The Telegraph’s Questor wrote a piece on Falkland Oil and Gas over the weekend, highlighting how low the share price is after the recent Scotia drill failure but advising readers to avoid the shares.
Questor’s sentiment is right in that the recent South Falklands drilling campaign demonstrated the high cost of drilling deep water as well as the high risk of failure in frontier plays. For investors in both Falkland Oil and Gas and Borders and Southern it has proved an expensive lesson, despite the supposed bullish position created in the former by its successful farm out deals with Edison and Noble.
With a lack of 3D seismic data on the acreage, the chances of success in the South Falkland basin were at best 1 in 4 per drill and unfortunately the law of averages didn’t work out in the end despite some sizeable gas and gas condendate finds. The economics of the area mean that only an oil find is going to get investors really excited.
The dream of the ten bagger has eluded the South Falklands stocks for now and punters will have to wait until 2014 to try their luck – again!
Contrarian Investor UK
Falkland Oil & Gas
30.25p
Questor says AVOID
Shares in Falkland Oil & Gas (FOGL) are at an all-time low, having plunged below their 2004 listing price of 40p a share.
This followed news that its latest well, Scotia, had found a substantial amount of gas but that the reservoir quality was poor and it was likely to be uncommercial.
However, on the positive side, the drilling has proved the presence of hydrocarbons in the geology within FOGL’s licence area and will help planning the next seismic studies ahead of expected drilling in 2014.
FOGL’s South Atlantic licence area is massive – one third the size of the North Sea – and this has attracted heavyweight partners, such as US group Noble Energy and Italy’s Edison.
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Other well drilled this year also found uncommercial gas. There was no sign of the hoped-for billion or so barrels of oil. This followed a slump in its shares in July 2010 after its Toroa well proved to be dry.
FOGL is fully funded to drill three more wells even after spending the expected $35m (£21.9m) on seismic studies in 2013.
There is definitely oil in the area. Rockhopper has made significant discoveries and Premier Oil has been farmed in to help with the next stage of development of Rockhopper’s discovery.
However, oil will not be easy to extract, given the weather challenges in the South Atlantic and the depth under the sea, which is about 3km.
The performance of FOGL highlights the risk of investing in explorers that do not have revenues from production to provide cash flow to invest in its drilling campaign.
Cash burn can be very high and such companies often have to repeatedly place shares to raise funds to carry on drilling – especially after a series of “dusters” or dry wells.
Private investors are locked out of such placings and this means that their stake is diluted – potentially on multipleoccasions.
FOGL has raised £80.5m in placings over the past two years alone compared with its current market capitalisation of about £95m. This is why Questor rarely recommended pure exploration plays.
In August this year, Noble Energy farmed into FOGL’s licence. This followed a similar deal with Italian oil group Edison in June.
Both these companies will be part-funding drilling and other exploration activity. Noble alone is expected to invest $180m to $230m in costs for drilling and seismic studies over the next three years.
FOGL currently has about $220m of cash, worth 43p a share. This is higher than the group’s market value which means any future discoveries are priced “for free”. However, FOGL could burn through this cash relatively quickly. Although there is a chance that FOGL will find a commercial discovery, private investors should stay away as the risks to capital are too high.
http://www.telegraph.co.uk/finance/markets/questor/9731577/Questor-share-tip-Falkland-Oil-and-Gas-shares-are-one-to-avoid.html