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Cannacord view from FT Alphaville (www.ft.com)


The farm-out option agreement announced by Falkland Oil & Gas (FOGL) underlines the corporate interest and geologic potential of the South Falkland Islands. However, given the counterparty is still unknown, and the farm-out is still an option agreement as opposed to an executed transaction, this may prevent markets from fully recognising the value of FOGL’s assets at this time. We remain positive on the FOGL story as we await drilling to commence in Q2/12 on the Loligo prospect and reiterate our SPECULATIVE BUY recommendation.

FOGL has granted an industry counterparty an option to enter into a Farm-out Agreement (FOA) and an associated Joint Operating Agreement (JOA). For corporate reasons unconnected with the proposed farm-out, the counterparty is unable to execute the FOA/JOA at this time, but expects to be able to do so within the next two months and prior to the commencement of FOGL’s drilling programme.

If the option is exercised the counterparty would farm-in to 25% of the FOGL licence areas and would pay its share of historical costs and its share of the 2012 drilling programme.

In addition, the counterparty would make a cash contribution of US$40 million, US$20 million on completion (expected to be prior to the spudding of the Loligo well), and US$20 million in 2013.

For consideration of the option FOGL will receive an option fee of US$6 million, which FOGL will retain if the option is not exercised before the spudding of the Loligo well (expected in June 2012). If the option is exercised, US$3 million of the option fee will be offset against the first US$20 million of cash consideration referred to above, whilst FOGL will retain US$3 million.


And Jefferies view

Effective $60m cash for 25% of FOGL’s acreage. If exercised, the farm-out option will see the farm-inee pay 25% of the $68m in licence back costs ($17m) plus $43m in cash including option fee paid. FOGL and farm-inee would pay their WI share of the 2012 working program of c.$140m for 2 wells (75%/25%). The cash will be paid $20m on completion, $20m in 2013 plus $6m for the option fee (of which $3m would offset the cash due in 2012). At implied 2:1 carry on 2 wells, we view these terms as attractive compared to other industry farm-outs of frontier acreage.

Preserves cash, valuable risk mitigation, additional industry validation. This
transaction increases FOGL’s estimated capital buffer from c.$35-40m to c.$130-$135m, providing significant downside protection if FOGL experiences material unplanned time/ cost overruns like Borders & Southern (BOR LN, 70p, Buy) has encountered. FOGL would be funded for a follow on well (possibly in the current campaign) or seismic. Securing a farmin also provides industry validation to FOGL’s acreage and while we do not know who the farm-inee is, we know it is an industry player that has $95m potentially available for frontier exploration drilling, implying a relatively large, well-financed industry partner.

Worst case – $6m cash if the option lapses – valid until Loligo spuds. The option agreement is valid until the Loligo well spuds, currently expected in early June. FOGL states the counterparty expects to be in a position to execute the farm-in agreement within this timeframe. However, if the option is not exercised, FOGL will retain the $6m option fee paid. If the option is exercised, half the fee will be offset against the $20m cash due in 2012.

Implied valuation 65-165% more than current market implied. The $60m cash
for 25% of the asset implies the gross assets are worth $240m (before the $35m net capex the farm-inee would fund in 2012). Using FOGL’s current cash of $225m, we estimate the market is attributing c.$90 to FOGL’s assets implying a transaction premium of 165% above the current market value. Alternatively, if we use the farm-in cost plus 2012 capex as the implied asset value, gross implied value is $380m. Excluding the capex FOGL will spend on drilling in 2012, we estimate FOGL’s current implied asset value is only $230m, implying a transaction premium of 65% above the current market value.

Flexibility for FOGL to renegotiate if Borders has success near their southern
acreage. If Borders is successful in either Darwin or Stebbing, the option includes terms to lower the farm-inee’s interest in the Southern Licences or increase the amount paid.

Drilling delayed by unplanned downtime on Borders drill, early-June anticipated spud. Borders announced last week the drilling of its Darwin prospect has
taken longer than expected due to mechanical issues on the rig. This has delayed FOGL’s anticipated spud date from May to June.

Continues to be preferred frontier exploration exposure. While FOGL’s drilling
remains high risk, we believe this farm-out option validates the upside potential of this block.

We estimate the implied read-through of this deal is c.90p/sh (excluding all cash to be spent in 2012), a nearly 50% premium to the current share price. We see unrisked upside potential of FOGL’s 2 wells in 2012 of c.50x the current share price on a completely derisked basis.

Farm out presentation link :

http://www.fogl.com/fogl/uploads/companypresentations/FOGL_FarmOutPresentation_March2012.pdf


Write up from MaxValue on what was said in the Conference Call about the Farm Out.


> They are already fully funded for the 2 wells. These wells will meet both Phase 1 and Phase 2 commitments.
> Currently they have a contingency on these wells of 30% (enough for 5/6 weeks).
> The farm out will provide a contingency of 120%.
> The farm in party (an international E&P) doesn't want to make an announcement due to an unrelated internal corporate issue they are dealing with.
> The deal is expected to complete in the next month or 2.
> FOGL are still talking to other parties as there was interest from a number of players.
> They choose this party as they are ready to proceed, had a good technical fit and is financially robust (others wanted to take operatorship or wanted a larger share).
> Depending on the results of the wells in the existing campaign (FOGL and BOR) the additional funds ($95m) maybe used on 3D seismic (1xNorth and 1xSouth) or on a 3rd well.
> The rig is due back in Norway by October so there is a window for a 3rd FOGL well.
> This is only an option at the moment.

GLA & DYOR

MV

Just to add some speculation from the rumour mills.

Tullow appears to be the favourite for the farm in, with Cairn a close second.

Will be interesting to see, if it goes ahead, who it is in the end.

Would prefer Andarco or another American company. That way Obama may get off the fence and support the UK.

can't see how fogl would fit with tlw nor why on earth they would be tempted ..... cne may be desperate for anything .... meanwhile goody gumdrops as bor drifts away

Edison update on FOGL 22nd March 2012. PDF can download on the link below

http://www.mediafire.com/?lxp8286btbd3rbj

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Bounce back from being oversold.

I would expect rumours from the BOR drill from around 9th of April - then it gets interesting.

Argies seem to be upsetting everyone at the moment - always a sign of a government desperately in trouble when they upset everyone else then cry how its all others fault, just like CFK is doing now......

http://en.mercopress.com/2012/03/24/us-relation-with-argentina-souring-congress-to-cut-special-trade-benefits

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http://www.irishtimes.com/newspaper/world/2012/0327/1224313954479.html

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http://epetitions.direct.gov.uk/petitions/31848

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Well, late next week is the first time there could be potential rumours as the drill bit could enter into the upper of the target zone at Darwin for BOR. Should be entering either late next week or early the week after, and so the fun begins.

From the Telegraph:

FALKLAND OIL AND GAS

Market cap: £206m

Described by one analyst as the “sleeping giant” of the frontier exploration companies on Aim, its giant Loligo prospect will be its first target

you might care to put that in the context of the rest of the article

The article is more to do with RKH and their immediate plans, which, as I expected, are not rushing along...........

FOGL has farm out interested and RKH........well, not - as I expected.

the article was actually entirely to do with the political threat from argentina, real or imagined ..... the insert listed the various FI oilies with a brief resume on each with market cap and prospects

Have a read of MRQ magazine...big article on the Falklands.

shall do ... i have it on my desk at the office ..... btw, i think the argentian so-called threat is little more than political shop-front window-dressing for the benefit of the argie voters ..... no way will argentina take up arms, but all this posturing has to be taken seriously and answered, dull and time-wasting as it is

Looks like they are getting ready for some major oil finds in the South... LOL ;)

http://www.telegraph.co.uk/news/9180967/Parachute-Regiment-to-return-to-Falklands-for-first-time-in-30-years.html

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Cairn have just completed some corporate action, buying Agora Oil and Gas.

Is it therefore Cairn who fill farm into FOGL's licenses ?

From the farmout RNS

............For corporate reasons unconnected with the proposed farmout, the counterparty is unable to execute the FOA/JOA at this time, but expects to be able to do so within the next two months and prior to the commencement of FOGL's drilling programme............


Given the Cairn purchase of Agora includes cash and shares then yes, that is a corporate reason for being unable to enter into the FOA/JOA until that purchase was completed. So I would suggest Cairn now moves to favourite to be the one to farm in.