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Why Did Weatherford’s Shares Jump after Its Share Sale?

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Weather announces share sale

On March 1, 2016, Weatherford International (WFT) disclosed that it will issue new ordinary shares. In its first SEC (Securities and Exchange Commission) filing, the company disclosed issuance of 80 million ordinary shares. Later, in a subsequent filing to the SEC, WFT raised the number of shares to be issued to 100 million. In addition, the underwriters of the issue could purchase an additional 15 million ordinary shares at a discounted price within the next 30 days. Weatherford International has set the issue price at $5.65 per share. The aggregate value of the offer is ~$565 million.

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What are the purposes of the WFT share issue?

Weatherford International plans to use net proceeds from the offer for “general corporate purposes, including the repayment of existing indebtedness.”

Weatherford International’s stock price reaction to the share issue

The share issue was announced on March 1 after the Market closed. Weatherford’s shares rose 11.5% to $6.90 yesterday from $6.19 on March 1. The confidence of Weatherford’s management that it can successfully boost the issue size by another 20 million shares and the possibility of a reduction to Weatherford’s huge debt burden boosted its share price. Despite the issue price of $5.65 coming at an 11.7% discount to WFT’s closing price on February 29, the market reaction was positive. The VanEck Vectors Oil Services ETF (OIH), an ETF tracing an index of 25 energy stocks, rose 3.2% yesterday. Weatherford International accounts for 3.4% of OIH.

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A few other energy companies have issued new equity in recent times. These include Enbridge (ENB), a midstream operator, which announced an issuance of $1.5 billion in common stock on February 24. Also, on February 29, Marathon Oil (MRO), an upstream energy company, announced a $1.3 billion new share issuance.

Conflict of interest for underwriters

J.P. Morgan Securities (JPM) and Morgan Stanley (MS), the lenders under WFT’s revolving credit facility, are deemed to have a conflict of interest, as they are also the underwriters of the new equity issue.

We’ll discuss Weatherford’s debt and equity in the next part of this series.

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