Zion Oil & Gas Falls Nearly 20% On Tuesday After Drilling Project Failure

Shares of Zion Oil & Gas (NASDAQ: ZN), a crude oil and gas exploration company, opened on Tuesday down more than 20% from last week's close. The company has onshore operations in the state of Israel that cover more than 162,100 acres of land. Their operations began in 2009 with the intention of providing energy within Israel.

At the stockholder's meeting on June 21st, Richard Rinberg—the CEO of the company—announced that Zion had been added to the Russell 3000, small-cap Russell 2000, the Russell Microcap, and the Russell Global indexes.

The increased visibility of being on these indexes can potentially attract additional investors, but it also increases the visibility of price drops like the one seen at open on Tuesday morning.

This price drop came after a press release from the CEO on the evening of July 1st, where it was revealed that the company had incorrectly predicted the capacity one of its new wells. After assessment, they discovered that the well most likely did not contain enough hydrocarbons for commercial purposes, meaning that they will likely not be able to gain a return on that particular drilling project.

From the press release, it seems that this particular well appeared totally viable during the drilling process, releasing amounts of pressurized natural gas as the company excavated. The results of the assessment highlight that this is a hydrocarbon company which is still exploring its territory and learning about the geology of their license area.

In the release, the CEO also stated that it was the mandate of the company to explore any potential energy resources that could be of benefit to Israel. This means that they may continue to explore drilling operations where the chances of achieving a viable return are perhaps less than profitable.

In the same press release, the CEO also announced that the company was offering units to any stockholder who had held shares since the 15th of June. One unit could be purchased for every 4 shares held on the 15th. A unit consists of one share of common stock and warrants to purchase two shares at $3.50 for up to a year of the close of the offer.

A representative for the company revealed that a meeting was occurring on July 6, to discuss future plans. Apart from a general project for a "seven well plan" the representative could offer no additional comment as to future plans before everything was "released to the general population."

ACTION ITEMS:

Bullish:

• Competitors of Zion may see an increase in their own business as it becomes clear that Zion will not be able to deliver as much oil and gas as they had hoped over the coming months. Its competitors in oil and gas exploration might work to take advantage of this fact. These companies may include Trans Atlantic Petroleum (NYSE: TAT) and Vaalco Energy (NYSE: EGY).

• Despite negative shareholder reactions, mid-range trends around 50 days on Zion share price are still moving upwards according to Market Edge. This indicates that a profit might be found by holding the stock for an intermediate amount of time and steering clear of potentially disappointing exploration announcements.

Bearish:

• Zion works under the compound obligations of its duty to shareholders and its larger mandate to provide continuing energy and resources to the state of Israel. What this means is its drilling operations may not always be profit-minded, and drilling may be undertaken to totally explore an area rather than just extract profitable resources. This might make the company somewhat less than competitive at times.

• The drop in price over the holiday weekend shows that shareholders will probably react strongly against drilling projects that don't yield profitable results. Oil exploration, according to the CEO, is inherently risky and drilling projects will probably occasionally bring back underwhelming results. Future disappointments may see similar declines in price.

As of this writing, Zion Oil & Gas is down over 5.25% on Wednesday's session, trading near $4.60.

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