"It's only when the tide goes out that you find out who's been swimming naked" – Warren Buffett. That quote certainly seems appropriate for the subject matter, which covers a company left in a precarious position after weak commodity prices and high debt forced a discounted capital raising.
Shares in electricity and LNG provider Origin Energy Ltd (ASX: ORG) have entered a week-long trading halt as the company announces a raft of initiatives to shore up its balance sheet and reassure shareholders.
Here's what you need to know:
- 4 for 7 pro-rata, fully renounceable entitlement offer, aiming to raise $2.5 billion at $4 per share (a 34% discount to yesterday's price), for ~636m new shares
- Institutional entitlement will be completed in time for resumption of trading next week
- Retail entitlements* will trade on the ASX from 6 to 9 October, and the entitlement offer will end on 26 October
- Used to reduce debt and strengthen balance sheet
- Origin will also implement $2.2 billion in cash preservation initiatives, including:
- fixing the dividend at 20 cents per share for 2016 and 2017**
- selling up to $800m of non-core assets by 2017 and
- reducing capital expenditure by $1 billion
*If you don't want to participate in the raising, you can sell your entitlement (to buy shares) to someone else
**Origin will pay 20 cents per share in dividends in 2016 and 2017, funded entirely from existing businesses, excluding the upcoming APLNG project
There are several important points to take away from today's announcements. First is a confirmation from Standard & Poors that Origin will maintain its credit rating despite recent commentary that the company could be at risk of losing it.
Second is the fact that Origin's balance sheet will improve measurably, although despite raising $2.5 billion, debt (currently $11 billion) will not drop below $9 billion until financial year 2017.
Third, and most crucially – and not mentioned in any of the investor presentations – is the fact that Origin expects to issue 'Approximately 636,010,580 shares', or more than 50% of its current shares on issue for a total of 1.7 billion shares.
In terms of simple arithmetic, issuing 50% of new shares will cut all earnings per share by one-third, assuming total earnings don't increase. Given that the purpose of the share issue is to pay down debt rather than make an investment, I do not believe investors are likely to see a corresponding rise in the value of Origin's earnings.
Then there are other issues to consider like the company's poor long-term performance. Today's announcement hasn't generated any confidence that the company has a brighter future ahead of it than behind it.
This is why I do not believe retail investors should participate in Origin's capital raising. After all, you give your money to a company expecting them to grow it, not to be hit up again for a bailout as and when they need it.
