Justin Reynolds
Rockhopper Exploration (RKH) is an AIM-listed oil and gas company best known for making the first commercial oil discovery near the Falkland Islands.
In 2010 Rockhopper – named after the region’s ubiquitous penguins – uncovered the Sea Lion prospect to the north of the Islands, estimated to have 2C resources of 517 MMbbl with potential to deliver 60,000 barrels of crude a day.
Two years later Premier Oil joined the venture as field operator, and this year Heads of Terms were signed for an agreement under which Israeli producer Navitas Petroleum will take a 30pc stake in the project. Premier and Rockhopper have 40pc and 30pc shares respectively.
Over the years Rockhopper has also built up a portfolio of production and exploration elsewhere, most notably a set of assets in the Adriatic Sea. But its the impressive Sea Lion prospect that will make or break the company.
A long road
On the long road towards realising the project, many staging posts have already been passed. Front-end engineering design has been completed. Letters of intent have been awarded to contractors. Approval has been granted by the Falklands authorities. Standard Chartered has been taken on as a pathfinder bank to seek senior debt project financing for the first phase of development. And inevitable tensions with Argentina regarding drilling in the disputed waters off the South American coast seem to be manageable.
Five years ago the Peronist administration led by President Cristina Fernández de Kirchner, launched a lawsuit against British companies exploring for oil and gas around the Islands. But although resentments regarding the sovereignty of ‘Las Malvinas’ are never far below the surface of Argentinian politics, they have receded somewhat in recent years as the country seeks to work through more pressing matters, notably its latest debt crisis. Relations with Britain have thawed, and the legal threat has been withdrawn.
Despite the real progress that has been made, however, securing the investment for beginning operations is still proving elusive, nearly 10 years on from the discovery. The momentum was taken out of Rockhopper’s sails by the 2014 oil price crash and has never quite returned. Flagging investor confidence in the project can be traced through the gradual decline in the company’s share price, which in 2012 topped 400p. By the beginning of 2020 the price was down to 20p, and since the Covid-19 crisis unfolded it has tumbled further to levels as low as 4p however today trade at 8p.
All set fair, seemingly
The deal with Navitas is designed to significantly strengthen the project’s credibility: the Israeli company has a solid operations record in the Gulf of Mexico, and expertise in securing project financing. And it secures Rockhopper’s financial stability up to and through completion of the first phase of the project, during which Premier and Navitas will fund the company’s costs. Capital expenditure for this first phase would be an estimated $1.8bn, with operating expenses set at $25 a barrel. The deal, which allowed Rockhopper to sell an Egyptian interest it had been relying on to meet its general and administrative costs, was greeted favorably, the company’s shares rising 30pc.
Confidence was further boosted a week later when Rockhopper’s Chairman, CEO and CFO added 285,000 shares to their holdings, and by the publication in April of solid results for 2019. Revenue was $10.3m and operating costs $4.6m, and cash operating costs $9.9 boe. Cash resources stood at $21.9m.
And there is the prospect of a significant cash injection following a positive result from the company’s arbitration with the government of Italy over one of its Adriatic assets. Rockhopper acquired the Ombrina Mare oilfield as part of its takeover of Aim-listed Mediterranean Oil & Gas in 2014. Two years later the Italian parliament imposed restrictions on offshore oil and gas activity, declining to award Rockhopper a production concession for Ombrina Mare. Last summer Rockhopper’s appeal that Italy had broken the Energy Charter Treaty, legislation which governs energy sector investments, was upheld, opening the way to lost earnings compensation of at least $20m. It may be substantially more.
The case for Rockhopper has clear parallels with that of two other energy companies covered by Total Market Solutions over the past couple of weeks. Like EnQuest with its Kraken field, and Berkeley Energia with its Spanish uranium mine, the company has worked hard to lay the groundwork for realisation of an impressive asset.
Long and short-term perspectives
Unfortunately for Rockhopper, the stars are not quite yet aligned. The Navitas deal notwithstanding, it isn’t possible to predict when the company might finally secure funding to get Sea Lion operations underway. Investors have been waiting a very long time for that.
But it is possible to take a shorter-term view. The company did not get a bounce during the brief rally in oil and gas stocks over recent weeks until yesterday. At 8p its shares look cheap. It may only take the news of a generous Ombrina Mare settlement, which may come next month, to push that price up.
Other players
In addition fellow Falkland player Argos Resources, yesterday watched its shares close approx 50% higher at 3p giving it a market cap of £6.9m, the company recently had its license returned back to them from its partners in addition to the government extending it until 2021. The company is seeking a partner and keen to drill at the earliest availability.
Borders and Southern appear to be the cheapest cab at the rank in the Falklands with a market cap of £3.9m, the company announced that the board had announced an administrative cost reduction. Borders also highlighted there intention to progress farm-out negotiations with there prospect inventory updated to include smaller pools close to the Darwin discovery, Borders had $3.7m in the bank at the end of 2019 and look good value at 0.85p
2015 headlines post-SeasLion Discovery “Diplomatic row over the Falkland Islands heats up”
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