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Is Genel Energy plc a falling knife to catch after dropping 20%?

Investor demand for Genel Energy (LSE: GNL) has fallen through the floor in Tuesday trading after a shocking operational update over at its flagship project in Iraq.

The stock was last dealing 17% lower from last night’s close, although it has recovered some ground during the course of the day after slumping 24% at the start of the session.

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Reserves fall

Genel Energy advised that gross 2P (or proved and probable) reserves at its Taq Taq field in Kurdistan have been estimated by McDaniel and Associates at around 59.1m metric barrels.

This comes as a major disappointment as gross 2P reserves has been estimated at almost three times this figure as of December 2015, at 171.8m barrels.

As a result Genel Energy has swallowed a $181m impairment on the project, it advised.

Taq Taq trouble

However, this may not be the end of the matter, Genel Energy commenting that McDaniel and Associates’ study indicates “that there is still significant uncertainty in Taq Taq oil reserves.”

In particular, reserves are dependent on the Shiranish formation fracture porosity in the un-swept portion of the reservoir, which remains very difficult to estimate,” Genel Energy added.

This is not the first headache the driller has encountered over at Taq Taq in recent months. The field is currently producing around 19,000 barrels of the black stuff per day versus 36,000 barrels at the close of 2016.

Genel Energy commented that “recently, key producing wells have exhibited high rates of decline as a result of water breakthrough, exacerbating the decline rate across the field.” Cumulative oil production up until February 28 was clocked at 207.9m metric barrels, although only 1.8m barrels of this amount have been heaved out of the ground in 2017.

And given the uncertainties over at its key Kurdistani project, Genel Energy has elected to withdraw its output guidance for Taq Taq. The driller had previously expected to record gross average production of between 24,000 and 31,000 barrels per day at the asset.

The company will give an update on Taq Taq, as well as details of its near-term development plan, at its full-year results slated for Thursday, March 30.

Risk burdened

Splashing the cash on mining and oil stocks is always risky business as potential payloads can often disappoint — indeed, this is not the first time reserves have disappointed over at Taq Taq. And the operational problems hampering current production at Genel Energy’s critical project is also par for the course in the world of commodities, of course.

But an extra layer of risk hangs over Genel Energy due to the location of its prized asset, the company subject to the uncertain timings of export payments from the Kurdistan Regional Government.

I believe investment in Genel Energy carried far too much risk even prior to Tuesday’s update, and that dip buyers should resist the urge to pile in.

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Royston Wild 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.

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