Investors seeking volatility should look to the South Atlantic Ocean.
Desire Petroleum Plc and Rockhopper Exploration Plc have the largest average daily price moves among U.K.-traded companies valued at more than 100 million pounds ($159 million). They explore for oil in the waters around the Falkland Islands, the sheep-farming outpost 8,000 miles from London that Margaret Thatcher fought a war to keep British 28 years ago.
The swings are driven by a brigade of individual investors wagering on the success of exploration wells in a region the U.S. Geological Survey says may hold 4 billion barrels of oil. Rockhopper, whose Sea Lion discovery may be the area’s first viable field, has risen or fallen more than 10 percent on 19 days this year. Desire gained 76 percent one day this week on speculation it had struck oil at its Rachel prospect.
“Gambling is too strong a word, but you’re effectively taking big bets on high-risk stuff,” said Richard Rose, an analyst at Oriel Securities Ltd. “You’re going to get wild swings because small bits of information have big hits on the shares. It will stay volatile as long as they keep drilling.”
Desire climbed 7 percent to 97 pence as of the 4:30 p.m. close in London. Rockhopper fell 1.9 percent to 318.5 pence.
The switchback ride is likely to intensify as the summer drilling season gets under way and as many as six fresh prospects are appraised by the end of June next year. The long-term future of the companies will depend on enough discoveries to make the development of an oil industry worth the investment in the remote islands, still claimed by neighboring Argentina.
‘Excite the Imagination’
“These companies excite the imagination of smaller investors,” said Lionel Therond, an analyst at broker Fox-Davies Capital in London. “There’s potential for big discoveries. It’s high-risk, high reward.”
A group including Royal Dutch Shell Plc drilled six wells in 1998 without making a commercial discovery. The U.S. Geological Survey says there’s a 50 percent chance the Falklands have 4 billion barrels of crude.
Desire, based in Malvern, England, has a 180-day historical volatility of 167 percent, an annualized measure of how much the stock has varied from its average price over the last 180 trading days. Rockhopper’s volatility is 164 percent. The figure for Shell, Europe’s largest oil company, is 24 percent.
Individual retail investors own about 80 percent of Desire’s shares and about 60 percent of Rockhopper, according to the companies. Falkland Oil & Gas Plc, the ninth most volatile stock on the 180-day measure, is 30 percent held by individuals. By comparison, 79 percent of BP Plc shares belong to institutional investors.
Internet chat rooms, where participants discuss the results of exploration wells, may help fan swings in shares. Comment on Desire’s shares increased on Interactive Investor on Oct. 27 as the stock rose as much as 112 percent on speculation that the company had struck oil or would be bought out.
The surge came two weeks after it said it had failed to find hydrocarbons in the main target at its Rachel well. Desire had to make a statement the following day saying it hadn’t been approached about a takeover.
Even with a big find, the dearth of pipelines or other infrastructure means production is years away, said Dougie Youngson, an analyst at Arbuthnot Securities Ltd. in London. Argentina also forbids vessels that stop in the Falklands from loading cargo at its ports.
Salisbury, England-based Rockhopper, named for the penguins that inhabit the islands, surged 150 percent on May 6, the day it announced the discovery at the Sea Lion prospect.
While the shares have risen more than fivefold this year, they plunged more than 20 percent on Oct. 13 after its advisers said the level of resources may be lower than expected. Falkland Oil & Gas slumped more than 50 percent on July 12 after abandoning an exploration well.
“These stocks are driven by the retail market, and they want volatility,” said Arbuthnot’s Youngson. “Rockhopper’s had some success, but it’s not big enough to establish an industry in a frontier environment.”
Still, Desire and Rockhopper have raised additional drilling funds for exploration in the North Falkland Basin through share placements within the past year. Argos Resources Ltd. also holds licenses to the north of the islands, while Borders & Southern Petroleum Plc and Falkland Oil & Gas focus on a different geological formation on the southern side.
The summer drilling season in the Falklands runs from October to April. Desire plans to drill the Dawn/Jacinta well in November and the Anna well in December. Rockhopper holds a 7.5 percent interest in both.
Falkland Oil & Gas has plans drill two prospects early next year, subject to rig availability. Borders & Southern already delayed plans to drill the Darwin and Stebbing prospects as soon as this quarter because it couldn’t find a rig.