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Questor share tip: Falkland Oil shares tumble

A busy drilling schedule planned for 2015 has not protected investors from the sharp fall in the oil price, says Questor.

Six new wells are scheduled in 2015 and this will mark the first new exploration activity in the region for more than two years
Six new wells are scheduled in 2015 and this will mark the first new exploration activity in the region for more than two years Credit: Photo: Heathcliff O'Malley

Falkland Oil & Gas
18½p +¼p
Questor says SELL

Falkland Oil and Gas [LON:FOGL] shares have tumbled along with the falling oil price, and we call time on our speculative buy recommendation despite a fresh drilling campaign set to begin in the first half of next year.

The shares have sunk from about 30p in September to 18p yesterday. Drilling for oil in the depths of the Atlantic off the coast of the Falklands was always reliant on higher oil prices. The worry now is that funding for projects will be put on hold as the oil price falls.

The Falkland Islands have not been a happy hunting ground for oil companies in recent years. The initial enthusiasm about the hydrocarbon potential in the region has been somewhat tempered after a series of failures. Falkland Oil and Gas had disappointments at two major prospects – Loligo and Scotia – in 2012. Neither site was found to contain commercially viable reserves of the black stuff and the company’s shares have gone sideways ever since.

Six new wells are scheduled in 2015 and this will mark the first new exploration activity in the region for more than two years. Falkland Oil and Gas announced the drilling contract in June; the Eirik Raude rig is currently off the Ivory Coast and due in the Falklands early next year.

The floating rig will drill in six sites – two wells in the North Falkland Basin (operated by Premier Oil), followed by two wells in the South & East Falkland basin operated by Noble Energy (not listed) and then a further two Premier-operated wells in the North Falkland Basin. Falkland Oil & Gas has interests in five of the wells ranging from 40pc to 52.5pc. The whole operation will take about 240 days.

When we tipped the shares (30.9p, September 3) we made clear the highly risky nature of exploration off the Falkland Islands. With Brent crude at $102 per barrel it still made sense. Not any longer.

The 42pc fall in the share price has been a painful experience, but it is better to get out with something and tidy up the portfolio for 2015. Sell.