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Over the past year, I've written bearish SA articles on more than 30 companies that seem to have attracted significant retail investor interest. The share prices of the vast majority of them have declined as of the time of writing as retail investor interest is often fleeting and the fundamentals just aren't there in most cases.

The Russia-Ukraine conflict has pushed oil prices above $120 per barrel as of the time of writing and it seems that some of the largest gainers on the US stock markets over the past few days have been nano and micro-cap oil and gas stocks such as Houston American Energy (NYSE:HUSA), Abraxas Petroleum (OTC:OTC:AXAS), and Imperial Petroleum (NASDAQ:IMP). There is strong retail investor interest in these names and I was surprised to see that this has spread to Camber Energy (NYSE:CEI), which transferred almost all of its oil business in October, as I explained here.

In view of this, I began searching for more companies that are associated with the oil and gas sector and have attracted significant retail investor interest, but shouldn’t benefit much from high oil prices. I think they could provide interest short selling opportunities at the moment and one of my subscribers suggested I should take a look at a company named Nine Energy Service (NYSE:NYSE:NINE ). Let’s review.

Nine Energy Service is an onshore completion and production services provider that focuses on unconventional oil and gas resource development. The company’s offering includes cementing and completion tools, and its competitive advantage lies in differentiated products like dissolvable frac plugs and casing flotation tools. Nine Energy Service has operating facilities in the Permian, Eagle Ford, MidCon, Rockies, Barnett, Bakken, Marcellus, Utica formation as well as in Canada. The business has strong barriers to entry and Nine Energy Service has an asset-light business model with the goal of building a full-cycle return on invested capital (ROIC) operation.

Looking at the financial performance of Nine Energy Service, I think things haven’t been going particularly well lately. In 2021, the company booked revenues of $349.4 million and an adjusted gross profit of $41.4 million. However, adjusted EBITDA came in at just $5.2 million while the adjusted net loss was 80.6 million. The unadjusted figures looked a little better thanks to a gain on the extinguishment of debt.

Turning our attention to the balance sheet, I don't think the situation looks well there either. The stockholders’ equity is negative as of December 2021 while the net debt was $279.8 million. In addition to this, intangible assets accounted for over 30% of total assets.

I think that Nine Energy Service may need to tap the equity market this year considering that it had $21.5 million in cash and $43.2 million of availability under its revolving credit facility as of the end of December. Fortunately for the company, the conditions for an equity issue look well as of the time of writing as its share price has tripled over the past few days. The trading volume has been pretty high too.

My theory is that this is happening as a result of high retail investor interest as there are a large number of posts about the company on websites like Twitter and StockTwits. Nine Energy Service is also the fourth most trending stock on Fintwit as of the time of writing. Note that the company isn't doing the promotion of its business or shares itself, but this is being done by a significant number of private investors and traders.

So, why are retail investors piling into Nine Energy Service shares? Well, many of the posts on social media say this is among the energy stocks that are gaining from recent oil price spikes. However, this confidence seems misplaced as the fortunes of Nine Energy Service are tied to the development of the U.S. fracking sector, which means that any short-term increases in oil prices won’t materially affect its financials. In my view, this is what sets apart Nine Energy Service from the likes of Houston American Energy, Abraxas Petroleum, and Imperial Petroleum and this creates a good short selling opportunity as retail investors should at some point realize this too. Another possible reason that the share price of Nine Energy Service is soaring is due to a short squeeze. According to data from Finviz, the short float stands at 8.95%, which is high. If this is the case, I think it remains a good short selling opportunity because short squeezes rarely last for more than a couple of days.

Data from Fintel shows that the short borrow fee rate is 12.31% but there are no shares available for borrowing as of the time of writing. Fortunately, there are put options available for Nine Energy Service and I think that the ones expiring in October 2022 look relatively cheap considering the momentum.

Oil prices are rising rapidly due to the Russia-Ukraine conflict, and it seems that many retail investors are piling into nano and micro-cap stocks from the sector. However, some of them are investing in companies that won’t benefit much from high oil prices in the short term, and among them is Nine Energy Service.

I think that retail investors should eventually realize that the U.S. fracking sector needs to pick up for Nine Energy Service to benefit from high oil prices and then the share price of the company is likely to come back down to earth. The share price could also decrease if Nine Energy Service decides to take advantage of the situation and carry out a capital increase.

In my view, the short interest borrowing rate is relatively low so you could wait for shares to become available for borrowing in order to take a position. Alternatively, there are put options available although they aren’t particularly cheap.

For risk-averse investors, I think it could be best to avoid Nine Energy Service as I perceive this as a high risk, high reward type of opportunity.

This article was written by

I have been investing in stocks for 13 years now, most of the time in my native Bulgaria. I have a bachelor's degree in Finance and a Master's degree in International Business and I like reading Pratchett and Michael Lewis. Regarding the opportunities that I cover, please take into account that I'm an admirer of legendary fund manager Peter Lynch so I tend to follow a lot of his investment philosophy.

- Disclosure: I am not a financial adviser. All articles are my opinion - they are not suggestions to buy or sell any securities. Perform your own due diligence and consult a financial professional before trading.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am not a financial adviser. All articles are my opinion - they are not suggestions to buy or sell any securities. Perform your own due diligence and consult a financial professional before trading.