Shares in Rockhopper Exploration surged in early trading as investors reacted to reports that the group is in talks with Cairn Energy about a possible takeover.

Rockhopper's share price was up over 10 per cent to 303.75p, a rise of 28.75p, at 11.43am, marking a ten-month high for the group.

AIM-listed Rockhopper specialises in oil and gas exploration in the Falkland Islands. 

Edinburgh-based Cairn is reportedly interested in either a full takeover of the group or a deal that will see it farm acreage in the Falklands basin.

Other potential suitors for the UK firm include Premier Oil and US-based Noble Energy.

Cairn, which discovers, develops and produces oil and gas globally, saw its shares boosted over 30p last week after completing the US$4.7 billion (£3 billion) sale of 40 per cent of Cairn India to fellow-FTSE 100 group, Vendanta Resources.

The deal returned US$3.5 billion (£2.2 billion) to shareholders, which leaves approximately US$1.2 billion (£784 million) available for a potential takeover, with Rockhopper valued at around £780 million.

Cairn's share price was down just over 5p this morning at 286.90p.

A partnership may be more attractive to Cairn than a full takeover, as Rockhopper is in need of a partner to help shoulder the estimated US$2 billion (£1.3 billion) cost of developing oil reserves in the Falklands, according to reports.

Cairn will have to weigh up the potential risks of exploration in the Falkland Islands, which remain a flashpoint between the UK and Argentina.

Last year, Mercosur, a South American trade bloc, banned Falkland-flagged ships from docking in Argentina, Brazil, Uruguay and Paraguay. Buenos Aires continues to claim sovereignty for the Falklands, known in Argentina as Las Malvinas.