Jul 26, 2021 (Financial News Media via COMTEX) -- FN Media Group Presents Oilprice.com Market Commentary
London - July 26, 2021 – When a small, ambitious exploration company starts drilling in a 6.3-million-acre onshore oil play, the vultures descend. In the case of Reconnaissance Energy Africa ( RECO ; RECAF ), those vultures are in the form of short sellers who have stooped to dangerously low levels in their failed attempt to destroy one of the best exploration plays we've seen in a long time... and with a company that isn't just fully funded for a 4 well drilling campaign, but one that's already reported results confirming an active petroleum system in its first two test drills, with more results expected in the next few weeks. Mentioned in today's commentary includes: Virgin Galactic Holdings, Inc. /zigman2/quotes/208333884/composite SPCE 0.00% , GameStop Corp. /zigman2/quotes/203755179/composite GME -1.52% , Tesla, Inc. /zigman2/quotes/203558040/composite TSLA +3.26% , AMC Entertainment Holdings, Inc. /zigman2/quotes/200235402/composite AMC -4.01% , Airbnb, Inc. /zigman2/quotes/222990650/composite ABNB +0.44% .
The bigger problem isn't just about ReconAfrica and its exploration play in Namibia's giant Kavango Basin...It's about the wider implications for capital markets, and the free market in general. It's about the regulators' apparent powerlessness to thwart stock manipulation. It's about a short-selling free-for-all that allows dubious abusive and manipulative shorters to employ illegal means to try and destroy a company out of sheer greed and the need to cover massive shorts.
More often than not of late, especially on the OTC markets and the Toronto Stock Exchange (TSX), it looks like short sellers don't protect retail investors from bad companies; instead, they appear to short stocks and then manipulate them to purposefully cause them to fail. Instead of protecting investors, we think they ensure their demise and strip them of their savings.
But based on what we've seen with Recon Africa, management is making all the right moves, insiders continue to buy the stock, and most of the selling is short. Shareholders aren't jumping ship and a huge number of catalysts are just around the corner.
It matters little at this point where Recon Africa ( RECO ; RECAF ) trades. We believe shorts have only a matter of weeks to try to bring this down more, and even if they manage a few more cents, it just opens the door for more buying ahead of what we are confident will be commercializing of the Kavango Basin oil play. We think shorts will have lost their shirts long before that. Why?
Because Recon Africa has just completed its second drill and is making multiple logging runs. It's taking up to 50 sidewall cores to maximize hydrocarbon recovery. And then, it will run the VSP between the first two wells, part of the 2D seismic program, which is a 450-kilometer program across the entire basin.
The Short-Selling Conspiracy Playing Out on Social Media
There are a lot of theories floating around as to who is behind a massive short, and there have also been attacks on Oilprice.com for its (disclosed) promotions of the company. But to fully understand how these short sellers operate, we think you have to also understand their relationship with social media. Paid 'factories' of social media commentators produce a constant barrage of lies to sow fear and uncertainty around the stock. There have been reports of personal attacks on staff, harassment of Nambian officials and vile, libelous comments on Twitter and other social media outlets.
And the disinformation campaign appears to be growing more intense by the day because short-sellers are now getting desperate to cover on a stock that we believe has incredible potential. In our view they have no chance of covering now.
The desperation comes from the fact that already by late May, naked short sellers may have been out by up to $4.50 a share --that could represent a huge loss if they don't manage to take this stock down.
Understanding Abusive and Manipulative Shorts
There are 4 trade identifiers - buying, selling, shorting, and covering. But there is also an important difference between declared or covered shorts and what we say are abusive and manipulative (naked) shorts.
Naked shorts (which appears to be what is happening here) could be 8 times higher than a covered short because the funds behind them want to fly under the radar and let people think there is still upside to shorting the stock. 'Abusive and manipulative' means that the shorts don't have the underlying security to back up the sale and have neither located nor borrowed the shares they have shorted. In other words, they have in effect just created stock out of thin air and are selling something that doesn't exist.
How can these funds get this huge amount of borrow? That's a good question that we think is really for the banks because shorting without borrowing for this long--as is the case with Recon Africa--is not legal. The borrow rates are so high, the banks may be happy to accommodate this behavior. It's probably far too tempting to resist. Either way, the banks win.
Investing has never been more of a minefield, with out-of-control hedge funds going for maximum greed and creating a very dangerous situation for the future of capital markets, especially in Canada, where every company--good and bad, legitimate and fraudulent alike--is completely vulnerable and unprotected against short sellers whom regulators are seemingly powerless to reign in. But in the case of Recon Africa ( RECO ; RECAF ), investors will hold strong.
The first two confirmations of an active petroleum system added to our already huge level of confidence given the big names involved on this one. And now, in a matter of days, we expect to see more comprehensive results from the first two deep test wells ever drilled in this basin. And any day, RECO says it will launch its 450-km 2D seismic program across the Kavango Basin. Once seismic is done, we're looking at the launch of the third and fourth drill and then it's potential JV time--the biggest potential reward for investors and the final death of this short-selling campaign.
Other companies facing off against short sellers:
The Gamestop's (GME) saga is a story for the history books expectations. Gamestop was one of the most successful companies in the video game industry for over the past several decades, but faced a number of headwinds in recent years. The company had been struggling to stay afloat, and until earlier this year, many thought it may never recover. Then, an army of Redditors came to the aid of the ailing stock, sending its share price into the stratosphere and shedding new light on Gamestop’s future. Since the company’s dramatic run-up from $17 in mid-November to its January high of $450, Gamestop has become a success story for a growing number of investors who dislike the concept of short selling. In fact, short-sellers lost billions of dollars on Gamestop, a move that has empowered retail investors and a new generation of traders. And now, it's making even more moves to bulk up its finances and keep investors on board.
AMC Entertainment Holdings, Inc. (AMC) is another company that drew massive attention for its interest among short sellers. AMC is a holding company with investments in movie theaters and entertainment venues. The company operates through two segments: Domestic Theaters and International & Other Theaters. AMC has been on the radar of short sellers for a long time. AMC’s business model, which includes owning movie theaters and entertainment venues instead of running them, leaves it especially susceptible to an event like the COVID-19 pandemic that closed down most public areas in North America.
Since the initial attack, the stock has become somewhat of a cult-stock for many. And now, the company is even offering special deals to its shareholders thanks to their efforts during its rough point.
Virgin Galactic (SPCE) has been one of the biggest targets of short sellers since its IPO. In fact, just a couple of months ago, the short volume exceeded 25,000,000, representing over 15% of the company's float. And it's not necessarily without undue cause. The company's share price has been especially volatile throughout the year. And it's part of a very speculative industry: space tourism.