The placing price of 1.9p shouldn’t be a surprise, as 88 Energy shared this information in a stock market announcement on 20 April. However, the size of the placing is a surprise — 88 Energy was originally targeting about A$15m.

88 Energy shares have risen by 400% so far this year, but they’ve fallen by 40% over the last month as the market has priced-in the firm’s need for cash. Will this placing put a floor under the shares and support further gains, or is it time to take some profits?

The good news

Unlike some AIM-listed oil stocks, 88 Energy does appear to have a real asset with genuine potential. A recent report commissioned by the firm estimated that the Project Icewine acreage within the HRZ shale may have mean prospective recoverable resources of 763m barrels of oil, net to 88 Energy.

So far, it has drilled one well, Icewine #1. This appeared to show promising reservoir characteristics, suggesting further exploration is worthwhile. However, Icewine #1 wasn’t flow tested or fractured. We’ll have to wait for the next well, Icewine #2H, for this.

How long will A$25m last?

88 Energy’s exploration costs are about to rise sharply, as the 75% Alaska tax rebate on exploration spending will fall to 35% in July.

According to the firm, today’s cash will be spent in three ways. Firstly, 88 Energy will complete the acquisition of the 174,000 acres of HRZ shale covered by its license. The second big cost will be 750km of 2D seismic, which will be used to refine resource estimates and future drilling plans. Some of the cash will also be used to fund 88 Energy’s overheads.

This work will occupy the remainder of 2016. 88 Energy expects to start drilling the Icewine#2H well during the first quarter of 2017. Icewine#2H will include a horizontal section and will be fractured and flow tested. This should provide much more information about the real commercial potential of the Icewine acreage in the HRZ shale.

More cash will be needed

Today’s announcement makes it clear that this placing won’t fund the drilling of Icewine#2H. Dave Wall, 88 Energy’s Managing Director, says that the new money will “bring the Joint Venture to the doorstep of … the drilling of our second well, Icewine#2H”. 88 Energy will probably need to raise more cash at the start of 2017.

In the meantime, I believe investors face a risk that the shares will continue to drift lower. Although 88 Energy says that the placing was “oversubscribed” by “institutional and sophisticated investors,” it’s worth considering a second viewpoint.

As I write, 88 Energy is trading at 2.3p. That means investors who paid 1.9p yesterday could sell today for an overnight profit of about 20%. I suspect a lot of placing buyers will do so.

Phase II of Project Icewine is going to require patience. Following today’s placing, 88 Energy has a market cap of £89m. In my view, now is likely to be a good time to take profits on the shares and then sit back to see how things develop.

The post Will 88 Energy Ltd Storm Ahead After Raising A$25m From Investors? appeared first on The Twelfth Magpie.

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Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

AIM-listed 88 Energy has dominated the headlines since January as shares exploded in value over 450% after the company’s first exploratory drills struck black gold. 88 may have begun life as an Australian oil driller, but after failing in the Outback it has shifted focus towards slightly colder Alaska.

While the company’s cold-sensitive workers may not have preferred this move, it has paid off for shareholders so far. Over the past years management has gone out on a limb and purchased roughly 200k acres of Alaskan tundra in the hope that the hydrocarbons underneath would be commercially exploitable. It was never in doubt that Alaska was oil rich, as oil majors have been snooping around the state for years, but only recently has 88 Energy sunk successful test wells in mainland Alaska.

However, while major oil reserves undoubtedly lie under 88 Energy’s acreage, the company is years away from being able to exploit these resources. The company has years of work ahead of it before its current exploratory wells produce significant quantities of crude. Furthermore, with limited cash on hand it will be forced to tap shareholders for further equity or turn to the debt markets to begin production.

And, even if production does begin, management is aiming for breakeven prices of $55/bbl for shale oil and $35/bbl for conventional oil, neither of which are particularly cheap for small producers. Due to its low capital reserves, uncertain prospects and years of work ahead of it, I would avoid shares of 88 Energy for the time being.

Shale oil wells also deplete quicker than conventional ones, requiring new wells to be built frequently. They also remain controversial with local landowners and are the frequent targets of populist politicians’ threats. With all these issues confronting them, I wouldn’t advise buying shares of 88 Energy any time soon for risk-averse investors.

The post Is American Shale Oil About To Make 88 Energy Ltd Investors Oil Barons? appeared first on The Twelfth Magpie.

More reading

• The £15bn defence splurge that could send UK shares soaring in July
• Up 446% in 12 months! What’s next for the Ceres Power share price?
• How much is needed in an ISA to unlock £1,220 of passive income a year?
• Forget meal deals! Here’s how £8 a day could be worth £357,000
• Up 132% and surging, how is this FTSE 250 share STILL so cheap?

Ian Pierce has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

CORRECTION: The initial version of this article stated that Pantheon Resources was also a shale player, whereas a fundamental tenet of the company's investment thesis is that it is precisely not involved in this field; rather, it is focused on the Eagle Ford conventional sandstone play, not shale. We apologise for any confusion this may have caused.