BHP Billiton (LON:BLT, ASX:BHP, NYSE:BHP) was hasty in quitting its partnership in Falkland Oil & Gas’ (LON:FOGL) southern licences, according to Westhouse Securities analyst David Hart.
The mining major dropped its 51 percent stake in FOGL's southern licences shortly after the first well, Toroa, failed to find hydrocarbons. The junior explorer now retains a 100 percent interest in these assets.
BHP does, however, still operate and own a 51 percent interest in the northern licences in the South Falklands Basin, where a high impact well is planned for 2011.
This morning FOGL updated investors on what it learned from Toroa and unveiled its plans to further explore the prospective oil frontier in the South Atlantic.
One stand out point was that negotiations are currently underway to secure a deep-water rig. It is understood that this rig will be earmarked for drilling the northern licences where BHP & FOGL hope to tap into the Loligo prospect.
“We view today’s update from FOGL as positive and it reinforces our view that BHP’s exit from the southern licences was hasty, in light of a single unsuccessful exploration well,” Hart said in a note to clients.
“While further work is clearly required, the prospectivity of the licences remains intact.
“In the northern licences, where BHP is still a partner, Loligo remains a high-potential prospect which would be a focus of drilling in the event that negotiations for a deep-water drilling rig are successful.”
The Westhouse analyst rates FOGL as a ‘buy’ with a 188 pence target price. The shares are currently trading at around 103 pence each.
Charlie Sharp, analyst at City broker Matrix, also featured the update in a daily note to clients. The analyst rates FOGL as a ‘hold’ and he believes that drilling is unlikely to start any time soon.
“With no drilling likely until very late 2011, we still see better exploration opportunities elsewhere in the sector for now,” Sharp said.
The analyst adds: “We still think it would be logical to take up (if available) at least one of the Borders & Southern rig options. We also note that one prospect must be drilled in the joint FOGL/BHP acreage by end 2011.”
FOGL is exploring the South Basin, a separate area of the Falklands Islands from the oil juniors that have been grabbing the headlines in recent months - Rockhopper Exploration (LON:RKH), Desire Petroleum (LON:DES) and Argos Resources (LON:ARG).
The company was forced to return to the drawing board after Toroa failed to find hydrocarbons in July 2010.
This morning the company told the market what it had learned from the experience.
Crucially, it reckons there are no implications for its other deep water licences.
"The Toroa exploration well was the first well in a previously undrilled frontier basin and although the outcome was disappointing the full analysis of the data has provided encouragement,” chief executive Tim Bushell said.
“The mid Cretaceous and Tertiary plays are entirely unaffected by the result and we are pursuing these in 2011.”
In its wholly-owned southern licences, FOGL plans to start a site survey programme shortly and it may add a 1,300 kilometre 2D seismic survey to help it define prospects and select future drilling locations.
It said a vessel is already on its way to the Falklands and the survey is expected to begin in late February 2011.
Several separate prospects will be surveyed initially, including Vinson - a Tertiary channel play - and another prospect in the mid Cretaceous fan play.
It is also considering two other prospects, which are similar to Borders & Southern’s (LON:BORS) 2011 drill targets nearby.
The data gathered from the site surveys will be used as part of an environmental impact statement, which will be submitted to the Falkland Islands Government this year as FOGL applies for drilling approval.
Reflecting on the Toroa results FOGL revealed that its post-drill analysis suggests that Toroa had no lateral seal to trap migrating hydrocarbons - this was one of the major pre-drill risks.
“The main risk prior to drilling was integrity of the trap”, the company said.
“In order for hydrocarbons to be trapped in Toroa an effective side seal was required. Such a seal is created by sands passing laterally into sealing shales and is referred to as a stratigraphic trapping mechanism.
“There are many giant fields (greater than 500 million barrels) that rely on such stratigraphic seals.”
FOGL concedes that it thought the target contained hydrocarbon filled sands, this was the result of a ‘false positive’ in its pre-drill analysis.