For most small-cap, pre-revenue companies, there will be a need to raise external capital at least once a year. This usually comes in the form of placements (available to sophisticated investors) or SPP/EOs (available to shareholders). These funds will allow the company to invest in growth activities and cover administrative costs.

This has been the case for Red Sky as the company advances its Killanoola project in South Australia. Their joint venture project is fully funded by Santos to date, so no additional capital is required there. However, oil and gas exploration is a risky and expensive endeavor, so ensuring that shareholders do not suffer unnecessary dilution and have the opportunity to maintain the highest amount of equity upside in future success is important.

When assessing whether access to capital raises has been equal for shareholders, we start by examining all the capital-raising structures in the last few years. In Red Sky's case, we will need to review four years' worth of such transactions, as that was around when the first project acquisition was announced under the new Managing Director, Andrew Knox.

As we can see, the smaller placements in 2019 and mid-2020 completely excluded shareholders. However, as the share price rose and interest in Red Sky's strategy increased, the company recognized the need to include the expanded registry in raises. The dilution simulation below confirms this situation.

As we can see, the first two capital raises decreased share ownership materially. The November 6, 2020, entitlement offer was well-structured and allowed existing shareholders to double their shareholding if fully subscribed. However, that offer was not well taken up, so the company had to rely on external capital via a shortfall placement. We can see in the latest capital raise the difference an SPP can make for shareholders who take up the full allotment.

While investing in similar style companies, the reality is that capital raises are going to impact your shareholding and ownership. It is always a good idea, therefore, to ensure you have sufficient capital to take up any SPP/EO should you align with the long-term potential of the business.

With this in mind, Red Sky appears to be treating shareholders equally during capital raises.

For most small-cap companies, the events that can happen week-to-week can materially affect the value proposition of the business. Ensuring shareholders remain up to date on the events happening within the company is, therefore, critically important.

For Red Sky, the task of managing goals is rather tricky. Firstly, the Innamincka Dome JV is managed by Santos, and therefore, Red Sky does not have full control of the timelines. Secondly, the company is advancing both exploration activities and development preparation at Killanoola. In the first investor presentation after the Innamincka farmout to Santos, the company released a roadmap:

It is probably obvious that Red Sky has missed most of these goals, as the JV ended up solely focusing on progressing Yarrow first. Yet, the timelines for the subtasks were also missed. The tasks ended up occurring on:

Yet, despite this vast change in goals, the company has kept shareholders well informed at each step of the Yarrow development, which must be commended. Let's now look at the Killanoola operations, which are fully owned and managed by Red Sky. Below is a roadmap released on 17 August 2021:

As we can see here, the company hasn't been great at keeping up with their timelines. Although there is a steady stream of progress at both Innamincka and Killanoola, the company should be additionally transparent about how goals are progressing and explain why timelines change. For instance, the initial timeline set for the full-scale development of Killanoola refers to a 3-6 well development (link), producing uapproximately 300 bopd per well. On paper, this is a fantastic proposition, as a 3-well operation selling at spot WTI prices would yield ~$US27 million in revenue per year. Yet little has been explained regarding why the timeline for this outcome has shifted so far.

Hopefully, Red Sky management can do a better job of following up on changing goals going forward.

Examining management's track record can help us understand their strengths and likely strategy for the company. This can be particularly interesting for investors, as numerous past successes by a CEO in one area (technical, financial, etc.) will likely repeat themselves at their current venture.

For Red Sky, Andrew Knox has proven himself to be a well-connected deal maker who sourced lucrative acquisition opportunities and financed them. Let's examine his major deals since he joined as Managing Director.

As we can see, these two significant acquisitions and one farmout occurred in a relatively short time frame and positioned the company to receive a 20% near-free carried interest in a Santos JV (Innamincka), while operating 100% of an oilfield (Killanoola).

Notwithstanding the company's ability as oil and gas operators, there is significant evidence to suggest that should Andrew Knox look to acquire new projects, he would be capable of delivering success as he has done in the past.

My concluding thoughts

Red Sky has achieved an impressive list of objectives over the last few years. It started 2018 as a shell company without any material assets, and today, it is about to generate its first revenue from a JV with Santos, ahead of the development of the 100% owned Killanoola for which Red Sky has raised funds itself. Indeed, management has shown its ability to prioritize shareholders in funding transactions and structure lucrative asset acquisition deals. Yet, further improvements can be made in ensuring that each step of the journey is better communicated to shareholders, including when goals change. This is a critical threat for small growth companies, as shareholders must be informed at every turn.

Therefore, although Red Sky looks structured for success, there is not sufficient evidence to classify it as a rare "Triple Threat."