The latest news coming from the Falklands explorers has been disappointing. As most know by now, Falklands Oil & Gas (LSE: FOGL) drilled a dry well at its Humpback prospect, but the 510 million barrel prospect wasn’t the gamechanger that many had hoped it to be. The company announced the well had encountered hydrocarbons but not in a commercial volume, and rather disappointingly no sample could be taken.
This leaves the Southern Falklands Basin (where much of FOGL’s acreage is) in a tough spot. Humpback promised to be the well that opened up the basin and de-risked other prospects. Instead, the Erik Raude rig leaves the area and moves back up to the much more encouraging North Falklands Basin. To make matters worse for the company, the well was over 80 days late — this obviously increases costs drastically. Day rates from the rig will have been expensive so it’s a bitter pill to swallow for Falklands Oil & Gas.
In my opinion, Rockhopper Exploration (LSE: RKH) looks much better value if you really want to invest in the region. It made the Sea Lion discovery in 2009 and since then has farmed out part of its interest to Premier Oil (LSE: PMO). Currently, the market’s attributing virtually no value to Sea Lion and instead is looking at Rockhopper’s European assets. Premier last week said it’s looking for a partner to take some of its stake — this could be the price catalyst Rockhopper needs. If a major comes in and pays well for a percentage interest, then the company’s shares should re-rate and settle significantly above current levels.
The 2015 drilling campaign has been a success, with two successful wells in the North Falklands Basin and the one unsuccessful well down south. Discoveries at Zebedee (the Competent Person’s Report should be released soon) and Jayne East have increased the likelihood of a development in the basin. There are two more wells planned in the next few months: the Rhea Stack (Noble Operated) and a re-entry into Jayne. Successful results here would really improve the sentiment for the stocks and provide some upward momentum.
As for Falklands Oil & Gas, its interests in the North Falkland’s basin must now be the core and focus of the company. It will be very interesting to see what the final well cost for Humpback was, as most people expect it to be close to double the original budget. That then opens up the possibility of an equity raise to pay for wells in the North Basin.
Investing purely in Falklands explorers is a risky business, so my preferred stocks to buy would be Rockhopper and Premier due to the more diversified portfolios of assets. All eyes now turn to the last two wells of the campaign which , if successful, could give shares a much needed price catalyst.
