This sheep, that is actually two penguins dressed as a sheep, appears roaming inside Fred the Farmer's Farm, located in Lumbridge. They are codenamed Paxton and Philbert. Attempting to shear the "sheep" will result in it walking away. It is referred to as "The Thing" by Fred.
During the Cold War quest, it is revealed that these two penguins are actually spies of the KGP.
It is also the only sheep outside of Zanaris with the "Talk-to" option, but it will simply give a dismissive response unless you are doing the Cold War quest.
Strangely enough, this "sheep" was part of RuneScape a long time before the Cold War quest was introduced.
- According to Noodle Fideu, the penguins were set up with their costume by Rotini, and they had "ome trubble wi' flyin' yeller amfibians on the walk down", which means that they were mistaken for Sick-looking sheep and someone tried to shoot a yellow toad at them.