Is 88 Energy plc a falling knife to catch after dropping 40% in 4 days?
In late 2015, Alaska-focused shale explorer 88 Energy(LSE: 88E) announced what seemed like an exciting discovery, and as updates kept on coming in from the firm's Icewine 1 drilling, more and more investors started to perk up their ears and open their purses.
Between early February and late March in 2016, the shares soared from 0.3p to 3.85p. It's risky penny-share territory, but that was almost a 12-bagger -- and you don't need many of those in your investing career to retire comfortably.
But since mid-June this year, the wheels have started to come off, and from a peak of 4.25p we've seen the price fall all the way to just 1.09p as I write (though it's still a trebling in a little over 18 months).
That includes a 40% drop over the past four days alone, so what's happened, and are we looking at a great buying opportunity?
Thursday's update on the firm's Icewine operations appears to lie behind the latest plunge, as it announced the shutdown of Icewine 2 for the Alaskan winter with operations not expected to recommence until April or May next year.
The well has continued to flow at similar volumes as reported in previous updates, with "a trend of increasing heavy components since last update," but flow rates are apparently not sufficient to keep the borehole fluid (mainly fresh water from the frack) from freezing over the 1,300ft depth of the permafrost layer through which the hydrocarbons need to be extracted.
When it resumes next year, the firm plans to employ artificial lift technology to get things flowing -- suitable equipment for doing that during the winter months is not available.
This latest setback follows on from months of disappointing fracking results, with pressures and flow rates not living up to earlier hopes. In fact, as early as July this year the company told us it was shutting its well for six weeks to allow pressure to build up and for imbibition to occur. That's the process by which fracking water is absorbed by rock layers to displace hydrocarbons. After resumption, flow testing was again suspended in September.
Waiting for pressure to build up is hardly the kind of activity that springs to mind when we picture images of gushing well heads, and this year's painful progress has sent a lot of impatient (or perhaps just sensible?) investors heading for the hills.
Things aren't all bad, as the company has been reporting an improving gas-to-water ratio, but it reckons it will still need to lift a lot more fluid before "effective connectivity to the reservoir can be achieved with representative flowback."
There's further upside in that since the well was shut-in, welhead pressure has built up to 739 psi. And the company says that "results to date are consistent with several other early stage unconventional plays that have subsequently been proven successful," though it's too early to tell whether that will be the case here.
Patient investors are just going to have to sit out the winter and see what happens next year.
I reckon 88 Energy could multi-bag from today's crushed share price, or it could turn into a total loss -- and I don't see a lot of middle ground. You might do very well, but it's not my kind of investment.
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Alan Oscroft 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.