Cavendish backs 88 Energy after Namibia exploration success

Cavendish Securities reiterated a 'buy' rating and 21.8p target on 88 Energy after the Kavango West-1X well in Namibia confirmed meaningful net pay and hydrocarbon shows and moves to production testing, with structural trends interpreted to extend into 88E’s PEL 93 licence. The broker said the result materially de-risks a comparable play for 88E, supporting prospectivity across its eleven mapped leads and prompting an airborne geophysical survey over PEL 93 in Q1 2026. 88 Energy remains highly leveraged to exploration upside with a market cap of £12.2m, enterprise value of £7.8m and shares trading at 1.04p.

Analysis

Market structure: The immediate winners are 88 Energy (AIM:88E / ASX:88E / OTCQB:EEENF) and Namibia service contractors—successful Kavango results increase prospectivity across PEL 93 and raise farm‑out interest; losers are regional explorers without similar acreage or scale to finance follow‑up. This is a localized geological de‑risking event with negligible immediate impact on global oil supply or majors’ pricing power, but it lifts risk appetite in frontier Africa exploration and can compress small‑cap E&P credit spreads modestly.

Risk assessment: Key tail risks are a failed production test, non‑continuous reservoirs, or Namibian regulatory/fiscal shifts; a negative test could send equity <0.5p within days. Timing: immediate (days) — low market reaction; short‑term (Q1–Q2 2026) — airborne survey and production test; long‑term (12–24 months) — farm‑out/drill outcomes that set real value. Hidden dependencies include operator data quality, reservoir fluid type (gas vs oil) and potential for rapid equity dilution—raising >£5–10m would likely dilute existing holders >30–50%.

Trade implications: For risk‑seeking allocation, establish a small, staged long (1–2% portfolio) in 88E over the next 30 days, scale in up to a capped average price of 2–3p, with a hard cut at 0.5p and partial profit‑take at 5p within 6 months; hold remaining for 12–18 months only if survey/drill catalysts are positive. If markets/derivatives exist, prefer a 12‑month call spread (example strikes 1p–5p) to limit upfront capital; pair trade: long 88E vs short Tullow Oil (TLW.L) ~0.5–0.75% to hedge oil price exposure.

Contrarian angles: The market has underreacted (flat at 1.04p) despite a potentially binary re‑rating path; conversely Cavendish’s 21.8p target is aggressive — probability‑weighted fair value today is likely nearer 2–6p absent immediate farm‑out. Unintended consequences: a positive test could force a rush to dilute at low prices or trigger overbidding for acreage, capping upside; negative outcomes can be swift and extreme given £12.2m market cap.

Key Decisions for Investors

• Establish a staged long position in 88E (AIM:88E / OTCQB:EEENF) sized at 1–2% of portfolio over the next 30 days: average entry target <=2–3p, hard stop‑loss at 0.5p, take 50% off at 5p within 6 months; hold remainder to 12–18 months only if survey (Q1 2026) and production test are materially positive.
• If options/liquidity permit, buy a 12‑month call spread on 88E with approx. 1p buy / 5p sell strikes to cap cost and retain upside (alternative: buy equity and hedge with a protective 6–12 month put); allocate max 0.5% portfolio capital to this structure.
• Execute a pair hedge: long 88E (1–2% exposure) versus short Tullow Oil (TLW.L) sized 0.5–0.75% to isolate geological/farm‑out upside from oil‑price risk; rebalance after survey or production test results within 30–90 days.
• Prepare dry‑powder to participate in potential fundraising/farm‑out within 3–6 months: reserve capital equal to ~0.5–1% portfolio to subscribe up to a price threshold of 2p (do not take part above 2p), as failure to participate will likely dilute holdings >30%.