With a £30m market cap and 8.6p share price against an estimated cash balance of c.$30m, Chariot Oil & Gas (LSE:CHAR) looks like an interesting buying opportunity on the face of it. The company has a high profile drill lined up for Q4 this year and its market cap is underpinned by its notional $31.7m cash balance. However, scratch a little deeper and the situation is not that clear-cut. The firm has a number of significant spending commitments and management has a track record of prudently managing the company’s finances to ensure it never “bets the farm” on a single well. While this approach makes strategic sense commercially, from an investment point of view shareholders have to second guess when the next placing might happen.
In its results for 2017, released last week, Chariot reported that it was debt free with a cash balance of $15.2m as at 31 December 2017 and had ‘no remaining spending commitments across the entirety of its portfolio’. Add to this the $16.5m raised in a February placing, and Chariot has a current, estimated cash balance of c.$31.7m. This figure converts to around £23.6m, suggesting that cash underpins c.79pc of Chariot’s current market cap- a winning number given the potential of its Prospect S exploration well in Namibia, due to spud in Q4.
However, although Chariot is claiming that it has no spending commitments, we already know that it has several expenditures that will considerably reduce cash by year-end. Most significantly, as noted in the company’s February placement RNS, it plans to spend at least $15m on drilling Prospect S. The firm also has $3.6m of restricted cash held against licence commitments and annual operating expenses of around $4.2m, based on 2017 figures.
If we subtract all these expenses and the restricted cash from the current $31.7m cash estimate, then by year-end, Chariot looks set to be left with $8.9m worth of cash on its balance sheet. If Prospect S turns out to be a failure, like Chariot’s Rabat Deep 1 well in Morocco earlier this year, then the company will be left in a much weaker position.
Now, an $8.9m cash balance is not a cause for concern alone, but it is worth considering that Chariot’s management has a track record of approaching the business’s finances with caution. Larry Bottomley, Chariot’s CEO, is a hugely ambitious elephant hunter and one day his strategy could well pay off. All he needs is one of the large prospects he has involved the company in to be successful and that will mark a sea change for the business. However, this strategy is not cheap and Bottomley’s approach towards managing the company’s cash balance has been cautious.
For the record, this caution is definitely a good thing- indeed. It means Chariot’s managers are not fly-by-night oil execs looking to make a quick buck by putting all their eggs in one basket. Instead, they are in it for the long-run, and as part of this they are likely to be considering the high chance that Prospect S will not be a raving success – after all, it is an exploration well. As a result, there is a good chance that the business will look to raise cash over the coming months to protect itself against this worst-case scenario, ensuring they have more than $8.9m with which to move forward.
The question now becomes whether Chariot has learned anything from its last placing, which, to put it simply, was a botch job. In February, just two weeks before the spudding of the Rabat Deep 1, the firm chose to raise $15m by placing shares at 13p each – an eye-watering 36pc discount to its 20.3p market price at the time.
This steep discount gave out the entirely wrong message about the company’s valuation and suggested it was desperate to raise cash. In the end, the placing managed to destroy all the positive momentum that had been flowing into Chariot from the retail market and its shares collapsed by nearly 50pc in just two days. There then wasn’t enough time for sentiment to recover before the result of Rabat Deep 1, so nearly all holders (placement participants included) ended up locked in.
This wasn’t well handled, but the market does have a very short memory so the company can move on from this if it makes the right moves over the coming months.
In hindsight, if the business had raised between September and November last year when its share price was between 15p and 16p, then 13p a share would have been a much less significant discount. This approach would have also got funding out of the way early doors and given Chariot plenty of room to be a speculative play, given that drilling was still some way off. Another approach would just have been to narrow the discount.
If another placing is indeed on the cards, it is crucial that Chariot learns its lesson from its mistakes earlier this year and does not shoot itself in the foot just weeks before drilling. There are enough clichés out there about making the same mistake twice for it to know that such an error is likely to be devastating.
One potential Ace Chariot has up its sleeve is if the company is able to secure another farm-out for one of its projects. The company certainly has a strong track record in delivering these and if it is successful again in the coming months then this could prove to be a catalyst for the shares to move higher.
For the time being it is certainly worth maintaining a close watching brief on Chariot. Now might not be the optimal time to buy, but taking a punt would be understandable. However, given the likelihood of a fundraise at some point in the coming months a lower risk entry point might present itself, even if that is at a premium to the current price.