Europa Oil And Gas – Follow A Failure By A Fundraise, Why Not?

Trade EOG Shares Your Capital Is At Risk
Tim Worstall
Updated: 3 Mar 2022

Key points:

Europa Oil and Gas (LON: EOG) shares are down near 30% on the back of a fundraise. This is pretty normal, a fundraise normally is at a discount to prevailing market price and all that. What matters in the short term technical sense is how the price reacts to the issuance price. What matters in the longer term is what the new funds are spent upon.

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Shareholders at Europa have the right to a certain amount of grievance of course. For the company did have a deal into a promising exploration field off Ireland. Which, given that Europa is an oil and gas exploration company is the very meat and drink of the business. Then events intervened. The recent rises in oil and gas prices – especially gas – led to the seller rescinding the deal. Not exactly happy days for Europa for of course the high oil and gas prices now, as opposed to at the time of the signing of the deal, are what make it so attractive to have done the deal. The very reason for the rescinsion is what made Europa want it to go through.

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However, such things happen at this end of the petroleum markets. As with riding a horse, what matters is to get straight back on and to persist. Which is what Europa Oil has done. They’re now doing a farm in on a North Sea block. This requires funding, to actually pay for the work that leads to the equity interest. Thus the fundraising, to be able to do the work.

Which leads to the technical point. The share issuance was at 1.8p. A successful issue leaves the Europa share price above that issuance price – the market believes that the company is worth more than the capital required to fund it. Sure, the Europa share price is down because of dilution but it’s at 20 at pixel time – a success by this limited measure.

What then matters in the longer term is of course the success, or not, of the actual exploration and drilling programme. That’s what determines whether this new capital will actually be put to good use or not. That’s pure risk of course.

Yes, of course, risk is mitigated as far as can be done. Do the geology, drill where results are likely to be good and so on. Reduce costs of development by looking where there is already at least some of the necessary infrastructure to exploit, all things that are being done here.

But while Europa Oil and Gas is indeed doing those correct things it is still necessary to take the risk of drilling the hole and finding what is actually down there. That’s just not something we know how to do without spending the money on drilling the hole.

The long term valuation of Europa shares is going to depend upon the outcome of the drilling programme therefore.

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