Empyrean, EME, Shares Down 80% On Dry Jade Well In China

Empyrean Energy (LON: EME) shares are down 80% this morning on the announcement that the Jade well in China is dry. In more formal language, the planned depth was reached, the total drill done, and “indicated no oil pay in the target reservoir”.

Given that the Jade well was the major short-term operational activity of Empyrean, this finding of a dry well – there simply is nothing useful there – this share price collapse is not all that much of a surprise. Not a surprise now that we know the results of the drilling, for of course the higher price, up at 10p rather than the current 2p and change, was a result of hopes that the results of the drilling would be rather better.

There is something a little odd to note, after close last night, during post-market trade, there was a deal at 0.9p for 500k shares. The most likely event there is simply a fat finger in the reporting of the trade, a misreporting of the price. The much more unlikely event is that someone was willing to sell at that price and get out of the stock. But that would bring all sorts of investigation for the news of the dry well was released this morning. There would be significant questioning of whoever was willing to sell at 0.9 and where they’d got the information that justified their doing so.

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As to the larger point of the company announcement, there’s really little they can say but “Oh well” although that’s possibly too much of a pun. This being both the problem and the possibility with resource exploration.

The specific exploration block, 29/11, looks interesting from a geologic point of view. It’s possible to tell that there’s something down there. There’s that shaping of the rock layers that indicates there could indeed be oil there. Empyrean has gained the rights to drill for it and a partnership with CNOOC. China would definitely like to find more domestic oil, so the operating environment is helpful to explorers.

So, as far as it’s possible to determine in advance, there’s a good opportunity here. But at some point, that pedal has to hit metal, and it’s necessary to spend considerable money to actually find out. Yes, modern geology and drilling techniques do increase the chance of identifying oil-bearing reservoirs. But it is an increase in the chance, not a perfect proof.

This means that there will be failures as well as successes, even if some of the risk of failure has been removed. Which is exactly what has happened here with Empyrean and the Jade well. There is no oil in the target reservoir – of again, in that careful phrase, “no oil pay”.

It’s a dry well, and so the next question becomes what to do with the whole block? For the first drilling will have been on the most likely prospect, any secondary drilling is by definition going to be on the less tempting prospects. It’s possible that the entire prospect, not just this hole, is a bust.

It might be possible to trade sentiment either way on this, but any solid resurgence will likely depend upon management’s announcements of what next?