On Wednesday, 88 Energy (LSE:88E) shares took a downward turn after the firm said it will tap the market to raise at least A$10m in a share placing. The exploration company is currently trading for 0.55p, down from highs around 2.5p earlier in the year.
So, let’s take a closer look at this company’s fortunes and see whether it might be right for my portfolio.
Results and capital raise sinks share price
On Wednesday, 88 Energy published its interim results and announced a capital raise.
It reported a loss of A$67.2m in the six months to June 30, down from a profit of A$445,446 the year prior. The firm highlighted that the loss was primarily due to the impairment of the Merlin 1 and 2 wells.
But the capital raise is probably the primary cause of the share price falling. The firm proposed to raise up to A$10.0m (£5.8m), with the ability to accept over-subscriptions of up to A$4.99m (£2.8m). The share raise has been out. forward at a price per placing share of A$0.009, equivalent to 0.5189p.
The placing price is equivalent to a discount of 18.2% to the closing price of the company’s shares on the Australian Securities Exchange on August 9. Naturally, no one is going to buy shares at the market value when they can buy them for 0.51p. So that’s why the stock is down.
According to a statement, the cash raised will be used to “strengthen the company’s balance sheet and will provide the company with sufficient capital to finance potential new ventures, purchase long lead items required for drilling of the well at Icewine in 2023, and also additional working capital”.
And finally, in a separate update on the Icewine project, 88 Energy told investors that a maiden independent resource estimate showed a possible 1.03bn barrels of oil. The project is situated on Alaska’s North Slope.
“Resources of this magnitude present our shareholders with significant upside potential and opportunity“, management said in a statement, reiterating its commitment to operations in Alaska.
Outlook
The big question is how well 88 Energy will be able to put this capital to use.
88 Energy will use the funds to drill more wells and explore the area that it is licensed to do so. After all, this is what exploration companies do. It could win big, or it could come up dry. This is what happened earlier in the year with Merlin 2 — it was empty.
So there are always risks that prospecting and drilling operations will end up a failure. It’s got a diversified portfolio of assets to explore — Yukon, Umlat, Peregrine and Icewine — but of course, there is no guarantee that it will come up trumps.
In general, I contend that we’re entering a period of scarcity characterised by greater competition for resources. So I’m fairly bullish on oil after 2022/23. However, oil exploration is a riskier business.
I’m not investing now, but I’ll certainly keep an eye on this one. If I did invest, I would only buy a limited number of shares given the risks involved.