Shares in Desire Petroleum and Rockhopper Exploration tumbled yesterday after confirmation that the first well drilled off the Falklands in more than a decade had been a disappointment.
Desire said oil might be present in the Liz prospect in thin intervals, but that the reservoir quality was poor.
Gas was also encountered in deeper drilling by the Ocean Guardian rig, but this had still to be evaluated.
Desire added: “Until the logging is complete and the results analysed it will not be possible to determine the significance of the hydrocarbons encountered and whether the well will need to be drilled deeper, suspended for testing or plugged and abandoned.
“Operations are expected to be completed later this week, when a full announcement will be made.”
Desire, which has a 92.5% stake in Liz, saw its shares nearly halve in value to 50.50p. Rockhopper, which holds 7.5% of Liz, recorded a 16% drop to 45p.
Westhouse Securities analysts said: “Expectations ran high ahead of the start of drilling for both companies and this morning’s share price reflects the market’s significant disappointment with news to date.”
Westhouse said the selloff of the firms’ shares had been overdone and added that, while there may be implications for drilling at other wells in the area, only the Liz project would be removed from forecasts.
The analysts said: “While clearly not the commercial success the companies were hoping for, it is still very early to declare the drilling campaign a failure.”
Falklands expert Gavin Farquhar, a partner in law firm McGrigors’ energy and infrastructure team, said further analysis of initial hydrocarbon finds on Liz was required. He added: “Regardless of the eventual conclusions on the Liz prospect, it is of course very early days.
“Even if Liz does not prove to be an attractive prospect, there is no reason to be overly despondent.
“The Ocean Guardian drilling programme over the course of this year will include five to 10 wells.
“The prospects are located some distance apart and results from one well will not necessarily reflect what is found elsewhere.
“The market’s negative reaction and effect on share prices reflects how high expectations are, but I believe a longer game has to be played.”
The Ocean Guardian began the Liz well on February 22 after being mobilised from Invergordon.
The semisubmersible rig has been contracted from Aberdeen-based Diamond Drilling Offshore UK.
The Ocean Guardian drilling campaign will include four wells for Desire and two for Rockhopper.
It is the first campaign since the late 1990s, when falling oil prices ended explorers’ interest in the area until now.
The rig, for which AGR Petroleum Services is running a well-management contract out of its Aberdeen office, will move on from Liz to drill Rockhopper’s Sea Lion and Ernest prospects.
The British geological survey has estimated that the Falklands area could hold more than 60billion barrels of oil equivalent.
Plans to drill for oil around the disputed islands sparked a fresh diplomatic spat between the UK and Argentina, who fought a bitter war over the territory in 1982.
Britain refused US secretary of state Hillary Clinton’s offer to broker talks between the two sides recently, insisting there was nothing to discuss about the sovereignty of the islands.