Rockhopper heads to the Med

Investors quickly took to the bulletin boards following Rockhopper Exploration’s (RKH) announcement that it was buying Mediterranean Oil & Gas (MOG). That cash and shares bid values Mediterranean at $50m (£29.3m).

While reaction to the news was mixed, the general consensus is that the deal has been struck partly out of frustration at the extended lead-times for the Rockhopper's Sea Lion development in the North Falklands Basin. Admittedly, Rockhopper's shares could experience a near-term boost once details of the design contract for the Sea Lion rig are made public. It's also worth remembering that there are 300m barrels up for grabs during the first phase of production at Sea Lion. But first oil from Sea Lion - which is being developed with mid-cap explorer Premier Oil (PMO) - still isn’t expected any earlier than 2018. So Rockhopper has decided to utilise around a fifth of its cash resources to add some productive assets to its portfolio.

Mediterranean generated €8.4m (£6.8m) in revenues last year, but the principal attraction of the deal for Rockhopper is the group's fully-owned Ombrina Mare project, offshore Italy, which already boasts contingent resources of 26.5m barrels of oil equivalent. That could rise appreciably with the next round of appraisal drilling, while near-term drilling at Mediterranean's Haqar Qim prospect, offshore Malta, is targeting 27m barrels of oil equivalent.

Westhouse Securities says…

Buy. The acquisition is an interesting move and could jolt some shareholders. Rockhopper’s management must be frustrated with the pace of progress in the Falklands and the ongoing uncertainty about who will replace Simon Lockett as Premier Oil's chief executive. Rockhopper has around $250m in the bank - which effectively covers its capital obligations on Sea Lion - so the deal is reasonably sensible. It's a small acquisition, but it's also a cheap one: at $1.60 a barrel for Mediterranean's proven and contingent resource base. Rockhopper trades at a 70 per cent discount to its core net asset value (322p), marking it out as the cheapest stock in Westhouse's E&P coverage. We maintain our buy recommendation and have a target price of 300p.

Macquarie Equities says…

Outperform. The Mediterranean move looks positive and could act as a catalyst for some share price upside. Meanwhile, Premier Oil's decision to pursue a ‘tension leg platform’ for Sea Lion, rather than a FPSO (floating production, storage and offloading) option, means it will benefit from a permanent drilling rig. That will necessitate minimal subsea infrastructure and should improve the economics of the project. The award of the design contract for the Sea Lion rig is expected this quarter, but the final investment decision on the development is targeted for the second quarter of 2015. Based on a 2020 start-up at Sea Lion, we reduce our sum-of-the parts valuation on Rockhopper from 357p to 288p.