Two material events on the horizon

Rockhopper Exploration 7 August 2019 Update
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Rockhopper Exploration

Two material events on the horizon

PIM submitted

Oil & gas

7 August 2019

Price

20p

Market cap

£92m

US$/£1.29

Net cash ($m) at 31 December 2018

40

Shares in issue

458m

Free float

99%

Code

RKH

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(3.5)

(11.6)

(51.0)

Rel (local)

(1.5)

(11.7)

(49.5)

52-week high/low

40.8p

19.9

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

Funding progress on Sea Lion

Q419

Ombrina Mare arbitration outcome

Q120

Analysts

Sanjeev Bahl

+44 (0)20 3077 5700

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

The Rockhopper (RKH)/Premier Oil (PMO) joint venture (JV) has submitted the preliminary information memorandum (PIM) to potential providers of senior debt project finance for the Sea Lion development. Submission of the PIM is supported by independent expert reports covering a range of technical, legal and tax aspects of the Sea Lion project. The JV views this as a material milestone and anticipates moving into detailed lender due diligence and documentation in Q419. In June, Italy's request for the suspension of the Ombrina Mare arbitration was rejected. RKH is seeking significant monetary damages and an award is now expected in Q120. Confirmation of Sea Lion FID and a successful arbitration outcome for Ombrina Mare have the potential to close the gap between the current share price and our valuation. We continue to assume a Sea Lion phase 1 first oil date of mid-2024, with our risked valuation standing at 79.6p/share.

Year end

Revenue
($m)

PBT*
($m)

Cash from operations ($m)

Net (debt)/
cash ($m)

Capex
($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

10.7

(2.1)

1.1

27.0

(24.0)

12/20e

2.2

(9.7)

(0.2)

22.4

(5.0)

Note: *PBT normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. **assumes capex ahead of first oil funded through RKH's share of project debt and PMO carry.

PIM a key milestone towards FID

Sea Lion PIM submission is material step forward for the project’s development and is a sign of commitment to it from both RKH and PMO. The JV has been engaging senior lenders and export credit agencies over the last 18 months and we understand the JV has been encouraged to make the submission at this time. The JV expects initial feedback on the PIM submission in Q419. The timeline for securing project finance and the Sea Lion final investment decision (FID) remains uncertain. We expect to revise our assumed mid-2024 Sea Lion first oil date in H219 once there is further visibility on funding.

Disposal consideration for Abu Sennan is in line

RKH has signed a sales purchase agreement (SPA) for the sale of its 22% interest in Abu Sennan, Egypt to United Oil & Gas for a total consideration of $16m. This is broadly in line with our last published valuation of the asset at $15.2m and above RKH’s net book value of $13.8m as of December 2018. The transaction is expected to complete during Q419 with an effective date of 1 January 2019.

Valuation: Market is heavily discounting Sea Lion

Our valuation suggests that the equity market continues to apply a c 20% chance of success (CoS) for Sea Lion Phase 1, which we believe is low considering the JV’s continued progress. Our broadly unchanged risked valuation stands at 79.6p/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.

Valuation

Our base case valuation remains broadly unchanged at 79.6p/share (from 78.9p/share). In our previously published note, we valued Abu Sennan at $15.2m ($17.6m on inclusion of associated cash and working capital). This is close to the $16m sales consideration implied by the transaction with United Oil & Gas. Our forecasts and NAV have been updated to reflect an effective transaction date of 31 December 2018 with completion expected in Q419.

We have not revised our Falklands valuation at this point with Sea Lion Phase 1 first oil assumed in mid-2024. We essentially include a one-year contingency over and above management’s guidance. We continue to base our valuation on a long-term oil price expectation of $70/bbl Brent from 2022.

NAV breakdown by asset

A full breakdown of our valuation by asset is provided in Exhibit 1 below, including a sensitivity to our underlying discount rate assumption of 12.5%.

Exhibit 1: Edison breakdown of Rockhopper NAV

Recoverable reserves

Net risked value at 12.5%

WI

CoS

Gross

Net

NPV

Asset

Country

First oil

%

mmboe

mmboe

$/boe

$m

p/share

10%

15%

20%

Net cash at 31 December 2018

40

6.8

6.8

6.8

6.8

SG&A (NPV12.5 of 5 years)

(24)

(4.1)

(4.1)

(4.1)

(4.1)

Proceeds from Abu Sennan disposal

16

2.7

2.7

2.7

2.7

Production

Civita

Italy

100%

100%

0.1

0.1

(21.9)

(1)

0.0

0.0

0.0

0.0

Guendalina

Italy

20%

100%

0.8

0.2

23.6

4

0.6

0.6

0.6

0.6

Development

Sea Lion Phase 1

Falkland Islands

2024

40%

55%

220.6

88.3

5.3

258

43.6

58.6

32.3

17.1

Sea Lion Phase 2 in PL32

Falkland Islands

2029

40%

20%

87.3

34.9

4.6

32

5.4

8.2

3.6

1.6

Sea Lion Phase 2 in PL04

Falkland Islands

2029

64%

20%

213.7

136.8

4.6

126

21.2

32.0

14.0

6.1

Ombrina Mare - under arbitration*

Italy

20

3.4

3.4

3.4

3.4

Core NAV

522.4

260.1

470

79.6

108.2

59.3

34.2

Source: Edison Investment Research. Note: Number of shares: 457.8m. *Based on 50% chance of recovering acquisition cost rather than risked recovery of loss of profit.

Rockhopper currently trades at 20.0p/share relative to our risked valuation of 79.6p/share. The equity market appears to be pricing in a materially 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 less than 20% for Phase 1 at $70/bbl or c 30% at $60/bbl. We believe the project is more likely to proceed than not (see our last published note for further details) hence our 55% commercial chance of success for Phase 1.

Exhibit 2: Core assets and Sea Lion Phase 1 sensitivity

Exhibit 3: Rockhopper NAV waterfall

Phase 1 CoS/

Brent $/bbl LT

50

60

70

80

90

10%

7.1

10.5

13.9

17.2

20.5

20%

8.2

15.0

21.9

28.5

35.0

30%

9.3

19.5

29.8

39.7

49.5

40%

10.5

24.1

37.7

51.0

64.1

50%

11.6

28.6

45.6

62.2

78.6

55%

12.1

30.8

49.6

67.8

85.8

Source: Edison Investment Research

Source: Edison Investment Research

Exhibit 2: Core assets and Sea Lion Phase 1 sensitivity

Phase 1 CoS/

Brent $/bbl LT

50

60

70

80

90

10%

7.1

10.5

13.9

17.2

20.5

20%

8.2

15.0

21.9

28.5

35.0

30%

9.3

19.5

29.8

39.7

49.5

40%

10.5

24.1

37.7

51.0

64.1

50%

11.6

28.6

45.6

62.2

78.6

55%

12.1

30.8

49.6

67.8

85.8

Source: Edison Investment Research

Exhibit 3: Rockhopper NAV waterfall

Source: Edison Investment Research

Financials: Sea Lion Phase 1 funding

Rockhopper ended FY18 with c $40m of cash on the balance sheet and no debt, in line with our estimates. With the disposal of Abu Sennan for a consideration of $16m, our forecast Italian asset capex and SG&A are covered for the next two years at c $5.4m pa. We believe Rockhopper is funded through to Sea Lion Phase 1 first oil given current operator estimates of capex (c $1.5bn gross through to first oil) and debt capacity. Funding for the project is expected to be split into vendor financing (c $375m), export credit/bank finance (c $750m) and upstream partner equity (c $375m).

In this note, we include FY21 financial forecasts for the first time.

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 Q120.

Exhibit 4: Financial summary

 

2017

2018

2019e

2020e

2021e

Year-end: 31 December; USD: Thousands

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Total revenues**

10,401

10,580

10,673

2,167

1,666

Cost of sales

(9,573)

(8,531)

(5,111)

(1,097)

(772)

Gross profit

 

828

2,049

5,562

1,070

893

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)

4,446

(2,246)

(2,423)

Finance income/(expense)

 

783

825

634

573

238

Other income/(expense)

 

(39)

(253)

(7,167)

(8,063)

(9,071)

Exceptionals and adjustments

 

0

0

0

0

0

Reported PBT

 

(8,962)

(7,106)

(2,087)

(9,736)

(11,256)

Income tax expense (includes exceptionals)

 

2,823

(25)

0

0

0

Reported net income

 

(6,139)

(7,131)

(2,087)

(9,736)

(11,256)

Basic average number of shares, m

 

457

457

457

457

457

Basic EPS

 

(1.3)

(1.6)

(4.6)

(21.3)

(24.6)

 

 

 

 

 

 

 

Adjusted EBITDA

 

(2,403)

(4,383)

5,175

(3,708)

(4,037)

Adjusted EBIT

 

(13,349)

(12,319)

(423)

(4,925)

(4,949)

Adjusted PBT

 

(12,605)

(11,747)

(6,956)

(12,414)

(13,782)

Adjusted EPS (c)

 

(5)

(1)

(6)

(18)

(21)

Adjusted diluted EPS (c)

 

(5)

(1)

(6)

(18)

(21)

 

 

 

 

 

 

 

Balance sheet

 

Property, plant and equipment

 

11,585

11,836

16,036

20,732

69,476

Goodwill

 

0

0

0

0

0

Intangible assets

 

432,147

447,035

450,236

449,932

449,932

Other non-current assets

 

10,789

10,308

15,308

15,308

15,308

Total non-current assets

 

454,521

469,179

481,580

485,972

534,716

Cash and equivalents

 

50,729

40,426

26,993

22,406

10,000

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

44,340

39,753

27,347

Non-current loans and borrowings

 

0

0

0

0

37,045

Other non-current liabilities

 

85,245

90,971

98,138

106,201

115,272

Total non-current liabilities

 

85,245

90,971

98,138

106,201

152,317

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

414,734

406,476

396,698

Non-controlling interest

 

0

0

0

0

0

 

 

 

 

 

 

 

Cash flow statement

 

Profit for the year

 

(8,962)

(7,106)

(2,087)

(9,736)

(11,256)

Taxation expenses

 

0

0

0

0

0

Net finance expenses

 

(743)

(572)

6,534

7,490

8,833

Depreciation and amortisation

 

5,687

4,111

2,799

608

456

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

1,133

(160)

(489)

Capex

 

(26,817)

(15,784)

(24,000)

(5,000)*

(49,200)*

Acquisitions & disposals net

 

(6,266)

(658)

13,800

0

0

Other investing activities

 

521

722

15,634

573

238

Cash used in investing activities (CFIA)

 

(32,562)

(15,720)

5,434

(4,427)

(48,962)

Net proceeds from issue of shares

 

0

0

0

0

0

Movements in debt

 

0

0

0

0

37,045

Other financing activities (includes rig settlement)

 

(13)

18

0

0

0

Cash from financing activities (CFF)

 

(13)

18

0

0

37,045

Increase/(decrease) in cash

 

(30,945)

(10,272)

6,567

(4,587)

(12,406)

Currency translation differences and other

 

655

(31)

0

0

0

Cash at end of period

 

20,729

10,426

16,993

12,406

0

Net (debt) cash including term deposits

 

50,729

40,426

26,993

22,406

(27,045)

Movement in net (debt) cash over period

 

(30,290)

(10,303)

(13,433)

(4,587)

(49,451)

Source: Rockhopper Exploration, Edison Investment Research. Note: *Assumes capex ahead of first oil funded through Rockhopper's share of project debt and Premier Oil carry. **Assumes Q419 completion of Abu Sennan disposal.

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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.

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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 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “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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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.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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