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It was only a month ago I commented on Rockhopper Exploration (RKH) and speculated on some of the matters surrounding the SeaLion development. Several developments have occurred since which have reconfirmed my positive stance. I noted before that Rockhopper had the benefit of revenue from production in Egypt which largely covered G&A expenses. The day after my previous article Rockhopper announced that asset was being sold for $16 million to United Oil & Gas (UOG). This sees Rockhopper effectively return to being a pre-revenue company so that rather puzzled me. Rockhopper is on the hook to pay 40% of the Sealion pre-FID costs, so is it the case cash is needed? Is it a desperate measure to shore-up the cash positon or was it an opportunity to realise asset value as the focus moves?
Latest announcements from both Rockhopper and the operator, Premier Oil (PMO), confirm some key points. Premier is now carrying the Falkland assets at $663.9 million up from $648.1 million at the 2018 year end. Assuming the increase is 60% of the last 6 months incurred costs on the Sea Lion asset, one can expect Rockhopper cost contributions to Sea Lion pre-FID to have been some $10.5 million over the last 6 months. Rockhopper cash at last reported year end (31st December 2018) was sat at $40.2 million, so pre-FID costs are denting it, and one can expect further costs of comparable magnitude over the next 12 months – and possibly greater given the likely higher percentage of lawyer involvement rather than engineer and accountants! I think the sale of the Egypt asset is a prudent move to ensure the cash position of Rockhopper does not become a material issue prior to Sealion FID.
Premier confirmed, as I predicted, the target of selling the Zama asset in Mexico. This looks to be a very saleable asset and should yield a very significant material cash inflow. Premier stated the hope that this sales process would be concluded by the year end and also confirmed embarking on a Sea Lion farm down process and noted the increase in the Sea Lion volumes planned to be commercialised by the Phase 1 development, from 220 million barrels to 250 million barrels, and with the gross capex increasing from $1.5 billion to $1.8 billion. Given the focus over recent years in driving down the project pre-first oil capex, this seemed a little surprising at first. Premier’s CEO confirmed the reason for the increase in a podcast – it improves the P90 (downside) case so makes funding easier to achieve. Rockhopper made no comment about the farm down process, which I find interesting, given the Rockhopper RNS re-iteration of the other aspects Premier announced.
One could either conclude Rockhopper will play no part in a farm down or the lack of comment confirms the company will be, but doesn’t want to say anything at the current time! I remain of the view Rockhopper will be part of the farm down process to provide cash for further exploration and to cover G&A during the development phase prior to first oil. It is clear to me, the latest announcements further increase the chance of Sea Lion happening. I now see the primary risk to a Rockhopper investment case to be the final finance deal and farm out outcome between the partners, rather than if Sea Lion will happen. I noted before the prior agreement to equalise the NPV between Rockhopper and Premier, and the high probability, in my view, of the carry deal between the project partners being the subject of renegotiation. Until this is clear I can see very good reason why the Rockhopper market cap will remain at a significant discount to the apparent Sea Lion asset NPV, even with Premier confirming free cash flow of over $1.5 billion per annum (gross) at plateau. The share price has steadily declined from 23p when I commented last month, down to 18p, but is now back to around 20p. I remain content to hold and only portfolio discipline stops me adding to my position.
Filed under: Rockhopper, ShareProphets Radio, Eddie Stobart, Teathers Financial, Tim Baldwin, TXO
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