Shares in UK Oil & Gas Investments(LSE: UKOG) - one of the most traded companies on the junior market - sank just over 30% in early trading this morning. That followed the release of an operational update on the firm's Broadford Bridge exploration well yesterday evening. Given the huge gains made by some investors from mid-June to the start of September (during which shares eight-bagged), is this a sign to take their profits and run or a perfect opportunity top up their holdings?
Yesterday's notification began positively with the small-cap announcing it had recovered "measurable volumes of light oil and solution hydrocarbon gas to surface" during clean-up operations at the Kimmeridge Limestone reservoir. This was "significant and encouraging news", according to experienced executive chairman Stephen Sanderson. He went on to say that periods of free flow from the well during the clean-up sequence, along with the identification of additional reservoir zones, "add further positive outcomes".
So why the big fall? According to the company, two independent analyses had revealed that the cement bond over some of the reservoir zones within the well are "less than optimal", thus preventing the proper evaluation of the full flow potential of UKOG's reservoir sequence. Keen to calm investors' nerves, the company stated that rectifying this bonding is "standard oilfield practice" and achieved by squeezing a whole load of fresh cement through perforations in the well's steel casing. This work has been scheduled to commence after the aforementioned clean-up operations have been completed. A new test flow programme will, the company hopes, also go some way to demonstrating the well's "near-term commercial viability".
Clearly, efforts by the company to reassure investors that the aforementioned bonding issues are nothing more than a temporary setback hasn't had the desired effect. Short-term holders have headed for the exits, no doubt inspiring at least some of those who imagined they would remain invested for longer to follow suit.
Quite where the share price goes from here is difficult to predict, especially since it has already recovered to be 'only' 15% down from when markets opened this morning. All this volatility suggests that many retail investors - particularly those lacking the technical knowledge to give them an edge over other market participants - might do well to sit on the sidelines for now. While this setback appears temporary, today's reaction is also a helpful reminder that questions still remain over just how just how big the company's assets really are, how easy it will be to extract the black gold further down the line, and whether UKOG's valuation has got ahead of itself.
Regardless of whether it makes sense to be bullish on UKOG's prospects or not, what can't be disputed is that yesterday's news underlines just how unpredictable oil exploration is, and why only the most risk-tolerant need apply. The binary bet nature of this kind of investment means that anyone thinking of buying into a story on the hope of dramatically increasing their wealth over a relatively short period of time must also be prepared to lose a large proportion - if not all of their money - if events go against them.
At times like this, it's worth remembering that our exposure to risk is the only thing we can control. Personally, I like to sleep at night.
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Paul Summers has no position in any of the 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.