Small Talk: BHP in the frame to take Falklands stake

Companies have been prospecting for natural resources in the vicinity of the Falkland Islands for what seems like an eternity, and so far at least the results have been about as tempting as a winter holiday at Goose Green. However, some well-informed corners of the City believe that the situation is about to change radically for at least two regional players.

The word is that Falklands Oil & Gas is poised to confirm that it has agreed a "farming-in" deal with the world's largest integrated mining group, BHP Billiton. Farming-in occurs when an exploration and production company invites a partner to share in the development and funding of a prospect.

The company has already confirmed that it is deep in negotiations with several potential blue-chip partners about a farming-in arrangement, and as a result the shares have rocketed from below 75p to Friday's closing 157p over the past two months. However, a deal with as prestigious a partner as BHP should see even more punters pile into the shares.

Although best-known as a mining stock, BHP has extensive oil interests, and expects several of its prospects to come into production over the nextsix months.

Many observers have been highly sceptical about the prospects for significant and more importantly economically viable finds in the South Atlantic. Not only is the environment one of the least hospitable anywhere in the world, requiring deep sea rigs capable of working in the roughest seas, the Falklands is a long way from any major oil market. But with black gold hovering at close to all-time highs, in absolute terms at least, perhaps now majors are set to take the region more seriously.

Elsewhere in the Falklands, recent newsflow has not been so good. Falklands Gold & Minerals confirmed that its drilling programme has failed to find commercial quantities of gold at Bluff Cove. The company still has £3.5m of cash, and the rumour is that it is considering a move even further south – into Antarctica, to be precise. How many geologists will be queuing up for a slice of the action is hard to tell – there is no shortage of demand for qualified geologists, and most locations don't require living life in the freezer.

ESS set for growth

Look out for what could be a well-received set of interim numbers from Aim-listed Equity Special Situation, due out this morning. The company, an active investor and business services provider in the financial services market, is expected to deliver more stellar growth despite the summer jitters across equity markets.

Punters are predicting a jump of something in the region of 195 per cent in earnings per share or 16p in the first half, not bad considering the stock trades on less than 160p at the moment. Assuming the second half matches the first, the stock trades on less than six times 2007 earnings, dirt cheap by any measure. Profit is expected to soar from a £700,000 loss in the first half of 2006 to a profit of £2.3m.

Perhaps a better measure of value is net asset value, and some investors believe it could rise to as much as 150p per share –a rise of more than 750 per cent since the company came to the market inApril 2004.

The company not only takes stakes in financial services groups, it also helps them to grow by providing administrative back-up and expertise. It holds stakes in 17 companies, including 6.5 per cent of Daniel Stewart Securities and 18.7 per cent of STM, a European financial services provider which has risen 47 per cent since floating on Aim in March.

With equity markets remaining fragile, to put it mildly, this looks like an excellent performance. For investors wanting to limit their risk in the smaller end of the market, ESS looks well worth further investigation, although be warned – the stock is very illiquid, so don't wade in all guns blazing.