Unfortunately for the company’s investors, after peaking at just over 4p per share in 2017, the 88 Energy (LSE: 88E) share price has since slumped by more than 70%, and I reckon there could be further declines to come.
That’s why I think now could be the time to sell 88E and buy Tullow Oil (LSE: TLW) instead.
String of disappointments
A series of disappointing trading updates from 88E has hammered the company’s share price over the past two years. After investors rushed to buy into the growth story in 2017, the realities of drilling for oil and gas have become clear during the past 12 months.
88E’s 475,000 acre Project Icewine is proving to be a tricky nut to crack, and the process of drilling in Alaska is proving to be costly. To fund its operations, the company is increasingly turning to shareholders to foot the bill. For example, in the last quarter of 2018 alone, 88E raised £2m via a rights issue in October and a further £5.6m with a placing in November.
88E’s 2019 drilling program may yet pay off, but what I’m apprehensive about here is the prospect of further dilution. The number of shares in issue now stands at just over 6.3bn after the last placing, that’s up from 4.6bn at the end of 2017, an increase of 37% in around 12 months.
With the number of shares in issue exploding, even if the company’s market capitalisation remained stable, the share price would decline as each share is now worth a smaller percentage of the business than it was 12 months ago.
In comparison, Tullow Oil is fully funded. The enterprise does not have to rely on shareholders to keep the lights on, and while there is a lot of debt on the balance sheet, management forecasts suggest the company will pay off these liabilities rapidly over the coming years.
According to the company’s latest corporate presentation, management believes Tullow can reduce net debt to around $2bn by the end of 2019, down from just over $3bn in 2018 and just under $5bn in 2016. This includes capital spending on new oil exploration projects and a dividend of “no less than $100m” per annum.
If Tullow is able to meet its debt reduction targets over the next 12 months, I think the upside potential for the shares could be tremendous. For the past few years, I have viewed Tullow as an uninvestable because of its obligations to creditors, and I don’t think I’m alone in this view. However, I am now excited about what the future holds for the company. As debt falls, management will have more capital available to return to investors. Indeed, there have already been some hints that Tullow will be increasing its dividend distribution substantially in the years ahead as it has more capital to play with.
With this being the case, I think Tullow has the potential to become a dividend champion if management sticks to its debt reduction and cash return plans. An undemanding forward P/E of 10.4 only adds to the appeal in my opinion.
88E can’t compete with this cash-rich African explorer.
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.