Monday saw the release of news regarding a placing by oil and gas company 88 Energy (LSE: 88E). It plans to raise up to A$17m as it seeks additional funding for its projects. This contributed to a fall in its share price of around 15% following the news.
Could this mean that after a period of strong gains for the company’s shares, it now offers an impressive risk/reward ratio. Or is there a better option within the wider oil and gas industry at the present time?
As mentioned, there is scope for 88 Energy’s placing to reach AS$17m. This will be undertaken via a proposal to raise A$12m, plus the ability to take over-subscriptions of up to A$5m. The money raised is to be used to fund the continued evaluation of conventional and unconventional oil targets on Alaska’s North Slope. Even though the company has a cash balance of over A$10m, it has a major work programme ahead which may require additional funding.
The shares in the company will be priced at an 11% discount to its average share price in the last month. That means they will be A$0.037 each, and this appears to have contributed to the company’s significant stock price fall following the news.
Clearly, 88 Energy is a relatively high-risk stock which lacks the size and scale of a number of its sector peers. But after an improved period for the wider oil and gas industry, it could offer high returns over the long run. It appears to have a solid strategy, although it is highly dependent upon the quality of news released regarding its exploration and development programme.
Therefore, while it may only be of interest to less risk-averse investors, it could have a favourable risk/reward ratio for the long term.
Also offering upside potential within the oil and gas industry at the present time is Soco International (LSE: SIA). The company has experienced a challenging period, with asset writedowns hurting its financial performance, while it continues to trade on an exceptionally high valuation. It is due to move into profitability in the current year, but with a price-to-earnings (P/E) ratio of 75 it seems as though investors may already have factored this in.
Still, Soco International has no debt and appears to have the potential to generate improving cash flow. This could help to support a dividend which yields over 4% at the present time and could move higher if the company’s performance improves. Given the prospects for the oil price, there is a good chance that both profitability and investor sentiment across the sector could improve, and this may boost the company’s stock price.
And with the potential for M&A activity in future, as well as a relatively efficient business model, the prospects for the business appear to be risky but potentially rewarding. As such, it may be of interest to less risk-averse investors.
Peter Stephens 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.