It has been a testing week for two of our favoured frontier oil and gas plays. Shares in Petroceltic International (PCI) were marked down heavily on Monday after it revealed that drilling at the Shakrok-1 well in Kurdistan had found a limited quantity of hydrocarbons. Hess Corp, as operator of the well, has now plugged the Triassic zone that was being drilled and moved on to the principal targets in the Jurassic strata.
Petroceltic's management, along with some analysts, believes that the company's large retail investor base took fright at the phrase "plugged and abandoned" and dumped the stock in the mistaken belief that Shakrok-1 had been forsaken entirely. In reality, work is already under way in the Jurassic zone, with results due out some time in May.
Despite this setback, Petroceltic has some cause for optimism in the near proximity of US driller Marathon's Mirawa-1 discovery well, which recently tested at around 11,000 barrels of oil per day from Jurassic reservoirs. With around 400m barrels of oil still up for grabs at Shakrok, it's perhaps surprising that investors booked their sell orders so readily. But they did - and the stock registered its biggest one-day loss in 18 months.
Nevertheless, Bank of America points out that the viability of Petroceltic's Ain Tsila well in Algeria has been re-affirmed by the recent sale of an 18.4 per cent stake to Sonatrach - Algeria's state-controlled oil company. The bank ascribes an unrisked valuation for Shakrok at 75p, with "the removal of the secondary target somewhat offset by the increased likelihood of finding oil in the primary target". With the share at 160p, we reiterate our buy advice.
Another frontier explorer, Gulf Keystone Petroleum (GKP), has also had problems of late. The prevailing negative sentiment towards the company was compounded last month when it revealed it was running out of cash. The announcement came a day after GKP said it was meeting fixed-income investors with a view to generating around £150m through a bond sale. Subsequent rumours that GKP's fixed-income roadshow had run into trouble dragged the share price down.
