Shares in Solo Oil (LSE: SOLO) climbed when markets opened this morning, after the small-cap oil and gas explorer published the latest drilling report from its hotly awaited Horse Hill-1 well in the UK Weald Basin, close to Gatwick Airport.
The firm — which is chaired by serial AIM entrepreneur David Lenigas — says that the Horse Hill-1 well has now intersected the Portland Sandstone and encountered oil shows from 2,100 feet to 2,140 feet.
However, Neil Ritson, Solo’s executive director, cautioned that until electric logs — measurements from electronic sensors lowered into the well — are run when the well reaches the third casing point at 5,900 feet, further information would be limited.
Tough decisions
Solo Oil’s share price has risen by more than 300% since the start of 2014, and investors face a difficult choice: should you hold on for further gains, or lock in big profits now?
Solo’s 6.5% interest in the Horse Hill prospect means that its share of the targeted mean prospective resources is 5.7m barrels of oil and 10.7 billion cubic feet of gas.
Although these are meaningful resources for a small company, substantial extra investment would be required to bring these resources into production, if the wells are successful.
What about Africa?
In addition to its 6.5% interest in the Horse Hill prospect, Solo also has a 25% share in the Ruvuma gas and condensate project, in onshore Tanzania.
Two discoveries — Ntorya and Likonde — have been made so far, and the operator of this project, Aminex, recently announced that the mean gas in place resource estimate for Ruvuma had been increased to 2.3 trillion cubic feet.
This area is already connected to the Tanzanian capital, Dar es Salaam, by pipeline, so Aminex and Solo believe that Ruvuma could become a major gas development project over the next years.
Don’t get diluted
My calculations suggest that Solo Oil probably has less than £5m in available cash. The firm’s African partner, Aminex, doesn’t have significant cash reserves, either.
This means that any development of the Ruvuma gas discoveries — or of any commercial finds at Horse Hill — would be likely to dilute existing shareholders.
Is Solo still a buy?
In my view, anything less than a spectacular success at Horse Hill will see Solo’s share price fall sharply, in a classic case of ‘buy the rumour, sell the news’.
If I were a Solo investor, I’d sell today.