The 88 Energy (LSE: 88E) share price has fallen 67% over the past 12 months. That was mostly as a result of a disappointing well test in March, which saw the stock plummet 65% in a single day.
The company was conducting wireline logging at its Merlin-2 well. But it had to conclude that “reservoir quality at this location is insufficient to warrant a production test.” And it proceeded to plug and abandon it.
I’ve invested in oil exploration stocks in the past, and seeing some prospects turn out dry is just part of the everyday risk. Is the best time to buy a stock like this is when it’s on a downer, rather then when everyone is excited about it?
Volatile penny stock
I think the bigger picture is more encouraging. After all, the 88E share price is up 15% over the past two years, even if there was a boom and bust in between.
On the subject of the share price, I must note one caution. 88 Energy is very much in penny share territory. In fact, the shares are down at sub-penny levels, currently at just 0.5p. That suggests they might be volatile. And I’d expect to see relatively large spreads between brokers’ buy and sell prices.
Icewine assets
It’s a risky business, so how does it stack up for 88 Energy? The latest big exploration is its Icewine project in Alaska. An update in August gave us some early resources estimates. For total unrisked gross prospective oil resources, the firm gave us an estimate of a little over a billion barrels. That’s big.
It’s a mean estimate though. And we’re looking at anything between a low estimate of 265m barrels, and a high estimate of 2.5bn barrels. And there can be a big difference between oil in the ground and actually pumped hydrocarbons, even if these estimates are anywhere near reality.
Cash burn
Meanwhile, 88 Energy is still burning cash to fund its exploration work. Shortly before releasing these Icewine estimates, the company announced an equity placement to raise A$14.9m.
But this really is the nature of oil and gas shares, at least with small explorers like this. It’s all about cash flow as they periodically raise new funds from shareholders to continue drilling. Sometimes it comes good and the black stuff starts gushing, and the share price skyrockets. But at other times, drilling creates nothing by dry holes, like at Merlin-2.
Where next?
So what might 88 Energy achieve over the next 12 months and more? Investors will surely focus on Icewine, which is in its very early days. Given that it would be a gamble at this stage, for me an investment would make sense only as part of an overall oil exploration strategy.
That would be based on investing modest sums in different explorers over the long term, and hoping some will hit the big time. I’m too old for that now, so I’ll sit it out. But were I 30 years younger, I might take a small punt.
