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Are Falkland Oil and Gas Limited, Rockhopper Exploration Plc & Gulf Keystone Petroleum Limited A Buy?

With the oil price bumping along below $50, is now the time to take a fresh look at small-cap oil firms with big prospects?

Falkland Oil and Gas (LSE: FOGL), Rockhopper Exploration (LSE: RKH) and Gulf Keystone Petroleum (LSE: GKP) could all deliver big gains for investors over the next year, but risks remain.

Gulf Keystone Petroleum

Kurdistan oil producer Gulf Keystone received a lifeline in August when the Kurdistan Regional Government (KRG) promised to start making regular monthly payments for oil exports from September.

So far, Gulf has received two monthly payments of $12m. These have been enough to push the firm’s cash balance up from $63.9m at the end of August to $76.2m last week. More importantly, the payments have helped to fund the $26.4m interest payment the firm said it was making last week.

In my view Gulf’s position has improved but remains precarious. A recent reserves update confirming proved and probable reserves of 639m barrels help underline the firm’s asset value, but debt remains the defining issue. Including debt, Gulf is now valued at around $1.50 per barrel of oil reserves.

That’s not expensive, but further investment is required to increase production as well as pay down debt. At current oil prices, it’s not clear how either of these aims will be achieved.

Rockhopper vs Falkland Oil and Gas

Shares in Falkland Oil and Gas fell last week after the firm admitted that ongoing problems with its Humpback exploration well meant that costs had risen and were eating into Falkland Oil’s contingency fund.

Results so far suggest to me that this won’t be a commercial find. The well was targeting mid-case gross prospective resources of 510m barrels and was Falkland Oil’s biggest hope for the Falkland’s South Basin.

Failure here will confirm Rockhopper Exploration’s position as the only explorer to make a potentially commercial oil find offshore the Falkland Islands. Rockhopper’s Sea Lion find is in the North Falklands Basin and it’s here that the firm’s partner, Premier Oil, is hoping to develop Sea Lion into a profitable production asset.

Although a final investment decision has not yet been made, Rockhopper has already logged two more oil finds in the North Falkland Basin this year, Zebedee and Isobel Deep, strengthening the case for the project to go ahead.

Rockhopper’s purchase of Mediterranean Oil and Gas in 2014 also means that it does have other interests. Gas production from the Guendalina project is expected to increase “materially” when a new side track well is completed later this month. The firm also has several other gas assets in the Mediterranean on which it is working.

Rockhopper also has one other big advantage: cash. At the end of June, the firm had net cash of $160m. In contrast, Falkland Oil and Gas had only $40m at the end of June, since when a big chunk of this has been spent on the Humpback well.

In my view, Falkland Oil and Gas has become a risky play on the Falklands oil. I rate Rockhopper as a far better buy, with lower risk and considerable medium-term upside potential.

However, the market for small-cap resources stocks remains difficult and volatile.

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Roland Head 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.