Rockhopper Exploration (RKH) was one of the darlings of AIM back in 2010/11 and was a big hit with investors when it first discovered and appraised the Sea Lion field in the Falklands, but since then interest has waned. The share price has pretty much been on a downwards spiral ever since its heyday, with people realising that the oil, which it had discovered in the North Basin, wasn’t going to be produced anywhere near as quickly as some had hoped – in reality it was always going to be long term due to the lack of infrastructure in the region, with no other commercial production currently. The company subsequently made several other large discoveries in the area, and these will eventually form part of its plans for a staged development of these assets in conjunction with its partner, Premier Oil (PMO) which farmed in for 60%. That leaves the company currently valued at circa £92 million and with a share price of just over 20p, but I think that now could be a good time to buy as long as you are taking a longer term view – as recently as May this year the shares hit 52-week highs of just under 45p, which shows just how quickly it can move upwards when it does get a bit of momentum behind it.
The Falkland licences aren’t going to be developed overnight, but progress is being made towards that stage, and in the meantime it does have other producing assets in Egypt and Italy that are generating revenue. Whilst a lot of the potential future value here revolves around the eventual success of the Falklands assets, Egypt is producing 840bopd net to Rockhopper and the company has seen an improvement in payments from the Egyptian General Petroleum Corporation, with receivables standing at $1.9 million, as at the most recent update. It has also had success with its exploration drill at Al Jahraa SE, which has increased the reserves and resources. It also has assets in Italy, with Guendalina producing 230boepd during the first half of 2018, plus it has a 23% stake in the Eni operated exploration licence at Monte Grosso, with prospective resources estimated at 250 million barrels. There is also an arbitration hearing to come in February 2019 against the Italian government where the company is seeking substantial damages in relation to the Ombrina Mare licence.
At the moment though Egypt and Italy aren’t anything to get really excited about as they produced revenue of just under $5 million in the first half of 2018, but they do cover the costs of running the company. At the last interims up to the end of June 2018 the company had $46 million in the bank and it has no debt, so it is in a decent position, even if the development of Sea Lion does drag on longer than expected. For a small company like Rockhopper, funding the development of a large exploration find like Sea Lion can be problematic, but that isn’t the case here as it has a free carry of $337 million for phase one of the development, along with $750 million in the form of a standby loan from Premier. Additionally, there is also a $337 million carry for phase two of the development. If it does manage to pull off Sea Lion then it will be huge for the company, as phase one alone is targeting gross production of 80,000bopd.
I think that the speed at which we see progress with the Falklands assets will depend on where the oil price goes next year, but providing we don’t see another collapse then I would expect to see a more defined timeline start to emerge. Given the upside potential and the fact that it has already secured a partner and a free carry, it is hard to see reason not to invest at the current share price, especially if you are prepared to hold your position for a few years, so for me I’d class the shares as a buy at around current levels.
Filed under: Rockhopper, Neil Woodford, ShareProphets share tips of the year, shares to sell, Mr Market
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