Revisiting Camber Energy: The Situation Still Looks Bad And I Continue To Be Bearish

Summary

• 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.

ErikMandre/iStock via Getty Images

Investment thesis

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.

(Source: YCharts)

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)

Investor takeaway

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)

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

I am not a financial adviser. All articles are my opinion - they are not suggestions to buy or sell any securities. Perform your own due diligence and consult a financial professional before trading.

Comments

[Gold Panda]

wow, what a spike today

[Platypussy]

@Gold Panda A fool's rally to be sure. Memesters have no clue as to how the value of the company depends on not just price but the number of shares.

If CEI ever files earnings reports again (going unreported for nearly two years now!) they'll have to disclose how many shares they've issued are since they raised the cap from 250M to 1B.

[Xxfactor]

Why haven't they filed earnings in 3 quarters? That's a huge red flag. Do they have an excuse?

[charly333]

CEI is a phenomenon. The stock dropped from $ 102 million in 2011 to $ 0.77 today and the price is still too high. Any buyers had good marks in math?
Dilution is the name of the game and it will continue as long as there are clueless buyers.

[Gold Panda]

@charly333 preach brother

[charly333]

@Gold Panda There's nothing like the stock market.

[Gold Panda]

@charly333 well, there are casinos

“A man can choose different ways to get rid of his fortune: the fastest is the casino, the most pleasurable is with beautiful women and the most stupid is at the stock exchange.” - André Kostolany

[Platypussy]

Digging a bit deeper into the weeds it turns out that following a 'Trigger Event', which is what happened after they failed to file reports with the SEC, the default conversion rate of their $20M in preferred shares becomes 85% of the stock price - minus 10c - of the 5 lowest days of the preceding 60 trading days to a conversion request. This price is subject to adjustment lower per the 60 succeeding trading days too!!

If for example one were to look at the 60 days leading up to Friday, Dec 4th, the 5 lowest days add up to about 5.20.

5.20/5 = 1.04 x 85% = .86c - 10c = 76c shares.

But the kicker is that those shares have to be sold as soon as they're converted to keep the lenders within the 9.9% ownership limits. As those shares get sold into the market they further depress the price which causes Camber to have to issue additional shares under the 60 days look-forward provision. That means more shares get issued in a revolving door of greater and greater numbers as the price goes lower.

The only limit is the lowest price on conversions has been set at 1c.

This is why they're called 'death-spiral' convertibles.

www.investopedia.com/...

[Platypussy]

@Platypussy Per the formula described above if one preferred share equals $10,000, at 76c that would convert into 13,150 shares. But if the 5 lowest day's ave in Dec and Jan is 75c, then Camber would have to go back and adjust the previous issue from 76c to 54c, which would result in increasing the number of shares issued to 18,520. That gives the lender an additional 5,362 shares to sell.

(.75 x 85% - 10c = .54c)

(10,000/.54 = 18,520 - 13,150 = 5,362 shares)

Of course what this doesn't include is the interest which is now running at 25% a year. The longer this lack-of-share delay continues the more shares this adds to the mountain.

All in all the stars aren't looking good for CEI!

[kbaba]

@Platypussy I recall there's something of a penalty rate of 35% under certain circumstance possible for the preferreds although I won't swear to it. Basically, if the company doesn't file all the reports tomorrow they'll be more in default to recent agreements. All the defaults will give the preferreds leverage to ask for whatever they want that won't fully kill the company in exchange for not calling the company out for breach of contract

[Platypussy]

@kbaba To a degree it's reminiscent of the saying, 'if you owe the bank $10,000 you can't pay you have a problem. If you owe them $10,000,000, they have a problem'

One way or the other they will get either a massive windfall from their loans by converting to shares or they only get a mere windfall by taking possession of Camber and Viking's assets such as they are in liquidation.

[jbsteelers716]

Only time will tell. Another acquisition coming next week. Enjoy your short position

[kbaba]

@jbsteelers716 The 'Conditional acquisition" Doris tweeted of was undoubtedly the Reno biodiesel plant which is conditional on Viking getting financing for it.

ir.camber.energy/...

from the CEI press release December 2nd
"...Viking's obligation to close the transaction is conditional on a number of items set out in the Membership Interest Purchase Agreement, including, without limitation Viking having obtained financing, on terms and conditions satisfactory to Viking in its sole discretion. There is no guaranty the conditions will be satisfied."

[charly333]

It seems CEI will see endless dilution. Then they could do a reverse split and so on. I would not touch this at any price.

[kbaba]

Glad for this article as there's not much discussion of CEI on SA. Indeed, the preferreds are the devil in the details. In the 14a SEC filing of November 29th, the company stated

"To the extent that additional authorized shares are issued in the future, they may decrease the existing stockholders’ percentage equity ownership and, depending on the price at which they are issued, could be dilutive to the existing stockholders. It is currently anticipated that a substantial portion of the additional 1,000,000,000 shares of authorized but unissued shares of common stock which will be made available through the increase in authorized shares of common stock will be issued in connection with the conversion of all or a portion of the 3,886 outstanding shares of Series C Preferred Stock, pursuant to the terms of the Series C Preferred Stock.

The 3,886 outstanding shares of Series C Preferred Stock are potentially convertible into approximately 498,564,677 shares of common stock, subject to a 9.99% beneficial ownership limitation and further adjustment as provided in the designation of such Series C Preferred Stock. As a result, future conversions of the Series C Preferred Stock would likely cause substantial dilution to existing stockholders."

So of the 750 million more shares the company wants 500 million of them are reserved for the preferred which MUST keep selling the shares they get to avoid the 9.99% ownership limitation that would cut them off from getting shares as dividends.

The company in that same filing reveals they have zero shares left in their treasury and the James Doris and the executive staff DON'T OWN A SINGLE SHARE between them!

That's grim when the Viking Merger is transacted one for one with CEI shares. Viking as about 100 million shares outstanding and contains all the significant CEI assets. So the Preferred and Viking accounts for 600 million of the 750 million shares they are asking for.

The company filed that they want to acquire a biodiesel plant under construction in Reno for 8 million$ and some preferred shares and there's mention of a "Viking bond" estimated between 250 and 275 million but really, financing seems very unclear. Similar Biodiesel plants of that size were turning a profit of about $1,250,000 million a year but much depends on diesel and veg/soy oil prices.

To avoid being called into default by the preferred after the company ran out of shares, the company made significant concessions to them as detailed in recent 8k filings. The preferreds got voting rights equalling 62 million shares, and the company can no longer end them early. There are stipulations in the agreement about that the company must get their delinquent filings in by Dec 6th (soon!) and get share authorization done by Dec 31st (company cutting it close)

Shareholders commonly saying they will vote no on the dilution without considering that would defeat the Merger and continue the default with the preferred. Might be doubtful the preferred would push the company into bankruptcy as that would kill the goose laying golden eggs but I remember something about a 34% penalty rate.

None of this is new to the company whose split adjusted share price on April 1st, 2011 was well over 70 million dollars per share. (there is a historical price calculator in the investor section of Camber's website) it's a miracle this company has never been bankrupt but, if shareholders deny the dilution, there might be a first time. Pick your poison, this company is very troubled but followers of Zach Morris hear "Carbon Capture, High Oil Prices, Generate clean electricity for Crypto mining" and think its the next Tesla. It's sad they will be led to slaughter I think

[kbaba]

@kbaba Seems to be an error is the filing I quoted, They wrote

"It is currently anticipated that a substantial portion of the additional 1,000,000,000 shares of authorized but unissued shares of common stock which will be made available through the increase in authorized shares of common stock will be issued in connection with the conversion of all or a portion of the 3,886 outstanding shares of Series C Preferred Stock"

But they are "only" asking for 750 million more shares and the 250 million they have are issued, so where is the question of "additional 1,000,000,000 shares of authorized but unissued shares of common stock" Seems like an error. No wonder they are in trouble with their filings

Note, it was only in april 2020 that the company went from 1.5 million authorized shares to 25 million authorized shares. 1.5 million to one billion shares within two years! Here is the history

"Effective on December 24, 2018, ...affected a 1-for-25 reverse stock split of the Company’s

Additionally, ....July 1, 2018, a 1-for-25 reverse stock split of the Company’s issued and outstanding shares of common stock, which went effective on July 8, 2019.

On October 28, 2019.... a 1-for-50 reverse stock split of the Company’s (a) authorized shares of common stock (from 250,000,000 shares to 5,000,000 shares); and (b) issued and outstanding shares of common stock. The reverse stock split was effective on October 29, 2019”…

and it was only after all those reverse splits that this happened

"Effective on April 17, 2020, the Company filed a Certificate of Amendment to its Articles of Incorporation with the Secretary of State of Nevada to increase its authorized shares of common stock to 25 million shares of common stock.

Effective February 23, 2021, the Company filed a Certificate of Amendment to its Articles of Incorporation with the Secretary of State of Nevada to increase its authorized shares of common stock to 250 million shares of common stock.""

[Platypussy]

@kbaba Nice work, I think it's time to publish an addendum!

It seems to me that if the debt holders get 62M votes the proxy is very likely to be approved. Yes it leaves 188M other votes but honestly how many times have you, has anyone, voted in these proxies? Not often I'd guess and I'd expect even less attention to details like voting from the 'apes'.

You might as well expect them to crack a 10-Q, ha!

[kbaba]

@Platypussy Here's the thing, there are two different rules for voting on proposal one and proposal two. They need a majority of ALL outstanding shares to get the authorization and lack of people voting (as you pointed out) means it could easily fail. Company will really have to rally shareholders to vote this in or perhaps crash and burn if they fail.

From the November 29th 14a

"Q: What vote is required to approve each item?

A: The following table sets forth the voting requirement with respect to each of the Proposals:

Proposal 1 – Approval of the filing of an amendment to the Company’s Articles of Incorporation to increase the number of our authorized shares of common stock from 250,000,000 to 1,000,000,000.

To be approved by stockholders, this Proposal must receive the affirmative “FOR” vote of the holders of a majority of the shares outstanding, and entitled to vote.

Proposal 2 –Approval to adjourn the Special Meeting to another place, or a later date or dates, if necessary or appropriate, to solicit additional proxies in favor of the Proposal listed above at the time of the Special Meeting.

To be approved by stockholders, this Proposal must receive the affirmative “FOR” vote of the holders of a majority of shares represented at the meeting, in person (including virtually) or by proxy, and entitled to vote."

[User 7680981]

Right on. Made the same assumption with less analysis before exiting a small position. Can’t say never again, but the valuations you give, I believe, are spot on.