SHARES in Melrose Resources plunged a further 10% after the oil and gas firm cut its production forecast for the second time in four months, although it posted a big increase in first half profits.

Edinburgh-based Melrose Resources said it now expected to produce an average 36,000 barrels oil equivalent daily (boed) on a working interest basis in 2011, 4500 boed less than the firm led investors to expect on May 6.

Blaming operational prob-lems in Egypt for the down-grade, Melrose said these would result simply in some production being deferred into future periods.

“These changes will have minimal impact on recoverable reserves and should smooth the working interest production profile over the next three years,” chairman Robert Adair said in a statement.

However, the share price reaction indicates investors were not happy to hear about the latest production challenges.

On May 6, Melrose cut its forecast for average production from 44,000 boed citing operational considerations in Egypt.

Shares closed at 174p yesterday. They hit 282.7p on May 5. The fall over that period has wiped £125 million off the company’s market capitalisation. This was £200m at yesterday’s close.

But Melrose’s chief executive, David Thomas, said the share price fall may have reflected a range of factors. He said concerns about the global economic outlook had put pressure on the share prices of exploration and production firms generally.

Melrose may have suffered because of market concerns about the political situation in Egypt, although the company’s operations have not been affected by unrest in the country. Mr Thomas admitted the price fall may have been partly driven by news of a dry well in Bulgaria and an apparent setback in Turkey, during a period of low activity by the company’s standards. Melrose said yesterday that the South West Kanun well, which it hoped would open a new exploration play in Turkey, has not found any traces of oil so far.

Mr Thomas added that directors think “most” of Melrose’s shareholders recognise that it had moved quickly to address the operational issues in Egypt.

He said Melrose had reaped the rewards of its decision to focus on developing fields in Egypt and Bulgaria in the six months to June.

Pre-tax profits increased to $62m (£37m) from $26m in the same period last year, helped by increased oil prices. Revenues increased to $156m from $110m.

Average output increased by 23% to 38,000 boed on a working interest basis following the start of production from the Kavarna and Kaliakra fields off Bulgaria last year.

Melrose has resources in place to support an active exploration programme. Its portfolio includes licences offshore Romania and France.

Mr Thomas said the cash generated by Melrose’s expanded production base could help fund a move into new areas.

Melrose said it was evaluating opportunities in some new countries with good hydrocarbon fundamentals, competitive fiscal terms and sound operating environments.

Analysts at Brewin Dolphin stockbrokers told clients Melrose offers investors an “attractive and diversified” oil and gas portfolio. However, they said: “Given recent exploration disappointments we would not expect a step change in rating ahead of exploration success and/or new business developments coming to the fore.”