Is Independent Oil & Gas plc a buy after falling 20% today?

Development and production-focused company, Independent Oil & Gas (LSE: IOG), has slumped by 20% today. The reason is an update regarding its Skipper oil discovery, with the market taking a negative stance on the company’s outlook following the release. 

The news release shows that Independent Oil & Gas has completed its objective to drill two mapped reservoir structures below the Skipper oil field in the Lower Dornoch and Maureen formations. The well didn’t encounter any hydrocarbons and will be plugged and abandoned. This is the key reason for today’s share price fall, although Independent Oil & Gas was still able to complete its primary objective of retrieving good quality reservoir condition oil samples in order to optimise the Skipper field development plan.

Furthermore, initial observations strongly suggest that Independent Oil & Gas has a better oil viscosity than the Competent Person Report’s (CPR) estimates. This bodes well for its future performance and the company is becoming increasingly confident of the commerciality of the Skipper field now that it has the required date to progress to the field development planning.

Under pressure

Clearly, the oil industry is still in an extremely uncertain situation. Although the price of oil has risen from its January lows of sub-$30 per barrel to today’s $51 per barrel, they’re still significantly lower than their previous high of $115-plus per barrel. This means that pressure on exploration and production companies remains high, since profitability is far lower than it was just a few years ago. In turn, this has caused investor sentiment to remain weak for a prolonged period.

Looking ahead, investor sentiment towards oil stocks such as Independent Oil & Gas could come under pressure. That’s because the demand/supply imbalance that has caused the oil price to fall is showing little sign of reversing. Most commentators expect the oil price to trade under $60 per barrel over the medium term, which indicates that the price rises seen thus far in 2016 are unlikely to be repeated. As such, investor sentiment towards the wider oil & gas sector could be somewhat weak, which would be bad news for Independent Oil & Gas’s share price.

Bright future?

However, the firm is well-financed having secured the backing of London Oil & Gas Limited. The £13.55m financing package will cover its licence fees and general and administrative expenses until mid-2018 at the earliest, which provides a degree of certainty in a very unstable market. Furthermore, Independent Oil & Gas’s cost control and the quality of its asset base indicate that it has a bright long-term future.

Undoubtedly, there are larger, more financially stable oil stocks that offer greater diversity than Independent Oil & Gas. And they’re on offer at ultra-low valuations. However, for investors seeking a smaller company with greater potential rewards (and higher risk), then it could be a sound buy if the oil price doesn’t fall to new lows.

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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. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.