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This could dwarf Rockhopper’s Falklands oil discovery
Tom Bulford takes a look at the latest developments in the Falkland Islands oil story, where the moment of truth is fast approaching.
Argentina's president, Cristina Fernandez de Kirchner, must be spitting blood. Having done everything she can think of to warn people off the Falklands, investors have taken absolutely no notice.
In December, Kirchner rallied South American nations to impose a ban on ships bearing the Falklands flag. And she's urged Argentine fishermen to catch the shoals of young illex squid that otherwise make their way to Falkland waters where, older and fatter, they provide the islanders with a large part of their national income.
None of these tactics has put off investors chasing the Falklands oil story.
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Since the start of the year, the five quoted Falklands oil explorers Falkland Oil & Gas (FOGL), Argos Resources (ARG), Desire Petroleum (DES), Borders & Southern (BOR) and Rockhopper Exploration (RKH) have seen their share prices rise by as much as 68%. That of the diversified group, Falkland Island Holdings (FKL), which owns land and runs several businesses on the islands, has risen by 32%.
Long-time readers of Red Hot Penny Shares and Penny Sleuth will know about the Falklands oil story. If you need a reminder, read here and here.
Today, I want to bring you up to speed with how the story is unfolding
The scent of Rockhopper's massive discovery draws in the big guns
This latest share price move is in part a belated appreciation of the discoveries made by Rockhopper in the Falklands' northern basin at the end of 2011. Secondary discoveries within its Sea Lion complex have now delivered two more confirmed oil discoveries: Casper and Casper South.
The timing for this could not have been better. Oil supplies are tight, prices are high and big oil companies are desperate to build on their reserves.
In total, Rockhopper is now estimating a resource of 1.3bn barrels of oil. With the prospectivity of the region now confirmed, there is every chance that more oil can be found in the northern basin. This has, of course, attracted the attention of oil industry big guns.
The Falklands may be remote and there may be an element of political risk, but the same can be said of most oil projects. Big oil companies need to go to wherever the oil is, because it sure isn't going to travel to meet them. So their preferred strategy is to diversify risk through having several projects in different parts of the world.
With this in mind, several oil companies have been considering partnering Rockhopper. Rockhopper is happy to give away a share of future revenues in return for the large investment needed to bring the field into production. All sorts of deals are possible, including a full takeover of Rockhopper itself.
The level of interest that Rockhopper is able to generate and the terms of the deal that it may be able to strike will tell us much about the perceived value of Falklands oil. But it could add a new twist to the story
So far only two names have emerged as potential partners. The first is Scotland's Cairn Energy (CNE), but the second is Anadarko Petroleum (NYSE:APC). This $40bn oil business has a dozen US onshore plays, is the largest independent deep water producer in the Gulf of Mexico and has other interests in Alaska, Algeria, Brazil, China, Indonesia, New Zealand, and Africa.
But the really important thing about Anadarko is that it is American born and bred
How 8bn barrels of oil could leave Ms Kirchner sullen
As the debate about the sovereignty of the Falklands has raged, the US government has sat on the fence, with Hillary Clinton's offer to mediate in the dispute as close as it has come to getting involved. While the USA presumably supports the UK government's argument that sovereignty should be the choice of the Falkland islanders and nobody else, it has not wanted to alienate the majority of the South American continent.
But if the fate of an American company, Anadarko perhaps, and the investment of millions of American dollars was at stake, that could tip US opinion against Argentina.
While Rockhopper's farm-out negotiations play out, the Falklands story could soon take an even greater significance. This is due to the arrival of the Leiv Eiriksson deepwater rig, now poised to drill two wells for Borders & Southern and two for Falkland Oil & Gas in the deep waters of the southern basin.
If you read Red Hot Penny Shares, you know which company I'm backing. I've been following it for four years, although I've also made the case for spreading risk across more than one company in a diversified Falklands portfolio'.
The time is coming when we will find out whether or not the Falklands southern basin holds the huge potential many believe exist. The four prospects that are to be drilled have a combined estimated resource of about 8bn barrels of oil, making them potentially much larger than anything Rockhopper has found so far.
If the Leiv Eiriksson strikes one of these monster fields, then the Falklands will attract even more attention than it is getting at present to the even greater consternation of Ms Kirchner. And perhaps it will make some brave penny share investors very happy.
The moment of truth is coming
This article is taken from Tom Bulford's free twice-weekly small-cap investment email The Penny Sleuth. Sign up to The Penny Sleuth here.
Information in Penny Sleuth is for general information only and is not intended to be relied upon by individual readers in making (or not making) specific investment decisions. Penny Sleuth is an unregulated product published by Fleet Street Publications Ltd.
Red Hot Penny Shares is a regulated product issued by Fleet Street Publications Ltd. Forecasts are not a reliable indicator of future results. Your capital is at risk when you invest in shares, never risk more than you can afford to lose. Penny shares can be volatile, relatively illiquid and hard to trade. There can be a large bid/offer spread so if you need to sell soon after you've bought, you might get less back than you paid. This can make them riskier than other investments. Please seek advice if necessary. 0207 633 3600.
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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.
