Borders & Southern: Bad Speculation Certainly not an Investment

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Having enraged half the lunatics who fall in love with small oil shares and post demonically on Bulletin Boards with my bearish remarks about AIM listed oil exploration stocks Range Resources (LSE:RRL) and Red Emperor (LSE:RML) – and having been vindicated already – it is time to piss off the other half with a few comments about Falklands darling oil penny share Borders & Southern (BOR).

At 32.5p Borders is capitalised at £157 million. Its shares raced ahead on 23rd August after announcing its analysis of the Darwin well drilled earlier in the year. The results are a 46-49 degree condensate with a mean recoverable volume of 190 million barrels. The company will start a seismic programme during 2013 with drilling thus unlikely to take place until 2014.  The company is fully cashed up to fund the seismic and its ongoing (not insignificant) PLC costs but to drill it must either farm out the prospect or pass the hat around yet again.

190 million barrels of condensate sounds a lot. But is it?  Firstly this find is in waters that are still the subject of an ownership dispute with the Argies. I believe in self determination and so I think the Argies have zero claim whatsoever over the islands but sadly that is not the view of Argentina. There has to be some risk weighting in any valuation for this. Incidentally if you have any colleagues or friends who annoyingly refer to the “Malvinas” might I recommend that you buy them for Christmas a tasteful “Piss off Argentina” mug or T-Shirt – available exclusively HERE

If we ignore the political risk the more prescient point is that Darwin is the very rough waters off the Southern coast of the Falklands and moreover is at a water depth of 2,000 metres which is very deep indeed in such waters. There is no existing hydrocarbon infrastructure in the area.

I assume that Borders will not soldier on alone (that is betting the bank on a roulette wheel & would involve a horribly dilutive fund raise) but will seek a farm out.  How much of the prospect will it have to surrender in order to find a partner that will help bring the field into production?  Rockhopper (RKH)had to give away 60% of its Sea Lion find ( shallow water at 400 metres and less rough) and Sea Lion was a lot bigger than Darwin. But even if a partner is given 60% of Darwin that it is only 115 million barrels of condensate.  I do not think it a dead cert that, given the costs of developing and running this field, that there is going to be a very long line of partners with the cash and expertise needed – lining up to assist in this frontier development. I also add the caveat that the next well in 2014 will not be a development well. There needs to be another well drilled at Darwin to discover more about the dynamics of the prospect in order to determine how ( indeed even if) it can be developed commercially.

Frankly if others make big finds in the region during the next 18 months then any asset will find a taker and Borders will secure a partner and shares in anything Falklands linked will zoom. But with no concrete news likely for a good while from Borders and its farm-out status unclear this will zoom far less than most. If there are a couple of high profile dusters in the South Atlantic then the odds on Borders getting a farm-in partner at all must be slim.

I do not fancy any Falklands oil stocks. They are not investments but speculations. But, with a gun to my head, if I had to own any speculation in this sub-sector it would not be this one. I now don my flak jacket and wait for the abuse…

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Comments

  1. barry says:

    An interesting piece.
    But,I beg to differ.Yes the prospect of these individual drills are not as blossoming as some of us would have wished.
    But, the main point you forget,the future of the south Falklands play has now some real gumption behind it. Every Tom ,Dick and Barry knows there is oil there in quantity.
    Each and every drill is proving this.Yes, it`s gonna be a bit expensive for shareholders.But, the eventual rewards outweigh any short term losses.
    Remember each of these little oil explorers have a lot of land to explore in and as yet most of it has barely been touched.

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  3. Tom Winnifrith says:

    Barry

    Thanks for the feedback and the pleasant tone from someone who disagrees with me. Such civility seems rare these days.

    I am sure that there is oil South of the Falklands. But it is a very large area. I suppose the analogy is with me trying to chat up 200 supermodels. I would need a lot of cash to start with (for a new wardrobe, cosmetic surgery, etc) and then off I go. I might get lucky early on. But frankly the odds are against me so I might be on attempt 189 before I get a date.

    A date with a supermodel would be bank balance busting. But arguably the reward is worth it.

    The point is that each of the Falkland plays can probably only afford to chat up a few supermodels. The odds on getting a result from so few chat-ups are not great.

    So some stocks will just lose investors everything as they fail to locate a commercial find ( a prospect must be v large to be commercial in such waters), others will be multibaggers. My call on BOR is that Darwin will not be shown to be commercial. But we will not know that for sure until the 2014 appraisal well.

    Best wishes

    Tom

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