CALGARY — Shares in international junior WesternZagros were pounded Friday after it proposed a $250-million equity rights offering and a $200-million loan to solve its money woes.
Shares in the company that partners on separate projects in Kurdistan with Calgary-based Talisman Energy Inc. and Russia’s Gazprom Neft fell as much as 19 per cent to 73 cents on Friday morning.
Last March, WesternZagros commenced a process to evaluate strategic alternatives as it faced a shortage of cash that would affect its ability to invest in projects by year-end. It is not currently producing from either Kurdistan block.
It revealed in a news release after markets closed Thursday that its process had resulted in a non-binding takeover proposal from “an international oil and gas company” for $1.46 per share in cash — roughly $700 million — but that option was rejected.
“As a result of deal-specific risks, including but not limited to current geo-political events, and upon exhaustive negotiation with the party to negate these risks, the special committee determined the proposal was not actionable in the near term,” WesternZagros said in its release.
Instead, the committee recommends a financing solution that includes the rights offering and a loan from its largest shareholder at 19.8 per cent, Crest Energy International LLC of Houston.
“This is the next exciting step in our efforts to advance the development of our world-class discoveries — securing the financing to bring these major fields into production and generate cash flow,” said WesternZagros chief executive Simon Hatfield in the release.
“The financing ... meets the company’s key goals of raising the substantial capital necessary to meet the company’s development needs, while allowing all shareholders the opportunity to participate in the growth of the company’s assets.”
A company spokesman did not immediately return a request for comment.
Under the rights offering, investors will have the option to buy one right for each share they hold. The subscription price will be the lesser of 65 cents or the common share price on the last trading day before filing of a final prospectus.
Crest has agreed, WesternZagros said, to “backstop” the rights offering by buying up to $200 million worth of shares not taken by the rights holders — if its share holdings wind up at more than 19.9 per cent, the excess will become non-voting preferred shares.
The private placement of shares to Crest requires the approval of the majority of the rest of the shareholders of WesternZagros at a special meeting, likely to be called in early October.
The record date for the rights offering is expected to be mid-October and the closing of the rights offering and private placement would take place in late November.
Analyst Al Stanton of RBC Europe predicted the stock slide in a morning note to investors.
“Although this deal helps address WesternZagros’ financial issues, the Calgary-based appraiser/development still faces a series of geological challenges,” he wrote.
“The current unrest in northern Iraq has further compounded the uncertainty, and given the pullback in share prices across our Kurdistan-focused universe, we see more attractive alternatives.”
Talisman is the operator and 40 per cent partner with WesternZagros in the Kurdamir block in Kurdistan.
WesternZagros is the operator and 40 per cent owner of the Garmian block, which it shares with Gazprom Neft, at 40 per cent, and the government.
On Wednesday, WesternZagros said it was suspending the last stages of a Garmian well workover designed to double capacity to ensure the safety of employees, contractors and equipment following the curtailment of a number of third-party oilfield services.
It said it would relocate non-essential personnel away from field locations and company regional offices, while emphasizing so far there has been no direct impact on operations and adding similar measures have been put in place at Talisman’s Kurdamir block operations.
It said it is confident in the Kurdistan government’s ability to maintain the security of its oil infrastructure — the Kurds are under pressure from armed forces of the Islamic State which has advanced across much of Iraq.
In the past year, WesternZagros shares have varied from a high of $1.52 last August to a low of 69 cents in October.
The company said its second-largest shareholder, Paulson & Co. Inc., with 11.1 per cent, has said it will support the financing, including participating in the rights offering.
Crest’s loan is to be made available in two tranches, the first for up to $150 million US on or after Oct. 1, 2015, and the second for up to $50 million US on or after June 1, 2016.
Both would have two-year terms. The first is to pay annual interest at 12 per cent and the second at 14 per cent.
If the loans are available but not drawn, WesternZagros will have to pay a fee of eight per cent annually, it said.
dhealing@calgaryherald.com