The Frontera Resources (LSE: FRR) share price has been on a rollercoaster journey over the past five years. After peaking at 1.59p in September 2014, the stock had fallen to 0.7p by the end of the year, before rebounding to 1.18p, and then slowly sliding to a low of 0.08p in 2016. However, at the end of 2017, the shares surged to 0.68p, but they have traded down ever since.
After jumping about for five years, Frontera shareholders are undoubtedly wondering if the share price can return to its five-year high any time soon.
The answer to this question could rely on the success of the company’s current drilling programme in Georgia. The firm is in the middle of a three-well drilling campaign in the Taribani complex where it recently started drilling operations at the second, Dino-2 well after completing the T-45 well.
This first well produced some impressive results with the completion of open hole well logging which had deepened the well to 2,700m. Drilling revealed an extra pay zone that was not initially expected, as well as a higher oil/gas mix in general, so it looks as if the prospect will exceed initial expectations, although nothing can be said for certain. The firm still has to conduct further testing on the well to ascertain its real potential.
The Frontera Resources share price might head higher on more good news from the wellhead, but the company has one overriding problem, it is short of cash.
So far in 2018 year, the firm has raised more than £4m by issuing new shares and further shares have been issued to meet its obligations under a convertible preference share deal with YA II PN, Ltd. As a result of these fundraisings, the number of Frontera shares in issue has jumped by 1.1bn or 7.5% since mid-December. For some comparison, at the end of the first half of 2014, the company had 2.6bn shares in issue.
Even though these cash calls have helped the company stay liquid and keep the lights on, they have transferred a lot of value away from existing shareholders, and it is going to be a lot harder for the stock to return to previous highs as a result (something my Foolish colleagues highlighted in 2015 and 2016). So, even if Frontera can generate extra profits from its Georgia wells, thanks to the dilution, these profits may not be enough to return the the share price to its five-year high.
The bottom line
Overall, even though Frontera might have some attractive assets in Georgia, the company’s lack of capital and requirement to continually issue shares to bolster the balance sheet concerns me.
At this point, we do not know if or when the business will become profitable and self-sufficient, or how many more shares the company will have to issue before profitability. With this being the case, I don’t believe that the Frontera Resources share price can make a successful comeback.
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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.