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Leading ASX oil stock breaks glass for emergency cap raise

The Oil Search Limited (ASX: OSH) share price went into a trading halt this morning as it becomes the first energy stock in the S&P/ASX 200 Index (Index:^AXJO) to use new emergency capital raising provisions.

It was only a matter of time before the Papua New Guinea-focused gas producer went cap in hand to shareholders. Oil Search is seen to have the weakest balance sheet among its peers, including Woodside Petroleum Limited (ASX: WPL) and Santos Ltd (ASX: STO).

Oil Search requested for two back-to-back trading halts totally four days under new rules set by market operator ASX Limited (ASX: ASX). The new rules make it easier for listed companies to raise cash during this coronavirus-hit market.

Don’t be fooled by the oil price bounce

While energy stocks may have bounced in recent days, the sector is more challenged than most, in my view.

Falling demand from the global recession triggered by the COVID-19 pandemic will hurt many industries, but oil and gas companies are also being trampled by the price war between Saudi Arabia and Russia.

US President Trump’s premature declaration of truce between the two major oil exporters led to a sharp oil price rebound but experts don’t think it’ll last. There are already cracks emerging as Saudi Arabia and Russia pushed back a proposed meeting to later this week while still trading barbs.

It’s also hard to see an enduring truce when the US is refusing to be part of the negotiations.

Everything has a price

This won’t help sentiment towards Oil Search’s proposed capital raising. If I had to guess, shareholders can expect new shares to be sold at a very steep discount to its last closing price of $2.73.

The problem is Oil Search isn’t in a position to dictate terms. In this market, the ones with cash are kings. Also, this will be viewed as a desperate dash for cash. Oil Search will take what it can, where it can, in my view.

Things in common with Webjet

That was how Webjet Limited (ASX: WEB) did their walk of shame. Both companies may come from different sectors, but there have a lot more in common than one might have thought.

Webjet priced their new share offer at fire sale price that was a 55% discount to its last traded price. Under normal circumstance, a company like Webjet would have received strong support with a less than 10% discount.

Foolish takeaway

It’s hard to see how Oil Search can persuade investors to pull out their check books without a big incentive.

Let’s not forget, there’s a governance cloud hanging over the stock too, which would justify slapping on an additional discount to whatever management was thinking before.

The silver-lining is that the Oil Search share price could bounce if the embattled company can raise sufficient cash to convince shareholders it can pull through the crisis.

This was what happened for Webjet, although would much rather back the travel agent than Oil Search if shares were offered on the same terms.

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Motley Fool contributor Brendon Lau owns shares of Webjet Ltd. Connect with him on Twitter @brenlau.

The Motley Fool Australia owns shares of and has recommended Webjet Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.