Falkland Oil's Noble farm-out erases risk - UPDATE

Shares in Falkland Oil and Gas (FOGL) raced ahead on Monday after the company announced a farm-out agreement with US giant Noble Energy, something which provides 'valuable downside protection' to the AIM-listed explorer and production company, according to analysts.

By MoneyWeek

published 6 August 2012

in Features

Noble will farm-in to the Northern and Southern Area Licences for a 35% interest (except for two excluded areas, Loligo and Nimrod-Garrodia). FOGL, which is currently the operator of both assets, will transfer operatorship to Noble by early 2013 (Northern) and early 2014 (Southern).

MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748.jpg

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Analysts at US broker Jefferies said on Monday: "This deal provides valuable downside protection to FOGL. In the event Loligo and Scotia are both unsuccessful or ambiguous, FOGL will now have the funding necessary to drill an additional two-three wells and do a large 3D seismic programme.

"This negates the need to come back for equity funding at very low valuations in the event the first wells are unsuccessful and materially increases the probability of a further drilling campaign."

Meanwhile, equity analyst Brendan Long from Merchant Securities said that the farm-out "brings one of the most successful American exploration companies to the Falkland Islands."

However, with FOGL's interest in the Scotia prospect having been reduced by 35%, Merchant's target price for the stock has been reduced from 402p to 338.5p. Nevertheless, Long said that the farm-out makes cash available for exploration wells in the future which have not yet been confirmed/identified and therefore not included in its valuation.

Both Jefferies and Merchant have retained their 'buy' ratings on the stock today.

FOGL's Chief Executive Tim Bushell said in a statement: "We have now brought in two highly respected international exploration and production companies and with this strong partnership in place, we have the financial and technical resources to help realise the potential from our large acreage position in the Falkland Islands."

The company will retain a 40% equity split in the Northern Area Licences (with the exception of Loligo and Nimrod-Garrodia in which it will keep a 75% interest), while it will keep a 52.5% stake in the Southern Area Licences. Italian firm Edison will retain the remaining stakes in the blocks.

By 15:39, shares had jumped 12.73% to 84.55p.

MoneyWeek is written by a team of experienced and award-winning journalists, plus expert columnists. As well as daily digital news and features, MoneyWeek also publishes a weekly magazine, covering investing and personal finance. From share tips, pensions, gold to practical investment tips - we provide a round-up to help you make money and keep it.