Four oil shares for the brave

Drilling for oil will soon begin in the seas around the Falkland Islands. And if oil is found, those involved will reap huge rewards. Here, Tom Bulford looks at four of the firms hoping to strike it rich in the South Atlantic.

Down in the Falklands, there are unusual rumblings of activity going on. And these rumbles are about to become a roar. The usually tranquil archipelago 13,000km away is about to be engulfed by the machinery and manpower of big oil exploration.

Early next month the towering frame of the Ocean Guardian drilling rig is due to arrive. An anchor-handling tug and a platform supply vessel are on their way. Due to dock in Port Stanley in the next few days are two cargo ships carrying 14,000 tonnes of equipment.

A storage yard is under construction, modular office buildings are being assembled, helicopters are arriving to ferry rig personnel to and fro, and the helicopter re-fuelling facility at Cape Dolphin last used during the previous round of oil drilling in 1998 is being restored.

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The cast is already assembling. Executives from Desire Petroleum and Rockhopper Exploration, the two companies that contracted the Ocean Guardian, are meeting government officials. Burly dockers and rig workers are appearing in town and seeking out the bars of Port Stanley.

There is a sharp sense of anticipation in this remote land. Within a few short months its future could be transformed. It all depends upon whether that oil, so often talked about, can now be found.

That this could be one of the biggest investment stories of the year is no secret. Bold investors have been placing their chips on the table for the last two years.

Sooner or later somebody was going to pay millions of dollars to drag a rig to the south Atlantic and plunge the drill bit into the ocean floor. At last it is about to happen.

So today I want to give you a reprise of the important facts, starting with the geology.

The constituents of 'the biggest investment story of the year'

About 400 million years ago the Falklands were squeezed between the tips of the South American and African continents as well as Antarctica.

Then tectonic plates parted and the Falkland Islands were left in isolation. But significantly for oil companies, in consequence of this tectonic split, the islands sit in the middle of four different basins. These are the Falklands Plateau to the east, the South Falklands Basin to the south, the Malvinas Basin to the west and the North Falklands basin to the north.

Two important things follow from this. First, that oil may be found in some areas but not others. Second, that while the drilling depths are below 500m in the North Falkland Basin, they are up to 3,000m in the southern basins. This of course effects the cost of exploitation...

There are six licence holders in the region. Two of these are private companies, Argos Resources and Arcadia. But the other four are all quoted on the stock market.

The big four Falklands oil shares

Desire Petroleum (LSE: DES): Desire holds licences in the shallow waters of the North Falklands Basin. It has contracted the Ocean Guardian drilling rig. It expects to drill four wells, starting in February. Evaluation of its top ten prospects has indicated prospective recoverable resources of over three billion barrels (boe).

Rockhopper (LSE: RKH): Rockhopper is the largest licence holder in the North Falkland Basin. It has indicated a possible 4.3bn boe in its licence area. The Ocean Guardian will drill two wells on its wholly-owned blocks.

Borders & Southern (LSE: BOR): Borders & Southern holds a 100% interest in five production licences in the South Falkland Basin. It has been cagey about how much oil could be here, referring only to "multiple targets". The biggest of these could contain over 1bn boe. It has also alluded to the contiguous Malvinas and Magallanes Basins to the west where discoveries of six billion boe have been reported.

In November Borders & Southern raised £113m, enough to finance the drilling of three wells. It may yet bring in a partner and it has also hinted at "sharing with other operators in the region". This is likely to mean Falkland Oil & Gas. This is partly because Borders & Southern's licences are in the deep waters to the south, but also because Desire and Rockhopper have already secured their rig.

Falklands Oil & Gas (LSE: FOGL): Having brought in BHP Billiton as a partner, FOGL has an interest of only 49% in its licence areas. But these areas cover an expanse the size of 223 North Sea blocks more extensive than all the other licences put together. The joint venture plans to use the Ocean Guardian to drill one well at one of the shallower points of its acreage. But the licence areas are predominantly deep water. To drill here it needs to hire a dynamically positioned drillship or semi-submersible, which it hopes to do later this year.

The real attraction of FOGL is that it claims to have much more oil than the others a total of 60 billion boe, with its top 20 prospects holding over 30bn boe. For that reason FOGL is perhaps the share with the greatest potential.

The important point for investors is that if any of the wells to be drilled this year strike oil, the impact is sure to be felt on the share prices of all the four quoted explorers.

Be warned. The combined value of these four is now approaching £1bn. That represents a huge bet on a prospect that has, so far, produced not a cent of revenue.

But time and again these bets have paid off, and will continue to pay off. And I'm on the hunt for them all the time.

This article was written by Tom Bulford, and is taken from his free twice-weekly email the Penny Sleuth

Tom worked as a fund manager in the City of London and in Hong Kong for over 20 years. As a director with Schroder Investment Management International he was responsible for £2 billion of foreign clients' money, and launched what became Argentina's largest mutual fund.

Now working from his home in Oxfordshire, Tom Bulford helps private investors with his premium tipping newsletter, Red Hot Biotech Alert.

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