The recent oil discovery at Isobel Deep in the North Falkland Basin will have brought payday distinctly closer for the companies owning a share of the assets. Premier Oil is operating the well, and Falkland Oil and Gas (LSE: FOGL) has a 40% stake.
Hot on the heels of that, announced at the end of May, comes the news that Falkland Oil and Gas has spudded an exploration well targetting the Humpback prospect covered by licence PL012 in which Falkland has a 52.5% interest. The new well, CEO Tim Bushell said, “…is the exciting first test of a new geological play concept within the South and East Falkland basins. In the event of encouraging results, we have identified, on 3D seismic, multiple follow-up prospects“.
The biggest yet?
There’s always the chance that the Humpback prospect will turn out dry, and that would hit the share price, but it doesn’t look likely at this point. In fact, the company estimates total prospective resources of over a billion barrels for the cluster of prospects in the Fitzroy sub-basin, of which Humpback is one. And the new well will target multiple stacked reservoirs, increasing the chance of a hydrocarbon discovery.
There has to be a good chance that Humpback will encounter the best field yet in the Falklands basins, and that could lead the South and East basins to eclipse even the already great-looking prospects North of the islands. It should take around 65 days to drill the well, so we shouldn’t have too long to wait to find out.
Why so cheap?
The big question, with production and profits surely not too far ahead for Falkland Oil and Gas, is why the share price is still stuck in a rut. After a disappointing well result back in November 2012 the price crashed, and it’s stayed there — between then and now, there’s been almost no overall movement to today’s 29p per share.
The oil price crash has obviously played a big part, and an asset valuation at prices of around $100 a barrel rather than current $65 levels would considerably boost the price of the shares. But even so, the explorer is fully funded for its 2015 drilling programme, and though there’s no profit forecast for this year and next, it really can’t be very far away now.
There aren’t many brokers offering recommendations at the moment, but there is a Buy consensus emerging — and the average price target of 34p sounds very conservative to me.
Good value
I’m not really an oil investor, but the risk to reward ratio for Falkland Oil and Gas is looking pretty favourable to me right now, and I see a high probability of profit for those investing at today’s prices.