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Falkland Oil & Gas's funded drilling and transformational prospects sets it out as a rarity in oil sector this year

Published: 15:00 05 Apr 2015 BST

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Falkland Oil & Gas (LON:FOGL) is something of a rarity for the junior oil sector this year, with its paid-for multi-well drill programme, new discoveries and genuine ‘company maker’ prospects.

The campaign's early success, with the discovery of oil and gas in the Zebedee well, gives a degree of confidence and assurance for the other five wells remaining in the initial campaign in the South Atlantic. 

Zebedee, as a potential bolt-on field, promises a significant increase in resources for the planned Sea Lion development and it could add new impetus for the nascent oil industry.

FOGL has a 40% stake in Zebedee as well as three other projects in the North Falkland Basin, alongside the Sea Lion partners Premier Oil and Rockhopper.

Sea Lion, as it stands, is still considered a viable development project albeit one that will be carried out in phases over a longer timeframe than originally anticipated.

It is hoped that this part of the programme will add critical mass to the Sea Lion in order to attract new partners to help accelerate the field's development.

The idea is that significantly larger resources, across multiple fields, may potentially draw-in larger oil companies to the basin; and in the future, a free-spending partner could more aggressively pursue the project.

Drilling will soon start on the Isobel Deep which is larger and, like Zebedee, could also be tied into the Sea Lion project. A result could come for Isobel Deep before the end of April.

A third North Falkland prospect, involving FOGL, is Jayne East and whilst this is also similar to Sea Lion it would have to stand alone as it is too far away from the field.

Chatham, a Premier-Rockhopper well only, is mostly appraisal rather than and it could prove up an extension to the east flank of the current the Sea Lion, in an area which could be either gas or oil.

The North Falkland projects have the potential to be very significant for investors in FOGL, but, they mostly represent a diversification from the company's main targets, in the deeper waters further south.

Here, in the South and East Falkland basins, are the real ‘company makers’ for FOGL.

A separate joint venture led by US major Noble Energy will begin drilling the Humpback prospect; following Zebedee and Isobel Deep it will be third in the campaign's overall running order.

And, as the name suggests, Humpback could be a considerably larger beast than the Sea Lion.

Pre-drill estimates put the prospect in the order of 510mln barrels of oil in the 'mid-case' scenario. Black moveable oil is the prime target here, and such a discovery would very significant breakthrough.

Humpback is operated by US firm Noble Energy and it will be the third well in the campaign’s overall drilling schedule.

“There is much more risk associated with the Noble programme,” said Tim Bushell, FOGL’s chief executive.  “But, at the same time, the rewards are far greater because if we prove oil in that basin, it is much larger basin in terms of follow on potential.

“It is huge, about the same size as the North Sea, and there have only been five wells drilled so far.”

Four of the five wells made discoveries, albeit gas condensate rather than oil.  More is now known about the deep water area and, crucially, this new phase of drilling is now informed by 3D seismic unlike the prior campaign which was based on older 2D data.

A ‘black oil’ success would be very significant proof of the exploration concept, given that only gas and condensate has been found so far.

“Humpback is the well where we see the potential could be transformational both for us as a company, but, also maybe for the Falklands, if we found oil.”

Sanjeev Bahl, analyst at Numis Securities, says the South Falkland programme is a potential "game changer" and he reckons a success at Humpback could be worth at least 100p per share - more than three times the today's price of around 30p. That punchy valuation is based on a discovery being oily with about 150mln recoverable barrels in size.

Being more conservative, the analyst rates FOGL as a 'buy' recommendation for the explorer and a 42p price target.

"FOGL is a stand-out explorer in 2015 with very few companies in the exploration biased E&P sub-sector offering investors exposure to the upside potential of a funded 4-5 well back-to-back exploration programme," Bahl said in a recent note.

Whilst the company's participation in the drill programme is funded, there is not expected to be much of the current cash pile left once the budgeted campaign is over. As such, investors can rightfully anticipate some form of cash call at some point.

Given the relatively tight capital market for oil firms therefore well results and investors sentiment towards the Falklands will have added significance.

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