Falkland Oil & Gas Still Has Real Potential

Published in Company Comment on 7 December 2012

Don't give up on Falkland Oil & Gas (LSE: FOGL) too soon -- it could still deliver.

It's been a pretty grim year for Falkland Oil & Gas (LSE: FOGL) shareholders. The firm's two big hopes for striking oil in the South Atlantic, Loligo and Scotia, each held the promise of at least a billion barrels of oil -- but both come up dry, or with no more than a whiff of gas.

FOGL's share price has tumbled 70% to 30p since its May peak, when investors piled into the stock hoping that the company would strike oil with Loligo.

Many private investors have now written off the stock -- but this could be a mistake. FOGL's big institutional investors remain committed to the company, which still has a lot of unexplored prospects -- and, crucially, it has the cash and partners needed to evaluate them.

What's next for FOGL?

It's worth remembering that FOGL managed to persuade two big oil companies, Noble Energy (NYSE: NBL.US) and Edison SPA, to farm in to its Falkland licences last year. Perhaps the more important of the two deals is with Noble, which will spend between $180m and $230m with FOGL over the next three years.

FOGL says that it is fully funded for three more wells and a 3D seismic programme. The company is planning to begin its 2013 seismic surveys shortly, and will plan a 2014 drilling programme that is expected to include three exploration wells, one of which is likely to be its 1.5 billion boe (barrel of oil equivalent) Nimrod prospect.

Cash only

FOGL's current share price of 30p is just below the value of its unencumbered cash -- around $160m.

This means that the market has assigned zero value to FOGL's prospects, so any exploration success -- even a promising 3D seismic survey -- could lift the share price substantially. Of course, FOGL's low share price also reflects the possibility it won't ever find oil, but that is always a risk with a pure exploration company.

FOGL's healthy cash balance and farm-in partners certainly give it an advantage over many other explorers, which often have neither of these.

There is oil down there

It's also worth remembering that Rockhopper Exploration (LSE: RKH) has already proved that there is oil under the sea bed in the Falkland Islands.

Rockhopper's 175 million barrel Sea Lion find was enough to persuade FTSE 250 oil independent Premier Oil (LSE: PMO) to commit a total of $2 billion to developing Sea Lion, with a view to starting commercial oil production in 2017.

It's your call

If you are considering buying shares in Falkland Oil & Gas, I strongly recommend this free Motley Fool report, which explains the factors you need to consider -- and the risks you might encounter -- when evaluating smaller oil and gas explorers.

This sector has always provided its fair share of multi-baggers and falling knives that can persuade even the most cautious of investors to take a wild punt -- so if Falkland Oil & Gas is tempting you today, please click here to read the Fool's exclusive oil and gas report before you hit the 'buy' button.

> Roland does not own any of the shares mentioned in this article.

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