$1.2bn (+180m) sen unsec cb coming tonight form GS/MS. Terms: 7y 2⅝ up 30%, full pctns. UOP=capex/gcp. RE-OFFERED 99-99½.indpnt deep water driller in Gulf of Mexico/Africa. Stk +19% on 12/05 announcing a big find in gulf (+78% ytd!). Want to concentrate on stk slippage so we’ll use L+600 & 35vol (leaps illiquid but 46iv bid, stk vol >40vol) but big deal/7yr. Now to stk; 70d, 50% go to h/f=5.25 ADV to hedge SO question is how much slippage do we a/c for. We’ll assume -7.5/-10/-12.5% (stk already -9% on low volume).-10% u will need +tick for that day & next. Theo @99¼ w /stk -7.5/10/12.5%=102.4/101.1/99.9. Key=book as o/r demand will offset pressure on stk (up & down). 99-99.5 is 2dnry here, where stk settles is primary. We’d >BUY< @ 99. BBg/Co Filing
UBS
Bought deal, 7-yr bullet, 2-5/8s up 30%, reoffered as of last night at $99. Tough credit situation—highly valued, speculative assets, no current revenue or reserves and enough cash to fund 3-4 yrs of operations. Assuming 10% stock slide and using L+600-650/35v, get TV of 99.5-100.5–just cheap enough to attract interest. Would not want to go tighter than that as we believe that even when the company eventually transitions to production, increased leverage and sensitivity to commodity prices will likely keep spreads wider than L+500 in today’s terms. In the meantime, stock is likely to be highly sensitive to marginal headlines on drilling progress, with few offsets on the balance sheet to cushion bad news.
Company currently has an 11.2bn mkt cap and $1bn of unrestricted cash and ST invs (plus another $500mm in restricted, pre-funded expenses)–but no revenue or booked reserves. Company currently has enough liquidity to fund opex/capex for 4Q12-YE13. Pro forma, liquidity will be about $3bn, assuming $1.5bn total deal size including shoe, which should be enough runway to operate at current pace for about 4 years.
Assets are still highly speculative as company currently books no reserves. UBS estimates unbooked net reserve potential could be as high as 3.6bn BOEs (see attached for our Initiating Coverage report on CIE from early Dec). At this point, assuming company could be valued like EXXI at $18/Boe (which has an oil mix at 71%), CIE’s pro forma EV implies potential reserves of 596MMBoes, A reserve base of that size would vault CIE into the ranks of the 2nd tier E&P players–if they can be booked. However, company not expected to begin to produce any oil before 2016. In the meantime, exploration and opex costs expected to be in the $600-$650mm range and our analyst expects future development of the fields to add another $300mm to the bill. Interest expense on the new notes will add another $40mm. As a result, we think company will have sufficient liquidity to fund about 3-4 years of operations. At that point, if conditions merit, we believe company will first look to raise more equity and then explore the HY markets to fund the production phase. HY market will require a relatively short bridge to reserve booking in order to establish a covenant package.
Company has a portfolio of leased, deep-water prospects in the Gulf of Mexico and off coast of West Africa (Gabon and Angola). While deep-water oil plays tend to be large and highly concentrated, it can be very challenging to extract efficiently at the high pressures found at those depths (consider the challenges in dealing with the Macondo blow-out as an example of the impact of high pressure). As a result, shift from exploration to development phase can be highly challenging.
Earlier this month, the company made a discovery in its North Platte field in the Gulf, where it is in partnership with Total. Stock was up 18% on that news. Since the $1.5bn secondary offer last February, stock is flat. CIE IPO’ed in 2009 and its PE sponsors still own about 60% of the stock. Our analyst, Betty Jiang initiated coverage on this stock in early December with a Buy, $34 PT. She believes that stock has potential upside to $46 and downside to $12. Based on current stock indication of $25, mkt implying 62% of the positive outcome vs. the negative outcome. We also note current stk includes $2.50/sh of net cash.