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Desire shares drop another 20 pct after latest Falklands duster

Desire Petroleum (LON:DES) shares slumped a further 20 percent this morning with yet another failed exploration well being plugged and abandoned.

This morning it revealed that its latest well in the Falklands failed to locate oil or gas in the Dawn prospect, the well’s second target.

The 25/5-1 well was designed to test two targets - Dawn and Jacinta - in the North Falkland basin. Last week Desire told investors that the well did not find any hydrocarbons in the Jacinta prospect.

This latest disappointment follows the dour news last month that the company’s Rachel North well would also be abandoned.

Desire will now await the results of its seismic survey being carried out in partnership with Rockhopper, which also plans to drill the next two wells in the basin. Later, the rig will return to Desire for the last drilling slot in the current exploration campaign.

David Hart, oil and gas analyst at Westhouse Securities, downgraded his view on Desire in the wake of this morning’s announcement.

The analyst cut his rating to ‘hold’ and reduced his price target to 40 pence - after previously rating the stock an ‘accumulate’.

“This is further unfortunate news for Desire, following the earlier disappointment with the Rachel prospect and Jacinta just before year end,” Hart said in a note to clients.

He added: “The ongoing 3D seismic programme may expand this portfolio of prospects but drilling more than one additional well is likely to require further financing as well.

“Looking ahead, we will adjust the risk associated with drilling Desire’s next well based on the results from Rockhopper’s (LON:RKH) upcoming wells and the results of the new seismic programme.”

Evolution Securities prefers Rockhopper Exploration and Argos Resources (LON:ARG) to Desire.

And the broker pointed out: “Desire has sufficient funding for one last well in the northern part of the basin, however, we remain cautious given the track record of well results and acreage and prefer Rockhopper and Argos,”

Evolution rates both Rockhopper and Argos ‘buy’, with price targets of 400 and 52 pence respectively.

“This is the second well in the southern part of the North Falkland Basin and neither has provided much encouragement for the future prospectivity of this area,” Evo added.

“Until we gain further information on Desire’s final drilling target we remain cautious on the shares which will, in the near term, be driven by drilling results from Rockhopper.”

The Desire share price has been decimated since a shock change in fortune in early December - with the company prematurely proclaiming a new oil discovery when in fact the prospect was water bearing. On the December 6 the stock more than halved in value as it fell from 133.25 to 67.25 pence in one session.

Subsequently the Dawn/ Jaquinta well has led to yet more despair for investors, with the stock falling to 42.5 pence and then 34.5 pence in the wake of the 25/5-1 drilling results.

It has not all been doom and gloom in the Falklands though. The new oil frontier provided one of the AIM market’s biggest stories in 2010, with many investors riding the white-knuckle rollercoaster ride.

Rockhopper Exploration’s Sea Lion discovery gave investors the stand-out result, as it confirmed what investors had long hoped for, however all the other wells drilled in 2010 failed to match it.

Whilst we now know that there is oil beneath the inhospitable waters surrounding the Falkland Islands, there is still much to do in 2011.

Looking back it is clear that 2010 was a hit and miss year in the Falklands. Overall three of the five AIM-listed explorers were actively exploring the Falklands, and between them drilled seven holes and one sidetrack.

Rockhopper and Desire did most of the work, with their operations in the North Falkland Basin taking centre stage. In total the two firms have now drilled six between them.

Meanwhile in the South Basin, Falklands Oil & Gas (LON:FOGL) shares were hit in July after the Toroa well came up dry in July.

Of all the wells drilled only the Sea Lion found potentially commercial quantities of oil.

The New Year will see the groups explore with more than just the drill bit. Rockhopper, Desire and AIM newcomer Argos Resources (LON:ARG) are set to open up a whole catalogue of new targets with a massive seismic programme in the early part of the year.

Back in October the groups agreed to two separate seismic programmes, one between Desire and Rockhopper and another between Argos and Rockhopper.

The first of the programmes got started on 20 December, as the Polarcus Nadia3D seismic vessel arrived in the waters around the islands.

The second programme, which will use the Polarcus Asima vessel, will follow shortly.

Results are expected in early spring for both programmes.

Let’s hope 2011 proves a more fruitful year for the companies drilling in the South Atlantic and also for the investors who have staked a lot of money on their success.