Why 88 Energy shares popped 25% last week

Motley Fool contributor Chris MacDonald dives into why 88 Energy shares surged last week on heavy volume, and what may be in store for this energy play.

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CORRECTION: An earlier version of this article incorrectly priced the shares in GBP rather than GBX.

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.

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.

Chris MacDonald has no position in any of the shares 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.

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