Gamble of the week: junior oil exploration and production firm

By Tim Price Jul 17, 2009

Tim Price

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The oil price isn't exactly stable, and a global recession isn't a great backdrop for the energy markets.

Yet I remain bullish on the long-term prospects for both oil and for Faroe Petroleum, a junior exploration and production firm that floated in June 2003.

The company focuses its exploration and drilling efforts on the Atlantic Margin; in other words, the Faroe Islands and the area west of the Shetlands, the North Sea and Norway. The company has six licences in the Faroes, eight west of Shetland, 14 in the North Sea and 20 around Norway.

Faroe Petroleum plc (LSE: FPM)

Oil partner Encore recently confirmed that, along with Faroe, it is in exclusive talks with a third party for a sale of 70% of the Breagh gas discovery. Brokers McCall Aitken McKenzie point out that several European utilities are stalking gas assets, and that Britain is now a net importer of gas; by 2020, 80% of the UK's gas will be imported.

Faroe's share of the Breagh discovery could potentially net the business, capitalised at £71m, something close to $50m. McCall sees Faroe's stock price trading in line with its current net asset value of 73p, "which implies the considerable exploration portfolio remains free".

For investors with sufficient risk appetite for small-cap exploration and production stocks, Faroe looks extremely interesting. McCall's price target is 95p a share.

Recommendation: BUY at 66.5p 

• Tim Price is director of investment at PFP Wealth Management. He also edits the Price Report investment newsletter.

• Paul Hill is away

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Published in Tips & advice | More articles by Tim Price

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