Synergy Resources' Asset Purchase Leads To Dilution, And A Roth Downgrade

Roth Capital has downgraded Synergy Resources Corp SYRG to Neutral from Buy, saying its recent $505 million asset purchase deal will lead to additional share dilution. Synergy Resources agreed to buy 33,100 netacres in the core Wattenberg (72,000 gross) from Noble Energy, Inc. NBL for $505 million in cash.

In order to fund the deal, Synergy announced a $27 million asset sale, a 45 million share offering and an $80 million private debt placement.

The recent deal could further dilute the shares, as analyst Joe Reagor noted that since the end of November, the company's outstanding share count has increased by an estimated 84.7 million shares or 79 percent (inclusive of its pending equity financing).

Reagor noted that the "future appears cloudy," as the company didn't raise its 2016 capital budget despite the large acquisition, and it may need to drawdown a portion of its revolver to fund 2016 capital expenditures, which could "limit its ability to grow in 2017."

"We are concerned by the significant dilution SYRG has experienced during 2016. Additionally, we believe there is some concern that SYRG will not have the necessary capital to grow production at an increased rate post closing of this acquisition," Reagor explained.

Commenting on the first quarter results, Reagor said the company's revenue of $18.3 million and a loss of $0.42 were below his estimates of $21.8 million and loss of $0.08. The revenue miss was driven by lower oil to gas production ratio and weak price realizations.

"We note that the gas to oil ratio appears to be trending in the wrong direction for SYRG, which could impact future well economics, in our view," Reagor added.

As such, the analyst recommends investors should take a step back until management provides further clarity.

Shares of Synergy Resources were down 0.84 percent to $5.90, while Reagor has cut the price target on the stock to $6.25 from $9.50.