CEI - Camber Energy: Do Not Ignore Its Recent Agreement

Summary

• With significantly higher oil production due to its recent agreement, CEI’s financial results may improve even with the current oil prices.
• Camber Energy is still involved with the problems of its negative equity. However, its assets-to-equity ratio improved in 3Q 2022.
• CEI’s short interest decreased recently, implying that investors’ sentiments are changing.
• The stock is a hold.

Recently, Camber Energy ( CEI ) entered into an agreement to acquire certain privately-owned companies with $55 million in annual gross revenues. This agreement gives CEI the working interests in 169 proved producing oil wells (producing 2000 barrels of oil per day), 174 proved non-producing wells, and 12 proved underdeveloped well locations. This is a huge step for Camber Energy. With the significantly high oil prices of more than $100 which the world experienced in 2022, CEI could have recorded exceptional oil sales as a result of the mentioned agreement. However, due to the continuing global recession, the demand outlook for oil is not strong and with the current oil prices, CEI’s realized oil prices cannot be as attractive as they could be 6 months ago. However, even with the current oil market condition, the CEI’s recent agreement must not be ignored. Moreover, it is worth noting that CEI’s short interest has decreased from 36740 thousand shares to 1140 thousand shares, meaning that the investors are revising their sentiments on Camber Energy. The stock is a hold.

Quarterly results

In its 3Q 2022 financial results, CEI reported oil and gas sales of $159 thousand, compared with 3Q 2021 oil and gas sales of $103 thousand. The company’s oil and gas sales increased from $266 thousand in the first nine months of 2021 to $467 thousand in the nine months of 2022. CEI’s total operating expenses increased from $920 thousand in 3Q 2021 to $1222 thousand in 3Q 2022. Camber Energy’s loss on derivative liability dropped from $257 million in 3Q 2021 to $14 million in 3Q 2022. CEI reported a net loss of $23 million in 3Q 2022, compared with $265 million in 3Q 2022.

In its 3Q 2022 financial results, Camber Energy claimed that it will be able to continue to leverage the expertise and relationships of its operational and technical teams to enhance existing assets and identify new development and acquisition in order to improve its financial position. However, the company's ability to improve its financial position is negatively affected by the oil and gas prices volatilities. Also, it is important to know that Camber Energy’s net proved developed producing oil and gas properties decreased from $68884 on 31 December, 2021, to $64346 on 30 September 2022. Furthermore, as of 31 December 2021, Camber Energy had $5854 thousand in cash holdings. This number decreased to $2455 thousand on 30 September, 2022.

The market outlook

Due to its recent agreement, Camber Energy got full access to 169 proved producing oil wells, which means that the company’s oil production can increase by 2000 barrels of oil per day.

According to EIA’s short-term energy outlook , total world petroleum and other liquids production increased from 101.02 mb/d in 3Q 2022 to 101.29 mb/d in 4Q 2022. EIA projects that total world production to decrease to below 101 mb/d in the first half of 2023. However, in the second half of 2023, total world petroleum and other liquids production may increase again (see Figure 1). U.S. petroleum and other liquids production in 4Q 2022 is higher than in 3Q 2022. Also, it is expected to increase further in the first half of 2023. Thus, in 2023, I expect CEI to produce oil at its highest potential production level. However, oil prices are not as attractive as they were six months ago.

Figure 1 – International petroleum and other liquids production and consumption

Due to the global recession, crude oil prices are not expected to increase to their significantly high levels in the first nine months of 2022. India’s economic growth is expected to slow as a result of pandemic-related distortions. Moreover, Saudi Aramco reduced its crude oil prices for Asia and Europe due to their decreased demands. Also, it is important to know that despite OPEC+ production cut plans, OPEC oil output increased in December.

On the other hand, due to falling global oil inventories in early 2023 (see Figure 2) and China’s reopening crude oil prices are supported. Also, The European ban on Russian crude and refined products that will come into effect on 5 February, 2022, may cause Russia to cut its crude oil output by 1 million barrels per day to retaliate. According to EIA’s latest report, Brent crude oil spot price is projected to remain below $90 per barrel in 1Q 2023. However, it is expected to increase in the second quarter of 2023.

Figure 2 – Brent crude oil spot price and global inventory changes

Performance outlook

Figure 3, shows the debt-to-assets ratio and assets-to-equity ratio of Camber Energy. The debt-to-assets ratio indicates how much of the company is owned by creditors, compared with how much of the company’s assets are owned by shareholders. Generally speaking, a debt-to-assets ratio below 1.0 is considered a relatively safe debt-to-assets ratio. According to Figure 3, CEI’s debt-to-assets ratio increased from 0.46 in 4Q 2021 to 0.88 in 3Q 2022, meaning that the company’s debt-to-assets ratio is impairing; however, it is still below 1.0.

The asset-to-equity ratio of a company shows how much of its total assets are owned by shareholders. Figure 3 shows that CEI’s assets-to-equity ratio is negative, meaning that its equity is negative. Negative equity means that the value of the company’s assets that was financed using debt has fallen below the amount of debt. Camber Energy’s loss on derivative liability has been the driver of its negative equity. We can see that from 3Q 2021 to 2Q 2022 the company’s assets-to-equity decreased from -0.71 in 1Q 2022 to -1.58 in 2Q 2022, meaning that CEI’s financial health was worsening in the mentioned period. However, the company’s assets-to-equity ratio increased from -1.58 in 2Q 2022 to -1.13 in 3Q 2022. Thus, it seems that management is taking the necessary steps to improve the company’s financial health. Also, as the company’s short interest decreased from 36740 thousand shares to 1140 thousand shares, investors’ negative sentiments about CEI’s performance are changing.

Figure 3 – CEI’s leverage ratios

Risks

Despite the company's assets-to-equity improvement in the third quarter of 2022, CEI's negative equity means that the management must do a great job to turn Camber Energy into a relatively healthy company. The management's potential to improve the company's financial health is linked to the oil and gas prices in the following quarters. With lower oil prices, the management's potential to turn CEI's negative equity into positive equity will decrease. Moreover, CEI has financed its new assets using debt. If Camber Energy remains unsuccessful in making a profit in 2023, its increased debt may negatively affect the leverage ratios of the company.

Summary

Camber Energy’s leverage ratios indicate that the company is involved with serious problems. However, its assets-to-equity ratio improved in 3Q 2022. Also, as a result of its recent agreement, CEI’s oil production can increase significantly, and even with the current oil prices, CEI’s financial results may improve. Finally, CEI’s short percent of float decreased significantly. I don’t expect a short squeeze to happen. However, I think that a hold rating is suitable for CEI.

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