Is the Frontera Resources Corp share price heading to 0.2p?

Rupert Hargreaves considers the outlook for Frontera Resources Corp (LON:FRR).

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

I tend to stay away from small-cap mining stocks because they are so unpredictable. However, every so often one company from this area of the market attracts my attention due to its unique properties.

Business turnaround

Frontera Resources (LSE: FRR) is hardly the most exciting stock on AIM, although it does have tremendous potential. The international oil and gas exploration company is headquartered in Houston, Texas, and has interests in hydrocarbon assets within Georgia, Moldova, and Ukraine.

For the past few years, the business has been dogged by a weak balance sheet, which has restricted the firm’s ability to grow and develop its assets. But now management is working to restructure Frontera and clean up its balance sheet. Operational costs have been reduced, and a restructuring of debt has helped the company bring down its annual interest expense. For the six months ended June 30, the firm’s reported interest cost for the period declined approximately 50% year-on-year while total operating expenses also fell 17% year-on-year.

Management is planning to reduce costs further and continue to improve the balance sheet, which is a positive sign, although I am concerned about Frontera’s revenue, or rather the lack of it.

Profits lacking

For the six months to the end of June, the company reported revenues from crude oil and gas sales of $1.8m, a positive figure but not enough to cover field operating and project costs. The loss from operations in the first half was $4.1m.

Frontera’s future seems to be tied to the success of its Block 12 asset in Georgia. At the beginning of September, the company reported that several unnamed oil “majors” were in talks with the firm regarding possible transactions involving a farm-out or joint operating agreement.

If management can seal a deal with a larger operator, it could be great news for Frontera and the company’s shareholders. On the other hand, if no agreement is reached, I’m not sure that the group can continue alone.

It has been a public company since 2005, and over this period it has failed to generate any value for investors. Even after rebuilding its balance sheet at the end of the first half, the company only had just under $700,000 in cash, which is hardly enough to pursue the development of a major oil well by itself. If Frontera struggles to partner with a deep-pocketed oil major, the only way I see it being able to develop a massive oil prospect is via a massive rights issue.

Conclusion 

Considering the above, Frontera looks to me to be a binary opportunity. Either the company agrees on a partnership or it doesn’t, in which case, the future for the business looks bleak and the shares could plunge below 0.2p. 

Personally, I’m not comfortable making these high-risk, high-reward type of bets, but for investors with a bigger risk tolerance, Frontera might be an attractive pick. If the company hits the oil jackpot, the sky could be the limit for the shares.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Young Caucasian man making doubtful face at camera
Investing Articles

Surprise! This monopoly stock has taken over my Stocks and Shares ISA (again)

Our writer has a (nice) dilemma in his Stocks and Shares ISA portfolio after one incredible growth stock rocketed higher…

Read more »

Investing Articles

10.5% yield – but could the abrdn share price get even cheaper?

Christopher Ruane sees some things to like about the current abrdn share price. But will that be enough to overcome…

Read more »

Investing Articles

£9,000 to invest? These 3 high-yield shares could deliver a £657 annual passive income

The high yields on these dividend shares sail sit well above the FTSE 100 average of 3.6%. Here's why I…

Read more »

Surprised Black girl holding teddy bear toy on Christmas
Investing Articles

I’ve got £2k and I’m on the hunt for cheap shares to buy in December

Harvey Jones finally has some cash in his trading account and is hunting for cheap shares to buy next month.…

Read more »

Investing Articles

Down 25% with a 4.32% yield and P/E of 8.6! Is this my best second income stock or worst?

Harvey Jones bought GSK shares hoping to bag a solid second income stream while nailing down steady share price growth…

Read more »

Investing Articles

Here’s how the Legal & General dividend yield could ultimately hit 15%!

The Legal & General dividend yield is already among the best of any FTSE 100 share. Christopher Ruane explores some…

Read more »

Investing Articles

Is December a good time for me to buy UK shares?

This writer is weighing up which shares to buy for his portfolio next month, and one household name from the…

Read more »

Investing Articles

Is it time to dump my Lloyds shares and never look back?

Harvey Jones was chuffed with his Lloyds shares but recent events have made him rethink his entire decision to go…

Read more »