Undervalued Rockhopper has options

Assuming the capital can be secured and the project sanctioned, Rockhopper's claim on the 83m barrels targeted in Sea Lion's first phase - let alone the hundreds of millions of barrels estimated in the wider discovery area - looks deeply undervalued with the shares trading at just 28 per cent of reported net asset value of 93¢ (74p), which includes 14p cash.

Nothing will happen without the say-so of Premier Oil, which owns a 60 per cent stake in Sea Lion's exploration licence, after farming in to the North Falkland basin in 2012. The latest capital expenditure estimate is for $1.5bn before first oil, with life-of-field costs at $35 per barrel and an estimated break-even price of $45. Unfortunately, Premier does not have the funds for this sort of development itself, but there are options, including export credit government funding sources or a vendor placing in which Rockhopper and Premier give up some of their stakes. A good example of this was recently provided by Ophir Energy (OPHR), which created a joint venture company with Schlumberger and Golar LNG to finance the Fortuna field.

Away from Sea Lion, Rockhopper has options of its own. Last year's acquisition of Beach Energy's Egyptian assets provides a cash-generative source of cheap production and room to expand in the Mediterranean. Rockhopper's all-share merger with Falkland Oil & Gas also suggests the management team is cannier than the market gives it credit for, as the exploration and appraisal assets were immediately booked at a $112m premium.

Less encouraging news has come from the Ombrina Mare field after the Italian government's restrictions on offshore drilling scuppered its development and lumped the group with abandonment costs. However, Falkland has been advised it has "strong prospects of recovering very significant damages" from Italy's breach of the Energy Charter Treaty, a claim given added ballast now a litigation funder has agreed to provide cash for the two- to three-year arbitration process.