If you invest in oil majors it would be reasonable to assume a lower level of execution risk, simply because that at any given time they will be involved in multiple projects. Whereas if you are looking to exploit the junior end of the oil and gas market, you are probably doing so in expectation that production, once achieved, will have a disproportionate effect on profitability and cash flows. Concentration of capital increases risks and potential rewards – think of EnQuest’s (ENG) travails with its flagship Kraken field.
You might also point to the decade-long experience of Rockhopper Exploration (RKH) and its 1.7bn barrel Sea Lion prospect in the North Falklands Basin. Over time, the driller’s interest has been whittled down, as a combination of geological challenges, regional politics and flat oil prices pushed back the time frame for ‘first oil’. First phase capital expenditure in the lead-up has been estimated at $1.8bn (£1.38bn), with operating expenses (including the floating production system lease) at $25 a barrel. That provides sufficient headroom, with Brent crude averaging $64.09 a barrel through 2019, especially if production eventually plateaus at 80,000 barrels a day.
Management at Tel Aviv-listed Navitas Petroleum LP (TLV: NVPT.L) apparently believes that the potential rewards at Sea Lion outweigh the risks. The company has farmed in for a 30 per cent interest, bringing it in line with Rockhopper’s stake, with the remainder in the hands of Premier Oil (PMO).
