Summary
- CAMAC began transforming in November 2013 with the purchase of the OML 120 and 121 fields in Nigeria.
- After the purchase, the company began to aggressively drill the Oyo-7 and Oyo-8 wells.
- The reverse stock split will help move the company into the institutional investor realm.
CAMAC Energy (NYSEMKT:CAK) announced on Friday, April 17, that it was executing a reverse stock split of 6 current shares for 1 new share and simultaneously changing its name to Erin Energy Corporation and ticker symbol to ERN. Over the past year CAK has made big moves as it purchased the rights for the OML blocks 120 and 121 in Nigeria. It has also made some movements in strategic exploration projects in Gambia, Ghana, and Kenya.
Since purchasing the rights for OML 120 and 121, the company has finished drilling two new wells, Oyo-7 and Oyo-8, with Oyo-8 now hooked up and ready to begin production. Production results have yet to be released, but the targeted rates were 7,000 BBLs per day per well. In spite of the price of oil being down, the 14,000 bopd will be a significant boost to the company.
In the announcement for the reverse stock split, the company added that this will be the next phase in the transformation of the company. For investors, there are a few reasons this is a good thing.
Penny Stock Status
The consolidation of shares will move the stock out of the penny stock realm. Over the past year, the company has remained under the $1 line at the beginning of the year sat around the $0.30 line. Since then, the company announced the completion of the two new wells, and the price rose to the current range of $0.80-$.90.
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Source: Yahoo Finance.
At the current price, the company has a market cap of around $1B. By doing a reverse stock split, the company will maintain roughly the same valuation, but have a stock price around $5. This price attracts a whole new realm of investor, including institutional investors, in the $5 range. Psychologically, it will convey a company in a stronger position than one sub-$1.
Institutional Investors
Many institutional investors are prohibited from investing in penny stocks, despite the fact the company may still have good prospects. The typical price breakdowns are the $2, $5, and $10 levels. By doing the reverse after the wells have been completed and the price has run up to the $0.80-$0.90 range it gets the stock into around the $5 level. If the reverse had been done in the $0.30-$0.40 range, it would have resulted in a $2 level.
The company has some institutional investors, but most of them don't hold significant levels. The one exception is the Public Investment Corporation (SOC) Limited from South Africa which helped to fund the purchase of the Oyo fields. In addition to the institutional investors, there will be higher levels of attention within the major analytical centers.
Valuation
At the end of 2014, the company had 1,168,468,000 shares outstanding. Once the reverse split is finished, the company will have just under 200,000,000 shares outstanding. To keep a valuation or around $1B, the stock will have to maintain a $5 price per share. With the completion of Oyo-7 and Oyo-8, it is likely the company will be able to maintain this price.
Conclusion
Investors are already happy with the reverse split and the name change. It helps to start new with fewer shares and a profile that will attract major investors. In the short term, investors may see the price slip some. Reverse stock splits are usually a signal of stock weakness as most companies use them as a way to keep their stock price above the markets required prices for trading on different boards. This case is different as CAK has languished at a lower price for quite some time and is using the reverse to help propel it into the limelight. Investors should use the pull back as an opportunity to increase their holdings.
Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.