A major cut to the amount of natural gas Niko Resources Ltd. expects to pull from the earth triggered a market rout Thursday, as investors fled a company whose Indian energy prospects suddenly shrank dramatically.

Niko shares sank nearly 40 per cent following a new evaluation of underground reservoirs that slashed the company's reserves by 62 per cent.

That roughly doubled the cut expected by some analysts, after Niko said the geology underlying a major Indian gas field was different from expectations. It's the second major reserve downgrade in two years for Niko, which has also suffered from a series of exploration setbacks that have not endeared it to markets. The company now faces the possibility of asset sales if it is to maintain enough money on its books to keep drilling for new energy.

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"The company hasn't had much luck on the drilling front in recent months," said Alan Knowles, an analyst with Haywood Securities Inc. "It's a whole bunch of things contributing to the selloff we're seeing."

Niko sought to calm market nerves by pointing out that the reserve change will have no impact on its energy output in the next two years, or the ambitious series of new wells it is about to drill, "the largest exploration program in our corporate history," as chief executive officer Ed Sampson said on a Thursday morning conference call.

"I recognize the disappointment in the reserve reduction," he said, but added that he hoped investors would give the company credit for a large "contingent resource" – meaning a less-certain energy source from another Indian gas field – that it hopes will soon gain government approval in India, at which point they can be called reserves.

"If these fields were onshore Canada or in the United States, they would be classified as reserves, and this alone would represent a core asset value for the company of about $30 a share," Mr. Sampson said.

Niko is also holding out hope it will get a lift in the $4.20 per million BTU it gets for gas it sells in India, far below what gas is worth on open international markets, where it trades as high as $16. Niko said the Indian government "is currently considering" a boost of that rate to $8.

The company cut its reserves after finding that the below-ground gas was present over a smaller area than once expected. The company developed a new underground model that showed a substantially smaller volume of gas that it would be able to extract.

Niko faces several difficult years ahead, with production declining through 2014. It is planning major new drilling in Indonesia, Trinidad and India – the company is in the business of chasing so-called "elephants," and its prospects are good enough that its partners include Statoil ASA, Marathon Oil Corp. and Exxon Mobil Corp. But any finds there are unlikely to boost its output for several years.

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If Niko does not receive a better gas price, it faces a funding shortfall by the end of 2013, said Mr. Knowles of Haywood Securities.

"But they have some things they can do," he said. "They could sell some assets. They have a lot of assets that aren't going to be monetized in the near term. So there's potential sales there."