Desire Petroleum warns it has 'insufficient' cash

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The Independent Online

Desire Petroleum lost more than half of its market value last night after telling investors that the last well in its closely watched six-well exploration campaign to find oil reserves in the Falkland Islands had failed to deliver. The setback leaves the Aim-listed oil prospector in need of additional funds to pursue future drilling campaigns. It stock plunged by more than 62 per cent, valuing the company at about £52m. Just last year, Desire tapped investors for £23m to fund data surveys by placing shares at 140p apiece, well above the 15p level at which they closed last night.

The chairman, Stephen Phipps, said that after completing work at its failed Ninky well in the North Falklands Basin the company would have about $37m (£23m) – enough to cover Desire's share of the cost of demobilising the rig, data surveys and its working capital needs, but "insufficient to drill further wells".

"Once the results of the Ninky well and the 3D seismic [data survey] have been analysed, we will review all financing options available with the intention of rejoining the drilling campaign later in the year if possible," Mr Phipps said.

The data surveys are expected to be released by the end of third quarter, suggesting that fund-raising moves are unlikely before the fourth quarter. Alex Martinos, an analyst at Mirabaud Securities, warned that if the company were to tap investors for extra money, the exercise was likely to be very dilutive.

"Given the current funding position and the fact that they are going to have to come to the market and say 'okay, we drilled six wells and none of them were successful but can you give some more money', I think shareholders, if they are going to back that with further equity finance, are going to want a pretty sizeable slug of whatever's left and therefore it would be very dilutive," he explained.

For its part, Desire highlighted the promise of its licence blocks in the Falklands. So far, rival prospector Rockhopper Exploration, which has a 7.5 per cent interest in the Ninky well, stands out as the most successful, having struck oil at its Sea Lion well – the first in the British-governed islands.

"[The] news doesn't have any decisive impact on the Falkland Islands as a whole, in terms of their visibility a petroleum province but it raises issues specifically for Desire," Mirabaud's Mr Martinos added.

The point was reiterated by David Farrell at Evolution Securities, who said the financing issue was likely to dampen sentiment surrounding Desire, most of whose shareholders are retail investors.

"While the company stresses the continued prospectivity of its licence blocks ... the question mark of how Desire will fund additional activity is likely to weigh on the shares, especially given all six wells drilled to date have been unsuccessful," he said.