Falkland Oil and Gas gets $10m for well switch

Falkland Oil and Gas has admitted that drilling at its Humpback well in the South Falkland basin is seriously behind, although $10 million of compensation from Premier Oil and Rockhopper Exploration has softened the blow. Falkland gets the cash as the pair decided to swap the driller's Jayne East well in the current drilling campaign for another on the Isobel/Elaine complex.

Targeting the Isobel Deep reservoir, which was previously found to be oil bearing but couldn't be sampled, the re-drill well is expected to discover additional reservoir targets in the Elaine South and Isobel Shallow fans. The Falkland Islands government needs to give the swap the go-ahead, but with over $40 million cash at the mid-year, FOGL's 40% equity share of the well - in line with the initial agreement - is fully funded.

Blighted by equipment issues, drilling of the Humpback well has resumed and results are expected in early October. "This is turning into one expensive little baby for someone," notes industry expert Malcolm Graham-Wood. But once this well has been drilled, attention will then turn to the re-drill well.

(click to enlarge)

The resource estimate for the Isobel/Elaine complex was recently increased from 240 million barrels of oil (mmboe) to 400mmboe by Numis analyst Sanjeev Bahl, indicating further resource potential. However, because it hasn't been tested, the analyst reduced the chance of success from 40% to 30%.

"We currently value FOGL at NAV 76p/share, target price of 38p reflecting potential farm-down dilution prior to development," says Bahl. "FOGL provides investors to a high impact, funded 2015 exploration programme."

FOGL shares rose 4% to 24p on Friday, but have halved since April and are three-quarters lower than 2012 highs at around 100p. Clearly, the AIM-listed explorer isn't immune to macro forces, but it could be worse, says Bahl.

"Depressed spot oil prices are unlikely to have a material impact on valuation of Sea Lion phase 2 (PL004b) or phase 3 (Isobel/Elaine) with first oil expected early to mid next decade. We continue to use a 77.5$/bbl LT oil price in our valuation."

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.