Contango Oil & Gas Company (NYSEMKT:MCF) recently revealed that it had entered into an agreement to acquire a stake in the Southern Delaware Basin (Texas). It said the acquisition would cost it $25 million, with initial payment being $10 million. But the company didn’t disclose how it intended to raise the funds for the acquisitions and now it can be revealed: equity fundraising.
What’s being acquired by Contango Oil & Gas Company (NYSEMKT:MCF?
According to Contango Oil & Gas Company (NYSEMKT:MCF), the stake it is acquiring in Southern Delaware Basin is one-half of the interest of a seller in the nearly 12,000 gross undeveloped acres. The company said that is about 5,000 net acres. Contango didn’t disclose the name of the company it is transacting with, but said it is a private oil and gas company.
According to Contango Oil & Gas Company (NYSEMKT:MCF), the Southern Delaware Basin is currently among the most economically attractive oil and gas regions in the U.S. Perhaps that explains why the company has agreed to pay $25 million for its stake in the Delaware basin.
The initial $10 million in payment is in cash. The remaining portion of the acquisition consideration will be in the form of $10 million for carried well costs and about $5 million in success payments.
Where is the acquisition fund coming from?
While shareholders in Contango Oil & Gas Company (NYSEMKT:MCF) might be in excited that the company is increasing its asset base, especially by expanding into potentially lucrative oil and gas basin, the manner of raising the acquisitions funds causes nervousness.
Contango has said that it is selling 5 million shares of its common stock with the hope of raising $50 million. The company has also granted underwriters in the equity offering to purchase additional 0.75 million shares to cover overallotment. As such, if the underwriters exercise their option, the gross proceeds from the offering could exceed $50 million.
Because just about $25 million is needed for the Southern Delaware basin acquisition, Contango Oil & Gas Company (NYSEMKT:MCF) said it would use portion of the equity offering proceed to repay its revolver credit. In case the acquisition deal doesn’t go through, the rest of the proceeds would be funneled to working capital.
But the sale of 5 million shares is bound to dilute value for existing shareholders.