A 31% fall to 11.05p amid technical problems on Chinese unconventional gas play Leyshon Resources' (LRL:AIM) latest well test is another example of how AIM-quoted resources stocks tend to overshoot the mark on good or bad news.
The company announced that its ZJS6 well on the Zijinshan gas project in central China produced water in a number of parts of the reservoir. As a result it has discontinued testing of the well – though it stressed it may be revisited at a later date to isolate the water and test different zones.
The problems are worth keeping in perspective. This is only the second in an eight well programme on the field and the first well – ZJS5 - flowed gas at commercial rates with several zones yet to be tested.
The next well, whose location has been determined through a 2D seismic survey of the average, should be spudded in the first two weeks of July. Zijinshan is located on the edge of the prolific Ordos gas basin which according to Chinese state energy firm CNPC contains around 11 trillion cubic metres of natural gas.
Initial results from the ZJS5 and ZJS6 wells saw the group peak above 24p last November (22 Nov). Prior to the commencement of the 2013 work programme the group had $45 million of cash on its balance sheet which equates to around 12p per share. Even after the $20 million allocated for this year's campaign is removed the downside is limited by anticipated remaining cash reserves of $25 million.
Leyshon chief executive officer Paul Atherley explained to Shares in March that the firm has agreements in place to sell its gas to the local power distribution company. Under these arrangements, the distributor will build an extension to its pipeline to receive the gas and amortise the cost out of the price it pays for Leyshon's production. Atherley said the group could expect to get around $9 per million cubic feet for its output.