City analysts believe investors have overreacted to New World Oil & Gas’s (LON:NEW) well result in Belize, and the 45% drop in the share price is ‘overdone’.
It was revealed this morning that the Blue Creek 2A ST well had been plugged and abandoned because insufficient quantities of moveable hydrocarbons were found.
The company stressed, however, that the well confirmed that an active hydrocarbon system exists, and live oil shows were measured in the Y3 and Hillbank formations. It also says extensive residual oil was present, along with high saturations of formation water.
On AIM, New World shares fell heavily, losing as much as half their value in early deals.
But, speaking with Proactive Investors, Seymour Pierce analyst Sam Wahab said the share price fall was too much.
“Given how bad 2012 was for a lot of exploration stocks, investors can get be spooked by 'dry' wells.”
“I think there is a reasonable retail element in the stock at the moment, and at this level, I think we’ll see speculative buying in this stock up into the next well result, especially now that it is so undervalued.”
Wahab also explains that the institutions that bought into New World did so primarily to gain exposure to the Danish assets and for them Belize represents additional upside.
“It is still there to play for, and at the moment trading at less than 5p a share, it is excellent value where it sits at the moment, especially as the company has got a fully funded programme in place.
“The next drilling location is likely to take [this result] into account. The company has got an extensive amount of data that they can read across from. So I wouldn’t say that Belize is a write-off [for New World].”
Similarly, Shore Capital analyst Craig Howie highlights that this is just the first of three wells, and he points out that the next one, Rio Bravo 1 well, is targeting a geologically independent prospect.
He also claims the share has been ‘hammered’ today and has fallen too far.
Howie says that while the result does have an impact on the stock’s valuation, New World still has ‘two more rolls of the dice’ and he believes there is still ‘pretty significant volumetric potential’ in the rest of the prospects.
“Today’s share price reaction implies there is no value [left] in Belize, but we would certainly contest that.”
Indeed, in this morning’s statement chief executive Bill Kelleher said that data analysis points to the migration of huge quantities of oil through the area.
“Combined with the presence of a reservoir ideal for oil production, and a large, extensive anhydrite seal, we remain highly confident that the elements required for a working hydrocarbon system are in place in North West Belize.
“As highlighted by B Crest, trap remains the key outstanding element required for success in this area and, with multiple prospects already identified, we believe it is only a matter of time before we locate a trap of significant size and in the process make a commercial hydrocarbon discovery.”
New World will now move on to the next scheduled well in the programme.
The Rio Bravo 1 well will target the West Gallon Jug Crest prospect, which has estimated un-risked prospective resources of 113mln barrels of oil. Drilling is set to get underway in the current quarter.
“Our two other drill ready prospects in Blue Creek, and the multiple prospects identified in our three licence blocks in Denmark will mark the next significant milestones for the company and I look forward to providing updates on these exciting prospects in due course.“