To me, it depends on the reason the stock fell off of the exchange. If the company is in dire difficulty and BK is imminent, then it stands to reason that it likely will go BK regardless. In the case of AXAS, the company has high debt but has had no problem meeting debt payments because the cash flow is very strong.
It definitely is much harder for an OTC stock to get recognized by the street and appreciate in price. However, if the fundamentals of the business are good and the management is good too, IMHO eventually the fundamentals will set the price right. Either that or a merger or acquisition will unlock shareholder value.
The underlying oil and gas reserves and gas processing facilities for AXAS are worth about $16 per share, after subtracting debt. However, the tangible book value is around -$10 after all the write-downs from ceiling tests, etc. done during the downturn. It is my understanding from the 10-Q and press release that it was the combination of lack of book value and bid price less than $5 that got AXAS booted off of NASDAQ NM.
Book value for an oil and gas firm often has a disconnect with the true intrinsic value of a company. It is not like a company that builds and owns factories, which then depreciate according to a nice schedule that anyone can follow.
Oil and Gas companies use an accounting pool, which constantly has costs added to it while depletion subtracts from it. The SEC requires a ceiling test which compares the cost pool with the underlying reserves, valued at the current commodity prices. When these commodity prices are very low and the total acquisition, driling costs, etc. exceed the reserve values, there are often huge write downs, reducing book value dramatically, as well as earnings.
I have one OTC BB stock, HEMA, that was booted from NASDAQ when the share price was around $0.30. That stock is now selling for over $1, and IMHO the stock is worth around $3.
I'm not adding to my AXAS position, but neither am I selling either. I don't see imminent BK, especially since commodity prices are much higher than last year's price. More likely, we might see AXAS move to a different exchange, such as one of the Canadian exchanges. AXAS could also sit on the OTC and wait for the right conditions to exist to reapply for NASDAQ membership. |
