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88 Energy – Is a large short closing out in the placing? (88E)

This morning 88 Energy (LSE:88E) announced a “proposed placing” to raise up to A$17m. The “proposed” price of this deal works out at roughly 2p per share, a 26% discount to the previous session’s close. The deal is apparently being conducted through a “UK bookbuilding process”, run by Cenkos. It will be interesting to see the final results of the placing, but an obvious question to ask is whether this fundraise is being used to cover a large short position?

Thanks to the secretive nature of building order books in the City, we’ll never be able to prove whether or not a short is using today’s 88 Energy placing to cover itself. However, there are some interesting indicators to be aware of.

First is the recent spike in price on high volume.

As you can clearly see in the chart above, since 11 April 88 Energy’s share price rose sharply from an open of 2.074p on that day to a close of 2.7p last Friday. In those 14 trading sessions 636m shares changed hands on just the London Stock Exchange. A further 160m shares traded on the Australian Stock Exchange, where 88 Energy also maintains a listing. Added together and this totals 769m shares traded at 2.074p and above; fertile territory indeed for a large short to close out at 2p.

On its own this isn’t proof that a short exists in 88 Energy’s stock, but consider next the nature of the move in the company’s shares. The narrative behind the rising share price was that the spring thaw in Alaska, where 88 Energy’s oil exploration play is based, means the company will soon be able to reopen the Icewine #2 well. Note this run-up in the company’s shares was not driven by RNS announcements, but rather speculation on what the local temperature will be.

As a trading tactic this is as good as any other on AIM, but it is hardly the sort of thing institutional investors tend to gamble on. What is far more likely is that the recent buying in 88 Energy stock was almost entirely lead by retail investors. For those professional market participants, who have made £millions over the years, this in itself presents a wonderful target to short.

Although this does not provide definitive proof a large short exists in 88 Energy the recent trading pattern at least suggests conditions were right for one to build.

The next indicator to be mindful of is the structure of the “proposed placing”. It seems that the company is pretty confident that A$12m is in the bag (£6.6m). The A$5m (£2.75m) set aside for “oversubscriptions” strongly suggests this. Why else have an over-allocation facility unless the company were confident it would secure the £6.6m?

It remains to be seen how much 88 Energy will raise in total, but if it only secures the £6.6m at 2p per share then it will issue about 329.5m shares. Given that 769m shares have traded over the last 3 weeks, then 329.5m would theoretically slot into that number if those who have been buying the stock have not yet taken delivery of it.

Of course, these are illustrative figures. It is not impossible that genuine investors, excited by the prospects of the company, have subscribed to today’s placing.

However, it is unlikely.

88 Energy’s current market cap is £115m. This looks heavily overpriced. While the company does control 475,000 acres, it has not found any oil and has no reserves to underpin its valuation.

This matters, because with nothing to bolster its share price other than retail sentiment, 88 Energy is not an attractive stock for professional investors. The company’s AIM 26 disclosure reflects this point, revealing that it has no institutional investors backing it. Without serious institutional support, it wouldn’t take much to kick the legs from underneath the current market cap.

The lack of institutional support is also an indicator for the company’s prospects. Even if the company does find oil, it is going to have to find one hell of a lot of it in commercial quantities to justify its £115m valuation.

None of this is surprising if you go back and look at 88 Energy’s original entry into Alaska. In early 2015, Tangiers Petroleum, as 88 Energy used to be called, secured its first 99,360 acres on the North Slope for £2.98m. This worked out at 3.3cents per acre. Now some might say this could turn out to be the deal of the century. But then again it probably won’t.

So, given the recent trading pattern, recent volume, the company’s valuation v. its prospects, the structure of today’s deal and the lack of notifiable institutional support it is quite possible that 88 Energy’s “proposed placing” could provide cover to close a large short.

There would be nothing illegal about this necessarily and it would be within current market rules (assuming no insider dealing breaches). However, for private investors the practice of using placings to close short positions is one that invariably costs them a great deal of money. In the brave new world of transparency and disclosure under MiFID 2, perhaps this will soon change.

Author: Ben Turney 

Disclosure: The author holds no position in any of the companies mentioned in this piece.

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