Last week was pretty rough for the Helium One (LSE:HE1) share price. Despite the penny stock’s stellar performance throughout 2021, it crashed by nearly 40% within the first 15 minutes of trading last Thursday. Seeing this level of volatility in a penny stock is not uncommon. But the question remains, what happened? And is now the time for me to buy or run for the hills? Let’s take a closer look.
The collapse of the Helium One share price
I’ve discussed this business before. But as a quick reminder, Helium One is an early-stage exploration company focusing on the discovery of helium gas. Demand for the element has been rising for several years thanks to its practical uses in optical fibre manufacturing and hospitals.
Throughout 2021, huge investor anticipation has been building up surrounding the firm’s Rukwa project. This is why the Helium One share price had risen by nearly 250% in 12 months before last week’s crash. And this upward momentum was pretty understandable. After all, most helium deposits are too small to be economically viable to extract. But Rukwa is estimated to contain 138bn cubic feet of the gas.
So, what happened? Last week, the management team released an update on the Rukwa project regarding the early drilling tests at its Tai-1A exploration well. The drilling was successfully completed, and the test confirmed the presence of helium. But unfortunately, several complications arose.
Due to large washouts within the borehole, the wireline logging data could only be collected for the uppermost suspected helium deposit starting at around 830m of the 1121m well. In other words, Helium One could not test the main reservoir as it initially set out to do. To make matters worse, the petrophysical analysis of the collected data revealed the formation of water saturated with helium instead of free gas. Put simply, it can’t be extracted.
Needless to say, this is not good news for the penny stock. And given this is the company’s flagship project, I’m not at all surprised to see the Helium One share price take a nosedive.
What’s next for this penny stock?
As disappointing as this update was, it wasn’t all bad news. The tests revealed a 130m thick layer of claystone that acts as a solid natural seal. Meanwhile, further analysis of the collected wireline logging data showed a good reservoir potential in the unexplored region.
Management has already begun planning the next phase of exploration. And with a better understanding of the Rukwa basin subsurface, future explorative drilling should hopefully run into fewer complications. Suppose Helium One can reach the lower region and confirm the existence of a high-quality reservoir? In that case, I think the share price could easily make a rapid recovery and potentially even explode.
The bottom line
As with any young exploration business, the unknowns with this penny stock are exceptionally high. These results are by no means a disaster, but they aren’t exactly encouraging either. All things considered, I’m keeping Helium One on my watchlist until more information becomes available.
Zaven Boyrazian has no position in any of the 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.