88 Energy Ltd plummets after scary operating update. What should investors do next?

Oil explorer 88 Energy(LSE: 88E) found itself in a tailspin in Monday business following a negative reception to its latest operating update.

While off three-week lows struck earlier in the session, the stock was still 12% down from last week's close at 3.02p per share.

Flowback fears

88 Energy advised today that flowback at its Icewine #2 asset in Alaska continues after it began on June 19 from stage two (the upper zone of the project).

Some 8% of total stimulation fluid was recovered until it became apparent -- due to rate and pressure observations -- that the upper zone was likely in communication with the lower zone. 88 Energy subsequently drilled out the plug between the upper and lower zones, it said, and no increase in pressure was observed, confirming that the two zones are in effective communication.

Trace hydrocarbons were encountered while flowing back the upper zone prior to drilling out the plug, 88 Energy added, and the flow rate returned to 100% stimulation fluid once the two zones were flowed back together.

The company has recovered 13% of the stimulation fluid pumped through, it said. But this remains some way off the 30% needed before hydrocarbons can be released from the reservoir.

Calls for patience

Managing director Dave Wall said: "We continue to monitor pressure and flowback of stimulation fluid whilst we wait for hydrocarbons to be released from the reservoir. Given that we are breaking new ground in relation to the HRZ formation, we need to establish the conditions under which the hydrocarbon cut will return and then increase.

"The stimulation was executed precisely as per plan with over one million lbs of proppant placed into the formation. A little patience is now required as we give the rocks time to show us what they can deliver."

88 Energy advised that artificial lift, using nitrogen or swab cups, may be required to increase the rate at which the fluid is drawn down. It added that if the pressure becomes too low that operations will need to cease to allow the fluid to soak and for the pressure to rise.

Too much risk?

It is unsurprising that the patience that Dave Wall has called for has proved to be in short supply in Monday trading. Extreme share price volatility is of course part and parcel of investing in early-stage commodity producers, where positive and negative operating updates can see share prices either soar or sink. Indeed, 88 Energy has certainly seen itself shake in recent weeks, the firm surging to three-year peaks above 4p per share earlier this month before today's collapse.

The City expects it to finally flip into the black after enduring many years of losses, and earnings of 10 US cents per share are currently predicted. However, a P/E ratio of 51 times is far too steep. Not only could this high multiple prompt a fresh sell-off should the troubles at Icewine#2 continue, but rising fears of the oil glut (currently putting a dampener on Brent prices) persisting longer than first thought could also prompt investors to re-evaluate 88 Energy's earnings profile.

I for one won't be ploughing into it any time soon.

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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. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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