“10 Billion Barrels of British Oil Ready to Drill”

by Travis Johnson, Stock Gumshoe | July 18, 2008 1:55 pm

This comes from our mates across the pond, the folks at the Red Hot Penny Shares[1] newsletter. And they’re just as worried about oil[2] in Merrie Old England as we are here in grumpy new Washington, so clearly the newsletter editors over there are just as eager to get your blood bubbling about a hot new oil stock.

I looked at an energy-related teaser from these folks way back in January, by the way, so if you happen to have fond memories of the ‘ol “Torpedo Technique” gas compressor company[3], that was brought to us by these same Red Hot Penny Shares folks. That pick, by the way, looked pretty good for a little while but is now down about 30% in the last month.

And the Gumshoe just loves it, of course — the more ideas the better. I’d rather not pay for them, though, so let’s see if we can’t figure out just what company they’re talking about here. I think we all know that England has been a significant producer of oil and gas thanks to the North Sea, but we also all probably have been hearing for years about the decline of those fields … so where is this 10 billion barrels of oil?

I’m so glad you asked.

The UK newsletters are good enough to put their disclaimers up top in small print, instead of on the bottom (along the lines of “this isn’t investing advice, even though we’re telling you to buy this stock right this second before taking another breath”), but they still fire up all those greed synapses just as soon as you read on a little bit about that massive pile of oil …

“One little-known London-listed ‘killer driller’ holds EXCLUSIVE rights to extract it from underneath this UK-owned territory”

“The oil in the ground could be worth 1,740 TIMES its current market cap… and gives you the chance to make 233% before the pumps are even fired up!”

And apparently this oil has all been revealed by some sort of mysterious “underground x-ray.” Excellent! Who wants to wager about whether or not they’re just making up that term? Anyone?

They call this the most significant British oil discovery in the last 38 years. I suppose that makes sense — BP was born in Iran as those oil fields were developed about 75 years ago when the Brits were all over the Middle East[4], but their first big oil field discovery in the North Sea was in 1970, 38 years ago, and I don’t know that anyone has discovered anything big in UK territory since then.

There’s more to the teaser — let me whet your appetite a little:

“Trapped beneath 65,354 sq km of seabed and surrounding ocean is an oil field so deep it could produce enough crude oil to end Britain’s dependence on Russian and Middle East oil for the next 15 years.

“And it’s located in a 100% British owned area.

“In the entire region, there’s an estimated 60 BILLION barrels of oil. Untapped.

“And one small company owns all the rights to 10 billion of these barrels… a company whose technological breakthrough has proved for the first time in 38 years that this oil can be drilled!

“According to the BBC this find is enough to propel the local population into the major league of oil producing nations… making them ‘the richest people in the world per head of capita, much more so than in places like Dubai.'”

Geez, now even I’m getting a little hot under the collar — who hasn’t seen the pictures of those crazy world map and palm tree man-made islands in Dubai, can you imagine what kind of money it takes to even have the chutzpah to build those?

OK, so 100% British owned, 60 billion barrels of oil, one small company … what on earth are we dealing with here?

Well, I’ll throw in one more little tidbit — a quote from the CEO:

“FOGL is now within touching distance of realising the potential of what is probably one of the most exciting high impact exploration projects currently being undertaken anywhere in the world.”

And a little more over-the-top hyperbole from the newsletter ad:

“It all started with a very important meeting with one of the board members of the company that could soon become the talk of the business pages.

“I’d been hounding this guy for months. I was DESPERATE to meet with him. You see, I’d had a tip-off that this company had trained its sights on something potentially EXPLOSIVE…

“A British oil supply that’s been right underneath our own territory for 242 years!

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“Surprisingly, he was extremely candid. He gave me chapter and verse on this unusual situation – including the location of the “hushed-up” oil.

“I couldn’t believe my luck: An inside scoop… mainstream investors aren’t anywhere near this… they don’t have even the slightest inkling!

“And do you want to know the weirdest thing?

“In 1770 this colony was not even considered fit for “savages”… soon every playboy in the world will be heading there!”

Well, I’d wager that it’s going to be some time before drilling for sea in the deep water[5] in this area is going to draw internatlonal playboys — more likely you’ll see Filipino sailors to drive the tankers and Texas roughnecks to man the rigs, if they can get their hands on rigs.

But this top secret area is, in case you haven’t yet guessed, the Falkland Islands (they do actually get around to mentioning this a while later, if you had the patience to read that far). Maybe Maggie Thatcher fought for them for a good reason if it turns out the oil reserves are significant — or perhaps it was the Argentinians who had their minds on the oil. Or maybe they all loved those little penguins, I dunno.

But I do know that the company in question is Falkland Oil & Gas (FLKOF on the pink sheets, where trading is very light, FOGL at home in London)

So what’s to like about them?

Well, it’s always nice to see a small company with rights to a new oil province, especially when they’ve got enough cash to keep going for at least a little while, and a deep-pocketed partner. That’s the case here, with BHP Billiton having bought in to the first couple drilling sites and agreeing to pay for the lion’s share of the costs in exchange for a 51% interest. That was the big news last fall, which helped the shares double over a month or two, though they’ve come back a bit since.

Of course, it’s also the Falkland Islands, and it’s probably mostly going to be hard sledding doing the discovery and production work there — deep water, and not the kindest conditions, probably fairly similar to the big offshore discoveries a bit North, in Brazilian waters (not in terms of the amount of oil, necessarily, just in terms of the difficulty to extract). And this is extremely early on, even though they’ve been doing seismic surveys and trying to map out potential drilling sites for many years (that’s that special X-ray business they mentioned — not terribly different from the seismic exploration techniques that everyone else uses, as far as my pea brain can tell, though they’re also doing some electromagnetic scanning that they hope will allow for better pinpointing).

I expect the next news of significance we’ll hear from these folks will when they decide on which prospects to drill and get drilling rigs in place, and hopefully they’ve got some feelers out already because they’re mostly all booked for several years out, though perhaps BHP has some available that they could repurpose there (unless BHP has rigs already on order or lease, there’s no way they’re starting drilling by 2009 as they hope — and from what I see, it’s already looking like it will be the second half of 2009 before any drilling is done).

So to some extent this will be essentially a crap shoot — they’re gearing up to pay for their share of exploratory drilling at two sites with BHP Billiton, which is now officially the operator and owns the majority of the license. If those drilling results are promising and BHP appears eager to throw more money in and keep working the site, I imagine the shares will shoot up, if not, I wouldn’t be surprised to see them cut in half as prospects of more heavy spending on exploration loom. Not much different from any other oil exploration company that has good leases, good prospects, and some cash on hand, but has yet to drill a hole. The way I read their results, it will be at least a year before anything is known about the drilling, probably longer.

Other than those generalities, I don’t know too much about the company — they’ve been around for quite some time and the share price has almost tripled since their 2004 IPO[6], from 40p to about 110p today (that’s in the neighborhood of $2, FYI), but in between the ride has been bouncy, indeed. I assume the big spikes up to 175p and dips back down to 80p are probably news-related — maybe the deal with BHP Billiton last fall was the biggest mover recently, but probably other troughs and swells have been caused by releases of surveys, or the price of oil garnering attention for them, or, God forbid, just the interest of a newsletter or two (this is a teensy, teensy company — market cap — but I haven’t researched those moves in any detail to tell you for sure.

Oh, and those oil licenses have been granted to these folks by the Falklands government — but do keep the penguins in mind, the Falklands is a major penguin breeding ground, and penguins are extremely susceptible to water pollution and, especially, oil spills (thanks to the whole “flightless” bit), so I expect that if large-scale oil exploration moves forward there will probably be some confrontations. Environmentalists (and maybe penguins) might be more likely to lose such confrontations when oil is pushing for $150 a barrel, but I thought I should mention it — after all, the cuteness factor is probably as large a driver of environmental concern and media coverage in the short term as anything else, and penguins are nothing if not cute. I don’t mean to spark debate on this topic, nor to take a position, just sharing.

This is a UK company, so they only release detailed earnings twice a year — the 2007 release was in March, and you can see the press release here for a quick summary[7], and the semi-annual update will probably come out in September sometime. If you’ve got a yen for this company, feel free to share with us.

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