Equal Energy – Equity (TSX: EQU) is trading relatively high (roughly a market cap of $160 million) and the balance sheet is strong for a small oil and gas producer by virtue of recently doing some equity fundraising and asset disposals. They still have a net debt position but it is easily buffered by cash flows from operations.
Their CFO did resign today over a compensation dispute – a yellow flag, but the market did not appear to be too concerned about this. I do not believe this will compromise their ability to pay off their debentures.
They have two series of debentures outstanding, including EQU.DB – $80 million outstanding, matures on December 31, 2011, pays an 8% coupon. Perhaps more importantly, they are callable presently at 105 and 102.5 after January 1, 2011 with 30-60 days of notice. Current market price at the ask is about 102, although if you floated a bid at 101.75, you would likely get hit. The following assumes a purchase at 102.
It is a respectably high probability event that they will refinance debt and call out their existing debt on January 1, 2011 for 102.5. If so, this represents an annualized gain of 9.1% – approximately 7.8% of that is a cash yield and a 1.2% premium for being called out between now and January 1, 2011. If not called out, then assuming you hold onto maturity for the final year, the gain would be 6.4% – approximately a 7.8% current yield and -1.4% capital loss.
Putting this into raw numbers, $100 invested today would give you $103.57 on January 1, 2011 assuming a call-out as anticipated. If not, $100 invested today would give you $109.12 on December 31, 2011 assuming maturity at par. None of this includes commissions and assumes a purchase at 102.
Considering that your risk-free yield at 4 months and 16 months is roughly 2% in a cash account, parking your capital in a manner such as this is a relatively low-risk, low-reward alternative that can give you more yield.