The mini-surge in the 88 Energy (LSE: 88E) share price in early 2018 has firmly gone into reverse since the summer. We’re now looking at a 35% fall over the past 12 months.
Flow test fail
It started when the company’s exploratory Icewine #2 well failed to get the oil flowing. Then, just as we thought a recovering oil price was set to relieve the pressure on small explorers, a new mini-slump that pushed the price down almost as low as $50, shook up already-beleaguered investors once again.
As my Motley Fool colleague Roland Head has pointed out, there are companies said to be considering making a bid based on overall Alaskan Icewine prospect data. A combination of the impressively-large reserves that 88 Energy is potentially sitting on, the low oil price, and the difficulty that 88 Energy is apparently facing trying to raise funds of its own, suggest a successful bid could made at a relatively low price.
A sell-out, or farm-out, is pretty much the direction all small prospectors hope to go, but it really does depend on whether that big provable oil strike can be made, what the commercial viability looks like, and how long a company can go before its cash runs out.
The firm’s latest update was pretty run of the mill, focusing on the building of an ice road, a new Winx-1 exploration well drilling permit, and other relatively mundane tidings.
In my view, 88 Energy needs more than this. I see it as just a gamble on that big strike happening — and time is running out.
If I wanted an oil explorer stock, I’d be looking at lot more closely at Cairn Energy (LSE: CNE) than at 88 Energy.
As fellow Fool Peter Stephens suggests, Cairn is expected to move into a period of tempting profitability. That’s the one key thing I’d want from any oil investment — profit coming in rather than cash burn.
While Cairn Energy has attractive potential, I’d still want to see some sort of safety margin in an oil company — and not having to go cap-in-hand to lenders and shareholders, especially during times of oil weakness, goes a long way towards that.
Cairn’s relative safety was buoyed on Tuesday by the firm’s latest operational update, in which chief executive Simon Thomson said that “Cairn enters 2019 with balance sheet strength and cash flow from North Sea production to fund significant growth opportunities.”
In 2018, net production to Cairn from its interests in the Catcher and Kraken fields came to approximately 17,500 barrels of oil equivalent per day, with 2019 estimates suggesting between 19,000 and 22,000 boepd.
Overall, the 2018 year has seen revenue from oil and gas sales of approximately $395m, with the company achieving an average price of $68 per barrel. With an average production cost of around $20 per barrel, Cairn looks to me to be in decent financial shape and should be able to face any further oil price dips in relative safety.
To that end, the company has managed to hedge around 2.7m barrels of 2019 production with weighted average prices of between $67 and $83 per barrel.
The Cairn Energy share price is already climbing in 2019, and I can see a good year ahead.
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Alan Oscroft 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.