One to Watch: FOG's for risk lovers

Falkland Oil & Gas162p -2.5pScotsman says HOLD

FALKLAND Oil & Gas (FOG) is an exploration company focused on Argentine president Leopoldo Galtieri's nemesis area. Investing in FOG is a high-risk venture that requires strong nerves but the rewards could be appreciable.

Listed on Aim in October 2004, FOG has a large acreage position in the East Falkland Basin. The North Falkland Basin saw drilling begin in 1998, which ultimately confirmed the existence of hydrocarbon deposits.

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However, there has, to-date, been little exploration activity in the South Falkland Basin. FOG has farmed out some 51 per cent of its licences to the Anglo-Australian behemoth, BHP, which is paying 70 per cent of the work programme and provided a further 13 million to cover past expenses. This is really Christmas pudding money for BHP but of critical importance to FOG.

There are enormous logistical challenges. Apart from the sheer distances involved – and it is difficult to see Argentina, for example, helping a UK exploration company to develop these resources – there is also a distinct shortage of rigs and little is likely to happen until the middle of 2011 at the earliest.

Having BHP aboard gives FOG access to funds and corporate critical mass. No-one should be under any illusions as to the speculative dimension of this ambition. Even if the reserves are confirmed as commercially viable, there is still the matter of transporting the stuff, which may require a huge capital investment in infrastructure. Nevertheless, the preliminary geological dimensions look encouraging and funding does not look an issue at present so the shares might have a place in a portfolio of those prepared to accept the high-risk dimension.

• The value of your investment could fall and you may get back less than you invested. You should take professional advice if you have any doubt about the suitability of this company for your portfolio.


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