Faroe operates the Novus exploration well in the Norwegian Sea and has a 30% stake in the discovery which it now estimates to have between six and 15 million barrels of oil equivalent in recoverable hydrocarbons.
But the company said: "Due to the presence of a large gas cap in the reservoir, Novus is unlikely to be of commercial size on its own; nearby de-risked prospects and leads offer potential for a future commercial combination."
Faroe chief executive Graham Stewart said: "We are pleased to announce a small discovery of oil in the Novus prospect and the de-risking of the identified structures and prospects which remain in the licence, through the successfully calibrated seismic data.
"The well confirms the robustness of our geophysical model and the team's ability, and there is real potential for Novus to have future commercial value in combination with a discovery from one of the identified and de-risked prospects and leads in the immediate vicinity."
The Novus prospect is located nine kilometres to the south of the Statoil-operated, producing, Heidrun oil field in the Halten Terrace hydrocarbon province of the Norwegian Sea. This is an area in which Faroe has previously had notable exploration successes including the Maria, Fogelberg and Rodriguez discoveries.
Investors responded by sending Faroe's shares down 5.25p or 4.23% to 118.75p.
Panmure Gordon analyst Jack Allardyce, who has a "buy" recommendation on Faroe, said: "Clearly the lack of commercial volumes is disappointing, with Novus the largest standalone prospect within the current programme.
"However, we do believe that the discovery does indeed have merit from a technical standpoint (and potentially commercial value in the future)."
Analysts at Credit Suisse cut their price target by 9p to 119p.
Faroe has other exploration activities in the area including the current drilling of the Butch East well, in which it has a 15% interest.