Falklands Oil & Gas Limited: High Risk/Reward Play For 5 Billion Barrels Of Oil

| About: Falkland Oil (FLKOF)

Falklands Oil & Gas Limited (OTCPK:FLKOF) is a UK company exploring for oil and gas offshore of the Falkland Islands. The company is listed in the UK under the symbol FOGL, however US investors can participate on the pink sheets under the symbol FLKOF.

FOGL was started ten years ago by a group of investors who were awarded offshore licenses by the Falkland Islands government. FOGL controls over 12 million acres in the East Falklands Basin, which lies to the East (and south) of the Islands. In those ten years, many seismic surveys have been taken and many prospects have been identified.

FOGL drilled one of their shallower prospects in 2010 and came up with a dry hole. The Toroa play was not a high priority for them, however BHP was a partner at the time and a drilling rig was in the area and BHP rushed FOGL to drill. The ultimate reason for failure was lack of a top seal on the reservoir to trap hydrocarbons. They did discover a lot of useful scientific information to help prove potential for their other targets. They saw excellent sands in the Mid Cretaceous which proved the potential for their Scotia play and also found large amounts of high TOC shale, which could be the potential source rock.

The total P50 prospective resources on their projects are in the neighborhood of 15 Billion BOEs. Their main play is named Loligo and has a P50 of 4.7 Billion BOEs. FOGL has the cash to drill at least two wells in the basin and rig slots committed. Their plan is to drill a well at Loligo and the second well is TBD.

The Leiv Eiriksson is currently in the area and has already drilled the Darwin well for Borders & Southern petroleum. The well discovered a wet gas and is awaiting gas analysis. Some of FOGLs smaller prospects are analogous to Darwin. Borders stock took a fairly hard hit when the discovery of wet gas vs oil was announced. FOGL sold off as well as both stocks ran up on rumors Borders found oil. Borders is currently drilling their second well on their Stebbing prospect, which FOGL also has an analogous play (Undine). After the Borders well is completed, FOGL will get the rig to drill Loligo.

To help reduce risk and raise funds for additional wells, FOGL has talked with an industry counterpart and given them the option for a 25% JV with certain stipulations.

Loligo, at 4.7billion BOE, has the potential to be a massive game changer for the debt free FOGL, for the UK, and for the Falkland Islands. Let's look at the reserves of some larger oil and gas companies:

  • EOG: 2 BBOE (over half is natural gas)
  • APC: 2.5 BBOE (half is natural gas)
  • APA: 3 BBOE (not sure on gas content)

As you can see, Loligo having the potential to have 4.7 billion BOEs is a pretty big deal when you think about the market caps of the above companies (~$30B). FOGLs current market cap is less than $500 million USD. According to an RPS Energy report, at $80/oil the NPV of a find would be $10/bbl, i.e. a 4.7 billion barrel find would be worth $47billion. $47 billion...well over the entire market cap of each of the companies listed above. Upon a find, the full valuation isn't going to come over night, however a large portion of it will and if they dedicate the second well to delinating Loligo, full valuation/buyout could come much faster than expected.

The analysts (take their opinions how you will) seem to think Falklands has good potential. Goldman was out with a recent report saying their price target is roughly double current price with a further increase of 17x upon hitting oil.

Sounds like a home run right? Why isn't everyone signed up for this? Risk. The risks are huge. Most people place 10-25% chance of success on projects like these. The bottom line is you can have the best engineering data and the best geologic data but you have to drill a well to be sure. The hydrocarbons are either there or they aren't and you can't tell until you drill.

I personally believe FOGL is one of the most attractive risk reward plays you can find right now. It's not often you have the chance to participate in a well of this magnitude for $1.4x a share. The upside, just from Loligo alone, is tremendous. Depending on the size and type of the find, after delineation or sale of the field, the stock could see 100x its current valuation. The downside is also just as harsh. You could easily lose 50-75% of your investment on poor drilling results at Loligo. A huge plus to Falklands is that even if they strike out at Loligo they have Scotia or another play for backup. Don't bet the farm and only play with money you can afford to lose.

Price is always important in stocks, but in this case, I don't think price is as important as just being in. If FOGL jumps 35x, you probably won't care too much if you are in at 1.46 vs 1.43, but if you fret over a couple pennies and never get a fill and FOGL strikes oil, you will definitely regret it. And of course, if FOGL strikes out and drops 50%, being down 50% vs 48% isn't a huge deal. The big deal is owning the shares before any catalysts.

The next major catalyst in the FOGL saga will be either the announcement of who the JV partner is or the announcement of logs from Borders Stebbing well. Borders is currently drilling the well and should TD the well in mid-late June. FOGL should see a good pop if Borders finds oil on Stebbing as FOGL has multiple prospects that are analogous to Stebbing. Just remember the potential to lose most or all of your investment is very real.

Disclosure: I am long OTCPK:FLKOF.

Additional disclosure: Also long FOGL on the LSE.