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Fair point. I would say three things: 1. As Jay said on the Webinar, the main reason they never spoke to the majors about a farm out was that they would always insist on control. You do that, or sell it out completely now, and yes you get a nice day 1 premium, but you won't get even remotely close to the value that mgmt genuinely believe is there in the 2.2bn bbl recoverable. 2. If you make an offer for the Company, it's very risky if you do not have the recommendation of the board. And Jay and the team are not in this to sell for say $0.80 / bbl Vs current mkt cap at $0.40. 3. The $1bn was in a "three phase" arrangement with payment 1 being quite small. The farm out partner would only be required to stump up for phase 2 and 3 on the basis of initial drilling success. So the farm out partner limits its risk to only being required to write the bigger part of the cheque AFTER the acreage has been derisked Vs an all out bid today which would require all the capital upfront without the drilling results.
The killer quote in this webinar is 1h28minutes in, where Justin says the terms of the farm out were a "ten digit" amount i.e. > $1bn, for "quite a modest percentage".
Market seems to have totally missed the significance of that.
Good point. I asked about this. They are prohibited from selling in the 30 days before the pricing point (since obviously the incentive would be to crash the price), but in the other two months, they can.
https://www.fca.org.uk/publication/data/short-positions-daily-update.xlsx
This I think would indicate you are probably right - there do not appear to be any short notifications in PANR. So, at least for now, it appears CB buyer is happy with his exposure!
It would surprise me however, in my hypothetical case where with the stock at 156p, and him being the equivalent of long $110m, he would not be hedging some! Who knows? Maybe he has more conviction than any of us!
Well yes, except the bondholder can elect to convert himself at anytime, so alas, the Company is not able to force him to take $2.75m in cash if the price is above 78p, and so the stock equivalent is worth more - CB holder would pre-empt and convert.
YEs I think you are right on the short data. Doesn't this have to be provided to the FCA I seem to remember? So yes you might very well be right that if this short existed, we would know about it.
Well it kind of depends on how the CB holder thinks. If he were behaving like a hedge fund, he would only be playing the volatility of the stock. So his spreadsheet would dynamically calculate the delta, and he would follow that, gradually selling short stock as the stock went up, and buying it back when the stock went down. This CB holder might not be thinking like that - he might very well be happy to take directional exposure to the stock. Not a bad argument considering he did also buy some straight equity.
But think about it like this: imagine an extreme case where (inshalla!) the stock doubled to 156p. In this case, the CB holder would know with almost certainty that all of his $55m would going to be converted into stock at a "purchase price" of 78p. SO his economics would THEN be that he is long $55m of stock at 78p (also of course enjoying the downside protection that if stock subsequently slumped back below 78p, he would then convert AT MARKET). In that situation, unless he was truly happy to own the equivalent of $110m of unhedged long stock at 156p, he would definitely be hedging some, or probably all of it.
So I think its inevitable that the CB holder probably is engaging in some gamme hedging. I am not unduly concerned. I mean as a rule of thumb, at the money options have a delta of 50%, and we are almost exactly at the money right now. So even if he were adopting a hedge fund strategy of a mathematically pure hedge, he would currently only be short $27.5m of stock. This shorting would have begun almost to the day the CBs were issued back in December, and given the fact the stock trades appox $5m / day, the market has had plenty of chance to absord that.
Yeah, so I just checked the CB RNS of 7 Dec 21. In the "share payments", it says: "If the Company elects to pay in Shares, the number of Shares to be delivered will be calculated by dividing the payment due by the lower of (a) the Conversion Price prevailing on the coupon payment date; (b) 90% of the 3-day VWAP; and (c) 90% of the 10-day VWAP. Amounts converted at the prevailing exchange rate."
SO this means, the CB buyer will receive stock at a 10% discount to VWAP (nice little kicker), subject to a ceiling of the Conversion Price (78p currently but can be reset lower). So if share price is > 78 / 90% i.e. 86.7p, then conversion price of CB tranche will be no higher than thew 78p, not the then prevailing price. And CB owner basically has 20 mini CBs, each with a quarterly maturity one longer than the previous one.
So the CB holder IS effectively getting long the stock if it exceeds 86.7p, so in all probability WOULD be hedging it.
So I got that wrong - sorry.
However, I would stick by my view that the CB, at $55m, being only 7% of current market cap of $760m really isn't that large, and gamma effect will be limited. Not to mention that as each tranch of $2.75m amortises away each quarter, it dwindles in size.
Sorry.
Hmm. PRoblem is I've just realised something which makes me think I wasn't right. I think it's the case that the conversion price of the CB is the LOWER of a) VWAP less 10% , AND b) prevailing conversion price (i.e. now 78p but mechnaism exists to lower), so infact CB holder DOES get long stock as price exceeds 78p, and would hedge. BUT, due to quarterly maturities, the CB is actually a $55m package of 20 mini CBs, each with a maturity of one quarter later than the prior. i.e. suppose the stock doubled to 156p tomorrow, CB holder would convert at 78p, so would be economically long the stock, so would be hedging.
I think I might have got it wrong in my post. I need to go back and check the terms.
Chaps, just to get something clear, the fact that the CB conversion price is 78p is IN NO WAY a cap on the share price. Bear with me as I am a financial specialist and mathematician and I know what I am talking about. Now the thing is that if the CB were structured in the normal way, it would be true that the delta would increase as the share price approached or exceeded 78p. And if that were the case, the holder normally would gamma hedge, increasing their short the higher the price went. This would, to some degree (the CB is not that large actually) have the effect of pinning the share price to 78p.
However, this CB is NOT structured this way. For this CB, the $55m amortises in 20 quarterly tranches over five years, at $2.75m / q (i.e bog all in comparison to the liquidity in the stock). Each $2.75m payment Pantheon has to make can be satisfied in either cash or stock at the Company's election. Given Pantheon does not have $55m in spare cash, it is almost inevitable that these maturities will be satisfied in stock, at a 10% discount to the VWAP. So think about what that means: it's the equivalent of the CB holder PUCHASING / receiving $2.75m of stock / q, based on the prevailing price (78p totally irrelevant). So to the extend the CB holder wishes to "hedge" that exposure, it will sell $2.75m of stock at VWAP during each pricing period, each quarter. It will NOT be pre-selling some or all of $55m of stock in advance, since these quarterly redemptions are AT MARKET (or infact at a 10% discount).
Hopefully I have said that in an understandable way. Forget about 78p - it has no meaning.
Scot, absolutely. That was by far and away the most significant piece of information. 10 digits I.e >$1bn for significantly less than 50% and this was TURNED DOWN! IMHO if they had done that deal the market would have at the very least inferred a value of >$1bn for the >50% Pantheon retained on a straight extrapolation and then a very significant premium on top of that on the basis that the farm in partner also expected to make a lot of money and control had not been ceded.
What he meant was that in the short term, share prices can be massively distorted / distended by trivial things like speculation. These distortions can be very large and last a surprisingly long period of time. i.e. they can explain the 88 situation. However, in the LONG term, the stock market is as weighing machine, i..e it will eventually value things "correctly" based on tangible things like cash flow, dividends, profits etc.
Well, cbaron, as Buffett famously said of the stock market, in the short term, it is a counting machine. In the long term, it is a weighing machine!
Now 9m traded!
BB quotes 412k. Exchange 100 day average 672k. Volume so far today 3.0m
Fascinating that with the US mkt only open for 40 minutes, PTHRF has already trades 2.1m shares. Daily average volume 400k.
Chaps, small speculative E&P names like this regularly exhibit this kind of volatility. There is nothing remarkable about it. If the gyrations are too stressful for you, you shouldn't be in the name.
It's a misonomer the way some broking results denote certain trades as buys or as sells. Obviously for every share tht trades, there is a buyer and a seller. The trade is not a buy nor a sell, or at least it's both. What they might mean is that the trade happened at the bid or the offer. I..e that the offer was lifted or the bid was hit. I suppose you could call that a buy or a sell, but as I say, every trade is both.
To be honest, I dont' really like this morning's RNS. (and before you all pile on, I am a big enthusiast and investor in Pantheon). Nothing really new of note in it. Certainly nothing that was price sensitive or required a statement. Smelt to me more like the company trying to pump its own stock price, and that is always a bad sign. Particularly so in this case when there is no point, as the capital has already been raised, and we'll find out soon enough how the drilling went.
Extraordinary stuff. Who is the author? He doesn’t seem to name himself anywhere in this report.
Well i mean it's almost impossible to say isn't it? Personally I don't see why we should be trading 90% below the $3.10 / bbl Oilsearch paid, but we are!