And so it has begun. Given persistent low oil prices over the course of 2015 so far, many service providers in the oil and gas sector have been feeling the heat. That’s especially so as some of them had increased their debt significantly prior to the collapse of the price of oil.
Now with battered balance sheets, a weak outlook for the oil and gas sector, and the risk of an interest rate hike coming soon, some oil & gas services companies may have to start looking at issuing new shares to raise capital and repair their balance sheets.
One company that has recently done so is Mencast Holdings Ltd (SGX: 5NF), a regional maintenance, repair, and overhaul (MRO) service provider for the offshore, marine, and oil & gas sectors. Yesterday, the company announced its plan to issue 54.6 million new ordinary shares of itself at S$0.27 apiece in a private placement to two investors, Wong Swee Chun and Goh Kai Kui.
Over the past few years, Mencast had increased its debt to equity ratio markedly – from just 27% at end-2010 to 136% in the third-quarter of 2015 – in the hopes of capturing the growth in the industry. Unfortunately, with the oil & gas sector moving in reverse-gear with the fall in the price of oil this year, Mencast had been caught off-guard with its weak balance sheet.
The private placement should raise about S$15 million for the company in gross proceeds. The 54.6 million new shares represent about 15% of the existing shares of Mencast. After the placement, Wong and Goh, who are existing shareholders of Mencast, would own 11.8% and 2.2% of the company, respectively.
It is questionable if the private placement would be sufficient to strengthen the balance sheet of Mencast for good. The S$15 million to be raised is only about 8% of the total borrowings of the company, which stand at over S$190 million at the moment.
If the oil & gas sector remains weak for a long period of time, there is a real chance that Mencast might need to raise additional funds through the issue of even more shares in the future in order to remain in business.
Looking at the stock market, are other highly leveraged firms in the same sector planning to raise equity capital as well? Some companies in the oil & gas space with debt to equity ratios of more than 90% include Swiber Holdings Limited (SGX: BGK), Ezra Holdings Limited (SGX: 5DN) and even SembCorp Marine Ltd (SGX: S51). Would they be next?
The issuance of new shares may dilute existing shareholders’ stakes in a company. As such, my two questions just above is something worth thinking about for investors.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim doesn't own shares in any companies mentioned.