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After Their Recent Rally Should You Buy, Sell Or Hold Falkland Oil and Gas Limited And Rockhopper Exploration Plc?

Falkland Oil and Gas (LSE: FOGL) and Rockhopper Exploration (LSE: RKH) have been on a roll over the past four weeks.

While the FTSE 100 has ticked lower by 0.6% over the past month, Rockhopper and Falkland Oil have added 25% and 8% respectively. 

But is it time to take profits following these impressive gains, or should investors hold on for further growth? 

Bright prospects

Falkland Oil and Rockhopper’s gains over the past few weeks have been driven by recent exploration successes. 

Last week, the two companies, along with their partner Premier Oil, announced a new oil discovery at Isobel Deep in the North Falkland Basin, which exceeded expectations. 

This discovery has led analysts to speculate that there could be up to 1bn barrels of recoverable oil reserves under the seabed in the Falklands region.   

Clearly, this is great news for Rockhopper and its smaller peer.

It’s believed that Rockhopper’s Sea Lion prospect will be producing an estimated 60,000 barrels of oil per day within five years. Recent discoveries indicate that Falkland Oil & Gas could be set to benefit from similar growth. 

Plenty of work to be done 

Unfortunately, while Rockhopper and Falkland Oil could be sitting on vast hydrocarbon reserves, the two companies are still years away from production. 

And there’s plenty of work to be done before either company’s Falklands assets start generate cash.

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 the fields will start to generate their own cash flow, which will allow further development to take place.

High risk, high reward

Overall, if everything goes to plan, there’s a chance that Falkland Oil and Rockhopper could return to their all-time highs when they finally start producing oil.

This indicates a gain of 545% for Rockhopper from present levels and a gain of 713% for Falkland Oil. 

That said, the chances of this happening are slim. The two companies could just as easily see their shares fall to zero. 

Your own risk profile

All in all, the decision of whether to buy, sell or hold Rockhopper and Falkland Oil after recent gains should be based on your own risk profile. 

These companies certainly aren’t for widows and orphans, and if you’re concerned about taking a total loss, it might be time to get out. However, if you’re willing to take on the risk, for the prospect of huge gains, it would be wise to hold. 

And if you do decide to hold Rockhopper and Falkland Oil, the best strategy would be to use a basket approach. 

Basket approach 

Simply put, basket approach involves building a portfolio with a combination of both risky oil companies and reliable dividend-paying stocks. This combination will allow you to profit from high-risk, high-reward stocks without losing your shirt. 

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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.