Jadestone: Proposed financing or how to squander the credibility of management

After having been covering Jadestone for over two years and following it since 2020, today we write an article about the company’s latest move, surely at its most critical point, both due to its financial situation and the credibility of the management, which has clearly been called into question.

After several weeks of consecutive communication errors that had driven its price to a 2.5-year low, Jadestone has issued a capital increase in which its largest shareholder, Tyrus Capital, along with the board and the rest of the main institutional investors, have participated.

This article aims to cover the details of the capital increase, the current situation of the company (from a financial and operational standpoint), reflections on this latest move, the scenarios that arise from now on (both for current investors and opportunists), the resulting financial structure, and our point of view.

Disclaimer: This article solely explains our opinions and thoughts based on our best interpretation of the publicly available information published by the company and does not constitute any form of financial advice.

Jadestone (LON: JSE – Market cap $270MM) announced a capital increase on Tuesday

• They placed $52.6MM ($2.6MM fees)among institutional investors, and there will be an open offer for minority shareholders amounting to €8MM (approximately $8.6MM), allowing them to acquire 1 share for every 30 shares they currently hold, at a price of 45p per share.
• Additionally, a $35MM standby working capital facility has been signed (by Tyrus Capital), which will be reduced based on the result of the placing that exceeds $50MM. From our perspective, the terms of the facility seem distressed: 5% undrawn / 15% drawn amount + 4.3% arrangement fee (minimum $1 million) + $30MM in warrants with a strike price of 50p over 36 months.
• In other words, in exchange for approximately $85MM, the number of circulating shares will increase from the current 446MM to around 570MM if the warrants are executed.
• Tyrus participated in the capital increase with its current 26.45% ownership and commits to lend, up to a maximum of $50M (Equity Underwrite Facility), the gap to $50MM of capital rise intended. Naturally, they charge a fee for providing this assurance: 5% undrawn / 13.5% drawn amount + an arrangement fee of $2.15 million. Note: the Underwrite Facility wasn’t necessary as the placing was oversubscribed.
• We believe that the terms are highly dilutive for minority shareholders but beneficial for the major shareholder, Tyrus Capital (which is, after all, a Hedge Fund pursuing its own objectives).

This is happening despite having signed a $200MM Reserve-Based Lending (RBL) facility just 10 days ago

• The RBL facility was intended to cover the necessary Capex for Akatara, M&A activities, and infill drillings (so far, at least $50MM has been drawn to repay the interim facility).
• Initially (as announced in April), the RBL facility required to hedge 40% of the production (from 4Q23 to 3Q24 inclusive), but now it has been changed to 50% of production from 4Q23 to 2Q25.
• Currently, 64% of the required (to hedge) production has been hedged at $70 per Brent barrel through swaps. This is the minimum Brent price in the last 2 years (and several dollars below the current 2024-2025 forward curve).

In this context:

• Jadestone was already producing 17,800 barrels per day, with 7,000 barrels coming from Montara, its main asset. The shutdown of Montara for 7 months significantly depleted the company’s cash reserves.
• The company’s value had decreased by 40% in recent months, partly due to operational issues at Montara and partly due to poor communication through RNS (Regulatory News Service) announcements during this period.
• Jadestone had been involved in M&A operations and had implemented a share buyback program, spending approximately $20MM to repurchase shares when the stock was trading between 70-90p.

This lead us to share some reflections regarding decisions taken by Jadestone’s management 

• Why did they need this financing if the RBL was closed just 15 days earlier?  What has happened in a span of six weeks of time that requires diluting investors by 27%? Additionally, why is the RBL expected to be reduced in three quarters’ time?
• It appears that no one was able to conduct a stress test between July 2022 and January 2023 when they were finalizing the acquisition of North West Shelf and completing the 10% acquisitions of Lemang PSC and Sinphuhorm, while Montara was shut down and they were buying back shares under the assumption of Brent at $70 (the 10-year average). Did they not anticipate the extended operational issues at Montara?
• Why do the conditions of the standby working capital facility resemble those of a distressed company and why were they signed despite not needing it? Why wasn’t a bridge loan sought in 2023 if the debt problem is expected in Q2 2024?
• As of May 31, 2023, the company had $41.2 million in cash and a debt of $50 million. With the $200 million RBL facility (available since May 22, 2023) and repayment of the current debt (actually paid on the 1st of June as confirmed in the Annual Report submitted on the 8th), the company’s liquidity would amount to $191.2 million. The company itself expects to use $135 million of the RBL in the next 6 months, leaving $56.2 million still available in six months from today, which considers zero cash generation at 17,000+ boepd. Is a standby working capital facility at a 15% rate necessary at this moment?
• The repair of the Montara FPSO could have potentially been carried out at a shipyard in Southeast Asia, taking less time and resolving all the problems, including those that persist today, such as the closure of petroleum tanks. It is unclear whether this decision was made to save money, due to lack of knowledge, or due to limited space in shipyards.
• How will the developments in PNLP (formerly non-operated assets in Malaysia that Jadestone now plans to redevelop) and Vietnam be financed? Is it the right time to invest in assets as problematic as PNLP, whose FPSO was in such poor condition that it lost its classification?

and about its communication to the market…

• If they were producing over 17,000 boepd, why wasn’t it communicated to the market until after the capital increase, despite the company announced they wanted to improve its communication with shareholders? 
• The series of grave errors in the RNS announcements in recent months, such as publishing incorrect guidance (revising it downward by 1,500 boepd shortly after presenting it), the need for Montara to halt production for a few days due to a typhoon without it being disclosed despite the impact on production, or the continuous suggestion that end of repairs was imminent without providing any planning – even an approximate one.
• Why didn’t any of these incidents cost the IR their position? 

Reached this point, and acting pragmatically, how does the company’s structure look like and what scenarios are posed post-financing for both current investors and opportunists?