Shares in AIM-listed oil and gas firm Desire Petroleum soared on Thursday morning after the announcement that it would be merging with larger peer Falkland Oil & Gas (FOGL) in an effort to diversify the activities of the two companies.
The news comes on the same day the companies signed an agreement with Premier Oil and Rockhopper Exploration over a farm-out of Desire's licences PL004a and PL004c.
The combination - through which FOGL will acquire Desire in exchange for shares
- will result in a "balanced portfolio with enhanced long-term prospects, a strong balance sheet and improved financing options", the two firms said in a joint statement. The new entity will have exposure to all known major hydrocarbon plays in the Falklands, they said.
Desire shareholders will be entitled to receive 0.6233 FOGL shares for each Desire share, meaning that FOGL will own 60% of the combined entity with Desire shareholder holding the remaining 40%.
Based on FOGL's closing price of 28.5p on Wednesday, the merger values Desire at around £61m and each share at 17.76p, a premium of 45% to its closing price of 12.25p the day before.
Desire was trading 30.6% higher at 16p in early trading, while FOGL dropped 6.1% to 26.76p.
Desire said it unanimously recommends the groups' combination to shareholders. Chairman Stephen Phipps, who owns 10.7% of Desire, said: "We have for a number of months been seeking additional investment into our North Falkland Basin licences and are pleased that this process has concluded with the combination with FOGL.
"Not only do Desire shareholders retain material interests in Desire's highly prospective exploration acreage, but we also benefit from the farm-out with Premier and Rockhopper, exposure to FOGL's upcoming programme in the South Falkland Basin, a strong balance sheet and expert partners."
Premier and Rockhopper signed an agreement with the two companies on Thursday that will see them farm on to PL004a and PL004c, Desire's currently 92.5%-owned and 75%-owned licences in the North Falkland Basin.
The deal, which is conditional on the merger becoming effective along with approvals from the Falkland Islands government, will see the new firm's working interests in the licence both reduced to 40%.
Premier and Rockhopper will fund the newly-merged group's share of the cost of two exploration wells which are expected to be included in the next drilling campaign.
FOGL's Chief Executive Tim Bushell said: "The farm-out to Premier and Rockhopper, which will reduce the combined group's working interests in PL004a and PL004c to 40%, is a prudent piece of portfolio management and allows us to participate in a more extensive exploration programme due to the drilling carry we have agreed, while retaining control through operatorship until both wells have been drilled."