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.

Lookers

A penny stock that did particularly well in 2021 was car dealership Lookers (LSE: LOOK). Its shares climbed 66% as demand for new and used vehicles from cashed-up drivers outstripped supply. Back in September, the small-cap revealed record first-half numbers. Underlying pre-tax profit rocketing to £50.3m over the six months to 30 June, compared to a loss of £36.5m in 2020. 

So what’s the outlook for Lookers? Well, there doesn’t look to be any sign of vehicle demand falling just yet. Used-car prices in December were up 28% on the previous year. A P/E of six also seems very cheap, considering the company’s potential to benefit from the growing popularity of electric vehicles.

Then again, there’s also an argument for saying there will come a point when people simply won’t pay inflated prices and demand will moderate. Margins in this line of work are normally very slim too. 

On balance, I think Lookers could still do well next year and I’d still consider taking a small position today. But will it rise another 66%? I doubt it. 

e-Therapeutics

e-Therapeutics (LSE: ETX) is another penny stock that’s been in scintillating form this year, rising 157%. Contrast this with the FTSE 100‘s 12% gain and it’s not hard to see why small companies appeal to retail investors. 

As impressive as this performance is however, there are a few things that make me cautious. While its technology is clearly useful — allowing scientists to computationally test potential therapeutic interventions and drugs — e-Therapeutics remains unprofitable. That could prove problematic in the event of a major market sell-off. Investors tend to dump ‘jam tomorrow’ businesses first.

Regardless of whether or not a crash happens in 2022, a second thing worth noting is that less than half the company’s shares are actively traded. This illiquidity means it won’t take many transactions to cause violent shifts down as well as up. The former could happen even if e-Therapeutics is in something of a sweet spot, thanks to the pandemic. 

Considering the above, I think there are potentially better opportunities in the market this year and I wouldn’t be a buyer of the stock now.

88 Energy

Alaska-focused, Australia-based oil and gas company 88 Energy (LSE: 88E) is a final penny stock that did superbly in 2021, rising 167%. There are multiple reasons for this, including the company’s efforts to improve its balance sheet (through the sale of tax credits) and the gradual increase in the price of crude oil.

Unfortunately, a lack of profits once again leaves me cold. Befitting a company in this space, it’s also worth pointing out that 88 Energy shares have been volatile. The very same shares have traded for a little as 0.41p and as much as 4.7p over the last 12 months. They currently change hands for 1.41p a pop. As such, I can’t see this penny stock appealing to anyone other than speculative investors. 

While the shares may continue to rally further in 2022 (most likely to do with drilling activity surrounding its Merlin-2 well), I’m content to watch with interest from the sidelines. As far as my own portfolio is concerned, it’s too hot to handle. 

The update concerns the Umiat oil field located onshore on the North Slope of Alaska. In what must be music to most shareholders’ ears, the company said it has identified “additional upside”.  The assessment arose because of further studies in conjunction with post-drill testing and analysis at the Merlin-1 well. 

The explosive 88 Energy share price

Recent operational progress has driven the share price a long way. The stock is showing a rise of around 15% today. But it’s up by as much as 40% since mid-July. And over the past year, it’s risen by more than 900%.

However, at times over the last four years, it’s been even higher than today’s level. And such volatility tends to go hand in hand with explorers like this. As such, I think 88 Energy remains a speculative proposition for investors.

The company also announced today approval to defer its Umiat Year 2 unit well commitment by 24 months to 31 August 2023. The United States’ Bureau of Land Management (BLM) granted the extension and corresponding extensions for obligations in years three, four and five.

88 Energy wants to use the extra time to analyse “extensive” historical data. The company acquired the Umiat oil field in January. But the field was discovered in the 1940s.  And by 1953, some 11 appraisal wells had been drilled, “several of which were tested.” And some produced oil.

On top of that, historically, a company called Linc Energy carried out “substantial” engineering and environmental work towards potential future development. And one of the routes for access to infrastructure runs through 88 Energy’s Project Icewine leasehold where there are also “significant independently estimated resources of oil and gas.” So the prospects for commercialisation look promising. And I think that’s another driver of the 88 Energy share price.

Looking ahead to field development

Looking ahead, over the second half of 2021, the company plans to study the historical development plans for Umiat. It will also consider alternative development options that may include development in conjunction with the nearby Project Peregrine.

Meanwhile, with the share price near 2.81p, the market capitalisation is near £287m. However, 88 Energy has yet to deliver positive cash flow or profits. Of course, all the discovery and development work adds to the known resources in the ground. And theoretically, they add to the value of the business.

But getting oil out of the ground, developing infrastructure and shifting the stuff to market takes time and money. Often, in the development phase, smaller companies such as 88 Energy end up partnering with firms that have larger financial resources. Or they come back to the stock market or lenders for extra funds.

So, despite the recent strength of the share price, I reckon shareholders will likely see further volatility ahead. And the success of any long-term investment in the stock remains far from certain. I’m not in a hurry to buy the stock and will watch with interest from the sidelines for the time being.

As volatility picks up in the market, investors are increasingly looking to take advantage. Investors in 88 Energy (LSE:88E) shares certainly have seen a roller coaster ride of late.

Since hitting a high of 4.70p earlier this year, 88 Energy shares have since settled down to the 1p level in recent weeks. That said, shares surged to more than 1.40p per share after hours on Friday. Last week alone, the shares saw an increase of approximately 25%.

Why the optimism with this stock? Well, there are a few reasons investors are considering 88 Energy. Let’s dive into what investors are looking at right now with this energy exploration company.

88 Energy shares surging on new debt-free status

A key update 88 Energy shared on Monday of last week – surrounding the company’s intention to sell its Alaskan oil-and-gas tax credits in a bid to eliminate its debt altogether – has investors cheering 88 Energy shares.

Indeed, this move significantly improves the outlook for 88 Energy’s balance sheet. The US$18.7 million sale will allow the company to repay the remaining US$16.1 million of the company’s outstanding debt. Furthermore, 88 Energy will bolster its cash position as a result of the deal, providing more operational flexibility with the company’s existing drilling programmes.

From a free cash flow perspective, this deal is also bullish for investors. The company will reportedly reduce its annual finance-related overhead costs by roughly $1 million per year.

Financially speaking, this deal was a no-brainer for 88 Energy. It appears shareholders are the real beneficiaries of this strategic move. Indeed, investors betting on the long-term viability of this c.£165 million market cap energy player have reason to get excited.

Bottom line

88 Energy shares haven’t been without their share of headwinds of late. Power outages preventing sampling of two prospective zones with the company’s Alaskan Peregrine project have caused a significant selloff in recent months. And while operational updates have suggested these headwinds are likely overblown and short term in nature, investors have nonetheless gravitated toward other energy players of late.

Of course, the rally in 88 Energy shares has also coincided with an impressive improvement in global crude prices. Investors may be correct in pricing in commodity-related risks with such stocks right now.

That said, 88 Energy’s recently announced tax credit sale provides a near term one-time balance sheet boost that makes this stock hard to ignore. Accordingly, this is a company I’m certainly considering adding to my portfolio on weakness moving forward.

The share price closed at four-year highs of 3.75p per share in March. This was after promising testing data at its Merlin-1 well. But subsequent problems in verifying the quality of the well caused the oilie to collapse back towards 1p.

But today, 88 Energy is back on the charge and up 12% from Monday’s close at 1.35p per share. Here’s why investors have piled back in following the company’s latest operational update.

88 Energy’s share price soars again

As I say, 88 Energy encountered problems in April when conducting a wireline programme at Merlin-1. It led the company to abandon testing work at least temporarily and plug the well.

Back then, the AIM company said that further drilling and an analysis of sidewall cores might be required to confirm a discovery at Merlin-1. And on Tuesday, the oilie confirmed that testing on sidewall cores, cuttings, mud gas and fluid samples is underway. It said that testing will take between two and 10 weeks to complete.

Testing will be carried out “to determine oil saturation, oil typing, PVT [pressure volume temperature] characteristics, porosity, permeability and rock mechanics,” it said. The business added that cuttings will be subject to a Volatiles Analysis Service too. This will help it to interpret results from the well.

In other encouraging news, 88 Energy said that “initial mapping of additional prospective zones encountered in Merlin-1 [is] encouraging.” It said that these zones “exhibited good shows with potential for pay,” and that “an initial mapping exercise has indicated that these zones may be of similar magnitude in terms of volumetric range as the originally targeted primary zones.”

Further testing would be required to confirm what it is sitting on, it added.

More exciting news

On Tuesday 88 Energy also announced some potentially exciting news concerning its Project Icewine asset in Alaska. It said that it has been observing nearby work by Pantheon Resources on its Talitha-A well. And these results have revealed “additional insights into the wettability of the Kuparuk formation,” the firm noted. These are results that it says may have “positive ramifications” for its own interpretation of the horizon.

88 Energy said its own drilling results at Kuparak had been interpreted “as likely gas condensate or residual oil”. As a consequence, no mapped targets had been identified by the company. However, 88 Energy views those recent Talitha-A results as “highly encouraging regionally for the Kuparuk [and] across Project Icewine.” Its internal geoscience team is therefore now re-assessing Kuparak’s potential.

To round off the release 88 Energy said that “it is also evident that several of the other prospective horizons encountered in Talitha-A, where pay has been interpreted by Pantheon, extend into Project Icewine acreage.”

Exciting acquisition news, combined with positive testing at its Merlin-1 well, helped lift the share price to multi-year highs in late March. But the UK oil share collapsed shortly after because of testing difficulties at its much-hyped assets. Indeed, the company has slumped again in value on Tuesday following the release of its quarterly update.

At 1.18p the 88 Energy share price is now 8% lower on the day and trading at two-week lows.

Merlin re-entry 

That said, there isn’t anything obviously chilling in 88 Energy’s latest statement. In fact the UK share confirmed in today’s update that “the [Merlin-1] well may be re-entered in the future, if warranted, in order to drill a side track and conduct a flow test”.

Drilling results at Merlin-1 in March were described by 88 Energy chief executive Dave Wall as “encouraging”. The company said that “the gamma log indicates the presence of more sand packages than those in the Analogue Wells,” and that the sand packages in Merlin-1 “are generally cleaner in nature” too.

Work also revealed that “oil shows were recorded over multiple intervals in the Nanushuk while drilling Merlin-1,” 88 Energy said last month. News that “one of the prospective horizons in Merlin-1 did have substantially elevated total gas” amplified investor buzz.

A subsequent wireline logging programme in early April failed to give market makers the news they wanted, however. Work confirmed “multiple prospective zones” in line with previous studies and “good mobility” across these zones. However, a power outage later in the programme forced testers to down tools. A return to the zone was deemed too high risk at the time. And so 88 Energy announced plans to plug the well, claiming then that “it is now too late in the season to initiate flow testing operations”.

The 88 Energy share price falls again!

So there was no news on Merlin-1 to cause the 88 Energy share price to sink again today, then. There were no further details on testing at its Project Icewine asset in Alaska, either. Nor was there news on permitting and planning at its Yukon leases or its acquisition of the Umiat oil field.

88 Energy’s latest share price fall illustrate one of the perils of buying penny stocks. UK shares that cost less than £1 can be prone to sudden and extreme volatility. Investors can build a big block of shares at little cost when shopping for penny stocks. So when they sell it can have significant ramifications for the share price. It therefore doesn’t take a nugget of bad news to send a share plummeting, as 88 Energy’s performance today shows.

This — allied with the high-risk nature of oil exploration — means that 88 Energy isn’t a UK share I’ll buy.

So what’s causing these massive price swings? And is this a business I should add to my growth portfolio?

The volatile 88 Energy (88E) share price

Last month, the oil exploration business published an operations update to inform investors that drilling had begun at its Merlin-1 site. Given that this location is expected to contain 645 million barrel’s worth of oil, it was particularly exciting news. And so the 88E share price began climbing.

The purpose of this drilling was to install a Blow-Out Preventer system so that material tests and later extraction can be done safely. Throughout March, the company performed all the necessary equipment and wireline tests to get more information about the oil reservoir.

Unfortunately, this is where things started to go wrong. After reaching the ideal depth, there was a power outage linked to equipment failure. This forced the company to pull out of the hole to make repairs. But upon re-entry, further complications arose, and it was no longer possible to perform the necessary tests or extract any samples.

Following this failure, 88 Energy decided to move to the next best prospective zone. But once again, the tests failed to be completed after the equipment became stuck. Eventually, this second site was deemed too risky to try again.

Ultimately this means that the company could not sample its most promising drilling sites to verify an oil discovery. And so, naturally, the 88E share price crashed just as fast as it went up.

What’s next for the business?

Such complications are not uncommon in this sector. Running such an oil exploration business is a complex and tricky challenge that carries a lot of risks, especially since it’s also at the mercy of fluctuating oil prices.

But despite these frustrating events, there are some reasons to be optimistic. While the company did not achieve the goals it had set out to, it did acquire some samples from some of its less prospective zones in the area. Based on initial interpretations of the gathered data, they show the potential for an extensive, previously unknown, oil reservoir. Further investigation and sample analysis are now underway.

Meanwhile, its second-leading project, Harrier-1, continues to show promising petrophysical characteristics in line with expectations. Drilling at this site will begin in 2022.

The bottom line

The failed tests are undoubtedly bad news. But as frustrating as it may be, these are ultimately short-term disruptions. The company has already begun preparing for the next stage in its exploration. And while it is lacking a significant source of revenue, it does have around $13m cash on the balance sheet to cover expenses for the foreseeable future.

Combined, the Merlin and Harrier sites are expected to contain 1.6bn barrels worth of oil. If the company can confirm this discovery in its next testing attempt, I believe the 88E share price can start surging again.

Having said that, I think it’s too soon to invest as there are currently a lot of unknowns. So 88 Energy is on my watch list for now.

A series of promising drilling updates at its Project Peregrine project eventually lifted the UK oil share to multi-year highs at the end of March. A disappointing operational update on Tuesday, however, has seen the 88 Energy share price lose almost all of these recent gains. At 1.3p per share it’s actually down 66% from its pre-Easter close.

88 Energy’s share price slumps

88 Energy recently advised that fresh drilling data at its Merlin-1 well in Alaska would be prepared over the weekend. Unfortunately equipment failures during the process meant that investors didn’t get the news that they wanted.

The first run of its wireline programme identified “multiple prospective zones” that were consistent with the shows and logs revealed during prior drilling. The work revealed “good mobility across most of these zones” too.

The second wireline programme stage — which was designed to take samples across these zones — wasn’t quite as successful, however. It said that initial observations indicated the presence of an oil signature in the fluid. However, a power outage caused by equipment failure put a halt to proceedings before a sample could be taken. Poor hole condition after repairs were carried out then meant that a cleanout run was needed at the site. But communication problems following re-entry with the sampling tool at the lowest zone scuppered any further work.

88 Energy said that it also encountered extra obstacles when it moved to the next shallowest prospective zone. Wellbore issues meant that the tool became stuck and testing could therefore could not be conducted. While the tool was freed, the company said that returning to the zone was deemed too high a risk.

And it added that “it is now too late in the season to initiate flow testing operations and the forward program will consist of plugging the well.” But it said Merlin-1 might be re-entered later down the line “in order to drill a side track and conduct a flow test.”

In cheerier news…

Drilling work wasn’t a complete washout though. 88 Energy said that one of the zones identified during the wireline programme “is considered to be a new prospective horizon within the Nanushuk Formation” that might also wholly be inside Project Peregrine. This zone was not one of the pre-drill targets.

On top of this, the company noted that “not being able to sample these two most prospective zones does not preclude a discovery.” But it added that an analysis of sidewall cores and possibly even additional drilling may be required for confirmation.

That said, 88 Energy’s share price crash is perhaps no surprise. Even a slight operational setback can hammer investor attitude towards a particular oil explorer. And in this case, the huge share price gains of March have exacerbated today’s drop. The high chance of such volatility in the future means that I won’t be buying 88 Energy for my shares portfolio.

The big question is, should I take advantage of today’s decline to snap up some shares in 88 Energy? 

Buying opportunity?

Before deciding if I’ll buy the stock, I need to understand why the 88 Energy share price has slumped so much in today’s trading session. 

It seems as if the company’s latest operational update is behind the decline. The update relates to the organisation’s operations in the NPR-A region of the North Slope of Alaska. 

The report reveals 88 Energy’s exploration activities in the region have stalled. Operational issues prevented the firm from taking hydrocarbon samples from the two most prospective zones. The long and short of it is that the company’s efforts to determine the viability of its best prospects have produced almost no hard evidence.

That being said, the company has achieved some samples from the Merlin-1 prospect, which it intends to test further. These may yet yield results, although nothing is guaranteed. 

So, what’s next for the company and the 88 Energy share price? It’s very difficult to tell at this stage.

Today’s results show how difficult it is for companies to successfully find and develop oil and gas resources. All indications have, until now, pointed to the conclusion that 88 Energy was drilling in the right place.

Unfortunately, turning indications and research into cold, hard cash and hydrocarbons has been significantly harder than expected. 

The company has drilled five wells in Alaska over the past six years. According to management, the latest drilling efforts at the Merlin-1 have delivered by far the best outcome. However, the business still seems to be a long way away from actually producing oil and gas.

88 Energy share price risks 

The last time I covered 88 Energy, I noted that the firm’s future was dependent on the results from its testing and exploration activities. Specifically, I wrote that “the share price could keep climbing if the business unveils further upbeat drill and test results in the next few weeks.“

But I also warned its prospects could change overnight if the drilling programme didn’t live up to expectations. That’s just what’s happened. Investors were expecting a lot from the firm’s drilling programme and that programme hasn’t lived up to expectations. It seems as if many investors aren’t hanging around to see what happens next. 

As such, I hold the same view of the 88 Energy share price as I did when I last cover the company at the end of March. I think the risks far outweigh the possibility for reward and, therefore, I wouldn’t buy the stock after today’s decline.

It has since pared these gains somewhat but was last trading at 3.7p per share at the time of writing. This is up 32% from Tuesday’s close.

Umiat acquisition news turbocharges the 88 Energy share price

The 88 Energy share price has soared again today on news concerning the acquisition of the Umiat oil field. The business declared that the final condition related to the transaction first announced in January had now been completed. 88 Energy said that “cement work associated with plugging and abandoning of two historical wells at the field ” has now been carried out. Remedial work at the site will now commence, it added.

Umiat — which is located in shallow Brookian (Nanushuk) sandstones in Alaska — is covered by two leases, which cover a total of 17,633 acres. The acreage is in a unit that was formed in September 2019 under an initial 10-year term. Unit conditions stipulate that a well commitment (either by exploration or appraisal) be conducted by 31 August, 2022.

Independent estimates by Ryder Scott in December 2015 revealed gross 2P reserves of 123.7m barrels of oil.

A “significant milestone”

Managing director Dave Wall today said that “the acquisition of the proven oil field at Umiat is a significant milestone for the company and its shareholders, particularly in the context of any discovery made at Project Peregrine, where wireline logging is currently underway”. The field was discovered in 1945 and sits adjacent to the Project Peregrine site on Alaska’s North Slope.

88 Energy said that 11 appraisal wells were drilled at the “historic discovery” in 1953. During testing the Umiat-5 well flowed 268 barrels per day on a three-month test, the company said. And Umiat-8 experienced a peak flow rate of 5.9mmcf/d of natural gas over four days.

Little work had taken place at Umiat until 2013 and 2014, 88 Energy said, when Linc Energy drilled the Umiat-18 and Umiat-23H wells. Umiat-23H was tested with a maximum flow rate of 800 barrels per day and sustained flow of 200 barrels a day, it added.

Merlin-1 results expected at the weekend

88 Energy also provided an update on that wireline logging programme at the Merlin-1 well at Project Peregrine today. It said that the programme is currently under way and that preliminary results here are expected over the weekend.

News that the company had located hydrocarbon-bearing zones during drilling at Merlin-1 sent the 88 Energy share price soaring earlier this week. The company is targeting 645m barrels of gross mean prospective resource at the well.

A second well at Project Peregrine — Harrier-1 — is scheduled to be drilled some time next year. 88 Energy says that it is targeting gross mean prospective resource of 417m barrels here.