Desire Petroleum drops as it finds water not oil in Falklands, but FTSE edges higher

Hopes of an oil bonanza in the Falklands have suffered another setback as Desire Petroleum revealed its Rachel North well had found, not oil as it said last week, but water.

On Thursday, in a statement which sent its shares soaring 25%, the company said:

Preliminary data collected indicate that this well is an oil discovery. Desire now intends to obtain more information on the reservoir quality, the hydrocarbon saturations and the fluid type to assess the significance of this discovery.

Sampling of the main sand has shown that the hydrocarbons are residual and that the mobile fluid is water.

Rockhopper Exploration

Overall the FTSE 100 finished 24.96 points higher at 5770.28, but investors remained cautious as Eurozone ministers met to discuss measures to prevent the spread of the current debt problems. There are concerns the group will find it difficult to agree a common approach to the problem.

News that Moody's had downgraded Hungary's credit rating did little to help sentiment, and pushed banking shares lower. Barclays fell 5p to 263p, while Lloyds Banking Group lost 0.27p to 66.10p.

Miners were buoyed by comments from the US Federal Reserve chairman Ben Bernanke about the prospect of a third round of quantitative easing to boost the country's economy. Rio Tinto rose 40.5p to 4456.5p, following news that the company had made a A$3.5bn approach to Australia's Riversdale Mining, which has coking-coal projects in Mozambique.

Riversdale said it was in talks with Rio, but there was no certainty an offer would be made. Rio itself added there was nothing on the table since it was not currently in a position to make an offer. In the market Riverdale's shares jumped above the mooted offer price to value the company at A$3.9bn, prompting talk of a possible bidding war for the business. India's Tata, Riversdale's biggest shareholder with around 24%, said it was monitoring the situation but its stake was a strategic investment and it would take appropriate action. Charles Kernot at Evolution Securities was not enthusiastic about Rio's move, and issued a reduce recommendation on the company's shares:

Rio Tinto's reported interest in Australian-incorporated Riversdale Mining is at least consistent with the group's stated strategy. However, having just sold assets to Coal of Africa for 7.5¢ a tonne and to be offering 29.7¢ a tonne [for Riversdale] appears to us to make little commercial logic – particularly as Riversdale also has infrastructural challenges in Mozambique.

Rio Tinto's recent statements suggested that a takeover at [A$3.9bn] would be unlikely given its capital expenditure commitments and it has advised Riversdale that it is not in a position to make an offer, which itself still needs to commit significant capital to its operations.

Meanwhile Xstrata, also a possible bidder for Riversdale, added 47p to £14.37 after reports that its major shareholder Glencore was planning a £30bn flotation.

A spate of takeover activity lower down the market enlivened the day. De La Rue jumped 193.5p to 841p after French group Oberthur Technologie confirmed it had made a 905p offer for the troubled banknote printer. Punch Taverns added 4.3p to 69.25p on reports that it could attract bid interest from private equity groups such as CVC or Texas Pacific, although many traders were dismissive of the tale. Meanwhile Paul Hickman of Peel Hunt issued a buy note on Punch, saying the company should let its two troubled securitisations, which fund tenanted pubs, default. He said:

It is quite clear that the bond structure that finances most of the tenancies is unsustainable. They would need increasing levels of financial support, currently £43m per annum, and equity shareholders would not be well served by the medium-term drain on value.

It is now crucial that a clear solution is imposed. Having considered alternatives, we believe the preferable outcome is to allow the A and B securitisations to default. We believe shareholders should use their influence to press for this outcome. Once this issue is resolved, the value in Spirit and group assets, which we put at 91p, will be apparent.

Mouchel

We believe that this [corporate interest] should be taken seriously; whilst a bid for the whole group is possible, a break up may also be likely. This may signal the low point for Mouchel – we consequently move the stock off the sell list [to hold].

Elsewhere in the sector Capita closed 34p higher at 669.5p, the biggest riser in the leading index. Chief executive Paul Pindar spent nearly £1m last week on buying 150,000 shares at 640p each.

Tullow Oil added 19p to £11.97 as Bank of America/Merrill Lynch issued a buy note with a £17.80 target. At the same time oil trading firm Vitol signed a deal to market Tullow's share of production from the Jubilee field, offshore Ghana. The first oil is expected next week.

But Cobham dropped 4.8p to 194.5p after Merrill cut its recommendation on the aerospace electronics group from buy to neutral. Cobham also announced the purchase of privately owned imaging specialist RVision for up to $48m.

Northern Foods, which recently announced plans to merge with Irish food group Greencore, rose 4.75p to 66.5p. A trust called Saerimner last week revealed a 6.6% stake in Northern. The trust's beneficiary is Ranjit Singh Boparan, owner of 2 Sisters, the UK's largest poultry company. Charles Mills at Credit Suisse said:

As a private company little detail is available on 2 Sisters. It has sales "approaching £1bn" according to its website. The last posted accounts (to August 2009) shows the business to have sales of £579m, and an EBITDA of £41m. Brands include Buxted and it is a major supplier to Marks & Spencer.

There are clearly many reasons why 2 Sisters may have chosen to take a stake in Northern Foods. It could believe it simply sees it as a good investment. It could be to secure a supply arrangement. It could be that it believes there is an opportunity in two M&S suppliers consolidating. It may harbor ambitions on Northern Foods itself, or a part of the group (notably the chilled business that supplies M&S?). It may believe there are other interested parties and wants a "seat at the table".

The decision by Northern Foods to merge with Greencore we believe will have encouraged third parties to look at Northern Foods. Remember it has extensive interests in industries dominated by private equity - notably biscuits and frozen foods.

We note that Northern Foods trades at a premium to the implied merger terms with Greencore.

Today it had to admit: It will now plug and abandon the well, and move on to another prospect in the south of the Falklands basin. The news saw Desire's shares halve in value, tumbling 66p to 67.25p. , which holds a 7.5% interest in Rachel North, lost 33.75p to 310p. A growing number of companies have been exploring the Falklands in the rush to find new oil reserves. But drilling in the area has proved controversial, since Argentina still claims sovereignty over the islands. Meanwhile , the outsourcing group which has been hit hard by government cutbacks, climbed 15.75p to 72.25p after it revealed it had received a number of preliminary approaches which could lead to an offer for the business. But it said it believed the approaches undervalued the company. At the same time it warned that trading remained difficult, and said it was in talk with its banks about refinancing its facilities, as well as looking at other funding alternatives. Shore Capital analyst Robin Speakman said: