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Rockhopper Exploration (LSE:RKH) is the contrarian play for high growth reward and low drilling risk. The deleveraging effect from the oil price to the Falklands drilling campaign is on every hedge fund and investors mind to take position before the crowd arrive. This article is one of the most in depth you will ever read before rig departure.
The game changing news came in November when Premier Oil (LSE:PMO) partner released news on Sea Lion developments positive future scaling down initial production, ensuring no need for additional farm in partner and ensuring the company keeps its 40% interest by keeping to first oil in 2019. The plan is to produce 50,000 bopd to 60,000 from a leased FPSO to reduce capex.
If you look at Rockhoppers balance sheet with $205m in cash, $48m exploration carry during 2015, $674m two part development carry and an increased unused $750m stanby loan, one wonders why on earth is the company valued at such a low market cap even with a 60% fall in oil prices. Crazy times the share price is sub exploration carry and cash 68p let alone other figures mentioned above.
Moreover my source still believes that if oil fell dramatically for example and Premier Oil walked, which my belief they will not under any circumstance, Rockhopper in that position would be paid substantial compensation. However even if Oil price fell you can buy oil future contracts substantially higher in 2016 FID sanction above $50 present commercial threshold.
Remember Rockhopper is still in the exploration phase not the production model yet. So can benefit by vast cuts in contractors capex during the Feed programme concluding in early Q2 2015. Followed on by FID sanction in the second quarter of 2016 by which time the extension of Sea Lion will be increased as a result of 2015 drilling allowing for commercial development in the $40 a barrel region. Importantly breakeven on a Falklands well is $35 a barrel due to the fiscal regime. North Sea developments all in cost 62% of costs compared to 26% in the Falklands.
Rockhoppers current share price discounts this financial projection or cash balance valuing Sea Lion 458m P50 recoverable light oil at NIL commercial at $50 a barrel now and Mediterranean assets at NIL. Investors seem to forget Premier Oil values Sea Lion at $5 per barrel at £2.20 per share on its farm out deal with the company . So deriving a net asset value of £3.25 per share excluding the Mediterranean assets based on a normal price environment. Even in this poor market 60% collapse in Brent Canaccord updated its new target last week to £1.70 which is still a vast gain compared to the rest of the oil sector in the near term.
Much of this gain will come on the drilling campaign very soon as the rig leaves from Ivory Coast. The geo of Zebedee first well is low risk stated in the PMO presentations 52% cos 282m gross P50. This is an extension or butt of Sea Lion with a calibrated well 14/5 and 3d pin pointing where to drill so its no wildcat. Of importance is the limited oil water contact on discovery well 14/15 meaning the oil find extends through the oil rich proven sands Casper and Sea Lion. This lies ontop of the multi stacked Zebedee prospect.
Combine this with the safe back up well to drill in 4Q 2015 Chatham which is another multi stacked well underneath the Sea Lion complex. Shell drilled in 1998 and hit the corner producing live oil increases a double chance for Rockhopper. The object is also to prove on the Sea Lion 20 fan 127m P50 gross a limited or zero gas gap increasing the numbers of Sea lion oil extension. The chance of success here is quoted 50% on SL20. For the laymen normal wells are drilled at a 15% chance of success so above 50% means the oil is there. I recall Nautical in the N.Sea giving Kraken a 60% cos with proven wells and oil already discovered including proven flow rates.
Other prospects to be drilled by Rockhopper include Isobel large exploration potential and Jayne low risk Casper/Beverley East play which i will go into detail another time.
Operationally i should mention Rockhoppers Italian assest, the Ombrina Mare contingent & reserves est 30m recoverable mainly light oil with 25m upside, just offshore 20m in water looks to be viable come March 2015 soon with Italian government approval likely then. Hence potential additional apprasial drilling increasing the size and forecast production of 10,000bopd before 2019. The assets even have structures in place before the inital ban. Other Italian assets part share with ENI look to double production Guendalina 20% gas interest to 400bopd selling at a giant premium in Italy so will part pay admin cash burn for the whole group.
Lastly back in the Falklands clearly Rockhopper can cope with $50 a barrel given the fiscal terms and $40 on successful campaign. But here is the exciting part as an exploration company we can review some history of drilling off these islands. In 1998 oil was $10 a barrel and early 2009 $45 a barrel in both occasions the falkland companies went up mutiple times justified or not. With the rig travelling to the islands soon i expect the same to happen, which makes it a good hedge even if oil goes lower. Do you really think seeing the rig on all the TV stations and in the main newspapers around the world again will not make a difference based on history ? Combined with the first Falklands low risk Sea Lion extension well instead of the normal wildcats of the past makes Rockhopper a number one choice.
More information on (LSE:RKH) Rockhopper Exploration can be heard from me Chrisoil by re listening to Dec 22nd 2014 Justin Waite ADVFN Podcast Show.
I will appear on a Falklands podcast Chrisoil Special DLC http://www.chrisoil.blogspot.co.uk Jan 29th 2015 sometime next week.
Tune in next weekend for in depth Part 2 (LSE:FOGL) Falkland Oil & Gas.
If you are interested in Advfn they have excellent data and level 2 well worth registering below to gain more knowledge about Falklands campaign.
Until the next time more ramblings can be seen @chrisoil
