The 88 Energy (LSE: 88E) share price has surged in value over the past couple of months. Since the beginning of the year, shares in the company have jumped nearly 200%. Over the past 12 months, the stock has increased in value by 120%.
However, over the past five years, the performance of the stock is far less impressive. It has declined in value by 60% since the beginning of April 2016.
Nevertheless, the 88 Energy share price’s recent performance is incredibly encouraging and suggests that the outlook for the business is improving.
88 Energy has put itself on a new path over the past 12 months. It is currently combining with fellow Aussie-listed, Alaska-focused explorer XCD Energy Ltd. The deal will create an enlarged business with a diversified portfolio on Alaska’s North Slope, with three distinct key areas: Project Icewine, Project Peregrine, and the Yukon licences.
The enlarged size of the business should help it acquire finance and attract institutional investors. I think this is incredibly positive for the long-term potential of the 88 Energy share price.
The most considerable risk any small-cap oil company faces is a lack of funding. The fact of the matter is, lenders do not want to risk their money on small oil businesses, which is understandable. Therefore, a larger corporation has more chance of being able to negotiate favourable deals with creditors.
88 Energy share price: size matters
The company may already be feeling the benefits of this combination. Today the firm announced that it had raised $6.5m as it advances the drilling of the Merlin-1 exploration well in Alaska.
It has entered into a share subscription deal with ELKO International, a contractor in the live drill programme. The shares have been issued at a 225% premium to its last fundraising, which took place in February. I think this is a strong endorsement of the company and its potential.
The Merlin-1 exploration well in Alaska is being drilled to a depth of 6,000 ft. It will subsequently be flow tested, subject to the initial results from wireline logging. Targeting a prospect that’s estimated to host some 645m barrels of oil, the Merlin well will give the company and its backers more information on the potential scale of the resources available to the enterprise. A favourable flow test result could be hugely positive for the 88 Energy share price.
The bottom line
All of the above suggests that the share price could keep climbing if the business unveils further upbeat drill and test results in the next few weeks.
However, this is a big if. Oil exploration is notoriously risky. Despite the group’s enlarged size, 88 Energy is going to face a tremendous challenge to become a profitable oil company. In this industry, nothing is guaranteed. A business’s prospects can change overnight if a drilling programme does not live up to expectations.
Therefore, I would not buy the stock today, despite its potential for further profits in the near term. I think the risks far outweigh the possibility for reward.
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Rupert Hargreaves 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.