Today's announcement by Givot Olam Oil Exploration LP (TASE:GIVO.L) about problems at its Meged 5 well underscored the fundamental problem that the company has had to deal with since drilling at the Meged field began in the 1990s: to get the oil in the strata beneath Rosh Ha'Ayin out of the ground.
The Meged 4 well, drilled in 2002, about which initial announcements by Givot were promising, sent investors running to buy shares. When the company encountered subsequent problems, which lasted for months, it tried various measures to boost output, including drilling a horizontal well, until the final report of the cessation of operations in October 2005. The company's share price dropped to just NIS 0.01.
However, it is not necessary to look so far back in time to foresee what could be the future of the share: it is enough to look at Zerah Oil And Gas Explorations LP (TASE: ZRAH), which in March 2010 announced disappointing results from the production tests of its Tzuk Tamrur 4 well - and the share price dropped 23.3% in one day.
Zerah now has no activity at all at its borehole in the Dead Sea area, and its share price continues to sink. It has fallen a further 30% since that fateful announcement, and is now traded a value equal to its cash, even though it owns other oil exploration licenses.
The condition of Givot's shareholders is liable to be far worse, if it in fact turns out that the company cannot get the oil out of the ground. The company owns no other licenses apart from Meged, and its market cap plunged to NIS 412 million after its 52.4% drop today to NIS 0.039. Its market cap is still ten times its cash.
Today's nosedive could become a buy opportunity if Givot is able to overcome the problems at Meged 5, but investors ought to remember that there is still a long way to fall.
Published by Globes [online], Israel business news - www.globes-online.com - on January 26, 2011
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