Oil and gas juniors farm value

Thursday, 22 March 2012 – Investors Chronicle

A slew of farm-in deals across the smaller oil and gas exploration sector has highlighted the value inherent across a number of companies.

Falkland Oil & Gas (FOGL) has agreed an option with an unnamed industry counterparty to allow the counterparty to acquire 25 per cent of FOGL's licence areas in the South Falklands in return for paying a pro-rata share of 2012 drilling costs that are expected to fund two exploration wells. The counterparty will also make a cash contribution of $40m (£25m) and pay its pro-rata share of around $68m of preparatory costs.

If exercised, the agreement will provide FOGL with greater options for financing its exploration programme. This should start around June with the drilling of the Loligo prospect, which has been estimated to hold up to 4.7bn barrels of oil. The agreement also provides for FOGL to retain a larger share of its licences should its shares spike following a discovery by Borders & Southern, which is currently drilling its first South Falklands well.

'Farm-in' deals such as FOGL's are common practice among junior oil and gas companies looking to minimise the financial exposure of drilling exploration wells that can cost tens of millions of dollars each ($50m-$60m per well in FOGL's case). In many cases, juniors wouldn't be able to drill wells without partners.

Chariot Oil & Gas has concluded deals that will see oil giants BP and Petrobras farm in to its southern blocks off the coast of Namibia. These incorporate the Nimrod prospect that could hold 4.9bn barrels of oil. Chariot will next month start drilling the Tapir South prospect in its northern blocks - currently held 100 per cent - but, given that the gross potential across all its licences has been estimated at 20bn barrels, Chariot is likely to introduce further farm-in partners across its blocks.

Elsewhere offshore Namibia, shares in Serica Energy surged after it announced that it is farming out a 30 per cent licence interest to BP in return for BP paying past costs and funding an extensive three-dimensional seismic survey.

IC VIEW:

Attractive farm-in deals are excellent signals to look for when appraising oil and gas juniors. They finance exploration, introduce oil major skills and in some cases can underpin a junior's entire market value. They can also trigger share prices and, perhaps best of all, they provide the strongest validation of licence potential. In addition to Chariot, other farm-in deals waiting to happen include Bahamas Petroleum, Frontera Resources (Georgia) and Tangiers Petroleum (Morocco and Australia).

Original article published on: http://www.investorschronicle.co.uk/2012/03/22/shares/news-and-analysis/oil-and-gas-juniors-farm-value-kLhdbAkXbV3hjxpCvPyvtL/article.html