mysticenergy
Zion Oil & Gas (OTCQX: ZNOG) – A long running complete dog of a stock
It’s usual to try to find at least some balance in an analysis of a stock or share. After all, there is at least some reason the company’s in business and there’s always the unexpected that can turn up. In my – agreed, heavily weighted – opinion this is not true of Zion Oil & Gas.
Zion used to be NASDAQ quoted (as Zion Oil & Gas, (NASDAQ: ZN)) and given the inability to maintain the minimum offer price of $1 this listing was withdrawn. I wrote about Zion back here at about the time that happened. Why this doesn’t matter to Zion aids in explaining why the company’s simply not investable for us out there.
It is possible to make a turn on the volatility in the stock. It does bounce around so, obviously, if one is correctly positioned then it’s possible to make a profit. But that does involve guessing which way that stock price is going to bounce. For there’s not really anything within the company that drives – as in any fundamental operational reason – those price changes.
The previous view of Zion
As I said that near two years ago “I get the impression, and of course this is me going over the top with the rhetoric, that if they drilled through a gas station tank, they’d still miss the hydrocarbons.” That was clearly unkind and possibly even hyperbole but that view hasn’t changed.
It’s also true that a fund manager whose opinion I value greatly, John Hempton, has been making much the same noises for 13 years now. This is about the congregation financing Zion, not about finding oil:
“I will refrain from again making a case for naked shorting because I can’t see any real social benefit in aggressive hedge fund managers sharing when Hal Lindsey fleeces his flock. We can keep the losses in the fundamentalist family without any major social detriment.” And on this – I pity the SEC. If the promoters hold the belief in oil in Israel as true religious belief it will be very hard for the SEC to go after them. Even if this is as transparent a scam as Mother Jones thinks it will be hard to prove. Did the Founding Fathers mean to constitutionally protect stock fraud?”
This note is to update by pointing to details which underline exactly that view.
In the numbers
We can look at the ongoing numbers from Zion here (updates here and here) and there’s nothing in them to change that view. They’ve not found oil, they continue to spend to try and find it, they fund this by selling more stock. And that really does seem to be the business function of the company.
I find this little detail interesting:
As of December 31, 2021, we had 24 employees and contractors of whom all but two are on a full-time basis. Included in this number are certain contractors who provide services to Zion on an ongoing basis. Of the 24 total headcount, 17 work out of our Dallas office and 7 work out of the Caesarea, Israel office.
That just doesn’t sound like a company that is all out weighted to go find oil really. Seems like an awful lot of the work is being done in the US, where the drilling rig ain’t.
We estimate that, when we are not actively drilling a well, our monthly expenditure is approximately $600,000 per month.
That’s an awful lot of overhead to be carried by an exploration company. Almost as if the carrying of the overhead is the point, not the exploration. Obviously, that’s not all wages but seriously? Sure, there’re flights to be taken, offices, computing and so on, but $25k per employee per month for what is essentially head office for an exploration company? We might think there’s a less than efficient allocation of resources here.
That NASDAQ quote
Sure, exploration companies eat capital – we all know that. So, there’s a continual issuance of new stock until something that can be monetised is found – we all know that too. But that’s why a NASDAQ quotation is something to keep – being on that more liquid market makes raising that outside capital easier. That is the function of this end of the stock market after all, raising capital for capital hungry companies.
So, why did Zion – which desperately needs capital – allow the NASDAQ quote to lapse? It would have been fairly easy to achieve the requirements, all that would need to be done is a reverse stock split to get that price back up above the $1 minimum offer price. A one for five would have been both easy and achieve that goal – perhaps a one for 10 would have been better.
So, why not? Because Zion is indeed issuing new stock in order to fund itself but it’s not doing it through the market. However, it still needs – perhaps desires is better – a market quote. So, OTC is good enough. That little point is here:
Currently, we are substantially reliant on the proceeds of sales of our common stock under the Dividend Reinvestment and Stock Purchase Plan.
They bring in new investors – or more from extant – by issuing stock directly, not through the market.
For the years ended December 31, 2021 and 2020, we raised approximately $26,219,000 and $28,390,000, respectively, under the Plan. Of the amounts raised, approximately 85% of the amounts raised in 2020 were attributable to one participant and 67% of the amounts raised in 2021 were attributable to two participants. The cessation of funding from these participants may result in adverse consequences to our business, such as a delay in our testing efforts, until we locate alternate sources for this funding.
Being able to sell stock to such investors is made much easier by having a market quotation. For such a stock purchase plan is much easier to run when new stock is issued “at the market”. So, that’s what’s done in my view. Some minimal quotation is maintained, in order to be able to issue stock at the market to those who believe in the fundamental view of the company. There’s Biblical evidence of oil in Israel, it would be good for Israel to have oil, therefore there’s a religious duty to spend to find that oil in Israel.
The really big question on that is not whether the investors believe that but whether management really does believe that.
For us as outside investors there’s also this:
In the future, we anticipate issuing additional securities in connection with capital raising efforts, including shares of our common stock or securities convertible into or exchangeable for our common stock, resulting in the dilution of the ownership interests of our stockholders. We are authorized under our amended and restated certificate of incorporation to issue 800,000,000 shares of common stock. As of March 15, 2022, there were approximately 434,717,503 shares of our common stock issued and outstanding.
They’re just over halfway through their already authorised dilution of the current stockholders through that stock purchase plan. That’s really not a good sign for the stock price now, is it?
The case against my thesis
Maybe there really is oil in that area of Israel and maybe Zion will find it. That is the case against my opinion. How much anyone wants to bet on that is entirely up to them of course.
My opinion
There’s a taste here – to put it no more strongly than that – that Zion Oil & Gas is a company run not to find oil but to pay those looking for oil. The funding to do so comes from the religiously inclined who are undertaking that funding for religious reasons. That makes it – for us non-religiously motivated investors out here – a dangerous proposition.
More than that, the company has been working for two decades now, found nothing, is diluting the extant stockholder base at a rapid rate (in 2012 there were 31.3 million shares outstanding, by now it’s that 400 million and change as above) and apparently intends to continue doing so.
There are variances in the Zion stock price and those can be traded and assuming that it’s possible to get timings right – and directions – money can be made. But that’s what is being traded, the volatility of belief in the mission, not the underlying fundamentals of the business.
The investor view
Speculate away on volatility by all means. But the idea that there’s going to be a basic change in prospects here seems extremely remote. On the basis that that’s not really the point of the company in the first place.
As I said two years back, as others have been saying for well over a decade. Zion Oil & Gas is a dog – yes, even as an OTC stock.
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