AXAS of Profits

Everyone seems to want a piece of AXAS these days.  After years of treading water with significant debt and mounting losses, things have really turned a corner for the company.

The following is an analysis about AXAS, an oil company that is 53% institutionally held (that’s a very high percentage in my experience), and has recently set the Management’s interest right alongside common shareholders.  I will get to all that in this article and dive deeper into why I think this is an excellent candidate for a 3 month to year-long (and actually as far as 2021) hold.

I will start with the two graphics that immediately made my mouth water. They are the “institutional holdings” chart (graphic 1) and the “insider ownership” chart/record (graphic 2) from nasdaq.com.

I am always very interested when a company has a large proportion of recently acquired shares in the hands of the management team and board of directors.  One reason, admittedly, is I like to play with stocks with low floats and high levels of implied manipulation by “whoever” (ahem, insiders and institutions).  So when someone important purchases a large number of shares (especially when it sneaks by the press and there is only an SEC filing) I take notice.

BUT this company is not one of those riskier, manipulated, companies.  This is AXAS Petroleum!  They have 165 million shares out there on the market.  They have major players involved (Blackrock, Vanguard Group, JPMorgan Chase, among others), and their stock price is so liquid (many shares exchange has daily) that the only thing that is really going to effect this significantly is continued improvement on their earnings announcements, managing their long-term debt more directly (without diluting), and the general economic outlook/oil price appreciation.

I do have a few cons–one of which I hinted at just above there (the long-term debt).  But for each of those cons, I have a “quasi-explanation” that I believe would hold true if history repeats.  I will start with a quick Pros and Cons analysis, and then move on to the explanation of why my “cons” aren’t so bad.

Pros:

  1. Management has been given a combination of options and warrants that vest fully by 2021.  Additionally, management can enrich themselves to the tune of 200% more if AXAS outperforms their peer group.  Take a look at the SEC filing that outlines the warrants and options (All I can find on this is a screenshot of the actual filling. If I can get the link to the filing I will link here).
  2. While there may be issues people have with oil companies and ethics, shareholders of this company should truly see ethics at play.  Management isn’t getting a special class of shares, and if they fail at their jobs the warrants are worth much less then if they succeed (both because the share price will be lower–all of our loss, AND they will get fewer shares).  Management is squarely taking accountability for the company on their shoulders, and I think that is one of the most ethical and moral things a company can do (subjectively, from an investors point of view)
  3. Institutions own more than half of the company.  That has two bullish effects.  One, credibility and confidence of retail investors are bound to be positively affected by this optimistic perception that other institutions have taken.  Two, the “float” of the company, or the number of shares that retail traders like you and I have to purchase from, is significantly less.  Holding all else equal (no emails! I said, holding all else EQUAL), the limited supply and stable or higher demand imply the price must increase to reach equilibrium.
  4. The last few earnings announcements are, as an analyst friend of mine said, “night and day” compared to last year. They shored up their “impairments” which helped a lot. But they also did the good-old fashion revenue increases, cost-cutting, and traditionally “positive” things companies do to become more profitable.

Cons:

  1. There is a high amount of long-term debt.  One might call it staggering, but I don’t think that’s fair.  This is an oil company.  The Industry protects itself by creating high barriers to entry.  On one hand, it is INCREDIBLY profitable to run an oil company.  On the other hand, it is INCREDIBLY expensive to get started and to continue operations during a downturn.  Some of the bigger companies, like BP, Exxon, etc. love it when companies get overburdened by debt during downturns because they get to scoop them up for pennies on the dollar.  But when there is an uptick in the oil-economy, debt is shrugged off and handled easily by profit margins.
  2. The acquisitions by management were not open market acquisitions.  That’s not a huge deal, but if they had been then the story would be even more bullish.  Management making an open market acquisition is a big statement that they think things are going smoothly, and profits are increasing.  Its a window into their mind. Options and Warrants, on the other hand, are given as motivators.  There isn’t necessarily as much proven, as there is to prove.
  3. The price of oil will dictate the profitability of the company and the retail investor interest in the stock.  If the oil price continues to rise then this is as safe a bet as any other.  But if tomorrow everyone stops fighting and there is no tension in oil-producing countries, the price will plummet at it could sink many debt-burdened, smaller companies.  I am not bearish at all on oil, it is typical for oil to increase more than inflation, and we are in a high inflation watch macroeconomic place right now.

I know I came off as bullish here, and I do have an optimistic sense about this trade, so that wasn’t unintentional. But the same advice is always relevant: The market doesn’t hand you profits on a silver platter. You need to stay vigilant, manage your risk, and allocate your resources strategically. This trade, all trades, are important decisions and requires more DD then just reading an article.

You may have guessed where I am going with this. Nothing I have ever said should be taken as investment advice! Let’s have a lawyer fill us in:

No information expressed or distributed by Black Ink Economics constitutes investment, trading, or financial advice. Black Ink Economics’s mission is to educate people on how to trade and to further people’s knowledge as to the workings of the financial markets. Any information presented or distributed by Black Ink Economics is for education and entertainment purposes only.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s