Is U.S. Energy Corp. (NASDAQ:USEG) Gearing Up For A Stock Offering?
tags: USEG
That shares tend to go down at the news of an impending stock offering is a well-known trend. That companies do their best to improve their market value prior to such an offering is a fact, too. As we screened the market for notable movements today, we stumbled upon a company that might be doing just that.
The company in question is U.S. Energy Corp. (NASDAQ:USEG) and its shares got a nice 40% boost in market value yesterday as the developer of oil and gas assets announced the tentative acquisition of a 40% stake in the DJ Basin Wattenberg Field, an area purportedly rich in oil and natural gas located in the state of Colorado. Will investors’ state of euphoria continue in the days to come, though?
It depends on a few factors.
First off, it is important to know how things will unfold and whether in particular the non-binding letter of intent (for that is how the formal document has been branded in the official corporate release) will eventually turn into a fully-binding Asset Purchase Agreement. Having been discovered more than four decades ago, the DJ Basin Wattenberg reportedly ranks among the largest gas developments nationwide, which is why it could potentially prove a viable investment opportunity. Technically speaking, however, the deal is far from finalized yet.
Second, one should not forget the expected drilling and exploration costs and the corresponding revenue they would generate. On the one hand, USEG expects to shell out $9.6 million in getting its drilling program going through mid-2017, with projected net revenue of $4.9 million for each of the first two years of drilling, which should be sufficient to justify the investment, albeit by a fairly tiny margin. On the other hand, this tiny margin could still find itself hanging by a thread should oil and gas prices fall yet again in the foreseeable future.
Third, U.S. Energy’s managers have missed to mention where the $9.6 million needed for the program will come from, as well as how they will finance the acquisition itself. The average working capital deficit for the last four quarters on record stands firmly at $10 million, while USEG‘s cash reserves as of Mar. 31, 2016 came up a tad below the $2 million mark. Needless to say, USEG does not appear to have the money required to execute the deal right away. Rather, it will need a fresh capital injection and this injection may come from a secondary public offering that could potentially be announced any time from now. What is more, the company’s stock is fresh out of a one-for-six reverse stock split which had two implications:
#1 – it practically increased USEG‘s per-share market value from $0.35 to $2.13 less than three weeks ago. Even though USEG retreated a bit to $1.77 per share in the following days, the news about its impending acquisition of a lucrative asset pushed the stock up to $2.49 per share yesterday on a record-breaking volume in excess of 400 thousand.
#2 – The split decreased the number of outstanding shares to 4.7 million (from 28.2 million), yet it did not affect the total number of authorized shares and this number remains “unlimited” as laid out in the latest 10-Q report.
While the former implication seems likely to have made the stock more attractive to potential investors, the latter might entice them to act with caution because an unlimited number of authorized shares gives USEG unlimited opportunities to dilute old and new stockholders whenever the company needs to raise cash through equity financing. Given the current financial state of U.S. Energy Corp., the risk for future dilution looks imminent.
