Viking Energy (VKIN) – Merger Arbitrage – 35% Upside

Current Price: $0.63

Expected Price: $0.85

Upside: 35%

Expiration: around the 1st of Aug

This idea was hinted by Kristian.

 

A very intriguing situation – Viking Energy (VKIN) and Camber Energy (CEI) are expected to merge next week and yet this arbitrage trades at a 35% spread. CEI borrow is expensive but available. CEI owns 61% of VKIN and the same CEO is running both companies. Shareholders on both sides have already approved the transaction and the other key conditions for the merger have been met.

I am sharing my research on the case below, but an important note upfront – spreads this large should not exist for mergers that are set to close in a week and have available borrow. I might be missing a crucial detail that could negate the whole case. The companies involved have a very checkered past, and I would not go near them with a ten-foot pole if not for this arbitrage situation. This is not investment advice. Do your own due diligence before investing.

Essentially, this is a merger arb on a pump-and-dump scheme, and because of that, probably lots of things could go wrong. But, I have not figured out yet what those things could be and so far it looks like the merger will close as expected, sometime around the 1st of August.

This is the latest press release announcing shareholder voting results:

Shareholders of each of Camber and Viking approved by the requisite voting thresholds at special meetings held separately by each company on July 20, 2023, the various proposals relating to the adoption and approval of the Agreement and Plan of Merger between Camber and Viking dated February 15, 2021, as amended on April 18, 2023 (collectively, the “Merger Agreement”) and the transactions contemplated by the Merger Agreement, including a wholly owned.
<…>
Camber and Viking anticipate that the Merger will be completed on or about August 1, 2023, subject to the satisfaction of required closing conditions.

In turn, the merger proxy clearly unambiguously indicates (emphasis mine):

Q: What will Viking Stockholders receive if the Merger is completed?

A: As a result of the Merger, each share of Viking Common Stock issued and outstanding immediately prior to the effective time of the Merger (other than shares of Viking Common Stock owned by Camber, Viking or Merger Sub) will be converted into the right to receive the following (the “Common Stock Merger Consideration”): one (1) share of Camber Common Stock (with such exchange ratio referred to as the “Exchange Ratio”).

The same one-for-one exchange ratio is also spelled out in the amended merger agreement.

As I understand the other key conditions for the merger have also been met – the share registration statement was declared effective by SEC and NYSE American approved CEI’s continued listing after the consummation of the merger.  And yet, currently VKIN trades at $0.63/share and CEI at $0.85/share. Interactive Brokers shows 350k CEI shares available for hedging at 47% rate. Liquidity is relatively ok as well – yesterday CEI traded at $4m volume and VKIN at $120k volume.

So why does the spread exist? I think there are several factors at play, with the last two probably having the key role.

• These are tiny nano-cap companies so no institutional players are involved in this arbitrage.
• The pending merger has been 2.5 years in the making – the market might no longer be paying attention. The delays happened due to the requirement for CEI to restate previous financials and maintain a positive book value of equity after correctly accounting for the liabilities from the ‘death-spiral’ preferred financing. This was resolved in March.
• Loads of other red flags in the history of these companies. Accounting for a number of reverse stock splits CEI price is down from $3,000,000,000/share in 2011 to $0.85/share today. Share count showed equally impressive growth in the opposite direction.
• There is a risk of a short squeeze. CEI borrow might disappear and it might take a while to receive merger consideration shares. Normally merger consideration shares should be distributed within days (or on the day the merger closes). But might this case be different?
• Crucially, CEI is meme-stock with most of its retail holders not even realizing they could switch their positions for VKIN instead. VKIN’s materially lower liquidity relative to CEI  does not help them to make the switch, so the retail crowd and the pumpers continue to concentrate on CEI and jump on any event/announcement.

Let me elaborate a bit more on the point.

Over the last month, shares of both CEI and VKIN shot up twice. The first time (around July 10-12) seems to coincide with the retail crowd receiving merger proxy materials. From Reddit:

And the second one was right after shareholders approved the merger (July 21), with a number of posts similar to this one:

The meme-stock history of CEI dates back at least to the Sep-Oct 2021 share spike. You can read all about it in this lawsuit (see pages 25-29 specifically for CEI). This likely was only one of the pump & dump shops of the covid times. Judging by Reddit comments most of the bag-holders are still from those days.

92. From in or around August 2021 to in or around October 2021, the defendants collectively sought to pump the price of CEI by tweeting and posting in Atlas Trading Discord approximately one thousand times. Indeed, the price per share of CEI rose from approximately $0.46 a share on or about August 3, 2021, to an approximate high of $4.37 per share on or about September 30, 2021, and closed at an approximate price of $1.30 per share on or about October 29, 2021.

I would not be surprised if a similar active pump and dump scheme has driven the CEI shares upwards during July. The trading volumes continue to be staggering – 23m shares on the 12th of July and 72m shares on the 21st of July. The company only has 24m shares outstanding.

For a bit of more background on both companies and events that led to the current merger agreement as well as the 2021 pump, I would recommend having a look at a very well-timed Kerrisdale’s report on both companies from Oct’21. The first few pages give all the background details one might need and not much has changed over the last two years. Just the merger seems finally likely to close.

Founded in 2004, Camber was originally called Lucas Energy Resources. It went public via a reverse merger in 2006 with the plan of “capitaliz[ing] on the increasing availability of opportunistic acquisitions in the energy sector.” But after years of bad investments and a nearly 100% decline in its stock price, the company, which renamed itself Camber in 2017, found itself with little economic value left; faced with the prospect of losing its NYSE American listing, it cast about for new acquisitions beginning in early 2019. That’s when Viking entered the picture. Jim Miller, a member of Camber’s board, had served on the board of a micro-cap company called Guardian 8 that was working on “a proprietary new class of enhanced non-lethal weapons”; Guardian 8’s CEO, Steve Cochennet, happened to also be part owner of a Kansas-based company that operated some of Viking’s oil and gas assets and knew that Viking, whose shares traded over the counter, was interested in moving up to a national exchange. (In case you’re wondering, under Miller and Cochennet’s watch, Guardian 8’s stock saw its price drop to ~$0; it was delisted in 2019.)

Viking itself also had a checkered past. Previously a shell company, it was repurposed by a corporate lawyer and investment banker named Tom Simeo to create SinoCubate, “an incubator of and investor in privately held companies mainly in P.R. China.” But this business model went nowhere. In 2012, SinoCubate changed its name to Viking Investments but continued to achieve little. In 2014, Simeo brought in James A. Doris, a Canadian lawyer, as a member of the board of directors and then as president and CEO, tasked with executing on Viking’s new strategy of “acquir[ing] income-producing assets throughout North America in various sectors, including energy and real estate.” In a series of transactions, Doris gradually built up a portfolio of oil wells and other energy assets in the United States, relying on large amounts of high-cost debt to get deals done. But Viking has never achieved consistent GAAP profitability; indeed, under Doris’s leadership, from 2015 to the first half of 2021, Viking’s cumulative net income has totaled negative $105 million, and its financial statements warn of “substantial doubt regarding the Company’s ability to continue as a going concern.” At first, despite the Guardian 8 crew’s match-making, Camber showed little interest in Viking and pursued another acquisition instead. But, when that deal fell apart, Camber re-engaged with Viking and, in February 2020, announced an all-stock acquisition – effectively a reverse merger in which Viking would end up as the surviving company but transfer some value to incumbent Camber shareholders in exchange for the national listing. For reasons that remain somewhat unclear, this original deal structure was beset with delays, and in December 2020 (after months of insisting that deal closing was just around the corner) Camber announced that it would instead directly purchase a 51% stake in Viking; at the same time, Doris, Viking’s CEO, officially took over Camber as well. Subsequent transactions through July 2021 have brought Camber’s Viking stake up to 69.9 million shares (73% of Viking’s total common shares), in exchange for consideration in the form of a mixture of cash, debt forgiveness,5 and debt assumption, valued in the aggregate by Viking at only $50.7 million.

Camber and Viking announced a new merger agreement in February 2021, aiming to take out the remaining Viking shares not owned by Camber and thus fully combine the two companies, but that plan is on hold because Camber has failed to file its last 10-K (as well as two subsequent 10-Qs) and is thus in danger of being delisted unless it catches up by November. Today, then, Camber’s absurd equity valuation rests entirely on its majority stake in a small, unprofitable oil-and-gas roll-up cobbled together by a Canadian lawyer.

What about the fundamentals of the business? I think both companies are empty and will continue to destroy shareholder value. Equity is quite clearly worth zero. However, this might not be relevant for the merger arbitrage to work out (but will become very relevant if my thesis does not pan out the way I expect).

I welcome any pushback on this pitch. As said at the beginning, I might have missed something important. Would love to find out what exactly.