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When Stock Issuance Isn’t A Bad Thing

In general, when a company announces plans to issue more stock, it has a rapid negative effect of the share price. That is understandable, each share is obviously worth less when there are more of them issued. Conventional wisdom says that the underlying value of the company hasn’t changed much, nor have projected earnings, but the number of shares has increased; each share must therefore fall in value. There are exceptions, however, and many of them have been seen recently in the oil exploration and production (E&P) sector.

The latest company to jump on the equity issuance bandwagon is PDC Energy (PDCE), and it is an example of why, in the current situation, issuing shares and diluting the investment of current shareholders can sometimes be seen as a positive for a stock.

When a company needs to generate cash there are two options. They can borrow money or issue stock. At a time when we have been told by the Fed that rates will rise at some point in the not too distant future and further volatility in the price of both oil and natural gas is a distinct possibility, loading up on debt would be at best a risky strategy. Far better to take the short term hit implied by stock issuance and, if anything, use part of the proceeds to pay down debt and improve cash flow in the future. That is what PDCE is doing, planning to use some of the cash to pay off their revolving credit facility.

That has two advantages. Firstly, when pressure on unconventional…

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