Dilution's Becoming A Worry...

...at least for the oil and gas sectors. Enerplus Resources Fund, a Canadian oil and gas income trust, announced last night that it's planning to issue an additional 9.25 million trust units at a price of C$21.65 per unit. At today's exchange rate, it amounts to US$19.88 for each unit. This financing will provide cash to acquire 30% of three companies' interests in their Marcellus shale natural gas property. The terms of the deal require US$162 million on closing, and US$243.6 million as a shouldering of half of the three companies' drilling and completion costs. Since the three companies' interest in the property amount to about 72%, Enerplus will have a 21.5% interest in the property itself. It's already a producer: the driling costs are to open up new wells to capture more of the underground gas.

It sounds like a good deal, but all the market saw was "dilutive." As of June 30th, Enerplus has 166.02 million units outstanding. The additional 9.25 million units will add about 5.6% to the total shares outstanding, assuming that the 166.02 million figure is also current.

At the open this morning, after the deal was announced, Enerplus units were down 4.36%: they were slightly below the offering price. The trust units did lumber back up somewhat, but couldn't breach the $20 level with any conviction. Enerplus closed at $20.01 on the NYSE today.

There's a real resemblance between the fate of Enerplus's stock and the knock-down that Suburban Propane Partners took last week. For whatever reason, energy trusts that issue additional units for either debt repayment (Suburban) or expansion (Enerplus) are seeing their units punished by the stock market for doing so. Both stocks dropped below the decided-upon offering price.

In Enerplus' case, this leaves the underwriters in a bit of a spot. This financing's a "bought deal," where the underwriter commits to buy the issued shares at the specified price. In Enerplus' case, as noted above, it's US$19.88 per unit. That's ver-y close to $20.01.

At any rate, this is the second time a secondary offering's shot down the price of an energy-related income trust. This slam-down applies even to a funding that have a good chance of being accretive to earnings. I'm making this point more as a warning than a tip, even if it results in said units going on sale. These income trusts ain't banks, that's for sure.


Disclosure: I'm holding both Enerplus and Suburban Propane Partners in the actively-managed Marketocracy mock fund I run.