Shares of Ring Energy Inc. (NYSEMKT:REI) tumbled more than 19% by 2:30 p.m. EDT on Tuesday after an analyst downgraded the oil and gas producers' stock.
Seaport Global downgraded Ring Energy's stock from "buy" to "neutral" while slashing its price target from $20 to $12 per share. Driving the downgrade was Seaport Global's findings after digging into some data obtained by DrillingInfo, which is an industry data provider. That information led Seaport to conclude that Ring Energy's most recent well completions are underperforming older ones by 25%. In other words, instead of delivering the expected improvement in well performance, the company's latest techniques are taking a step backward.
Other shale drillers have encountered similar problems in the past as they tested out new ways of completing wells to improve their performance. Sanchez Energy (NYSE: SN), for example, experienced higher-than-expected production decline rates at its Comanche asset earlier this year, which caused it to report disappointing second-quarter results. Before that, the company ran into trouble at its Catarina position after its enhanced well-completion technique didn't work as expected. However, the company fixed its problem at Catarina and is working to address the issue at Comanche.
Part of the learning curve with shale drilling has been that some wells completed with new techniques perform worse than the prior version. That's the risk these companies are willing to take as they search for the optimal way to unlock more of the oil and gas trapped in these tight rock formations. When those risks don't pay off, it can cause pain for investors in smaller shale drillers like Ring Energy and Sanchez Energy, which is why they might want to consider going with top-tier oil stocks like this trio instead.