Shares in Falkland Oil & Gas (FOGL) plunged by roughly a half after the frontier explorer said its second exploration well in the region had failed to discover oil. The Scotia well encountered strong gas shows over the main 50 metre target interval, but management said the host rocks form a "fairly poor quality reservoir" at that location, and the well will consequently be plugged and abandoned.
The exploration failure comes on the heels of FOGL's disappointing Loligo well in September, which also found gas but no oil. That well found much better quality host rocks, however, and the company is still completing test work to determine if the discovery could be deemed commercial. But the huge costs required to develop such a stranded gas asset will keep interest in Loligo to a minimum.
The announcement brings to an end the four-well 2012 exploration programme executed by FOGL and Borders & Southern Petroleum (BOR) in the South and East Falkland Basin. Three of the wells resulted in gas discoveries, "proving that there is a working hydrocarbon system across the basin", says Ian McLelland, an analyst at Edison Investment Research. But, "with only gas and gas condensate encountered in these wells, it remains unknown if oil is present in the region".
Meanwhile, support services group Falkland Islands Holding (FKL) offered a low-risk way to play the drilling programme at FOGL, through its 4 per cent holding of the oil explorer. And low-risk it proved. The shares are only down 10 per cent on our buy tip following the disappointing well results. Falkland Islands Holding should continue to benefit from the wider exploration activity in the region. The islands' government recently announced the construction of a new deepwater port facility to cater for the oil and gas industry and no surprises are expected in the interim results on 6 December. But, with the oil story gone away again for now, we downgrade its shares to a hold.
