Hedge funds swoop on Falklands oil search

LONDON Wed Oct 31, 2012 9:08am EDT

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LONDON (Reuters) - Hedge funds have been quietly building up stakes in the fledgling oil explorers operating off the Falklands, betting that companies will ignore the threats made by Argentina to disrupt the activity.

Lansdowne Partners, one of Europe's most powerful hedge funds, Crispin Odey's Odey Asset Management and Blackfish Capital, owned by the Rowland family, have all acquired stakes, regulatory filings show, as investors grow more excited over drilling prospects and a clear plan for the first oil field development.

One of the longer-time backers of the sector has been the RAB Special Situations fund, which owns more than 10 percent of Falkland Oil & Gas (FOGL.L) and which has 28 percent of its portfolio invested in the company. The shares were unchanged at 62.5 pence on Wednesday, valuing the company at 200 million pounds.

More recently Lansdowne Partners has gradually built up a 13 percent stake in Borders & Southern (BSTH.L), making it the largest shareholder in the firm, which had a market value of 113 million pounds on Friday, when the shares were trading unchanged at 23.25 pence.

Meanwhile Odey raised its stake in Rockhopper Exploration (RKH.L), the most successful local explorer to date, to just over 7 percent in August, while in July Blackfish Capital, a subsidiary of Banque Havilland, bought a 20.13 percent stake in Falkland Islands Holdings (FKL.L), making it the biggest shareholder by some distance.

On Friday Rockhopper's shares were up 2 percent at 160 pence, valuing the firm at 455 million pounds, while Falkland Islands Holdings was worth 47 million pounds.

Falkland Islands Holdings, in which Mercury Asset Management's founding director and private investor Leonard Licht owns a 5.9 percent stake, according to Thomson Reuters data, has a 4 percent holding in Falkland Oil and Gas.

None of the hedge funds responded to requests for comment.

But seven months ago the risk of investing in any of the five small companies looking for oil off the remote archipelago - lying about 300 miles off the Argentine coast - was far higher and there was no certainty that the oil found would make its way out of the ground.

Argentina, which wants Britain to give up the islands, has threatened to take legal action against any companies involved in exploration or development work around the "Islas Malvinas", leading to worries that none of the big oil firms with the deep pockets needed to help the explorers bring finds into production would want to become involved.

Since then more hydrocarbons have been discovered and three large companies have signed up to the region.

"It (Falklands exploration) has been de-risked politically from the perspective of other interested parties now joining the activities down there," said Edison Investment Research analyst Ian McLelland.

Most significantly veteran British firm Premier Oil (PMO.L) last week completed its $1 billion deal with Rockhopper to take a 60 percent stake and the operating role in developing Rockhopper's Sea Lion oil field situated in the South Atlantic about 120 kilometres off the north of the islands.

"I don't want to sound flippant, but the oil industry deals with this type of political risk, of border disputes, of disputed territories all around the world, Premier's finance director Tony Durrant told Reuters at the time of announcing the outline deal in July.

Meanwhile Borders & Southern in April discovered gas condensate, a naturally occurring mix of light liquid hydrocarbons, and FOGL found gas last month.

"Borders & Southern and FOGL are both in a much more positive position than they were at the start of this drilling campaign (in January) after the really positive drilling results and the significant de-risking of the politics," said Mirabaud analyst Robin Haworth.

Formerly the domain of only British explorers, the arrival in the Falklands as partners of FOGL of two foreign industry heavyweights - Edison, owned by France's EDF (EDF.PA), and U.S. firm Noble Energy (NBL.N) - has also helped put the islands on the global oil map.

Drilling at FOGL's next well, Scotia, is currently underway and investors are watching it closely in the hope that it will find oil, which given the islands' remoteness would be far easier to produce and transport to market than gas.

(Editing by Greg Mahlich)

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