ERHC Energy Inc. (OTCMKTS:ERHE) is Acting Strange Again

ERHC Energy Inc. (OTCMKTS:ERHE) lost a tenth of its value during yesterday’s session and it ended up at just under $0.003. This doesn’t sound too convincing, but prior to Tuesday’s drop, the ticker logged nine consecutive green days and it managed to run from $0.0005 all the way to $0.0031. And even though it closed yesterday’s session in the red, it registered a dollar volume of about $144 thousand which goes to show that some people are still ready to jump in. But why?

That’s a tricky question. There aren’t any promotions to get investors all fired up, there are no new filings worth talking about and the latest press release, as optimistic as it is, is more than a month old. It’s a shareholder update written by Peter Ntephe, ERHE‘s CEO, and he says that some progress has been made on the company’s projects.

Bear in mind, however, that in an interview for the Houston Chronicle, Mr. Ntephe promised that drilling on their Joint Development Zone property in Sao Tome will start “within about six to eight months”. The interview in question was taken in May 2008 or about eighty-five months ago, and the company still hasn’t generated even a dime in revenue.

The financial statement isn’t particularly pretty, either. The latest 10-Q came out about three weeks after the shareholder update and it showed that at the end of March, ERHE had:

• cash: $1.5 million
• current assets: $2.3 million
• current liabilities: $1.1 million
• quarterly net loss: $1.9 million

Indeed, we’ve seen worse balance sheets among OTC companies, but ERHE have a rather ambitious plan of developing numerous projects alongside established oil and gas enterprises, and the figures they recorded at the end of Q1 simply aren’t solid enough to predict a brighter future.

And you have to ask yourself: If the company’s projects really are so impressive, then why is the stock deep in the sub-penny range?

That has to do with the mountains of convertible debt ERHE has accumulated. A total of $808 thousand worth of convertible notes was picked up between May 2014 and March 2015 and all of it can be turned into stock at discounts ranging from 40% to 45%. The favorable (for the note holders) conversion terms have already taken their toll on the share structure. Between January 31 and April 30, the number of issued and outstanding shares grew from around 884 million all the way to more than 1.3 billion. In other words, ERHE went through a 51% dilution in a matter of just three months. At the moment, people around the message boards are speculating that the O/S count is hovering close to 2.6 billion and we must say that we won’t be too surprised if this is the case.

So, the company is not exactly flush with cash and it’s riddled with toxic debt, the stock has been diluted to within an inch of its life, and people are jumping in for no obvious reason. You should decide for yourself whether the risk is really worth it.