Lagavulin disappointment 'won't put us off Shetland' says Faroe boss

No commercial oil reservoir was found off the west coast of Shetland at Lagavulin, the most-northerly well ever drilled in British waters and also one of the deepest.

The setback pushed Aim-quoted Faroe's shares down nearly 13 per cent, or 22p, to close at 148p, valuing the Aberdeen-based company at about 360 million.

Drilling at Lagavulin began in October but has been delayed by bad weather, a tight regulatory regime following BP's Gulf of Mexico oil spill and complicated rock formations in the area.

But Stewart said that the additional costs of the project - which analysts have estimated could be as high as 12m - wouldn't stop Faroe's drilling programme, which consists of 18 fully-funded wells between now and 2013.

Some traces of oil or gas were found at Lagavulin, which Stewart said gave him confidence to drill at other sites in the area.

He said that work would begin at the Fulla prospect to the west of Shetland within the next fortnight. Lagavulin, in which Faroe held a 10 per cent stake, was drilled by Chevron, while Faroe will probe Fulla itself.

Faroe and Canadian Overseas Petroleum each own 50 per cent stakes in Fulla, which is located to the north-east of BP's existing Clair oil field.

Stewart said: "Lagavulin was a true high-risk frontier exploration well. While the outcome is a disappointment, the presence of hydrocarbons has now been proven and offers encouragement to continue our deep-water exploration plans in the region."

Stewart revealed that the company would receive a "significant un-budgeted windfall" through extra oil being sold from the Blane field, in which Faroe bought an 18 per cent stake last year from Italian energy group ENI.

Faroe raised 70m last year through a rights issue, in which Scottish & Southern Energy took a 5 per cent as part of its efforts to secure gas supplies.

David Farrell, an analyst at Evolution Securities, trimmed 10p off his target price for Faroe following the Lagavulin disappointment to take it to 170p.

But Farrell retained his "add" recommendation and said: "We like the Faroe story and would buy on excessive weakness now the uncertainty regarding the Lagavulin well has been removed."

RBC Capital Markets analyst James Hosie agreed the fall in Faroe's shares gave a "buying opportunity". He said the four remaining wells due to be drilled this year are all "lower-risk and lower-cost" than Lagavulin.