Shares in small-cap oil explorer Roxi Petroleum (LSE: RXP) slumped by as much as 20% in early deals this morning after the company revealed problems with its flagship deep Kazakh well.
According to the press release issued by the company today, Roxi’s A6 well in Kazakhstan, which is part of the BNG Project, has run into drilling problems. However, it appears that these problems aren’t severe as the group remains optimistic about the well’s potential.
Furthermore, management notes in today’s release that the delay is unlikely to have any material impact on the company.
The problematic A6 well was drilled to a depth of 4,528 metres and was believed to have 130 metres of oil bearing intervals. A 54-metre interval was supposed to be opened up, but early indications suggest the targeted area will need to be re-perforated because the first perforations failed. As the necessary equipment for re-perforation has been moved to another of the company’s wells, Deep Well A5, further work on A6 isn’t expected until after the A5 programme is complete.
Commenting on today’s news Clive Carter, Roxi executive chairman said: “The need to repeat the perforation work at Deep Well A6 is frustrating but the board believe it is unlikely to have any material impact on the final outcome at the well, which we believe remains very encouraging.”
Look to the long-term
Even though shares in Roxi lost a fifth of their value in early deals this morning, today’s news doesn’t seem to be that detrimental for the company in the long term. Delays when drilling new wells are common, so A6’s problems are nothing out of the ordinary.
What’s more, Roxi’s press release today contains some good news as well. The company has identified some areas of interest in the newly drilled Shallow Well 142 on the MJF structure. Existing wells already producing from the structure (wells 141 and 143) are producing 1,297 barrels of oil equivalent per day and Well 142 has the potential to yield an even greater rate of production. Roxi notes that Well 142 is a material step-out and therefore it has the potential to yield more scale in output than the shallow MJF structure.
The next 12 months should be an eventful time for Roxi’s investors. As the company moves on to complete its A5 well, tests well 142 and then moves to complete Deep Well A6, as long as there are no further unforeseen surprises, Roxi could end the year with a greatly increased production profile.
City analysts are expecting the group to exit 2017 with revenue of £4.6m up threefold year-on-year. Pre-tax profit for the year ending 31 December 2017 is expected to be a loss of £2.3m as the company’s costs continue to outpace gross profit. Nonetheless, during 2018, Roxi’s revenue is expected to surge to £22.3m and while City analysts currently expect the group to report a pre-tax loss of £1.3m I wouldn’t rule out a profit if oil prices continue to trend higher.
The bottom line
So overall, shares in Roxi are falling today thanks to a drilling setback but this isn’t a long-term issue, and over the next few months the company should regain its composure.
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Rupert Hargreaves 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.