Desire Petroleum Surges On New Oil Find

Published in Company Comment on 2 December 2010

Desire reports an oil discovery at its Rachel prospect.

Looking for some extra excitement in your life? Then pick up some shares in a Falklands oil explorer and you'll never be bored again.

The last week has seen wild gyrations in the share price of Desire Petroleum (LSE: DES), as you can see from the chart below.

Desire share price

The oil explorer is one of a group of companies exploring to the north of the Falkland Islands. Earlier this year, it had some success with a gas discovery at its 'Liz' prospect. But, for the last couple of months, it's been drilling a separate target called 'Rachel'.

The first Rachel well was unsuccessful and a subsequent sidetrack was unable to be properly tested. However, Desire's second stab, at Rachel North, looks as if it will be rather more fruitful. Rumours regarding the well saw the shares surge on Tuesday of this week, only to then fall back when no information was forthcoming.

But in this instance, the rumours did have some truth to them. This morning, Desire said it had discovered multiple zones of oil covering a total of 57 metres.

Testing is yet to be carried though. So the quality of the oil, how much of it is down there and whether it will flow properly is yet to be ascertained. As shareholders in small oil companies will know, these are rather crucial details!

So there's oil... but how much?

Analysts at Panmure Gordon reckon the find could amount to 50 million barrels. Due to the cost and complexity of extracting oil from this area, they only class this as "borderline commercial". 

Nevertheless, Desire's shares rallied 27% to 134.5p on the news. Desire has previously said a find of around 25 million barrels is economic at the current oil price of $88 a barrel, but a find of 60 million barrels is required if the oil price were assumed to drop to $50.

Desire owns 92.5% of the Rachel prospect, with the remaining 7.5% held by Rockhopper Exploration (LSE: RKH). Rockhopper, which continues to appraise its 100%-owned Sea Lion oil discovery made earlier this year, moved up a more sedate 8% to 353p.

Desire was originally planning to drill two more wells with this rig after Rachel, moving some 40km or so further south to its 100%-owned Dawn and Jacinta prospects. Dawn is a small gas target, but Jacinta is Desire's largest oil prospect. Of course, success at Rachel could mean this drilling programme is altered.

£2bn of value

Today's price gains mean that the five companies exploring around the Falklands are now worth almost £2bn.

CompanyShare priceMarket value
Borders & Southern (LSE: BOR)68p291
Falklands Oil & Gas (LSE: FOGL)110p161
Argos Resources (LSE: ARG)51.25p111
Total 1,934

Given that not one drop of Falkland oil has been sold yet, that's a hefty price tag. But each little success means we move closer to the prospect of this area becoming a significant oil producer.

More on oil investing:

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