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This Is Why Solo Oil PLC Is Falling Today

oilSolo Oil (LSE: SOLO) announced an oil discovery at Horse Hill this morning — and as I write, the firm’s shares are down by more than 10%.

The explanation is simple: although today’s news confirms that the Horse Hill-1 well has found oil, the amount found appears to be far below pre-drill expectations. The first (Jurassic) stage of the well has found oil in only one of the four targets that original well operator Magellan specified before drilling.

Jurassic disappointment

The discovery, which was made in the upper Portland Sandstone interval, only appears to contain an estimated 3.1m barrels of oil in place — compared to pre-drill estimates of 57 million barrels.

Today’s announcement from Solo also refers to the lower Portland Sandstone interval having a gross unrisked in place prospective hydrocarbon volume of 16.8 million barrels of oil. However, it turns out that the Horse Hill-1 well has not discovered this interval, which appears to be located further south than thought. In other words, the well has missed this target completely.

The key numbers

Here’s a comparison of Magellan’s pre-drill estimates versus today’s reported results:

 

Pre-drill operator expectations* (mean oil in place)

Result announced today (mean oil in place)

Upper Portland Sandstone (primary target)

57 million barrels

3.1 million barrels

Lower Portland Sandstone (primary target)

147 million barrels

Not discovered — estimated at 16.8 million barrels in place

Corallian Sandstone (secondary target)

33 million barrels

Dry

Greater Oolite Limestone (secondary target)

104 million barrels

Dry

*Source: Magellan Petroleum Corporate resource estimates/ukogplc.com Jan 2014

To be honest, today’s results look pretty bad to me, and I think that the share price carnage would be worse if investors weren’t holding on for the big one — the Triassic Sandstone — which has yet to be drilled.

Triassic big hope

The Triassic Sandstone interval could be a real game-changer for the firms involved in Horse Hill if it comes anywhere close to expectations, as it could contain significant amounts of gas.

Magellan’s original estimates were for a mean gas-in-place figure of 234 billion cubic feet (bcf) of gas for the Triassic, or more realistically, mean prospective resources (i.e. potentially recoverable) of 164 bcf.

There’s no doubt that if found, this gas would trigger massive gains for investors in Solo Oil and the other Horse Hill firms.

Is Solo still a buy?

Solo Oil does still have the benefit of a 25% interest in the Ruvuma gas discovery in Tanzania. This 2.3 tcf gas asset has real commercial potential, so Solo’s fortunes do not completely depend on finding gas at Horse Hill.

However, I believe Solo’s current valuation still includes a fair amount of expectation that gas will be found in the Triassic at Horse Hill — and if this well disappoints again, then I would expect to see Solo’s shares take another tumble.

Oil and gas exploration is a speculative business, and today's Horse Hill-1 results are a sharp reminder that there's no such thing as a sure thing.

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Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.