CEI - Bidding Farewell To Camber Energy-Viking Energy: The Merger Is Finally Over

2023-08-02 03:20:17 ET

Summary

• One of the craziest M&A opportunities I have ever seen.
• Not often do you pocket a 35% merger arb spread in less than week.
• Long-awaited merger between Viking Energy and meme-stock Camber Energy will close today.
• What’s next for Camber Energy?

One Of A Kind Opportunity

The merger between Camber Energy ( CEI ) and Viking Energy ( OTCQB:VKIN ) attracted my attention last Thursday and I shared the idea with my group.

This has turned out to be one of the craziest M&A situations I have ever seen - and this is no small feat as I have been covering merger arbs for over 10 years. What’s so interesting about it? Well, with just a few days left until closing, the arbitrage traded at a wide 35% spread. Meanwhile, there seemed to be no hurdles for transaction closing:

• The merger had already been approved by shareholders on both sides.
• The other closing conditions, including approvals from the SEC and NYSE American, have also been received.
• CEI had already owned 61% of VKIN’s shares.
• The CEO, who was running both companies, had strong incentives to pursue the merger as his economic interest in the combined entity would increase significantly due to the conversion of VKIN preferreds. The merger was necessary for CEI to maintain its listing on NYSE. Keeping this listing, which has a large meme-follower base, would go a long way in helping the CEO to gradually liquidate his lucrative position in the company.

Moreover, borrowing for hedging was widely available.

The wide spread seemed to be explained by these being tiny nano-cap companies, the fact that the merger had been 2.5 years in the making as well as the checkered past of both companies. For instance, CEI's share price has dropped dramatically from $3,000,000,000 per share in 2011 to a mere $0.85 per share today. Meanwhile, the share count has seen impressive growth in the opposite direction. How often do you see such value destruction?

So how did it go? Just as expected. As shown on FINRA OTCE platform , yesterday VKIN shares were delisted from OTC and trading has been halted, confirming that the merger will be consummated promptly. I expect that CEI shares should hit the arbitrageurs’ accounts by the end of this week, letting them bow out with smiling wallets.

What’s Next?

I've got to say, if it wasn't for this merger, I would not touch these companies with a ten-foot pole. CEI is a meme-stock with a number of red flags (as detailed in this short report from Kerrisdale Capital) that has continuously destroyed shareholder value. VKIN has a similarly poor value creation track-record.

I think that the combined company's equity is a zero and the management might further erode shareholder value. CEI is currently valued at a $20m market cap vs the current book value of -$19.5m. CEI's financial situation is challenging, with only $0.6m in gross cash as of March 2023 compared to $34.7 million in long-term debt. This is a cause for concern given the operating cash burn of $1.4 million in Q1’23. Put simply, the company will need debt, equity, or preferred equity financing in the near future. Interestingly, Mercer, which performed valuations of both companies as part of the transaction, has itself highlighted that the ability of CEI to make it through 2023 is questionable. High oil prices did not seem to help as CEI's cash burn remained at $4.4 million in 2022 compared to $5.4 million in 2021. Until the merger is finalized, CEI's only real asset has been its stake in VKIN. If not for expensive borrow fees, CEI would an interesting shorting candidate.

As for VKIN, its financial position is similarly difficult, with $1.9m in gross cash as of Mar’23 compared to $3.4m in short-term debt alone. This, coupled with the company’s cash burn of $1m in Q1’23 and $10m in 2022, suggests that the merger will likely only add to CEI’s liquidity issues.

Checkered Pasts

A bit more background on the track record of both companies.

The company’s history dates back to 2006 when the company’s predecessor Lucas Energy Resources went public via a reverse merger. After years of bad investments and a close to 100% decline in stock price, the company renamed itself to Camber in 2017 and began to pursue new acquisitions in 2019. Since then, the company has been trying to acquire Viking Energy.

During Covid, CEI became a target of a pump-and-dump scheme, leading to a temporary spike in its share price in September-October 2021. The details provided in this litigation indicate that CEI's share price surged from $0.46/share on August 3 to $4.37/share on September 30, with the perpetrators profiting $5.5 million. The recent share price increase in July 2023 might have also been influenced by similar pump-and-dump dynamics. This is likely given that CEI has an outsized following among retail investors and maintains a presence on various social media platforms, including its own subreddit.

VKIN has a similarly spotty track record. Originally a shell company, VKIN transitioned into a private investment firm operating in China. With no business success, VKIN pivoted its strategy and started acquiring income-producing assets in North America, building a portfolio of oil wells. Despite these efforts, the company has struggled to achieve consistent profitability, accumulating a net income deficit of -$105 million from 2015 to H1’21. To pivot away from oil and gas, in mid-2021 VKIN acquired a Canadian industrial engines and power generation products manufacturer Simson-Maxwell, however, this has not allowed the company to reach profitability so far. A bizarre detail is that VKIN’s CFO from 2014 to 2016 was allegedly a fictitious person as no one aside from the company’s founder/former CEO had ever met the executive. The founder was eventually charged by the SEC for fraud.

Takeaway

The VKIN-CEI merger has turned out to be a one-of-a-kind opportunity for merger arbitrage, with investors seeing a fantastic 35% return in less than a week. However, I am cautious about holding shares in the combined company. Both CEI and VKIN have had checkered pasts. The combined company's equity is currently quite clearly overvalued and might eventually end up being worth close to nothing. For these reasons, I believe it is best to stay on the sidelines.

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