Rockhopper Exploration (RKH) made one of the world's most promising new oil discoveries in 2010 with its 393m-barrel Sea Lion oil field near the Falkland Islands. Analysts at broker Westhouse Securities believe there is a 75 per cent chance the field will be successfully developed and that Rockhopper's minority interest is worth at least $1.5bn (£900m), with more exploration potential on top. Yet the market value of the company's equity at £279m is a mere fraction of that.
- Sitting on a major oil discovery
- Wide valuation disconnect
- Partner has begun 'farm-down' talks
- No oil production until 2018 at the earliest
- Lack of immediate share-price catalysts
This valuation disconnects results from a special situation that will be unwound in due course. Meanwhile, the market is effectively implying just a 20 per cent probability that the project will be put into production. This is simply too harsh and, as Sea Lion advances towards production, the market should ascribe a more realistic risk level, prompting the shares to re-rate.
The key to this re-rating will be the arrival of a third partner on the licence. Rockhopper sold a 60 per cent stake in Sea Lion to London's Premier Oil (PMO) in 2012 for $231m cash upfront and help with most development costs. That was not the quick and lucrative takeover speculators had hoped for, but it was a good deal for Rockhopper. Premier became the project manager and has been firming up the design of the development infrastructure ever since.
The problem is that Premier does not really have the resources to shoulder the $3.8bn cost of getting Sea Lion into production. Indeed, Premier's bosses recently told investors that they are seeking another partner, and only once a deal is secured will a final investment decision be made.
ROCKHOPPER EXPLORATION (RKH) | ||||
|---|---|---|---|---|
| ORD PRICE: | 98p | MARKET VALUE: | £279m | |
| TOUCH: | 97.5-98p | 12-MONTH HIGH/LOW: | 160p | 92p |
| FWD DIVIDEND YIELD: | nil | FWD PE RATIO: | na | |
| NET ASSET VALUE: | 58p | NET CASH: | $259m | |
| Year to 31 Mar | Turnover ($m) | Post-tax profit ($m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2012 | nil | -54 | -11.9 | nil |
| 2013 | nil | -75 | -15.8 | nil |
| 2014* | nil | -61 | 11.6 | nil |
| 2015* | nil | -8 | -1.1 | nil |
| 2016* | nil | -8 | -1.5 | nil |
| % change | – | – | – | – |
Normal market size: 10,000 Matched bargain trading Beta: 2.0 *Westhouse Securities forecasts £1=$1.672 | ||||
The process is also complicated by two factors. First, an ideal partner would be a major oil company with the experience of operating offshore project, yet with no interest in Argentina since it would not want a row with Argentina's government by entering the 'Las Malvinas' dispute. Second, Rockhopper may have to sweeten the terms of a transaction by agreeing to reduce its stake slightly, so as to give a major partner sufficient scale and control.
We do not see either issue proving insurmountable, however. The financial benefits of a tie-up for the third party - be it a commodities trader or a BP type - would be substantial; final cost estimates and deal metrics should be available following the conclusion of a 'FEED' (front-end engineering design) study by the end of 2014. Premier's management has suggested a deal could be sorted out in the fourth quarter of 2014 or 2015.
True, this leaves a longish wait for Rockhopper shareholders. First oil from Sea Lion is not expected until 2018 at the earliest and, before a farm-in partner is found, there are few potential catalysts to move the share price. Premier and Rockhopper hope to begin exploring nearby prospects in 2015, however, and have begun the process for securing a drill rig.
