It’s been a disappointing year for US oil explorer 88 Energy (LSE: 88E), which operates 301,000 acres of the Project Icewine prospect on the North Slope of Alaska.
The firm’s shares have fallen by about 65% since June, after flow testing the Icewine #2 well failed to produce any oil.
The company is actively searching for a ‘farm-out’ partner to share the costs of continuing to drill and evaluate the Icewine acreage. The deadline for bids was the end of 2018, but in an update today the firm said this had been extended into the New Year.
Multiple “high-quality” companies are said to be examining the Icewine data while considering a bid. But the falling price of oil probably isn’t helping. A deal is now being targeted during the first quarter of 2019, so that there’s still enough time to schedule “the drilling of multiple wells” during the 2020 summer season.
A big worry
As a pure explorer, 88 Energy doesn’t have any oil or gas production or any other source of revenue. This means it relies on cash from shareholders and loans to fund its operations.
Unfortunately, investors are becoming less willing to supply fresh cash. In October, an attempt to raise A$14.33m (£7.96m) from existing shareholders only yielded A$3.6m.
In November, the firm tried again, hoping to raise £5.9m from by selling new shares to investors through brokers. This raised £5.56m before costs — more successful, but still short of the firm’s target.
My verdict
88 Energy does have a large and prospective acreage. The firm could still make a big, valuable oil discovery. But this is very much a gamble, in my view.
Financing seems to be getting harder to find and interest costs mounting on the group’s loans. This stock is much too speculative for me.
I’d buy this instead
Although I do invest in small oil companies, I have a rule of only investing in firms which have commercial reserves and ongoing production. What I look for are companies that can fund their exploration activities entirely from their own oil and gas sales.
This may seem dull and boring, but it helps protect me from the kinds of losses often suffered by shareholders in speculative stocks such as 88 Energy.
One of my top picks in the small-cap oil sector at the moment is SOCO International (LSE: SIA), which is one of the largest producers in Vietnam. This company is still run by founder Ed Storey, who has a 4.2% shareholding in the firm.
A bid target?
Mr Storey is now in his 70s. I wouldn’t be surprised if he looked for a takeover bid or a merger at some point in the next few years, to allow him to step back from the business.
In the meantime, SOCO is expanding its operations into Egypt via the acquisition of Merlon. This deal should add at least 6,500 barrels of oil per day to the group’s production and generate strong free cash flow, thanks operating costs of just $6 per barrel.
Analysts expect SOCO’s earnings to take a step up next year, doubling to $0.14 per share. This puts the stock on a 2019 forecast price/earnings ratio of just 6.3. This looks good value to me, especially as it’s paired with a dividend yield of nearly 7%.
