Just days ago some of the City’s top analysts hailed Desire Petroleum’s (LON:DES) new oil discovery in the North Falklands basin, but a dramatic turn of events has seen oil apparently turn into water.
Even by AIM’s standard’s this is a particularly swift change in fortunes.
Last Thursday Desire proclaimed a new oil discovery after preliminary results indicated that it had found 349 metres of sands and shales with hydrocarbons, including 57 metres of net pay in multiple zones.
However, this morning it told the market that sampling of the main sand has shown that the hydrocarbons are residual and that the mobile fluid is water.
The response from investors was both swift and severe, with Desire shares falling around 50 percent in early deals, to 68.25 pence.
Among analysts the overriding message is one of disappointment, however some believe that the selling has gone too far and all may not be lost for Desire.
In a note to clients Westhouse Securities analyst David Hart leaned on the positives.
“Today’s announcement represents a dramatic turn of events for Desire,” Hart said.
“The positives that can be taken are the thick sands that have been encountered, as well as oil that has passed through,
“Discovering where this oil has migrated to is clearly the challenge for Desire and other operators in the basin.”
According to Hart, this morning’s sharp sell-off appears to be overdone.
The analyst maintained his ‘accumulate’ rating for Desire but cut his target from 142 to 96 pence per share. He also keeps a ‘buy’ rating for Rockhopper and reduced his target by 7 pence to 489.
Fox-Davies analyst Lionel Therond also sees the sell-off as an over reaction and a buying opportunity. He does however cut his risked valuation of Desire to 150 pence, due to increased risk.
“This is obviously a disastrous blow to the stock and beyond that to the whole of the North Falkland Basin exploration potential,” Therond said.
“Stratigraphic traps are notoriously more difficult to find as they rely on subtle changes of rock properties that can seldom be ascertained from available data pre-drill,
“We should expect the chance of success to be markedly lower than initially anticipated, increasing the risk and depressing valuations.”
He adds: “Nevertheless, the positives are that good sands are present and oil transited through those sands, finding its final destination along possible migration paths is now the name of the game.”
“Desire is still well funded and needs to plan the next moves carefully.”
Evolution analyst David Farrell was less optimistic as he downgraded the stock to ‘reduce’ and slashed his target from 180 to 50 pence.
“This is a major blow to Desire and the prospectivity of the North Falkland Basin,” Farrell said.
“Desire has two wells left to drill in this campaign and while the Dawn/Jacinta well is to be drilled next, the company will hope that Rockhopper will take the rig subsequently to give (it) time to interpret its recent drilling results before drilling its last funded well.”
He adds: “Desire is drilling the Dawn/Jacinta well next but this is extremely high risk (6-8% CoS) and we value the company based upon its residual well in the North Falkland Basin,” Farrell added.
Charlie Sharp, head of oil & gas research at Matrix, said it the turnaround was extremely disappointing. The analyst believes that the basin needs more discoveries.
“We continue to think that commerciality in the basin will depend on finding more reserves than Sea Lion looks likely to deliver at the moment, and that some diversification of development risk will be beneficial,” Sharp said in a note to clients.