Xtreme Drilling and Coil Services Bites The Bullet

Xtreme just had to raise money at the worst possible price of $1.15 per share. That’s a penny under the 52 week low of $1.16. The company is raising $15 million by selling 13 million common shares. The underwriter will have the option to to purchase an additional 15% which would bring the gross proceeds of the offering to $17M. XDC finally bit the bullet after months of trying to avoid raising money from the market.

That is certainly not the turn of events I was hoping to see.


XSR500 Service RIG, service that Balance Sheet Plz!

Xtreme Drilling and Coil Services XDC.TO 5.12 [+0.12] was featured when the company was looking for a debt instrument in the summer. It looks like the interest rate offered was unfavorable to the company. So they decided to go with an equity issue.

I think the company was over ambitious with its build program. At the end of Q2, it had $18M left in new build capex through the end of the year for 2 XDR500 rigs. Its lending facility stood at $160M with $130M drawn.  Chances are the limit was going to be hit and it looks like it did.

So the XDR500 is one heck of a drilling beast and the company’s rigs are in high demand. Every new XDR500 is contracted 2 years out. Technically speaking these guys are great but they missed it when it comes to financial projections and risk management. They could have raised the money at $2 or even at $3. The obvious question here is: why did you wait that long to raise money?

Xtreme’s build program called for a 50% increase to the drilling fleet adding 14 rigs. Someone didn’t do a good job at risk management and shareholders have to pay the price now.

The new issue represents a 20% dilution (13M/65M O/S). This means analyst targets are automatically cut by 20%.

On the other hand, management will be putting a lot of skin on the line: between $3M and $5M of their own money. I’ve been wondering why no insiders have been buying,we finally get that vote of confidence. The company will be able to finish its build program and get into free cash flow generation mode.

Book value is still strong providing a lot of upside. According to Altacorp the book value stands at $4.12 per share. Cannacord upped its target to Buy from Speculative Buy.

Now that the focus on debt will start dissipating, I think the turning point is at hand. The share price will reverse course in my opinion as the market increasingly focuses on the deep value XDC represents at 0.3x of NAV. The stock is already trading above the offering price probably due to shorts covering.

Management needs to double their efforts at this point to make up for the lost time, revenue and the dilution. There’s no room left for mistakes anymore, the difficulties reported in Q2 in XDC’s coil services segment have to be resolved. Q3 will be of paramount importance to the direction of the share price.

Finally, XDC operates in the Niobrara, Eagle Ford and Bakken unconventional shale plays in the US. The price of oil remains strong and there’s no spring break up or oil price differentials to worry about. The company has a substantial amount of 2013 cash flow contractually locked with major operators. There’s absolutely no reason for not delivering on the bottom line.

What do you think?