Faroe Petroleum output to surge after swapping assets with Petoro

Aberdeen-based oil explorer Faroe Petroleum will significantly increase oil output this year after an asset swap that will see it take on three producing fields in exchange for its stake in an undeveloped prospect.

The deal with Norwegian state-owned oil firm Petoro - described as "transformational" by the company's chief executive Graham Stewart - will add more than 7,300 barrels of oil equivalent per day (boepd) to its 2011 output.

Faroe now expects average production of 9,200 boepd this year compared to 1,200 last year.

Under the swap, Faroe is exchanging its interest in the undeveloped Maria prospect in the Norwegian North Sea for stakes in the Njord, Brage and Ringhorne fields which are already producing. The new fields contained proven and probable reserves of 14 million barrels of oil equivalent. Stewart said the deal represented a significant achievement for Faroe "at a number of levels".

He continued: "It demonstrates clearly the value of the Maria discovery; it proves Faroe's portfolio business model of realising significant value for exploration success and it swaps on a fair value basis undeveloped resources for producing reserves."

As the company did not now need to make a substantial investment to develop Maria, Stewart said it would also considerably increase its cash-flows and free up funding for other projects.

Faroe had a 30 per cent stake in Maria, where a discovery of oil was announced in July. To date, the company has invested 5 million in the Maria work programme. Analysts responded positively to yesterday's news with Oriel Securities saying that the transaction enabled Faroe to "monetise" the Maria discovery without making the 280m investment that might have been required to bring Maria on stream.

"It should also allow the company to become self-funding, with these assets being estimated to generate 98m of pre-tax profit in 2010," they pointed out.

Analysts at Killik said they remained "positively inclined on Faroe Petroleum", with the next significant news likely to be drilling results from the Lagavulin exploration well west of the Shetland Islands.

Yesterday's deal may also see renewed speculation over the near 23 per cent stake held by Dana Petroleum-owner KNOC, which is known to be keen on increasing its production assets to meet South Korea's ambitions to have greater control of oil supplies.

Shares in Faroe, which Perth-based Scottish & Southern Energy also holds a stake in, closed up 5.25p or 3 per cent at 183.25p.