Key Highlights

  • Eligible shareholders can subscribe for five new shares for every one held, at 1.1 cents per share.
  • Each new share comes with one free attaching option exercisable at 1.7 cents over a three-year term.
  • Up to about 183.7 million new shares could be issued under the offer.
  • PAC Partners will underwrite up to A$1 million, and a director-linked entity will sub-underwrite the remainder.

Metgasco (ASX:MEL) announced on 10 November a partially underwritten, renounceable entitlement offer to raise up to A$2.02 million. Eligible shareholders can subscribe for five new shares for every one share held, at 1.1 cents per share, with one free attaching option for each new share. The Options have an exercise price of 1.7 cents and a three-year term. The options would provide further funding to the company only if exercised.

Up to about 183.7 million new shares could be issued. Because the ratio is five new shares for each existing share, the offer is large relative to the company's current share base, and shareholders who do not take up their entitlements would be significantly diluted as a result. As the offer is renounceable, entitlements can be traded rather than simply allowed to lapse.

Underwriting and a related party

PAC Partners will underwrite up to A$1 million of the offer. Glennon Small Companies (ASX:GC1), which is linked to Metgasco director Michael Glennon, will sub-underwrite up to the full A$1 million. Its commitment will be settled through an equivalent reduction in Debt owed to it, rather than in cash.

Glennon currently has a relevant interest of about 20% in Metgasco. Depending on how many shareholders take up their entitlements, that interest could range from 3.33% to 76.97% after the offer. The upper end of that range would arise if Shareholder take-up is low and the sub-underwriting is fully called upon, which would give a single holder a controlling position.

How the cash will be used

Metgasco said cash proceeds will go towards planning new wells at its Odin and Vali gas fields in the Cooper Basin, oil exploration at Thaldra, and a permanent connection at Odin. Because the sub-underwritten portion is settled by reducing debt, any shortfall taken up by Glennon would strengthen the Balance Sheet but would not add cash for these activities.

Why it matters

The offer gives existing shareholders the first opportunity to fund Metgasco's next phase of Cooper Basin work on equal terms. The planned spending is aimed at future production growth and exploration, and a permanent connection at Odin points to the company's interest in more reliable infrastructure at that field.

The Underwriting structure is the most significant feature for shareholders to weigh. Converting debt into Equity can reduce financial obligations, but it also means the amount of new cash depends heavily on take-up by other shareholders. The potential for a director-linked entity to move from about 20% to a majority stake is a governance consideration, and shareholders may wish to review the offer document for the controls and any approvals that apply.

Entitlement offers are a common way for small energy companies to raise Capital because all eligible holders can participate pro rata, unlike a placement, which is offered only to selected institutional or sophisticated investors. The renounceable feature gives non-participating holders a means to capture some value from their rights, although that value depends on Demand for the entitlements while they trade.

Risks and what comes next

The proceeds are intended for planning and exploration rather than completed drilling, so the outcomes of the work remain uncertain. New wells at Odin and Vali, and any oil exploration at Thaldra, would require further spending, and their results cannot be assumed. The scale of the offer means the share base could increase substantially, and the options, if exercised, would add further shares.

The final result, including how much was taken up by shareholders and how much fell to the underwriters, will determine both the cash raised and the post-offer ownership of Metgasco.