I would attribute the stock price falling due to increased risk. The stock has more risk now than it did just prior to drilling.
1) Sinopec has to decide whether it wants to go into Phase II. Phase II, as it turns out, is just 4 more holes, if I understand the PSC correctly, and its costs would be about the same as Phase I. So if Sinopec needs to "pause" in order to decide to go to Phase II, with a six month extension, for a paltry 4 holes, then what's the big deal? The big deal is that the JDZ thus far has nothing commercial, from Sinopec view point.
But given that Phase II is not all that expensive, let's assign it happening a generous 90% chance, shall we? Ok next, ...
2) The entire future of the company seems to hings on one other company: Total. Total seems to be the only entity on the planet which can take a non-commercial stand alone JDZ and turn it into an AKPO. Without Total, you are relying on the Chinese to do it, and it remains to be seen whether SNP has the wherewithall to go it alone.
So getting Total to enter is the next hurdle. What kind of probability would you assign Total entering the JDZ? Let's give it a generous 90% chance, ok? Next...
3) The only overture by Total thus far is "talks" with Chevron for Block 1, a non-ERHC block, and so far as we know, not yet a deal.
So what is the chance that Total will enter actual ERHC owned blocks? Well, my feeling is that Total will first finish its engagement with the Chevron talks, then enter Block 1, and only then start talks on the other JDZ blocks...but it will eventually enter the JDZ.
So let's also assign a generous probability of 90% that Total will enter the other blocks.
4) The next hurdle for ERHC, therefore, is to be able to wait until the Total announcement some time next year or later, and
then show that it will have enough cash to survive until production.
Here's where assigning the probability is tricky. What are the chances that ERHC will have enough cash for the many many years its going to take to reach production? How much of the EEZ will it have to sell? Will it be able to run the marginal fields? Will there be cash raised through dilution on the AIM?
So let's say ERHC's chances of survival until Total does its thing is say a generous 70%.
So what is the probability of ERHC being a great investment?
Expected Probability of Erhc being a great investment is : 90% x 90% x 90% x 70% = 51%
Hence the chances that you will do well with ERHC is about 51%.
That's why the share price is down...it's not the sure thing as it was when we thought we would get blow out drill results.
Krombacher
