Falklands update: "My biggest fear is Rockhopper is bought out"

Initial coverage of the four-way mega deal between oil and gas players in the Falklands has focused on the proposed merger between Falklands Oil & Gas and Desire Petroleum.

But what about the impact on Rockhopper Exploration and Premier Oil, the two companies set to farm into the North Falkland Basin?

Tom Ewing, portfolio manager of the Fidelity UK Growth fund, which owns shares in Rockhopper, says the importance of the deal should not be underestimated.

"Investors tend to lump the Falklands together because the perceived political risk and tax considerations for both is the same. But geology, weather and operations in the two basins [north and south] are quite different," he says.

The sea and climatic conditions affect each of the basins differently and the rock types reflect this.

Prior to the planned takeover of Desire, FOGL was purely focused on the south basin, where there are big structures but where there are yet to be any discoveries. Investors get very excited about the potential upside there is if any prospects come in, Ewing explains, but it is still very much a gamble.

In the north basin, on the other hand, there are proven resources, which Rockhopper found in May 2010 with its Sea Lion discovery.

US firm Noble Energy has farmed into the south basin, which Ewing sees as a good sign for prospects there, and he would never say there is no gas or oil in the region. It is his preference to back oil and gas projects that have already seen discoveries though, which is why he sticks with companies who have interests in the north basin.

FOGL has done well then to swap some of its south-basin risk for north-basin exposure through the deal with Desire.

By using Rockhopper's knowledge of the north basin, FOGL has shown even greater savvy, Ewing says.

"Rockhopper has shown over the course of the past few years that they really understand the rocks and geology in the area. I think they know exactly where they are going to drill and I would say if you are going to back somebody to do your drilling and pick the location for you in the Falklands, backing Rockhopper is a good deal," he adds.

It is not pure altruism from Rockhopper to pass on this expertise since the firm gets to increase its proportion of acreage in the north basin, which it clearly thinks is prospective.

Additionally, if drilling is successful, the infrastructure in place for processing the Sea Lion reserves is close enough to tie into.

"Investors had been wondering what the point of Rockhopper was because it had given operatorship on Sea Lion to Premier. I happen to think there is enormous hidden value in the stock, but people interested in shorter timeframes might not be patient enough to see it.

"If more oil is struck in the north basin in 2014/15, when the drilling is expected to start, then more investors might start to ask if there is a lot more oil down there," Ewing predicts.

He would not be drawn on his target price for the stock, although he did say his biggest fear with Rockhopper was that it would be bought out at a price which is a premium to its current price but did not truly reflect the value of its ten-year prospects.

Meanwhile, he is happy with his position in the Falklands, adding: "Just having them all singing from the same hymn sheet is a good thing."