The share price of oil and gas exploration company Providence Resources (LSE: PVR) declined by as much as 40% after the company released an update on Friday.
It stated that the company’s offshore Ireland operations have continued to progress. The well penetrating the Paleocene Druid prospect within the pre-drill depth prognosis was safely drilled to its section target depth. However, preliminary analysis indicates that the Druid prospect comprises a porous water-bearing reservoir. This means that the company will now press ahead with an assessment of the deeper Lower Cretaceous Drombeg exploration target. It is situated around 2km beneath Druid, and has a resource potential of around 2m barrels of oil versus Druid’s 3m.
Clearly, Providence Resources faces a more difficult future after its update. Investors are likely to remain disappointed with the company’s progress regarding the Druid prospect in the short run. This means that there could be further share price falls ahead. That’s particularly the case if its update regarding the Drombeg prospect fails to be positive.
Of course, oil and gas exploration companies such as Providence Resources are by their very nature highly volatile and risky entities. Their share price performance is largely dependent on news flow and the success of their drilling operations. In some cases, this can lead to significant share price growth. However, negative news tends to be received extremely poorly by investors due to smaller exploration companies lacking the diversity of their larger peers.
Despite today’s share price fall, Providence Resources is still down only 12% in the last year. This is a relatively positive performance compared to some of its sector peers. Clearly, the outlook for the industry is challenging, and a low oil price may remain in the short run.
In the long run though, exploration companies such as Providence Resources and Rockhopper (LSE: RKH) could deliver improved performance. Both stocks could benefit from a rising oil price, with demand from the emerging world in particular expected to increase. At the same time, a reduction in global supply from OPEC and non-OPEC countries may lead to a fall in the supply surplus which has been present in recent years. This may lead to higher industry-wide profits and higher valuations.
Of course, Providence Resources and Rockhopper remain lossmaking at the present time. In the case of Rockhopper though, it has built a range of assets in numerous territories which means that its asset base may be less risky than those of some of its sector peers. Furthermore, its production volumes could increase in future and allow it to directly benefit in a potentially higher-oil-price environment.
With both stocks being relatively small, they are of a high-risk nature. Therefore, they may remain highly volatile in future and may only be worthy of consideration alongside larger, more financially stable, sector peers within a portfolio. However, with high potential rewards, they could be worthy of a closer look for less risk-averse investors.
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Peter Stephens 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.