Macro Tsimmis

intelligently hedged investment

Oilsands Quest (BQI) update #2

Posted by intelledgement on Wed, 21 Nov 07

Oilsands Quest (BQI) announced yet another round of financing yesterday shortly before the market close—their third this year…and then today they announced pricing for the offering, and considerably scaled it down. Yesterday’s announcement envisaged a huge offering: 41.5MM shares (when all associated warrants are exercised) and up to an additional 5MM shares (including those distributed when all warrants are exercised) if the offering were oversubscribed. Today, the size of the offering was scaled down to 11MM shares/5.5MM associated warrants—each share comes with half a warrant—priced at US$5 for the US market and 2.6MM shares priced at CDN$6.17 for the Canadian market, and up to an additional 1.65MM shares/0.825MM associated warrants if the offering is oversubscribed. Each warrant entitles the owner to purchase a share of BQI for $6.75 for up to two years following the closing of the deal.

Not surprizingly, the stock—which closed at $5.35 on Monday scuttled down to $5.03 by the end of trading today. And short term it is not a bullish sign that demand was apparently not as high as management anticipated. With the US economy facing possible recession, investors are likely to be at the skeptical end of the scale on oilsands development, which certainly needs a high-demand environment to be viable. But presumably anyone who is buying at $5 with an option to get an additional half-share for every share purchased at $6.75 is not expecting the stock to head much lower. The transaction is expected to close by 5 December; if the underwriters don’t take the extra shares, that would be another sign of weak demand (for the stock at least).

If all these shares (including the extra ones) are sold and warrants are exercised, the float will increase from 184MM to 203MM. Oilsands processing is an expensive proposition and our model anticipates another 200% of dilution over the next eight years—to 600MM shares—if the company remains independent in order to finance testing and development of production capacity. So we are not going to get overly excited over the pricing/market demand for this particular offering.

However, we will keep an eye on what happens by 5 December.

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