Is the Frontera Resources Corp share price heading to 0.2p?

I tend to stay away from small-cap mining stocks because they are so unpredictable. However, every so often one company from this area of the market attracts my attention due to its unique properties.

Business turnaround

Frontera Resources(LSE: FRR) is hardly the most exciting stock on AIM, although it does have tremendous potential. The international oil and gas exploration company is headquartered in Houston, Texas, and has interests in hydrocarbon assets within Georgia, Moldova, and Ukraine.

For the past few years, the business has been dogged by a weak balance sheet, which has restricted the firm’s ability to grow and develop its assets. But now management is working to restructure Frontera and clean up its balance sheet. Operational costs have been reduced, and a restructuring of debt has helped the company bring down its annual interest expense. For the six months ended June 30, the firm’s reported interest cost for the period declined approximately 50% year-on-year while total operating expenses also fell 17% year-on-year.

Management is planning to reduce costs further and continue to improve the balance sheet, which is a positive sign, although I am concerned about Frontera’s revenue, or rather the lack of it.

Profits lacking

For the six months to the end of June, the company reported revenues from crude oil and gas sales of $1.8m, a positive figure but not enough to cover field operating and project costs. The loss from operations in the first half was $4.1m.

Frontera’s future seems to be tied to the success of its Block 12 asset in Georgia. At the beginning of September, the company reported that several unnamed oil “majors” were in talks with the firm regarding possible transactions involving a farm-out or joint operating agreement.

If management can seal a deal with a larger operator, it could be great news for Frontera and the company’s shareholders. On the other hand, if no agreement is reached, I’m not sure that the group can continue alone.

It has been a public company since 2005, and over this period it has failed to generate any value for investors. Even after rebuilding its balance sheet at the end of the first half, the company only had just under $700,000 in cash, which is hardly enough to pursue the development of a major oil well by itself. If Frontera struggles to partner with a deep-pocketed oil major, the only way I see it being able to develop a massive oil prospect is via a massive rights issue.

Conclusion 

Considering the above, Frontera looks to me to be a binary opportunity. Either the company agrees on a partnership or it doesn’t, in which case, the future for the business looks bleak and the shares could plunge below 0.2p. 

Personally, I’m not comfortable making these high-risk, high-reward type of bets, but for investors with a bigger risk tolerance, Frontera might be an attractive pick. If the company hits the oil jackpot, the sky could be the limit for the shares.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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