Traditionally seen as an oil explorer, Faroe Petroleum (FPM:AIM) currently faces a problem; how to develop the discovered barrels currently sat in its portfolio of assets.
Faroe has 35m of barrels of oil equivalent (boe) in proved and probable (2P) undeveloped reserves, according to Canaccord Genuity analyst Charlie Sharp. In layman’s terms, this is oil which has anywhere between a 50% and 100% chance of being produced.
There are up to a further 45m boe associated with its Brasse discovery, on which it drilled a successful appraisal well this summer. These are not yet at the point where they can be put in the reserves category, however.
CASH BACKED
Unlike several its peers, Faroe has a strong balance sheet with £114m of net cash and an undrawn debt facility of $250m. THe question is, how much more is the £365m company likely to need to bring all these barrels into production?
Time may also be of the essence. In Sharp’s view, in order to maximise the value of its assets Faroe ideally needs to get this oil out of the ground within a relatively narrow window. Between 2020 and 2022, believes the analyst.
‘That would be a stretch for even a significantly larger company,’ Sharp says.
RIGHT KIND OF CHALLENGE
Yet investors might reasonably believe, as Shares does, that this is a nice problem to have. Robust finances suggest any new capital required can be raised from a position of strength.
If not, Faroe has other funding options. Asset sales could be an alternative way of accessing fresh development cash.
Investors will likely get a clearer steer of Faroe's future plans when the company reports first half results, expected 26 September.
