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Melrose shares slide 7% after downgrade

SHARES in Melrose Resources fell 7% after the oil and gas firm slashed its production forecast and downgraded reserves estimates to reflect the problems it has encountered in Egypt and Bulgaria.

Edinburgh-based Melrose cut its forecast for average production in 2011 by 8%, to 40,500 barrels oil equivalent daily (Mboepd). In December, Melrose had forecast that it would produce an average of 44.0 Mboepd in 2011, up 7% on the record level achieved in 2010.

While Melrose’s operations have not been affected by the political unrest in Egypt, the company has hit technical challenges in the country, where it produces the bulk of its output.

Regarding the cut in the forecast, Melrose said: “This is primarily due to the recent North East Abu Zahra-1 well performance and the impact of the decision to initially complete the latest West Dikirnis horizontal producer as a vertical well coupled with other minor production variances.”

In December, Melrose said the development well on the North East Abu Zahra-1 gas and condensate field had started producing water.

In Bulgaria, Melrose has found that the western area of the Kaliakra find that it brought into production last year may contain only “minor gas volumes”. The company may do further appraisal drilling on the western flank of the structure.

“A preliminary view of the ultimate reserves which may be recovered by the Kaliakra-2 production well alone is approximately 33 billion cubic feet (Bcf) gas, compared to the pre-production full field reserves estimate of 49 Bcf,” said Melrose.

The company has increased estimates of the reserves in the Kavarna field, which started production last year, to 27 Bcf, compared to pre-production estimate of 25 Bcf.

David Thomas, chief executive of Melrose Resources, said it remains encouraged by “the strong production performance” from Kaliakra and Kavarna. In a note to clients, analysts at Cannacord Genuity wrote: “Today’s release reads badly for Melrose.”

Shares in Melrose Resources closed down 18p at 255p.

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