CDEV Stock/Warrant Arbitrage Play

Centennial Resource Development [Nasdaq:CDEV] is a Delaware Basin pure-play oil producer. It was formed through the Silver Run Acquisition Corp (a special purpose acquisition company) acquiring Centennial Resource Production (a distressed independent oil producer) in October 2016.

As a sweetener of the Silver Run IPO, each IPO share include a share of the straight stock and some warrants with strike price of $11.5 and expiring at 2/23/2021. On 2/27/2017, CDEV released an announcement of its intention to deliver notice of redemption of warrants (link here). Long story short, the warrants carried some condition that, if triggered, will allow the company to redeem (forcing exercise) all the outstanding warrants. The condition is that the stock’s close prices are at least equal or larger than $18 for any 20 trading days within a 30 trading day window, which was met by 2/24/2017. According to the announcement, the company will initiate the redemption starting from 3/1/2017 and the warrant holders will have until 3/31/2017 to exercise their warrants, or the company will redeem it at $0.01/warrant! Obviously, the most important thing for any warrant holders is that don’t forget to exercise or sell your warrants before 3/31/2017.

Some other thoughts I had is checking the arbitrage opportunity, now that we know the warrant is going to expire soon. I called up the investor relation department of CDEV and confirmed the cash-based approach (i.e. exercising the warrant by buying each share of CDEV @ $11.5) is no longer available, and the investors only have the cashless option, which is to convert each warrant to 0.376 shares of CDEV.

As of today, CDEV is closed at $18.64 and CDEVW is closed at $7.03. A quick calculation can be seen in below:

0.376*$18.64-$7.03 = -$0.02136, implying 30 bps spread on the warrant

Regarding liquidity capacity, CDEV had average daily volume about 1 million, and CDEVW however only had about 100,000. You probably cannot put more than 10% the daily volume or the market impact would eat the spread up. Given the liquidity constraint on the warrant side, it is already a gone opportunity, unfortunately.

Looking back, if someone were able to act on the announcement day (Stock closed at $19.54 & Warrant closed at $7.29 on 2/27/2017), the spread would be  0.376*$19.54-$7.29 =  $0.05704 (78 bps), which is still small but may be more actionable.