Borders & Southern (BOR) – Operations Update – Positive on the surface, but drill down to a sell

The Falklands oil exploration stocks remain the darlings of the Bulletin Board but the bare fact is that while Rockhopper (RKH) has served up some good news the “field” has disappointed.  Yet hope springs eternal and thus a presentation on 28^th January from Borders & Southern (BOR) has sparked its shares into life once again sending the shares to 27.75p valuing the company at £133 million.

Borders has in the past enjoyed some success.  In April 2011 it announced the Darwin find where initial tests suggested a gas condensate reserve of 130 to 250 million barrels of liquid. Recently the company re-asserted that a mid case recoverable reserve could be 210 million barrels. Note the words could be.
The Darwin well was the first hydrocarbon find to the south of the disputed islands and the share price rallied to 130p initially. However, subsequent drilling failure at Stebbing has seen a retreat back to even lower than the current share price.  The issue is that in an area devoid of infrastructure, initial capital costs are so large that a find must be material to be commercial.  The jury is still very much out on Darwin.

The update of January 2013 states that at a production of 200 million barrels the project would be commercial at $65 per barrel and with 100million barrels it requires an oil price of at least $85 a barrel.  But with limited drilling undertaken to date there can be no certainty as to the size of the recoverable reserve.

The company goes on to say that “Leasing the FPSO delivers a higher economic return. Using an oil price of $100/barrel with a $1/barrel discount and including a 40% capital expenditure and operating expenditure contingency, a 200 million barrel development could yield a net present value (at a 10% discount rate) of $1.7 billion.”

However, it then spells out the bad news:  Up front capital costs are estimated at between $3.77 billion (FPSO purchased) and $2.435 billion (FPSO leased) which includes a 40% contingency.

But that is all in the future. The company has £35 million cash.  It hopes to drill one more appraisal well in 2014 (that is all that it can afford).  Unless that comes in with a stella result on that well it will not have an attractive enough asset to secure either external funding or a farm in deal and it is game over.  If the result is positive however you only have to look at the capital needs for Darwin and the potential dilution ahead will be enormous. With a year to go until we know the fate of Darwin, Borders shares will simply drift.

I am not the only bear. My colleague Tom Winnifrith is also bearish as you can see here.
And broker Fox Davies values the shares at just 19p.  I would regard that as generous. Target price 10p – sell.