Evolution Securities published a note on the intensely watched exploration campaign around the Falkland Islands in the South Atlantic - and started coverage of the participants in the race to unlock the potential of the area, including the latest entrant, Argos Resources (LON:ARG).
It is also initiating coverage of Desire Petroleum (LON:DES) and Rockhopper Exploration (LON:RKH), which explore the Falklands North Basin in a joint venture, and of Borders & Southern (LON:BOR) and Falkland Oil & Gas (LON:FOGL) which operate in the South Falkland basin.
Argos Resources joined the AIM exchange at the end of July with a £22 million IPO. It owns a number of prospective interests in the North Falkland basin.
In a note titled “Scream if you want to go faster”, Evolution said the 2010/11 Falkland Islands drilling campaign has started off with one major oil discovery, a non-commercial gas discovery and two dry wells.
“We expect the area to continue to attract investor interest: there are at least three more wells to drill in the North Falkland Basin, flow testing is ongoing at the Sea Lion discovery, and there is potential for Borders & Southern or Falkland Oil and Gas to contract a drillship to expedite activity in the deepwater South and Plateau Basins.
“We initiate coverage on Argos (BUY, TP 52p), Falkland Oil and Gas (BUY, TP 248p), Borders & Southern (NEUTRAL, TP 101p), Desire Petroleum (BUY, TP 136p) and Rockhopper (NEUTRAL, TP 359p).”
Evolution said it has been an encouraging start to exploration in the northern part of the North Falkland Basin where Argos, Desire and Rockhopper operate. Rockhopper’s Sea Lion oil discovery has proved the potential for commercial oil fields.
News from the southern part of the North Falkland Basin, though, has been less optimistic – Rockhopper’s Ernest well’s failure to encounter hydrocarbons has called into question that area’s prospectivity.
The Liz 14/19-1 well drilled by the Rockhopper/Desire JV only showed uncommercial hydrocarbons.
The South Falkland and Falkland Plateau Basins to the south of the Falkland Islands are far less developed, and so far only one well (the unsuccessful Toroa prospect) has been drilled. The remaining prospects will require a deepwater rig to be contracted, something that is being worked on by Falkland Oil and Gas’ partner, BHP Billiton (LON:BLT, ASX:BHP, NYSE:BHP & BBL), and by Borders & Southern.
The lack of wells and data make drilling in these Basins higher risk than in the North Falkland Basin but this is offset by larger potential prizes, with prospects generally surpassing 1 billion barrels each.
Evolution said that while the Falkland E&Ps have historically been grouped together, there is a clear distinction between those operating in the North Falkland Basin and those in the Southern Basins as these are geologically different areas with differing risks.
“While we see upside for all companies we have grouped the companies by area and then based recommendations on where we see greater relative value. In the North Falkland Basin, we prefer Desire over Rockhopper, owing to the former’s leverage to near-term drilling. In the Southern Basins we prefer Falkland Oil & Gas over Borders & Southern owing to its mix of play types and more attractive valuation.
“Argos is at a less developed stage than the other four but operates in the right postcode and appears a low-cost entry route into the prospective northern part of the North Falkland Basin,” the broker added.