Is Sound Energy plc a falling knife to catch after dropping 30% today?

Royston Wild discusses Sound Energy plc (LON; SOU) following Monday’s heavy dip.

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Sound Energy (LSE: SOU) entered a fierce tailspin in start-of-month trading after the release of an unfortunate operational update.

The driller was last 23% lower on Monday morning, and dealing at levels not seen since August 2016, after announcing disappointing drilling results at its Badile onshore exploration well in Italy.

Trouble in the Med

The Kent business advised that a well drilled to a depth of 4,472 metres had revealed further significant gas shows at an expanded Conchodon dolomitic reservoir section, down to a measured depth of 4,387 metres, and in the primary Conchodon dolomitic reservoir at a depth of between 4,462 metres and 4,472 metres.

So far so good. But investors were scared off as Sound Energy noted that “the significant gas shows in both the Upper and Primary Conchodon reservoirs were also accompanied by water influx and mud losses into what are believed to be fractures in the formation.” The company has subsequently deemed the gas volume as “sub commercial.”

The energy giant “is intending to run a limited set of logs which will, if confirmatory, likely be followed by operations to plug and abandon the well,” it added.

Up and down

Today is not the first example of investors marching to Sound Energy’s exits following a patchy operational update. And it is unlikely to prove the last, such is the unpredictable nature of fossil fuel exploration.

Still, despite Monday’s share price decline, buying into the gas goliath a year ago or more would have proved a shrewd bit of business — after all, Sound Energy is still up almost 200% from exactly 12 months ago today.

Splashing the cash in the oil and gas sector is always a high-risk tactic, and share pickers must always be prepared to take the rough with the smooth. And undoubtedly many dip buyers will see today’s nosedive as a fresh buying opportunity, particularly as Sound Energy continues to step up its operations in Africa.

Indeed, chief executive James Parsons commented today that “our focus now returns to our more material Eastern Moroccan position, where the seismic acquisition has begun and we are positioning for further drilling in Q4 of this year.” It has also recommenced testing at its Koba-1 well at Sidi Moktar in west Morocco in recent weeks.

On top of this, the firm may also be seen as less of a gamble than many other London-quoted drillers. The business is well funded and boasted a cash balance of £46.8m as of December.

However, it remains a lossmaking enterprise, of course, and the City expects it to remain in the red through to 2018 at least. Sure, the driller may be packed with potential — particularly given its emphasis on less-environmentally-harmful energy sources — but there is no guarantee that its Mediterranean and African assets will deliver the blockbusting returns currently hoped for.

While positive operating updates in the months ahead could see it resume its impressive share price ascent, I believe those seeking a less bumpy ride should invest their cash elsewhere.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Royston Wild has no position in any shares 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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