A CR (or Capital Raising): 88e are selling some more shares before we get to test our really important next well Icewine #2 is exactly the boost to confidence we need and as everyone here and on HotCopper is discussing. This is all about reducing shareholder risk. We all know that because we were talking about it recently. But let’s pull everyone’s comments together and look at the detail.
A 50% Chance of Success has now got better.
Dave has always being telling us that we have a 50% Chance of Success with this really important next well. “It’s crunch time!” he said. Icewine #1 showed us that we have the oil in the ground, lots of it, estimates are quite varied, 1 billion Independently assessed by consultants D&M perhaps too conservatively, 2.6 billion Mean Average according to 88e and with the extra acres we acquired in December last year we can see something like 50% more barrels so somewhere around 4 billion barrels and that’s without the conventional leads we have yet to look at. We all know what that means. A $10 profit per barrel gives an asset worth $40 billion, ok let’s not get the bloody Magic Calculator out again now but we can see a very attractive uplift in our share price if we can get the oil out of the ground. That is the risk. Can we get the oil out of the ground at a commercial rate? Dave says we have a 50% Chance of Success and until now it was all on this next one well called Icewine #2. Lots of us think he is being too cautious, Pauk Basinski certainly seems very confident, but Dave can’t say its better than 50%.
If it didn’t work it would be very difficult to raise more cash to try again because our share price would probably have dropped quite a bit! But if this one well did flow then suddenly we will have proven the method which can be used for all the rest of our acres. So suddenly we are much more valuable. Crystal balls anyone? With this upside we could see 10p 15p perhaps even 20p if some big oil company starts sniffing around. What do I know? You can have a shot at trying to work out what we might be worth once we have proven the whole thing with a few full production wells dotted up the Dalton Highway and some East/West, but trying to say what we might be worth after a successful Icewine #2 is very difficult. What we can look forward to is a much improved share price from this point. That looks very likely.
So why not wait until after Icewine #2 flows nicely before 88e goes to the market to fund the next stage in proving our assets? It would be much easier to raise funds when our share price was say 4 times what it is today, we would need to sell 4 times less shares to raise enough for the next well. That is the all-important decision that Dave has made. He has decided it is safer to have some money in the bank now for a second shot at getting the oil out of the ground to cover the downside risk of Icewine #2 not flowing nicely.
As Steve068 on HotCopper said, “50% is the same as a toss of a coin”, heads we get the oil out of the ground tails we don’t. That level of risk determines how much we are all prepared to invest of our important life savings into 88e. We look at this and say 50% chance of losing the lot or a 50% chance of making a very large capital gain. For most of us 50% is interesting but we wouldn’t bet too much on it, we make a choice.
So with money in the bank for a second shot? Let’s call that Ice #3 and lets assume Ice #2 and Ice #3 both have a 50% Chance of Success. Steve068 explained it nicely for us, there are four possible outcomes when you toss two coins:
With two coins we have three chances of at least one success so we can add them all up and our overall Chance of Success has improved from 50% to 75%.
But of course as SP_Oiler pointed out on LSE the Chances of Success of the next drill, "Ice #3" as we are calling it, is very much dependent on if and how Ice #2 performs or the reasons for less than hoped for flow rates which is distinctly different to our toss of a coin analogy. It is a good explanation as to why this helps our investment case.
The market will look at this and conclude that it can perhaps risk more of hard earned life savings because the chance of getting one well flowing is now more likely than both failing. So before we even get to start drilling our SP should reflect this improved Chance of Success. Not everyone will have spare cash under the mattress or lurking in an old tea pot so we can’t tell how much the SP will go up, but what we can say is that concern that a failure with Ice #2 will cause a funding crisis for 88e will be significantly reduced.
And, what’s even better, with Ice #3 funding in the bank we can imagine not having to give away so much of our assets in exchange for a JV. We can prove the assets “cream the curve” ourselves to a greater extent, keeping control longer, before talking to JV partners. We will be in a much stronger position to negotiate as they will not have to factor in so much risk.
It shows Dave Wall is right on the ball, thinking ahead, navigating this ship of ours around risks. I have always put the Chance of Success as a little better than 50%, I am now thinking we are closer to 80%.
With the level of risk/reward we are now looking at it doesn't get much better.
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