Merchant Securities has decided to place its valuation of Falklands Oil and Gas under review after the explorer announced the discovery of six gas bearing reservoirs at Loligo, in the firm's northern licence on the Falkland Islands.

While it believes that the "scale of the resource is potentially enormous," its analysts are cautious given that the reservoir was unable to produce a good sample and because the water saturations were reported to be high.

In that same vein, the broker adds that: "From our perspective obtaining a fluid sample was really the whole point of drilling the prospect. It is frustrating that this was not possible; however, it could now be possible to design a fit for purpose test for a second well. For now, we believe that much more analysis of the data must be performed in order to draw conclusions."

Hence, the conclusion which it reaches is that from a basin wide perspective the result is positive to the extent that both reservoir and hydrocarbons were discovered, which has positive implications for future exploration efforts.

However, the commercial success of Loligo has not been established, it says.

Finally, the broker writes that: "We will update our valuation and target price (previously 337.9p) in due course. We are placing our recommendation under review from Buy, while we update our valuation."

AB

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