After a long period of stability, the 88 Energy (LSE:88E) share price has recently become quite volatile. The stock suddenly started surging last month, only to fall back down again a few days later. But even after this decline, the share price is still up around 380% over the last 12 months.
So what’s causing these massive price swings? And is this a business I should add to my growth portfolio?
The volatile 88 Energy (88E) share price
Last month, the oil exploration business published an operations update to inform investors that drilling had begun at its Merlin-1 site. Given that this location is expected to contain 645 million barrel’s worth of oil, it was particularly exciting news. And so the 88E share price began climbing.
The purpose of this drilling was to install a Blow-Out Preventer system so that material tests and later extraction can be done safely. Throughout March, the company performed all the necessary equipment and wireline tests to get more information about the oil reservoir.
Unfortunately, this is where things started to go wrong. After reaching the ideal depth, there was a power outage linked to equipment failure. This forced the company to pull out of the hole to make repairs. But upon re-entry, further complications arose, and it was no longer possible to perform the necessary tests or extract any samples.
Following this failure, 88 Energy decided to move to the next best prospective zone. But once again, the tests failed to be completed after the equipment became stuck. Eventually, this second site was deemed too risky to try again.
Ultimately this means that the company could not sample its most promising drilling sites to verify an oil discovery. And so, naturally, the 88E share price crashed just as fast as it went up.
What’s next for the business?
Such complications are not uncommon in this sector. Running such an oil exploration business is a complex and tricky challenge that carries a lot of risks, especially since it’s also at the mercy of fluctuating oil prices.
But despite these frustrating events, there are some reasons to be optimistic. While the company did not achieve the goals it had set out to, it did acquire some samples from some of its less prospective zones in the area. Based on initial interpretations of the gathered data, they show the potential for an extensive, previously unknown, oil reservoir. Further investigation and sample analysis are now underway.
Meanwhile, its second-leading project, Harrier-1, continues to show promising petrophysical characteristics in line with expectations. Drilling at this site will begin in 2022.
The bottom line
The failed tests are undoubtedly bad news. But as frustrating as it may be, these are ultimately short-term disruptions. The company has already begun preparing for the next stage in its exploration. And while it is lacking a significant source of revenue, it does have around $13m cash on the balance sheet to cover expenses for the foreseeable future.
Combined, the Merlin and Harrier sites are expected to contain 1.6bn barrels worth of oil. If the company can confirm this discovery in its next testing attempt, I believe the 88E share price can start surging again.
Having said that, I think it’s too soon to invest as there are currently a lot of unknowns. So 88 Energy is on my watch list for now.