Solo Oil (LSE: SOLO) announced an oil discovery at Horse Hill this morning and as I write, the firms shares are down by more than 10%.
The explanation is simple: although todays 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.
Todays 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
Heres a comparison of Magellans pre-drill estimates versus todays 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, todays results look pretty bad to me, and I think that the share price carnage would be worse if investors werent 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.
Magellans 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.
Theres 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 Solos fortunes do not completely depend on finding gas at Horse Hill.
However, I believe Solos 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 Solos 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.
