Sea Lion funding outlook strengthened

Rockhopper Exploration 10 January 2020 Update
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Rockhopper Exploration

Sea Lion funding outlook strengthened

Farm-down

Oil & gas

10 January 2020

Price

20.2p

Market cap

£93m

US$1.26/£

Net cash ($m) at 30 June 2019

27

Shares in issue

457.8m

Free float

99%

Code

RKH

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

34.4

7.5

(17.0)

Rel (local)

28.2

0.2

(25.4)

52-week high/low

28p

14p

Business description

Rockhopper (RKH) is a London-listed E&P with fully funded development of Sea Lion, a 500mmbbl+ field in the Falklands with the potential for a similar size discovery to the south. RKH also holds production and exploration assets in the Mediterranean.

Next events

Ombrina Mare arbitration outcome

Q120

SPA signing

Q120

Farm-in completion

Q220

Sea Lion Phase 1 FID

H220

Analysts

Carlos Gomes

+44 (0)20 3077 5700

Elaine Reynolds

+44 (0)20 3077 5713

Rockhopper Exploration is a research client of Edison Investment Research Limited

Rockhopper (RKH) has announced that, together with Premier Oil, it has signed Heads of Terms with Navitas Petroleum to farm down a 30% interest in the Sea Lion project. The deal increases confidence that project debt financing to the joint venture can be secured successfully for Sea Lion Phase 1 of development, while Rockhopper maintains a material 30% stake in Sea Lion, and Premier 40% and operatorship. Rockhopper’s share of project costs will now be covered from 1 January 2020 through to Phase 1 completion, pending sanction. Meanwhile, partner Premier has announced a series of significant North Sea M&A deals, which materially strengthen its balance sheet and further support the Sea Lion project financing discussions. We update our valuation to account for the farm-down deal and roll forward the discount date, resulting in a risked valuation of 53.7p/share, down from 79.6p/share.

Year-end

Revenue
(US$m)

PBT*
(US$m)

Cash from operations (US$m)

Net cash** (US$m)

Capex**
(US$m)

12/17

10.4

(9.0)

1.6

50.7

(26.8)

12/18

10.6

(7.1)

5.4

40.4

(15.8)

12/19e

10.4

(2.3)

0.9

17.8

(19.0)

12/20e

2.2

(10.0)

(0.1)

14.6

(15.0)

Note: *PBT normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. **Assumes capex ahead of first oil funded by Premier and Navitas interest-free loan from 1 January 2020.

Rockhopper fully funded for Sea Lion Phase 1

The entry of Navitas into the Sea Lion joint venture (JV) brings incremental equity and debt financing to the project, leading to greater certainty that project financing can be delivered. Rockhopper has protected its balance sheet while retaining a 30% stake and is now funded by a combination of Premier Oil and Navitas Petroleum interest-free loan from 1 January 2020 to Phase 1 project completion.

JV balance sheets shielded to unlock debt funding

Premier’s UK North Sea M&A deal will provide additional cash flow that will accelerate the company’s debt reduction, increasing the likelihood that project finance can be secured for Sea Lion Phase 1. Meanwhile, the preliminary information memorandum (PIM), submitted by the Sea Lion JV to potential providers of senior debt project finance in August 2019, is now also likely to progress, having been held up in Whitehall due to the general election.

Valuation: Market implies heavy discount on Sea Lion

Our valuation suggests that the equity market is more optimistic towards Sea Lion Phase 1 sanction, implying an increased chance of success of 30% vs 20% at the time of our last note. Our updated risked valuation accounts for the new Heads of Terms, consequent participating interest readjustment and new interest-free loan to fund Rockhopper towards Phase 1 project completion. Our risked valuation now stands at 53.7p/share based on a Sea Lion Phase 1 CoS of 55%. We provide sensitivities to Phase 1 CoS and will publish a more detailed review once funding has been secured.

Ombrina Mare arbitration

In March 2017, Rockhopper started international arbitration proceedings against the Republic of Italy in relation to the Ombrina Mare field it acquired from Mediterranean Oil & Gas. Rockhopper believes it has strong prospects of recovering ‘significant monetary damages’ based on lost profits as a result of the Republic of Italy’s breaches of the Energy Charter Treaty. We estimate this will be recoverable at c $20m on a risked basis in our valuation using a simplified approach, which assumes a 50% chance of recovering the associated acquisition costs. We have not carried out a loss of profits calculation but press reports suggest it could be materially higher, with the claim running up to €275m plus interest. Clearly, there is material upside to our valuation in the event of a damages award to Rockhopper. Indicatively, a $50m award to Rockhopper net of costs would be worth up to 8.5p/share to equity holders. On 26 June 2019, the tribunal rejected Italy’s request for the suspension of the arbitration and Italy’s intra-EU jurisdictional objections. Rockhopper expects a final outcome and potential damages award in the next three to six months.


Valuation

We value Rockhopper’s asset base using a conventional risked net asset value (NAV) approach, based on a risked valuation for proven reserves, and contingent and prospective resources. Key assumptions in our valuation include estimates of production profiles, asset development costs and operational costs in addition to realised commodity prices and costs of capital. We use publicly available sources for key assumptions, including company guidance.

We have updated our forecasts and NAV to reflect the Heads of Terms agreed between Rockhopper, Premier Oil and Navitas, in which RKH’s participating interest in Sea Lion licences was settled at 30%, the same as Navitas, while Premier retains 40% and remains the operator of the licences. As per the agreement, RKH will be funded by Premier and Navitas from 1 January 2020 to Phase 1 project completion (estimated to occur 9–12 months after first oil from Phase 1). The company was granted an interest-free loan by its partners to fund project development, which will be repaid from 85% of Rockhopper’s working interest share of free cash flow. We assume FID will be taken in H220 and first oil for Sea Lion Phase 1 in mid-2024. We continue to base our valuation on a long-term oil price expectation of $70/bbl Brent from 2022 inflated at 2.5% onwards. The NAV table below, in Exhibit 2, provides a breakdown of our valuation by asset.

Exhibit 2: Edison breakdown of Rockhopper NAV

 

 

Recoverable reserves

 

Net risked value

Asset

Country

First oil

WI

CoS

Gross

Net

NPV

12.5%

10.0%

15.0%

20.0%

%

mmboe

mmboe

$/boe

$m

p/share

p/share

p/share

p/share

Net cash at 31 December 2019e

18

3.1

3.1

3.1

3.1

SG&A (NPV12.5 of 5 years)

(24)

(4.2)

(4.2)

(4.2)

(4.2)

Proceeds from Abu Sennan disposal

12

2.1

2.1

2.1

2.1

Production

Civita

Italy

100%

100%

0.0

0.0

(96.7)

(2)

0.0

0.0

0.0

0.0

Guendalina

Italy

20%

100%

0.4

0.1

18.5

2

0.3

0.3

0.3

0.3

Development

Sea Lion Phase 1

Falkland Islands

2024

30%

55%

249

75

4.8

197

34.2

43.8

26.9

17.0

Sea Lion Phase 2 in PL32

Falkland Islands

2029

30%

20%

87

26

4.8

25

4.3

6.4

2.9

1.3

Sea Lion Phase 2 in PL04

Falkland Islands

2029

30%

20%

214

64

4.8

61

10.6

15.7

7.1

3.2

Ombrina Mare - under arbitration*

Italy

20

3.5

3.5

3.5

3.5

Core NAV

 

 

 

 

551

165

308

53.7

70.6

41.6

26.2

Source: Edison Investment Research. Note: Number of shares: 457.8m; FX = US$1.26/£. *Based on 50% chance of recovering acquisition cost rather than risked recovery of loss of profit.

Rockhopper currently trades at 20.2p/share relative to our risked valuation of 53.7p/share. Even though an increase in the share price was observed following the deal announcement, the equity market still appears to be taking a more pessimistic view of Sea Lion Phase 1 and/or lower oil price expectations compared with our base case. The current share price suggests an implied chance of success of c 30% for Phase 1 at $70/bbl or c 55% at $60/bbl, similar to current oil prices. We believe the project is more likely to proceed than not, now reinforced by the Navitas deal, hence our 55% commercial chance of success for Phase 1.

Exhibit 3: Core assets and Sea Lion Phase 1 sensitivity

Exhibit 4: Rockhopper NAV waterfall

Phase 1 CoS/
Brent $/bbl LT

50

60

70

80

90

10%

3.3

4.8

7.4

10.1

12.7

20%

5.4

8.4

13.6

18.9

24.3

30%

7.5

12.1

19.8

27.8

35.8

40%

9.6

15.7

26.0

36.7

47.4

50%

11.7

19.3

32.3

45.6

58.9

55%

12.7

21.1

35.4

50.0

64.7

Source: Edison Investment Research

Source: Edison Investment Research

Exhibit 3: Core assets and Sea Lion Phase 1 sensitivity

Phase 1 CoS/
Brent $/bbl LT

50

60

70

80

90

10%

3.3

4.8

7.4

10.1

12.7

20%

5.4

8.4

13.6

18.9

24.3

30%

7.5

12.1

19.8

27.8

35.8

40%

9.6

15.7

26.0

36.7

47.4

50%

11.7

19.3

32.3

45.6

58.9

55%

12.7

21.1

35.4

50.0

64.7

Source: Edison Investment Research

Exhibit 4: Rockhopper NAV waterfall

Source: Edison Investment Research

Our estimated production profile is in line with company guidance for c 250mmbbls in Sea Lion Phase 1 and c 300mmbbls in Sea Lion Phase 2. Sea Lion Phase 2 is estimated to come online approximately five years from first oil at Phase 1. However, there is no development plan in place for the project. As per the agreed deal with Navitas, the existing funding arrangements between Rockhopper and Premier will be replaced for Phase 2. Rockhopper will receive contingent payments of up to $36m from Premier’s and Navitas’s share of Phase 2 cash flows, linked to the achievement of certain production and oil price milestones.

Exhibit 5: Edison gross production profile for Sea Lion Phases 1 and 2

Source: Edison Investment Research

Financials

Rockhopper ended H119 with c $27m of cash on the balance sheet and no debt, in line with our estimates. With the disposal of Abu Sennan, our forecast Italian asset capex and SG&A are covered for the coming years at c $5.4m pa. As a consequence of the Navitas farm-in, Rockhopper is fully funded through to Sea Lion Phase 1 project completion given the newly agreed interest-free loan from Navitas and Premier. We are accounting for this partnership loan in the company’s balance sheet; however, we do not believe Rockhopper will need to access any additional funding for Sea Lion Phase 1 development. Funding for the project to the joint venture is expected to be split into vendor financing, export credit/bank finance and upstream partner equity.

Exhibit 6: Financial summary

 

2017

2018

2019e

2020e

2021e

Year-end: 31 December, US$000s

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Total revenues

 

10,401

10,580

10,376

2,167

1,666

Cost of sales

 

(9,573)

(8,531)

(5,072)

(1,052)

(766)

Gross profit

 

828

2,049

5,304

1,114

900

SG&A (expenses)

 

(5,282)

(5,386)

(5,386)

(5,386)

(5,386)

Other income/(expense)

 

(3,422)

(5,014)

2,200

0

0

Exceptionals and adjustments

 

(1,830)

673

2,070

2,070

2,070

Reported EBIT

 

(9,706)

(7,678)

4,188

(2,202)

(2,416)

Finance income/(expense)

 

783

825

485

49

0

Other income/(expense)

 

(39)

(253)

(6,979)

(7,852)

(8,833)

Exceptionals and adjustments

 

0

0

0

0

0

Reported PBT

 

(8,962)

(7,106)

(2,306)

(10,004)

(11,249)

Income tax expense (includes exceptionals)

 

2,823

(25)

0

0

0

Reported net income

 

(6,139)

(7,131)

(2,306)

(10,004)

(11,249)

Basic average number of shares, m

 

457

457

457

457

457

Basic EPS (c)

 

(1.3)

(1.6)

(5.0)

(21.9)

(24.6)

Adjusted EBITDA

 

(2,403)

(4,383)

4,915

(3,665)

(4,031)

Adjusted EBIT

 

(13,349)

(12,319)

(679)

(4,878)

(4,941)

Adjusted PBT

 

(12,605)

(11,747)

(7,173)

(12,681)

(13,774)

Adjusted EPS (c)

 

(5)

(1)

(7)

(19)

(21)

Adjusted diluted EPS (c)

 

(5)

(1)

(7)

(19)

(21)

BALANCE SHEET

 

Property, plant and equipment

 

11,585

11,836

26,086

28,883

139,517

Goodwill

 

0

0

0

0

0

Intangible assets

 

432,147

447,035

448,988

448,684

448,684

Other non-current assets

 

10,789

10,308

15,308

15,308

15,308

Total non-current assets

 

454,521

469,179

490,382

492,875

603,510

Cash and equivalents

 

50,729

40,426

20,000

20,000

20,000

Inventories

 

1,621

1,779

1,779

1,779

1,779

Trade and other receivables

 

16,840

9,510

15,000

15,000

15,000

Other current assets

 

4,354

568

568

568

568

Total current assets

 

73,544

52,283

37,347

37,347

37,347

Non-current loans and borrowings

 

0

0

2,215

5,383

116,956

Other non-current liabilities

 

85,245

90,971

97,950

105,802

114,635

Total non-current liabilities

 

85,245

90,971

100,166

111,185

231,591

Trade and other payables

 

12,772

15,148

13,048

13,048

13,048

Current loans and borrowings

 

0

0

0

0

0

Other current liabilities

 

9,450

0

0

0

0

Total current liabilities

 

22,222

15,148

13,048

13,048

13,048

Equity attributable to company

 

420,598

415,343

414,515

405,989

396,218

Non-controlling interest

 

0

0

0

0

0

CASH FLOW STATEMENT

 

Profit for the year

 

(8,962)

(7,106)

(2,306)

(10,004)

(11,249)

Taxation expenses

 

0

0

0

0

0

Net finance expenses

 

(743)

(572)

6,494

7,802

8,833

Depreciation and amortisation

 

5,687

4,111

2,797

607

455

Share based payments

 

864

1,478

1,478

1,478

1,478

Other adjustments (impairments)

 

5,652

1,628

0

0

0

Movements in working capital

 

(868)

5,891

(7,590)

0

0

Interest paid / received

 

0

0

0

0

0

Income taxes paid

 

0

0

0

0

0

Cash from operations (CFO)

 

1,630

5,430

873

(117)

(483)

Capex*

 

(26,817)

(15,784)

(19,000)

(15,000)

(111,090)

Acquisitions & disposals net

 

(6,266)

(658)

0

11,900

0

Other investing activities

 

521

722

5,485

49

0

Cash used in investing activities (CFIA)

 

(32,562)

(15,720)

(13,515)

(3,051)

(111,090)

Net proceeds from issue of shares

 

0

0

0

0

0

Movements in debt

 

0

0

2,215

3,167

111,573

Other financing activities (includes rig settlement)

 

(13)

18

0

0

0

Cash from financing activities (CFF)

 

(13)

18

2,215

3,167

111,573

Increase/(decrease) in cash

 

(30,945)

(10,272)

(10,426)

0

0

Currency translation differences and other

 

655

(31)

0

0

0

Cash at end of period

 

20,729

10,426

0

0

0

Net (debt)/cash including term deposits

 

50,729

40,426

17,785

14,617

(96,956)

Movement in net (debt) cash over period

 

(30,290)

(10,303)

(22,641)

(3,167)

(111,573)

Source: Rockhopper Exploration, Edison Investment Research. Note: *Assumes capex ahead of Sea Lion Phase 1 first oil funded by Premier and Navitas interest-free loan from 1 January 2020.

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This report has been commissioned by Rockhopper Exploration and prepared and issued by Edison, in consideration of a fee payable by Rockhopper Exploration. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

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This report has been commissioned by Rockhopper Exploration and prepared and issued by Edison, in consideration of a fee payable by Rockhopper Exploration. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2020 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2020. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

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United States

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