Shares in Independent Oil and Gas, the Aim-listed oil group with licenses for exploration in the North Sea, have tumbled more than 40 per cent after it lost $10m of investment, wiping several millions from its value.
The company said the backing from an internationally listed firm with a multi-billion dollar market cap will not proceed due to the recent fall in commodity prices.
"The decision from our potential investor is unexpected based on the progress made to date and clearly very disappointing," said IOG chief Mark Routh.
"It is a decision based on external factors and not a reflection on our team and assets. While we anticipated that the transaction was likely to conclude, we have continued to keep other opportunities open. We are now pursuing these opportunities with the aim of maximising value to shareholders."
IOG will now look for alternative ways to fund its acquisition of the rest of the Skipper well licence it doesn't already own from Alpha Petroleum, a deal agreed earlier this year.
It comes on the same day oil prices hit a six-month low, with benchmark Brent Crude falling to $48.60, continuing a torrid year for global oil prices.
Some 70 per cent of the 126 oil explorers listed on the Aim and main market are loss-making, according to research by Company Watch, with losses totalling £1.8bn. A third were not producing any revenue at all, as of February. At the time, head of analytics Ewan Mitchell said it expected a "wave of mergers, highly discounted share placing and sadly more than a sprinkle of company failures if commodity prices don't soon recover".
IOG, which has also lost a multi-million pound debt facility due to the investment withdrawal, said it is funded until 4 September, when it is due to repay a £358,000 loan, following a share placing in July to raise short-term funding.