Is this the next billion-barrel Falklands oil stock?

The rush for Falklands oil is one of the most exciting penny share stories I've seen in my 30-plus career as a small cap investor. No doubt about it.

This year we've seen exhilaration and a buying frenzy after Rockhopper Exploration's success at its Sea Lion well in May. That sent Rockhopper's shares up 758% in three months.

We've seen the disappointment of Falkland Oil & Gas (FOGL), when its Toroa well failed to find oil. FOGL's shares fell 65% overnight.

But there's still plenty to play for. Not just with Falkland Oil & Gas which has other wells to drill. But also with Rockhopper, Desire Petroleum and Borders & Southern, which all have other interests to explore in the area.

And as if we needed any further proof that the Falklands oil story is alive and well, we got it last Thursday.

That was the day that AIM newcomer, Argos Resources (LSE: ARG) was listed. And the reception for these new shares was nothing short of rapturous.

Investors pile into the latest Falklands wannabe

Having raised £22m through an issue of new shares at 31p, it saw the price immediately go to 33.5p. That valued Argos at £72m.

Argos has nothing else in its locker. So it implies that the stock market is willing to put a value of £50m on two things. One is Argos's licence over 1,126kms of the North Falkland basin. The other is the expertise of its team, led by the former Chief Operating Officer of LASMO, John Hogan.

I've had a good read through Argos's prospectus and a chat with Hogan. And that's filled out the picture of what is happening in the region. It also gives us clues about how things might unfold over the next year or two. Let me show you what I learned.

Argos has a 100% interest in a licence area that adjoins those of Rockhopper and of the consortium led by Desire. These are in the Falkland's Northern Basin, while Borders & Southern and Falkland Oil & Gas have licences covering the Southern Basin.

Following the failure of Falkland Oil & Gas's Toroa prospect, no commercial oil system has as yet been found in the Southern Basin, although it is as yet early days. BHP has committed to finding a rig to drill two wells on FOGL's acreage, and this has been scheduled to happen before the end of this year.

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However, I understand that BHP is keen to secure a high specification, deep water rig and that these are in short supply. So there may be some delay to the timetable. But BHP will eventually secure a rig. And when it does, it is possible that this may be shared with Borders & Southern, which has raised enough money to finance the drilling of two or possibly three wells on its own deep water acreage.

So that should be at least four wells that should be drilled, possibly next year, on the Southern Basin.

Meanwhile, let's look at the Northern Basin. This is dominated by Rockhopper, Desire and now Argos. So far, two wells have been drilled in this Basin. These resulted in one failure (Desire's Liz prospect) and one success (Rockhopper's Sea Lion).

Well number three, Rockhopper's Ernest prospect, is now being drilled, and the Ocean Guardian rig will then move on to test Rockhopper's Sea Lion discovery and then drill Desire's Rachel prospect.

But it will not end there. Desire has stated its intention to drill four other prospects. Two of these will, under the terms of a 2008 deal, be largely financed by Arcadia. That's a private oil company run by Norwegian-Cypriot shipping billionaire John Fredriksen (which has a 35% interest in part of Desire's acreage).

On top of that, Rockhopper may want to drill further test wells on Sea Lion. And now, of course, Argos has joined the fray.

This could hold more than one billion barrels of oil

John Hogan is confident that Argos has a promising location. The 242 million-barrel Sea Lion discovery of Rockhopper is next door. And straddling the acreage of Argos and Rockhopper is the Johnson gas discovery.

Found by Shell in 1998, the Johnson area could hold 8 trillion cubic feet of gas. But back in 1998, when the oil price was just $12, Shell judged this to be uncommercial and walked away.

Today, while the oil price is much higher, the price of gas has not risen to the same extent, and there are anyway a number of other gas reserves around the world looking to be exploited as liquefied natural gas projects. So Hogan does not see Johnson as a likely commercial proposition at this stage. But it is certainly further evidence of the presence of hydrocarbons in the region.

Argos has 2D seismic data, dating from 1996, upon which it identified seven prospects and five leads. The former is estimated to hold 747m barrels of oil with a best case of 1.75bn. It now intends to run 3D seismic surveys over the southern hemisphere summer months, in a programme that could be shared with Desire and Rockhopper.

This will help to firm up drilling prospects and could also increase the reserve estimates. This could put Argos in a position to drill in late 2011. And given that the Ocean Guardian has no confirmed booking beyond its Falkland campaign, Hogan believes that it could still be in the region.

So we can now look forward to another ten or so wells being drilled in the region over the next 18 months. This will keep the Falklands story very much in the headlines.

And, of course, the more wells that are drilled, the better the chances of making the discoveries necessary to turn the Falklands into a new oil producing province. I'll be watching the story unfold and will keep you up-to-date with what I find.

This article is taken from Tom Bulford's free twice-weekly email The Penny Sleuth