MercoPress. South Atlantic News Agency

Goldman Sachs makes a positive near term appraisal of Falklands’ oil industry

Ocean Guardian is currently drilling exploratory wells

The Falkland Islands will continue to be an important focus for European exploration and production (E&P) oil and gas investors in the near term, according to research by Goldman Sachs.

Goldman singled out the headline grabbing frontier play in a comprehensive note to clients entitled: “50 E&Ps to change your portfolio”.

Goldman Sachs’ analysts Christopher Jost and Ruth Brooker said that the Falkland Oil & Gas (LON:FOGL) story is not dead, as it initiated its coverage with a ‘buy’ rating and a 12-month price target, of 200 pence, that implies 96% upside.

Falkland Oil & Gas was the first to break ground in the frontier play, and the unsuccessful Toroa well – which failed to find any hydrocarbons - prompted farm-in partner BHP Billiton (LON:BLT) to pull out of the next exploration phase.

Goldman believes the stock is undervalued ahead of the next well. “The key catalyst will be the next well at Loligo – success or failure will be the key driver of share price performance.”

The analysts believe that success at Loligo would re-rate Falklands Oil & Gas.

Goldman highlighted that Rockhopper Exploration’s (LON:RKH) Sea Lion discovery fully supports the current share price. The analysts initiated its coverage with a ‘Conviction Buy’ rating with a 12-month target set at 640 pence.

They believe that the Sea Lion discovery offers a significant opportunity. The analysts expect exploration and appraisal drilling to be the key share price catalysts.

“We believe that Sea Lion has partially de-risked the basin, meaning that Rockhopper has high visibility on a potentially transformational pipeline of lower risk drilling catalysts,”

“We believe that further appraisal drilling on Sea Lion could help to reduce the commercial risk on the asset and potentially increase the estimated volume of reserves.”

Goldman began its coverage on Desire Petroleum (LON:DES) with a ‘buy’ rating and a 12-month price target of 197 pence.

“We believe that Rockhopper’s Sea Lion discovery has helped to de-risk Desire’s substantial acreage in the north eastern part of the North Falklands basin,”

“Desire’s acreage in this part of the basin amounts to over 1000 sq km giving it substantial running room to drill a significant number of potentially transformational wells over the next few years.”

The analysts believe that successful exploration could increase Desire’s valuation by 6 times, however they cautioned that the downside could be close to 100 percent – if no further discoveries are made in the basin.

Nevertheless the analysts state: “We believe that the market tends not to be aggressive enough in valuing new basins after the initial discovery, and while we appreciate the risks involved, we are willing to give Desire value for exploration drilling out to 2013 in the area”.-