- The company’s share count has hit 250 million and is likely to increase further due to the conversion of Series C preferred shares.
- Its main subsidiary posted weak results for Q3 2021 and it transferred most of its oil and gas business in October.
- With that, the main assets left include a 60.5% stake in Simson-Maxwell and an IP license agreement for a carbon capture system that covers Canada.
- I doubt those two are worth much and I’m still bearish.
So far in 2021, I’ve written bearish SA articles on more than 30 companies that seem to have attracted significant retail investor interest. The share prices of the vast majority of them have declined as of the time of writing as retail investor interest is often fleeting and the fundamentals just aren’t there in most cases.
In September, I covered an oil and gas firm Camber Energy (NYSE:NYSE:CEI) whose valuation was soaring on the back of an intellectual property license agreement for a carbon capture system. A lot has happened since then. The company released its restated Q3 2020 results, which showed a $30.9 million increase in liabilities due to the Series C preferred shares. The merger with Viking Energy (OTCQB:VKIN) is still pending and the Q3 2021 financial results of the latter look bad. Also, it seems that Viking is almost out of the oil and gas business and there isn't much left.
Overall, I continue to be bearish on Camber Energy despite the fact that its share price is down 30% since my first article. Let’s review.
Overview of the latest developments
On November 23, Camber released a restated version of its Q3 2020 financials and the major change was the addition of a large derivative liability, which pushed its shareholders’ equity into negative territory.
(Source: Camber Energy)
This derivative liability is linked with the company’s Series C preferred shares, which were convertible into up to 83,132,183 common shares as of September 2020. The issue was that Camber Energy recorded that type of shares as permanent equity, which the SEC didn’t like. You see, these preferred shares can be bought back by Camber or exchanged for common stock. They are convertible at a fixed $3.25 rate and then their owner is entitled to dividends as if the shares had been held to maturity.
Yeah, those dividends are 24.95% on the face value per year and Camber Energy decides whether this conversion premium will be paid in cash or shares. If the premium is paid in shares, then the conversion ratio will be calculated using the VWAP based on the lowest stock price over the 30 days before the conversion date and the 30 days after the conversion date (page 26 here). The result of the latter is a derivative liability, which reflects the historical volatility of the company’s common shares.
Well, Camber Energy has almost no cash and the conversion of the Series C preferred shares is the reason its share count has been soaring over the past few years. Kerrisdale Capital pointed out in its short-seller report that it estimates 99.7% of the company’s shares were created through the conversion of Series C preferred over the past several years.
The issue is that we don’t know how many of these shares are there considering the company hasn’t released financial results for the past few quarters. We can see that the number of common shares outstanding has grown almost fivefold since June alone and hit 250 million, which is the highest it can get.
Considering Camber Energy has just called a special shareholder meeting to increase the number of authorized common shares from 250 million to 1 billion, I think it’s likely there is much more stock dilution to come.
Let’s now turn our attention to the Q3 2021 financials of Viking Energy, a majority-owned subsidiary of Camber Energy with which it has been trying to merge since February 2021. At the moment, Camber Energy owns a 70% interest in the company and the latter was the buyer of that carbon-capture system license. In my opinion, Q3 2021 was pretty weak considering Viking’s oil and gas business was barely profitable and there were $9.5 million in other expenses. That $16.4 million derivatives loss for the first nine months of 2021 comes from swaps and collars on oil and natural gas prices and Viking was being pushed to the wall as the global energy crisis unfolded.
(Source: Viking Energy)
In view of the significant losses, I wasn't surprised to find out that Viking has almost exited the oil and gas business as its main subsidiary Elysium Energy Holdings was transferred on October 12. Viking didn’t receive a penny as the consideration was the assumption of all of the rights and obligations by the buyer.
(Source: Viking Energy)
The assets that Viking kept generated revenues of only $3.1 million in the first nine months of 2021. Looking at the Q3 balance sheet, the company should be left with $33.9 million in assets and $22.3 million in liabilities. At least the shareholders’ equity should be positive now. Following this move, the main assets of Viking include a 60.5% stake in Simson-Maxwell and that IP property license agreement.
(Source: Viking Energy)
Simson-Maxwell is a Canadian industrial engines and power generation products manufacturer and the stake was bought in August 2021. Between August 6 and September 30, the company booked revenues of $3.5 million and its net profit was $78.961. In view of these figures, I think the $8 million that Viking paid for this stake was high. Viking will start to consolidate the results of Simson-Maxwell as of Q4 2021.
(Source: Viking Energy)
Camber Energy hasn’t posted its financials for the past few quarters but I think it’s safe to say that it has been continuing to finance its operations through the highly-dilutive Series C preferred shares.
Its main subsidiary Viking Energy transferred most of its oil and gas business in October and should be left with $33.9 million in assets and $22.3 million in liabilities. Its main assets now seem to be a 60.5% stake in Simson-Maxwell and an intellectual property license agreement for a carbon capture system that covers Canada. I doubt both of them are worth much.
I continue to think that Camber Energy is significantly overvalued and investors can take advantage of this by short-selling the shares. According to Fintel, the short borrow fee rate stands at 4.42% as of the time of writing.
There are also put options, but they are pretty expensive due to the significant share price volatility.
(Source: Seeking Alpha)
This article was written by
Gold Panda has been working as an M&A analyst for over 11 years. He's been investing since 2007. Preferring value to growth, he tends to take a relatively conservative approach in his investing. His focus is on small and micro-cap stocks, which he believes is the area which offers the greatest opportunity to exploit market mis-pricings.Gold Panda is part of the team that runs the investing group Microcap Review. He provides a real-time portfolio to the group. Microcap Review focuses on three areas of opportunity in the micro-cap space: arbitrage and special situations, net-nets and undervalued stocks. Learn more.
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