OTTO Energy has reduced the running costs of its Houston office through reducing work hours, salaries, and placed staff in unpaid furlough off the back of a string board rearrangements and operational curtailments as it charts a course through the rough economic seas and an ill-timed capital raise.
The company told the market this morning the running costs of its Houston office will be reduced by 40% against budget and 50% against the 2018/19 actual costs, by placing workers in unpaid furlough, reduced hours for the remaining workforce, as well as a 30% pay cut to base salaries for staff and contractors.
The latest cutbacks come just a week after Otto chairman, Ian Boserio, resigned and was replaced by John Jetter and the board took a 50% pay cut.
Its Gulf of Mexico joint venture partner Byron Energy has also scaled back production from its F1 well at the flagship South Marsh Island 71 asset, following the price of Louisiana Light Sweet spot oil prices falling off a cliff. Previously it was trading at a premium to West Texas Intermediate.
Otto said SM 71 production rates will be continuously adjusted depending on the changes in oil price.
"The company has implemented some tough initiatives in recent weeks, and I would like to thank the board, staff and shareholders of Otto for the continued support they have shown the company," Otto managing director Matthew Allen said.
That support has wavered in recent weeks, as the company pushed ahead with a capital raise campaign that saw little institutional support outside of longtime major shareholder Molton Holdings.
The company completed the first stage, raising a total of $6.4 million through the issue of 1 billion shares at 0.6 cents per share, Molton took 536.9 million shares.
The company is trying to raise a total of A$17.5 million, more than its current market cap, to try and steady its balance sheet.
Allen said Otto had managed to "inject significant additional capital into the company at this crucial time and in combination with the announced austerity measures, Otto is now very well positioned to weather the current storm."
The company expects to have US$18 million in cash by April 20, so long as the remainder of the placement/entitlement offers "proceed as contemplated".
Allen did not sugar-coat his assessment of current market conditions however, noting the major destruction in demand, mass crude hoarding by some nations and interrupted supply chains caused by the COVID-19 pandemic.
"Given many of the higher cost segments of the oil and gas industry are significantly hedged for the coming 12-24 months, the impact upon supply is going to take some time to work through the industry before we see significant structural changes," he said.
In a note this morning, Morgans moved Otto's rating to reduce, highlighting that while the company's low-cost oil and gas assets are sound, the near-term financial risks to the business are "very high", and cut its target price from A$5c to A$0.4c per share.
Analyst Adrian Prendergrast also said the company had limited margin for error in its capital raise, with its shares now trading at a discount to its offer price, and its limited capacity to react operationally, given it does not operate its SM71 flagship asset, Lightning or GC-21.
"If current market conditions persist, which we fear they might, we see little earnings potential from Otto's operations over the remainder of 2020 and 2021," he wrote.
Otto is trading steady at 0.5c
CORRECTION: A previous version of this article said Otto Energy had laid workers off. This is incorrect, Otto has place part of its workers in unpaid furlough.