The dangers of concentrated exposure to oil and gas exploration are demonstrated in spades today as Tower Resources' (TRP:AIM) Welwitschia-1A well, offshore Namibia, fails to undercover hydrocarbons. The shares collapse by 62.9% to 1.08p, slashing the market cap from £109 million yesterday to barely £40 million today.
The results from the highly anticipated well on the Delta prospect are the just the latest in a series of disappointing drilling updates from the exploration and production (E&P) sector - a key factor behind its relative underperformance as investors typically buy the sector for the step change in valuation exploration can deliver in the event of success.
Tower raised £19.3 million at a heavily discounted 3.5p in April (9 Apr) and to compound matters delays mean its share of costs on the well (it had a 30% stake) are likely to be higher than assumed at the outset. The drilling effort was led by Spanish giant Repsol (REP:MAD) and its total cost is expected to be around 10% over the $91 million budget.
Deeper targets have not been tested, but it is decided that drilling will now stop because the cost of drilling deeper is put at $40 million and the chance of success was estimated to be lower than for the unsuccessful shallower targets. The plan is to evaluate the findings before making a decision about further exploration efforts - however the chances of Tower participating in further drilling here look slim. The reason the shares have not fallen even further on today's news is the company has made some efforts to diversify - adding acreage offshore South Africa, Zambia and onshore Kenya earlier this year.
Northland Capital puts its hold recommendation under review and comments: 'A very disappointing announcement to the much anticipated Welwitschia-1A well. Whilst shares have been weak of late, much value was associated with the Delta prospect and we expect to see shares correct significantly following this release.
'As a high risk prospect, it was always more likely to produce a negative than positive outcome. It is also disappointing but understandable that the partners were not sufficiently encouraged pursue the deeper targets at this stage.'
