In a recent update, Bahamas Petroleum (LSE:BPC) announced a convertible loan facility and funding update. The company is a great stock to trade both long and short, and I now think there is likely to be more opportunities to trade in the future.
The funding facility that Bahamas has unveiled means that it can now “go it alone” according to chief executive Simon Potter. However, “at the same time”, he adds, “we continue to consider several farm-in options”.
Now, we have to take these “farm in options” with more a few grains of salt, given that Bahamas has literally been talking about them for years with little to show for it.
The firm did manage to agree to an exclusivity period, where it earned $250,000 of cash per month for three months. However, in the end, the major international oil player walked away in spite of the cost it had sunk. If the major was not interested, then who else will be?
Do not get me wrong – I would love to see a farm-in here. Not just for the believers, but because the share price will go bananas and I know I will be able to take more money out of this stock. But right now, I cannot see it happening. I guess I am right until I am proven wrong.
The Perseverance-1 Well
This well has potential to be a company-maker. Bahamas is targeting an estimated 1,030 million barrels of prospective resources.
Many shareholders have been waiting for this well for a long time. It is a roll of the dice that could see multiples of the share price if it strikes and is found to be commercially viable.
If the well is a duster, and then plugged and abandoned, then this will not be great for Bahamas. I have no idea what its next plans are if this does not work out.
Terms of funding
The terms of the funding here are not great. When all is said is done, this is death spiral financing, known for its destruction to the share price. This was hidden in the RNS but the clue is there:
“Conversion Price: The lower of (i) a 25% premium to the price of the Company’s ordinary shares on the date of draw-down, or (ii) the lowest closing bid price of the Company’s shares on the five days prior to the date of conversion”
It is not drawn down yet, but alongside the costs of the well the company’s recent equity issue will not be enough to fund this.
Therefore, the company has these options:
- Go ahead and drill using the destructive convertible loan notes when required
- Conduct another equity raise to shore up the balance sheet
Now, management work for shareholders. But they also work for themselves, as a company with no cash cannot pay any wages. It will be interesting to see what happens but I am expecting volatility to increase as the story develops.
How does the chart look?
We can see that volume and volatility has increased in recent months and certainly in the last few days.
Chart taken from SharePad
This stock has been a wild ride, and I previously called this a short around 2.6p, given that the AGM resolution to issue more equity was passed. I then shorted more when Tom Winnifrith posted about a placing.
However, the company pulled this placing, resulting the big gap up in October where I covered and went long for a trade, closing the same day. The board then managed to get a fundraise away much higher. So far, management have played an absolute blinder with the stock price sitting where it is, and I have to take my hat off to them.
Shareholders will be hoping that they can continue this run of form into the drill.
Author Michael Taylor’s website www.shiftingshares.com contains a number of tutorials on how to trade and invest as well as his free book – ‘How to Make Six Figures in Stocks’.