Consolidation among the Falklands oil explorers dominates the junior oil sector today as Falkland Oil & Gas (FOGL:AIM) moves to acquire Desire Petroleum (DES:AIM) in an all-paper recommended offer valuing the latter at 18p a share.

In response FOGL is down 5.6% to 26.9p – suggesting its shareholders are uncertain on the merits of the deal – Desire itself gushes up 29.4% to 15.9p. Concurrently Premier Oil (PMO), unchanged, and Rockhopper Exploration (RKH:AIM), ahead 1.6% to 130p, announce plans (conditional on the agreement going through) to farm-in to two of Desire's licences in the north Falklands basin (the prospective acreage off the disputed South Atlantic islands is split between the northern and southern basins which have very different geologies).

The net result is the Desire-FOGL combination will participate in five exploration wells late next year – two in the south and three in the north. The costs on four of these wells are carried and this should preserve the combined company's £170 million cash position. What hasn't changed is that, in the absence of further corporate activity, investors will have to wait until the end of 2014 before there are material catalysts for these shares.

Broker Oriel Securities, which reiterates a 'buy' rating on Falklands Oil & Gas and offers 'hold' advice on Desire, comments: 'This is a good deal for FOGL as it has broadened its portfolio around the Falklands while preserving its cash and gaining three carried E&A wells in the North.'

VSA Capital analyst Dougie Youngson says: 'This is a positive series of transactions for the Falkland peer group and removes a huge amount of uncertainty in terms of future drilling. Instead of having a group of companies seeking their own funding the new “combined” entity is a much stronger platform to drive exploration in the region forward.'

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Issue Date: 03 Oct 2013