Houston-Based Oil Company Acquires Significant Stake in Falkland Islands Venture

LONDON–Falkland Oil & Gas Ltd. (FOGL.LN) said Monday that a second large international oil company has taken a significant interest in its South Atlantic exploration licenses, bringing funding and considerable deepwater exploration experience in a deal worth up to $230 million.

Shares in FOGL rose as much as 16% in morning trading after it said that Noble Energy Inc. (NBL) will earn 35% in its Falkland Islands prospects, excluding the two large Loligo and Nimrod targets that are estimated to contain 4.7 billion and 1.5 billion barrels of oil respectively.

Analysts said the deal brings operational expertise to the difficult deep-water exploration projects, with the involvement of a U.S. company potentially validating the contentious ownership issues in a region where Argentina makes sovereignty claims.

“The entrance of the first U.S. company into the Falkland Islands…more than offsets the partial dilution of the asset ownership,” brokerage Jefferies said in a note to investors.

Excluding Loligo and Nimrod, FOGL will reduce its stake in the Northern area licenses to a 40%, with Noble taking 35% and becoming operator in the next drilling program due early 2013. For the Southern area licenses, FOGL will retain 52.5% and operate them until no later than early 2014 when Noble will take over.

FOGL will continue as operator of Loligo and Nimrod, holding 75% with Italy’s Edison SpA (EDN.MI) holding the remainder.

FOGL expects that Noble will invest between $180 million and $230 million over the next three years, will pay 60% of the upcoming Scotia well costs, including costs incurred during 2011, and will also pay 60% of the costs of a commitment well on the Southern licenses. Noble is also scheduled to pay FOGL $25 million in cash in January 2013.

FOGL plans to drill a well on the Scotia prospect, in the Northern area licenses, some time in the fourth quarter 2012 following completion of the Loligo exploration well. FOGL started drilling Loligo Friday and expects it to take about 60 days to complete.

Jefferies said: “In the event Loligo and Scotia are both unsuccessful or ambiguous, FOGL will now have the funding necessary to drill an additional 2-3 wells and do a large 3D [three-dimensional] seismic program. This negates the need to come back for equity funding at very low valuations in the event the first wells are unsuccessful and materially increases the probability of a further drilling campaign.”

Jefferies has a ‘buy’ rating on the stock and a 195.0 pence target price.

“The involvement of a large American oil and gas company in the Falkland Islands is positive from a political perspective and this read-across extends to all the companies operating in the area,” brokerage Merchant Securities said in a note to investors.

Merchant also has a ‘buy’ rating on the stock and put its 402 pence price target under review.

At 1200 GMT, FOGL shares were trading up 9.0 pence, or 12.0%, at 84.0 pence, in a slightly higher AIM index–up 0.2%.

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