Why Resolute Energy Corp's Shares Jumped 20% Today

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What happened

Shares of oil and gas explorer Resolute Energy Corp (NYSE: REN) jumped as much as 19.5% in trading Wednesday after the company announced an acquisition and new financing. At 11:00 a.m. EDT shares were still up 12.7%.

So what

The financing was in the form of 8.125% Series B Cumulative Perpetual Convertible Preferred Stock. That's a long name, but it's just preferred stock that pays an 8.125% dividend yield and can be converted to common stock at a conversion price of $29.53 per share. Proceeds are expected to be $52.8 million, or $60 million if underwriters exercises their overallotment option.

On the acquisition front, Resolute Energy agreed to buy oil and gas assets from Firewheel Energy for $135 million. The deal includes 3,293 net acres of operating area and wells that produce about 1,200 barrels of oil equivalent per day. The deal will be paid for with $90 million in cash and the rest in common stock.

Now what

This is a big acquisition for Resolute Energy, but it's also a costly one. With shares rising on Wednesday they're already trading near the conversion price of the convertible preferred stock, meaning existing shareholders will be diluted and the company will have to pay a dividend to new preferred shareholders in the future, leaving less cash for common stockholders.

Success in this deal will require Resolute Energy to generate more in returns than the acquisition's purchase price and costs. Keep an eye on earnings for growth in cash flow because this is a deal that will need lots of cash generation to pay off.

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Travis Hoium has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.