plunge in oil prices.
But they did the common stock offering anyway. Why? One technical reason and one that speaks to the big picture.
On the technical side, GDP's borrowing base under its revolving credit facility will be lowered to $150 million on April 1 in conjunction with the second lien offering announced Friday (I gave the details on that offering in my Friday column). If the offering doesn't close by then (it's supposed to close March 12), GDP would be in breach of the covenants of that revolving credit facility.
So the $47.5 million in net proceeds applied to the $187.5 million GDP had drawn on the revolver as of last week (that was disclosed in yesterday's 8-K filing) gets them to a net of $140 million, or safely under the new, lower borrowing base of $150 million.
I believe that's a moot point, as the counterparty to the second lien offering was also disclosed in the 8-K as Franklin Advisers. Certainly a household name in asset management, and Franklin will benefit not only from an 8% coupon, but also from warrants packaged with the deal and the ability to do another $75 million tranche of second lien debt with Goodrich later this year.
So Goodrich will be fine with its lenders, and preferred shareholders should always be included in that group even if our interest is junior to holders of GDP's senior notes.
We're happy today, and looking forward to continued payments from a security (in the case of the Series C) that is still only trading at 46 cents on the dollar after Tuesday's massive move, and still sports a current yield of over 21%.
In the bigger picture, GDP management followed the advice I have given to many other managements of E&P companies (I don't have a relationship with GDP's management).
It's what I call "the Ford deal" and harkens back to Ford's (F) decision to sell $1.6 billion (including the underwriter's overallotment, which was ultimately exercised) worth of equity at $4.75 per share on May 12, 2009. In the short term, it crushed F shares (they fell 18% the day the deal was announced), but in the long term, the fresh equity capital -- and the signal to the market that it could raise equity -- placed a bottom on the stock.
That allowed the blue-oval company to survive the financial crisis without taking a dime -- at the automotive level -- from the U.S. Treasury, and ultimately to come back a much stronger company. It even allowed Ford to get the blue oval itself out of hock, as the company had sold the rights to that trademark in the darkest days of the crisis.
Other E&P managements have done equity deals in the last few weeks, and I believe it is a move that should be considered by all.
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