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Is It Time To Buy Rockhopper Exploration Plc & Falkland Oil and Gas Limited As They Prepare To Start Drilling?

Small-cap oil explorers Rockhopper Exploration (LSE: RKH) and Falkland Oil and Gas (LSE: FOGL) are pushing higher today after the two companies announced the mobilisation of the Eirik Raude rig.

The Eirik Raude has commenced mobilisation from West Africa to the Falkland Islands, and should arrive within a few weeks. The drilling programme will commence in March 2015 on the Premier-operated, Zebedee well, which will test the southern lobe of the Sea Lion field. After Zebedee, the Eirik Raude will move to drill the Isobel Deep well, also located in the North Falklands Basin.

Making progress

The mobilisation of the Eirik Raude is the first in the 2015 drilling programmes of both Rockhopper and Falkland Oil. If all goes to plan, the two companies should have more clarity on the potential of their oil assets by the end of the year, or within six months. 

Falkland Oil’s management has stated this morning that the company does have enough cash on hand to fund the drilling of the first four agreed wells. The company had $100m of cash with no debt at year-end 2014.

Additionally, Rockhopper estimates the total net cost of its participation in the four wells to be approximately $25m. Rockhopper had just over $75m in cash and cash equivalents at the end of the third quarter. 

The total recoverable resource being targeted in the six-well drilling campaign is over 500 million barrels of oil.

Low risk, high reward

There’s no denying that this drilling campaign could be a game-changing development for Rockhopper and Falkland Oil. Indeed, the drilling campaign will provide clarity for shareholders regarding the potential resource available. And the two companies, as well as their partners, have plenty of cash on hand to fund the drilling programme. 

This winning combination of both a strong cash balance and world-leading resource reserves makes Rockhopper and Falkland Oil two extremely attractive bets. 

Specifically, if the drilling campaign does yield the desired results, the two companies are going to be in high demand. Both Falkland Oil and Rockhopper have market caps of under £150m, significantly undervaluing the two explorers considering the reserve potential. 

Both Rockhopper and Falkland Oil are planning to begin oil production from the Falklands prospects, assuming everything goes to plan, by 2019. The recently revised field development plan will cost the two companies $2bn. After this initial expenditure, it is expected that field will start to generate its own cash flow, which will allow further development to take place.

Still, there’s no guarantee that either Rockhopper or Falkland Oil will manage to get their assets into production. It’s almost impossible to predict what will happen over the next four years. So, if you are thinking about buying in, you need to be prepared for volatility. These companies are not suitable for widows and orphans.

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.