Can Empyrean Energy plc's extraordinary run continue?
Shares in Empyrean Energy(LSE: EME) have exploded higher over the past 52 weeks, making the stock one of the market's top performers in the past year.
From a share price of 1.65p a year ago, the shares have gained more than 800%. However, since mid-September, its rally has lost a lot of its momentum and the shares are currently trading at less than half of its 52-week high of 31.25p. Does this means it has hit a roadblock, or is this just a short-term setback?
Disappointing well results
Certainly, there's a great deal of uncertainty about the growth prospects of the AIM-listed oil and gas explorer's assets. The company has made significant discoveries over the past few years, but there's still no clear indication of the potential scale of the recoverable resource.
As such, it's not surprising to see some profit-taking after such a rapid ascent in its share price -- especially as concerns grow on the lengthy wait for the important drill test results from its Dempsey well in the Sacramento Basin, California.
Things were only made worse by Empyrean's disappointing well test results last week, which found gas at its lowest zone of the Dempsey 1-15 well flowing at rates that were "sub-commercial", meaning those reserves may not be economically recoverable at the current gas prices.
But in spite of the recent disappointment, Empyrean could still offer promising growth potential should its Dempsey well project come good. As the company said in its statement on 18 November, "analysis of this zone, and its full potential, remain at an early stage." What's more, the tests are being conducted in the order from the lowest up, and not in priority of interpreted significance, meaning some disappointing results were likely before sufficient commercial flow for production would be found.
Initial estimates put the project's potential recoverable reserves at between 116 and 352bn cubic feet of gas. But should all the stacked reservoirs be full of gas, the cumulative unrisked recoverable resource within the Dempsey prospect could rise to more than 1trn cubic feet. And that's even before we consider Empyrean's other interests outside of California, including in China and Indonesia.
An alternative play
Shares in Kurdistan-focused oil producer Genel Energy(LSE: GENL) haven't done nearly as well. They have recovered substantially since reaching a new agreement with the Kurdistan Regional Government (KRG) over the company's historic receivables relating to unpaid entitlements for past oil exports. But political uncertainties in the region continue to overhang the market.
Recent regular payments from the KRG have given Genel's cash flow a big boost in recent quarters, but the sustainability of such payments in the future remains in question as tensions between Erbil and Baghdad continue to be high after the Kurdistan independence referendum.
Genel is also struggling to prove its worth to shareholders after it sharply downgraded its reserve estimates in the Taq Taq field, one of its two Kurdish mainstays. Still, I reckon investors should not overlook its potentially game-changing gas prospects in the Kurdish region. There's almost 1,500 MMboe of 2C reserves in its Miran and Bina Bawi gas fields and it is currently in talks with farm-out partners to help fund its development.
Valuations are undemanding too, with the shares trading at 7.3 times expected underlying earnings in 2018.
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Jack Tang 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.