Should You Buy Falkland Oil and Gas Limited After Humpback Failure?

Falkland Oil and Gas Limited (LON: FOGL) shares crash after Humpback disappoints.

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Oil and gas investors have been on the edge of their seats for weeks now, keenly awaiting the results from the new Humpback well being drilled by Falkland Oil and Gas (LSE: FOGL).

After a delay while a sidetrack needed to be drilled, the results were finally out on Thursday — and the well’s a dud.

Share crash

The shares were either going to spike if the news was good, or fall if it was bad, but the size of the drop did surprise me. By mid-morning as I write, the price is down 33% to 13.5p, taking the fall over the past 12 months to 52%. So just how bad was it?

After the well was drilled to a depth of 5,136 metres, all it had encountered were “non-commercial quantities of oil and gas within a number of sandstone intervals, including the main APX-200 target“, with the deeper targets showing “only moderate porosity […] and low hydrocarbon saturations“. It was also apparently impossible, for operational reasons, to extract any fluid samples from the well.

Telling us that the company now needs to “assess the implications for the overall oil and gas potential of our southern licences“, chief executive Tim Bushell has described the results as mixed — although the market seems to see it as mixed between bad and worse. The big question for investors is whether the resulting price crash is justified, or are the shares an oversold bargain now?

Plenty more prospects

Humpback is, after all, only one well, and there are plenty of proven reserves already tucked away. The Zebedee well discovery in the North Falklands basin in April found deposits consisting of 27.5 meters of net oil-bearing reservoir together with 17.5 metres of net gas-bearing reservoir, with a quality better than expected.

The successes continued in May with the company’s Isobel Deep discovery, which found 24 metres of oil-bearing sands at the bottom of the well, with higher pressure than expected. Isobel Deep is approximately 30km south of the Sea Lion field, and could be the start of a new oil play in the firm’s PL004 licence — estimates suggest there could be 400 mmbbls in the licence area, in which Falkland has a 40% stake.

But the big scare from the disappointing Humpback results is indicated in Mr Bushell’s reference to the southern licences, as Humpback is the first exploration well to be drilled in the South Falklands basin. The big fear, naturally, is that Humpback might be indicative of the entire region which might not be up to North Falklands standards.

Early days

But on the upside, at least there were hydrocarbons there, and it’s entirely possible that Humpback just happened to be in a poor location to find commercial quantities.

As always, an investment in an oil explorer like this is a big risk, but the biggest winners are often those who invest when sentiment is poor — and I’d certainly consider a small punt myself.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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