Yesterday, the share price of Nostra Terra Oil & Gas (LON:NTOG) sunk a massive 10% on news that the company had to shut down one of its new wells (C8) after it encountered a high pressure inflow of salt water whilst drilling the well. The company was in the middle of drilling and encountered a high pressure of salt water at 2195 feet, several hundred feet above of the target reservoir. In light of safety reasons, the decision was taken to shut down and permanently abandon the well.
The situation is far from ideal. However, one the positive things from the situation is that the company managed to save the majority of the budget that was allocated to the C8 well. The CEO Matt Lofgran commented:
“Although this isn’t the result we were hoping for, the oil field isn’t without risks. We plan for this by having a larger and carefully balanced portfolio. Our exposure is only approximately 3% of our current market capitalization. “
So effectively, the exposure (potential downside) was 3% of the market capitalization, but the share price dropped 10% and remains at supressed levels (there was another 2% drop today). This suggests to me that the share price has been oversold as a result of the news.
This setback has reminded all shareholders that success is in the minerals sector is not without challenges. To think that every well being drilled by a company can produce a positive result is not realistic and is the sort of thinking that belongs in ‘cuckoo land’.
Continuing through the release:
Nostra Terra will use the data gathered from the C8 drilling operation and apply this when planning future wells on this lease area. The Clearfork and San Andres are currently producing formations in neighboring wells on this lease and remain the Company’s targets for future drilling operations on this lease.
The data will be used in planning future wells. The reservoir is still there, but for today, nature won the battle and the drill site had to be shut down. The Clearfork and San Andres are currently producing formations and remain the company’s targets for future drilling.
Lastly, the CEO made a final point about the company’s current financials:
“Nostra Terra’s balance sheet remains strong and we continue to be cash flow positive at the Plc level, while still growing our production and reserves.”
Effectively the CEO’s saying that although the well has been shut down but the company remains cash flow positive and that business continues.
In summary, the shutting down of the well is a temporary setback. The company continues to be cashflow positive in an environment where the global oil price is strong. Although the CEO confirmed that the well had 3% exposure to the market cap, the market cap has fallen around 12% since the news broke, suggesting that now may be a great entry point for a new investor.
As always though, please do your own research before buying/selling this share; the opinions above are only my personal views and should not be considered as advice.
