Don’t you just love small-cap oil explorers and the potential for massive profits they offer? Or do I mean hate them because it’s so easy to lose your shirt on them?
Both of those questions have probably been going through the minds of 88 Energy (LSE: 88E) shareholders over the past few years, as the share price has alternated between boom and bust.
Disappointing tests
The company’s Icewine project looked very exciting, with suggestions of up to 3.6bn barrels of oil to be tapped. But test drilling this summer pretty much drew a blank, and the company couldn’t persuade any of the black stuff to come to the surface — just a bit of gas was all it got for its efforts.
That took up a big chunk of Wednesday’s interim report, with the company having emphasised again that “progressing to horizontal appraisal wells is now the best use of time and money” at Icewine, and further investigation of the prospect’s potential is “planned to be accomplished via farm-out.“
88 Energy’s other prospects appear to be at very early stages, with seismic data analysis still in progress.
So, the big question (which we have to ask of any ‘profit tomorrow’ oil explorer) is whether 88 Energy can get to profitability before its funding runs out.
Funding
On that front, the company successfully raised a gross A$17m (approx £9.5m) in a placing in May, having earlier completed a refinancing of its US$16.5m (£12.9m) loan with Bank of America. The new loan terms, said to be “substantively similar terms to the original agreement,” were not disclosed, but the new agreement extends the maturity date by four years to 30 December 2022.
The half resulted in a loss of $3.2m, and at 30 June, the firm was sitting on cash of $15m, so it doesn’t look like there’s any danger of going bust in the near future.
But 88 Energy’s prospects look like they could go anywhere to me, and if you’re thinking of investing in the company today, you really need to know about the risks you face.
If, for example, you’d bought some shares in January 2016 before the Icewine excitement kicked off, you’d have found yourself sitting on a 10-bagger by March. The shares promptly lost about half their value in the next few months before spiking up to an even higher peak… and then crashing back down again.
Winners and losers
Over the past three years, the false starts, the booms and busts, would have left you with your investment trebled had you bought right at the start and held on all the way through.
But you could also have lost nearly three quarters of your money had you been unlucky enough to get in at just the wrong time. That’s the kind of danger that lies at the heart of investing in unproven oil explorers.
At this stage, despite the suggested potential for hydrocarbons at 88 Energy’s prospects that got so many investors excited, we still don’t know if the company will actually uncover any commercially viable oil or gas at all.
If it does, investors at today’s depressed share prices could be in line to bag a tidy profit. But I can’t see any better way to value this than a 50/50 gamble — and I don’t invest like that.
