Alaska-focused oil explorer 88 Energy (LSE: 88E) surprised investors this morning with news that it’s raised A$25m in a placing at 1.9p per share.
The placing price of 1.9p shouldn’t be a surprise, as 88 Energy shared this information in a stock market announcement on 20 April. However, the size of the placing is a surprise — 88 Energy was originally targeting about A$15m.
88 Energy shares have risen by 400% so far this year, but they’ve fallen by 40% over the last month as the market has priced-in the firm’s need for cash. Will this placing put a floor under the shares and support further gains, or is it time to take some profits?
The good news
Unlike some AIM-listed oil stocks, 88 Energy does appear to have a real asset with genuine potential. A recent report commissioned by the firm estimated that the Project Icewine acreage within the HRZ shale may have mean prospective recoverable resources of 763m barrels of oil, net to 88 Energy.
So far, it has drilled one well, Icewine #1. This appeared to show promising reservoir characteristics, suggesting further exploration is worthwhile. However, Icewine #1 wasn’t flow tested or fractured. We’ll have to wait for the next well, Icewine #2H, for this.
How long will A$25m last?
88 Energy’s exploration costs are about to rise sharply, as the 75% Alaska tax rebate on exploration spending will fall to 35% in July.
According to the firm, today’s cash will be spent in three ways. Firstly, 88 Energy will complete the acquisition of the 174,000 acres of HRZ shale covered by its license. The second big cost will be 750km of 2D seismic, which will be used to refine resource estimates and future drilling plans. Some of the cash will also be used to fund 88 Energy’s overheads.
This work will occupy the remainder of 2016. 88 Energy expects to start drilling the Icewine#2H well during the first quarter of 2017. Icewine#2H will include a horizontal section and will be fractured and flow tested. This should provide much more information about the real commercial potential of the Icewine acreage in the HRZ shale.
More cash will be needed
Today’s announcement makes it clear that this placing won’t fund the drilling of Icewine#2H. Dave Wall, 88 Energy’s Managing Director, says that the new money will “bring the Joint Venture to the doorstep of … the drilling of our second well, Icewine#2H”. 88 Energy will probably need to raise more cash at the start of 2017.
In the meantime, I believe investors face a risk that the shares will continue to drift lower. Although 88 Energy says that the placing was “oversubscribed” by “institutional and sophisticated investors,” it’s worth considering a second viewpoint.
As I write, 88 Energy is trading at 2.3p. That means investors who paid 1.9p yesterday could sell today for an overnight profit of about 20%. I suspect a lot of placing buyers will do so.
Phase II of Project Icewine is going to require patience. Following today’s placing, 88 Energy has a market cap of £89m. In my view, now is likely to be a good time to take profits on the shares and then sit back to see how things develop.