Shares of Encana (ECA) - Get Report are down over 6% Tuesday after the company announced it will sell 107 million shares at $9.35 in a secondary offering. The sale would generate proceeds of roughly $1 billion.
"This is a blank check" for Encana, TheStreet's Jim Cramer, co-manager of the Action Alerts PLUS portfolio, said on CNBC's "Mad Dash" segment.
However, investors don't know what the company plans to do with the money. What company or assets will it buy? If investors knew that answer perhaps the stock would be up on the day, not down, Cramer reasoned.
He explained that in the past these types of secondaries have turned out well for Pioneer Natural Resources (PXD) - Get Report and PDC Energy (PDCE) - Get Report because these companies have used the proceeds to make purchases in the Permian Basin.
The Permian has a very low cost of production for oil, meaning the companies that operate there can still turn a profit despite depressed crude prices, Cramer said.
It would be beneficial for Encana to expand its oil operation, he concluded.
At the time of publication, Cramer's Action Alerts PLUS had no position in companies mentioned.