Description

Zion Oil and Natural Gas (ZN) represents the opportunity to short a blatant scam with both an imminent catalyst and a pure arb opportunity. This is timely and straightforward so I’m going to keep it brief.

Essentially ZN claims to be prospecting for oil in Israel. I’m not a geologist or oil expert so I will leave it to the reader to determine whether their method of using the Bible to locate oil is a sound exploration methodology.

Their CEO John Brown explains their process in this video.

https://youtu.be/lH-dvoG3PEM?t=10m5s

John Hempton had an interesting exchange with them in the past

http://brontecapital.blogspot.com/2009/10/zion-sent-their-lawyers-to-get-us-it-is.html

More pertinent to this investment thesis is their current direct investment program and the dilutive catalyst it creates.

Starting today, May 22, 2017, and ending July 12, 2017 (unless extended at the company's sole discretion), Zion is offering this new Unit Option to purchase Units of our securities where each Unit (priced at $250.00) is comprised of: a) shares of ZN common stock determined by dividing $250 by the average of the high and low sale prices of the Company's common stock on the Unit Purchase Date, and  b) 25 common stock purchase warrants. Each warrant (symbol "ZNWAF") affords participants the opportunity to purchase one share of ZN common stock at a warrant exercise price of $1.00. The warrants will first become exercisable on August 14, 2017, the 31st day following the Unit Option termination date (unless extended), and continue to be exercisable through August 14, 2020 (three years) at a per share exercise price of $1.00.  If the Company's Common Stock closing price trades above $5.00 per share for 15 consecutive trading days at any time prior to the warrant expiration date, Zion may provide a notice to warrant holders of an early warrant termination within 60 days of the notice.  All references in the Original Prospectus Supplement, concerning the Unit Option, continue, except for the substitution of the new Unit Option terms and features above. All other Plan features, conditions and terms remain unchanged.

If you go onto the website they will take the money straight out of a bank account up to 10k, I believe you have to wire to do more. For every 10k assuming that for tomorrow the high-low average today’s close at 2.75 just for simplicity you will get 1000 warrants and about 3600 shares. Shorting 4600 shares against that until you can get the shares settled and dumped in a few days and the arb should net about 1700 dollars per 10k in 2 months. Given you only will need 1000 shares for most of the time to hedge and the warrants are cashless, the after borrow IRR could be as high as 250-350%.

Alternatively, one could just short the stock outright as the borrow rate is in the teens and the dilution coming from all the newly issued stock today and warrant exercises in August are undoubtedly going to crush the stock, as is the unwind of today’s pump to create an incentive for people to do invest in the plan. Either way it is a very attractive setup it’s just by doing the direct investment you can effectively cover some today at 1 vs waiting until all the dilution brings it there in a few months.

Risks

-If too many people send prayers to the company and for Israel, they may find oil and the stock could spike further.

https://www.zionoil.com/prayer/

-The warrants could be terminated early but this is not really a risk because, given the 60 day notice and requirement to trade over 5 for 15 days, they will be exercisable before this could happen in August.

-The borrow rate could spike, but even at 50-100% the trade will work over the timeframe in play so it’s nothing to worry about really.

-The only true risk and difficulty I can see to this is that it is unclear if you wire in money to them if you can get the current day vs a 1-2 day delay for them to receive the money and thus give you a future day's strike. For what it's worth I wired money today vs the slower online ach method that is guaranteed to have a 1-2 day delay to try to get today's strike of 3.01 as it looked to be a good deal earlier in the day and it appears despite the wire going out at 2pm they arent giving me shares for today (which looks to be lucky obviously in this case). This creates some hedging uncertainty given the current level of volatility. However, given the strong short bias the favorable play is to have at least a bit of extra unhedged short anyway so in practice this shouldn’t really matter too much. Volatility should come back in after a few days making this a bit more straightforward (albeit likely at a lower less attractive price to arb the warrants).

Catalyst

Dilution from new stock sales and existing Warrants now (https://www.zionoil.com/dspp/exercise-warrants/)

Dilution from new warrants August 14th

Parabolic blow off today has a natural expectation to unwind, as bagged pump chasers sell