Falkland Oil and Gas loses half its value on Malvinas disappointing results

Falkland Oil and Gas, which is engaged in a roller coaster ride to find oil in the disputed South Atlantic Malvinas Islands, lost almost half of its value when it announced the abandonment of a well following disappointing results.

The statement wiped 49 percent off FOGL's volatile stock, sending its shares to an historic low of US$0.51, giving it a market value of US$165 million.

The stock price had hit a high of US$4.28 in July 2010.

FOGL, which is partnered with US firm Noble Energy and Italian utility Edison on the project, said a reservoir at its Scotia exploration well appeared to be of poor quality, with low permeability.

The collapse in the shares, however, came despite an insistence from the firm that it remained upbeat on its campaign, with further tests set to determine whether there was a higher quality reservoir elsewhere in the region.

"Today's much anticipated well results will come as a disappointment for investors in FOGL, following their gas find at the Loligo prospect in September," analyst Sam Wahab at Seymour Pierce said.

"The recent rally in the company's share price was in market expectation of an oil discovery, and on this basis we would expect FOGL's shares to fall this morning."

Oil exploration by British companies in the area has been controversial and complicated from the start.

It has sparked anger in Argentina, which claims sovereignty over the Malvinas, South Georgia, and Sandwich islands, while has called the drilling in Malvinas 'illicit'. It has also threatened legal action.

However, while many investors have shrugged off the geopolitical risk, bumping up the company valuations, some analysts have started to question the likely chance of commercial success of the finds, particularly given the high costs of extraction.

Gas, which has been found off the Falklands by Borders & Southern and FOGL at its Loligo well to the south of the islands, is harder to extract and transport than oil.

Oil was found to the north of the Malvinas in 2010 by Rockhopper Exploration, which has enlisted Premier Oil to fund development, while Desire Petroleum also confirmed the positive potential of its licence in the North Malvinas basin last week.

"Drilling in the South Falkland [Malvinas] Basin has yielded mixed results so far this year, following Borders' two well programme, and we may see investor appetite in the region begin to wane in favour of the North Falkland [Malvinas] Basin, which encompasses the oil bearing Premier-operated Sea Lion field," Seymour Pierce's Wahab said.

FOGL now intends to plug and abandon the Scotia well.

"The results of the Scotia well provide further endorsement of the hydrocarbon potential of the South and East Falkland [Malvinas] Basin and have proven the presence of hydrocarbons within the mid Cretaceous Fan Play," FOGL Chief Executive Tim Bushell said.

"During 2012 we have drilled two encouraging wells, both of which found hydrocarbons and were completed safely and within budget. They reinforce our confidence in the potential of the basin."