Faroe self-funds drilling

Oil and gas explorer Faroe Petroleum expects to produce between 6,000 and 8,000 barrels of oil equivalent per day in 2012, based on estimates by the operators of the fields in which the company has interests. This would be a key milestone for Faroe since cash flow from such a volume, combined with existing cash and debt facilities, would enable it to self-fund its busy planned schedule of high potential exploration drilling and field investment commitments.

On one of its licences, Butch, Faroe has decided to stop drilling the Butch South West side-track (deviated) well before the well has reached its objective. Faroe holds a 15 per cent interest in the Butch licence, which is located in the Norwegian North Sea. Following the Butch discovery last October, the partnership led by operator Centrica drilled a successful appraisal side-track well, which enabled Centrica to estimate a preliminary resource of 30m to 60m barrels of oil equivalent (mboe).

This second side-track well aimed to establish additional oil volumes to the south of Butch, although following hole instability problems the well is now being plugged and abandoned. The target of the well can be drilled more efficiently and with significantly lower technical risk from another well located closer to the prospect, explained Faroe.

Meanwhile, Faroe continues to drill the T-Rex well in Norway, which, if successful, offers considerable follow-up potential. Upcoming wells in Faroe's 2012 drilling campaign include Kalvklumpen (Norway), North Uist (west of Shetland), Clapton (Norway), Cooper (Norway) and Santana (Norway).

Macquarie says...

Outperform. The Butch SW prospect target was not reached due to “hole instability problems”. Any drop in the shares today is unwarranted in our view because the Butch SW prospect is still there and a sidetrack to it was a bonus well in the programme. Faroe only pays 22 per cent of its net costs. Separately, T-Rex (115 mboe, 30 per cent working interest, offshore Norway) is still drilling and Kalvklumpen (100 mboe, 20 per cent working interest, offshore Norway) is expected to start drilling imminently. Faroe remains one of our top picks in the small-cap space with a fully funded, firm and busy near-term exploration and appraisal programme.

Westhouse says...

Buy. Faroe has announced that it has encountered wellbore stability issues on the second side-track of the Butch discovery well. This was drilled following the Butch discovery well and first side-track as a step-out well targeting an objective to the south of the Butch discovery, within the same reservoir sequence. As a result of the technical problems encountered, the well has been plugged and abandoned. The prospect to the south of Butch remains valid and will be drilled at a later date. We maintain our BUY recommendation on Faroe.