Why Is Bahamas Petroleum Company PLC Surging Higher Today?

oil rigShares in Bahamas Petroleum Company (LSE: BPC) surged over 25% when London markets opened this morning, touching a high of 4.7p, before settling back slightly to a 10% gain.

The trigger for these gains was news that a new Petroleum Act has now been drafted in The Bahamas, and has been placed before parliament for final approval. This long-awaited new act will define the legal and tax framework for oil explorers operating in The Bahamas.

When will we know more?

The company didn’t specify a timescale, but said chief executive Simon Potter said that “After a short recess, following a busy parliamentary agenda, the process will be finalised.”

I suspect that it could be a number of months before we know much more, but this is an important step forward for the firm, which is currently planning its first exploration well in the islands.

Cutting costs before farm-out

For a small-cap explorer, Bahamas Petroleum is relatively well funded, with cash reserves of $12.4m.

However, that won’t be enough to fund the drilling of its first offshore exploration well, and the company is actively looking for a funding partner for the deal, in order to try and unlock the potential of its exploration licences.

It’s very unlikely that any potential farm-out partner will agree a deal before the Petroleum Act is finalised, but the firm has been taking a proactive approach to prepare for this step, by developing a revised plan that should cut the anticipated costs of its first well in half — from $120m, to a more affordable target cost of $60m.

To show their commitment to delivering a funding deal, Bahama Petroleum’s board has agreed to convert 20% of their salaries into a share-based deal, which is dependent on a farm-out deal being achieved.

What next?

Bahama Petroleum’s current licences stipulate that a well must be drilled by April 2015. Clearly this is impossible, so following the adoption of the new Petroleum Act, the company expects to receive a licence renewal with a 12-month drilling deadline.

However, the contents of the new Act are not yet known by investors, and it’s possible that the financial terms may not be as generous as hoped for, which could make it more difficult to find a farm-out partner on favourable terms.

These risks mean that exploration plays such as Bahamas Petroleum should only usually account for a small part of your portfolio, as there’s a very real risk of a 100% loss if things don’t go to plan.

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Roland Head 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.