Investors on Thursday lost patience with Karoon Gas Australia Ltd. (KAR.AU) and its string of tepid drilling results, dumping the company's shares after it reported weak gas flow rates from a key appraisal well.

In response, Karoon Executive Chairman Robert Hosking said he remains "very confident" in a previous reserves estimate that suggests that the company's joint venture with ConocoPhillips (COP) has enough gas to support a liquefied natural gas terminal.

"The reserve estimates have hardly been affected in a negative fashion at all," Hosking told Dow Jones Newswires in an interview.

"The company is still very confident about its resource estimates," he said.

Karoon said in a statement late Wednesday that weak flow-test results at its Poseidon-2 appraisal well in the Browse Basin offshore Western Australia state are unlikely to materially alter an initial contingent resource estimate for the Poseidon field of 7 trillion cubic feet of gas.

At least 4 tcf of gas is traditionally considered necessary to support construction of an onshore LNG plant, although Hosking said that floating LNG technology is being considered by nearby resource owners like Royal Dutch Shell PLC (RDSB.LN) for smaller gas deposits.

Analysts and market watchers said the initial 30% fall in Karoon shares on Thursday was overdone, and by 0032 GMT the shares had recovered to be down 14% at A$5.73.

Share prices of companies without producing assets that are focused on exploration are especially vulnerable to any perceived negativity in drilling results.

So far, Karoon and ConocoPhillips have drilled three wells in the Browse Basin, and on all three occasions the results have been mixed or poor.

The first well, Poseidon-1, last year struck a 200 meter gas column, putting a rocket under Karoon's shares, but gas flow testing couldn't be completed because two measuring tools got stuck in the drill hole.

The second well, Kontiki-1, didn't find much and was written off as a miss.

In a promising sign, the third well, Poseidon-2, penetrated the same three gas-bearing sand intervals in the Plover geological formation struck 6 kilometers away at Poseidon-1. It also penetrated the higher Montara formation in a surprising development.

Karoon said late Wednesday that flow testing from the middle, or B, interval at Poseidon-2 indicated gas flows at 850 standard cubic feet per day, which isn't a particularly inspiring flow rate.

Karoon said higher flow rates would probably be achievable from the other two intervals, considering that the B interval contains lower porosity sand.

Macquarie analysts again noted Thursday that the Poseidon-2 well was a risky play because it was attempting to test the outer limits of the Plover formation initially penetrated by Poseidon-1.

Karoon confirmed that it wasn't expecting fantastic flow rates from Poseidon-2 anyway.

"The prime purpose was not to get a flow rate on the boundary. It was, first of all, to assess the extent of the boundary," Hosking said.

"So a lot of it's market ignorance and perception."

Macquarie's analysts said the 7 tcf contingent resource estimate is "looking increasingly aspirational".

"This is a potential problem as the commerciality threshold is high in the Browse Basin and any significant cut from 7 tcf could rule Poseidon uncommercial as a standalone project," they said.

With the market's patience tested, Macquarie said pressure is building on the next scheduled well in the campaign, Kronos-1, to be drilled later this year. It downgraded Karoon shares to Underperform and cut its price target on the stock to A$7.00.

Hosking confirmed that the next preferred well to be drilled will be Kronos-1.

It will be 20 kilometers away from Poseidon-1 and will commence as soon as Poseidon-2 is plugged and abandoned in about five or six days.

"But it's on top of the structure--it's 400 meters up-dip--so this is an area where you'd look at putting production holes," Hosking said.

"So, yes, we would call it a low-risk well, although that's not to say that there's no risk at all.

"But in comparison to getting flow rates 400 meters down-dip, we feel a lot more confident."

-By Ross Kelly, Dow Jones Newswires; 61-2-8272-4692; ross.kelly@dowjones.com
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