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Does New Oil Discovery Make Falkland Oil and Gas Limited, Rockhopper Exploration Plc & Premier Oil PLC A Buy?

Shares in Falkland Oil and Gas (LSE: FOGL) and Rockhopper Exploration (LSE: RKH) were volatile when markets opened, after the firms revealed details of a new oil discovery in the Falkland Islands.

Investors have been eagerly awaiting news from the Isobel Deep well, in which Falkland Oil has a 40% interest and Rockhopper a 24% stake. However, this morning’s report from well operator Premier Oil (LSE: PMO) contained mixed news.

Good news

The good news was that moveable oil, described by Premier as “similar in nature to Sea Lion crude”, was recovered from the well.

According to Andrew Lodge, Premier’s exploration director, this demonstrates that the PL004 licence area, which has not previously been drilled, does contain “a trapping mechanism … and moveable oil”.

Bad news

The bad news was that high pressure in the well target reservoir meant that Premier was not able to acquire wireline logs, which would have provided more detailed information about the size and quality of the oil find.

The Isobel Deep well was targeting mean unrisked gross prospective resources of 56 million barrels of oil, according to Premier. As yet, we’ve no idea whether the discovery reflects this potential.

The well has now been suspended and the rig moved to the South Falkland Basin. The three firms will now assess the find and decide on the next course of action for PL004, before the rig returns in August.

What’s next?

The rig used to drill Isobel is scheduled to drill several more wells in the Falklands this year.

Each of these companies has an interest in two more wells, so there’s a lot for investors to look forward to:

Well

Mid-case gross unrisked prospective resources*

Company (interest)

Humpback

510 million barrels

FOGL (52.5%)

Jayne East

85 million barrels

FOGL (40%), Premier (36%), Rockhopper (24%)

Chatham

19 million barrels + Sea Lion extension

Premier (60%), Rockhopper (40%)

*Company estimates

The next well to be drilled will be Humpback. Falkland Oil’s numbers suggest this prospect has the potential to be a big discovery. Success here would be very significant for the firm.

However, Jayne and Chatham, while smaller, shouldn’t be discounted. They have the great advantage of being close to Sea Lion, Rockhopper’s original Falkland discovery in the North Falklands Basin.

Premier and Rockhopper are planning to develop Sea Lion for production. Additional discoveries nearby could be much easier and quicker to commercialise than a new discovery in the South Falklands basin, where Humpback is being drilled.

Is now the time to buy?

I wrote recently that Falkland Oil and Gas was “reasonably priced as a speculative buy” at under 30p. After today’s news, my view remains the same.

At 63p, Rockhopper shares are up by 23% from the all-time low of 51p seen in January. However, rising gas production from Rockhopper’s Mediterranean assets plus the potential of Sea Lion mean it has the potential to become a mid-cap exploration and production company.

I’d rate Rockhopper as a buy in today’s market, albeit with some speculative risk.

Despite Premier’s much larger size, the successful development of Sea Lion would be a big coup for the firm.

The only question, in my view, is over financing. Premier has net debt of about $2bn. While it remains well funded at present, the cost of this debt could be a burden that will limit shareholder returns over the next few years.

Overall, I’d rate Premier as a hold.

Of course, your view may differ.

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Roland has no position in any company mentioned. The Motley Fool 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.