Raising $66 million (£43.4 million) via a share placing with an Israeli conglomerate will bankroll project development and shore upIthaca Energy's (IAE) balance sheet. Despite the dilution effect on existing shareholdings, one brave analyst thinks it was a "sensible and understandable" decision by the North Sea-focused oil company's management team. The shares, they say, are now worth buying and could rise substantially from current levels.
Late last week, Ithaca announced a placing of 82 million new shares at C$1.05 (53p), a 19% premium to the previous day's close on the Toronto Stock Exchange. That gives Delek Group, which has sizeable natural gas activities in the Levant Basin in the Eastern Mediterranean, a 19.9% stake in the company, which is listed both in Toronto and on London's AIM.
Crucially, that removes the very real risk of a rights issue, the key reason for broker Macquaire's previous 'neutral' recommendation. By removing immediate funding concerns from its valuation analysis, the analyst upgrades the shares to 'outperform' and raises its price target to 88p, almost double the current 45p share price and 52% higher than previous expectations. They were worth less than 30p a fortnight ago.
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Management want to use the cash to strengthen the balance sheet and reduce bank debt, essential during oil price volatility. A large chunk is also earmarked to finance development in the Greater Stella Area (GSA).
With Ithaca's current portfolio providing little room for growth, analyst Kate Sloan warns that it could be too dependent on GSA. Still, there is a lot of opportunity to create value there, she says.
"While we don't see much scope for significant incremental capex until 2017/18, Ithaca could do deals with limited upfront capex," she said. "We identify >300 mmboe of discovered resource within tie-back distance of GSA that is mostly in the hands of Big Oil (and therefore likely disposal candidates)."
Sloan's research team has a "rosy" outlook on the future of oil prices, too, with its most conservative forecasts still anticipating Ithaca having around $813 million capital available for reinvestment by the end of the decade.
"This increases to US$1,181m if GSA can be delivered to guidance. In this scenario, we would expect some reinvestment in growth starting from 2H 2017 and a dividend."
Investors will have to wait until next year for Ithaca to make any money, though. Macquaire pencils in a £34.5 million loss for 2015 before Ithaca reports an adjusted profit of £3.4 million next year and £38 million in 2017.