Rockhopper - Sea Lion Valuation Analysis
The question on a lot of people's mind is as follows - has the share price for Rockhopper Exploration (LON:RKH) got ahead of itself?
To consider this question, the spreadsheet here and summarised below looks at the Sea Lion valuation and its value expressed in terms of the RKH share price.
Please note that the analysis does not account for upside nor any other RKH assets or cash balances (select the Rockhopper file to download).
For the analysis, I used the following assumptions:
- Well cost = $40m, no wells = 34, no injectors = 6, Subsea CAPEX Costs = $1500M, Development Cost = $3200m, FPSO = $500k/day, OPEX = $7/bbl, CAPEX + DRILLEX = $13.5/bbl.
It's best to download the spreadsheet but a quick look below at the unrisked sensitivity table suggests not. However, it is less clear if you factor in "political" uncertainty, reserves uncertainty (until more appraisal drilling is complete) and also fiscal uncertainty (I don't for example support the theory that FI oil revenues will revert to FI and that Oil Companies will be allowed to keep as much revenue based on 30% tax and 9% royalty, hence the table showing risked and tax equalisation sensitivity). I haven't accounted for farm down either as that is "subjective" but you could also divide project NPV into 50% but add back the farm down cash raise so this should be fairly neutral.
So, at 480p (today's SP), I guess it's six of one and half dozen of the other - glass half full! The jury is out for now but, if the share price gets back to 550 or beyond, it certainly looks over-priced unless more reserves are added.
As ever, comments appreciated on Sea Lion or indeed any aspect of developing oil / gas in Falklands.
JPGH
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12 comments
Not been approached nor approached the broker so I can't say if that's right or not. It does seem/feel about right. Possibly a bit higher, approaching 300p.
It won't have been done last week is my guess, otherwise no need for bookbuild and this process is what sets the pricing.
Looking at the trading today, seems as if news went to the interested parties around 12-12.30. Only a guess though.
Rumours on ADVFN that's it's 275p. Anyone heard any more "concrete" rumours? Seems like this might have been done a while back ..... so will last weeks news on resource reduction have any impact on more risk averse uptakers?
JPGH
Now this should be interesting - theyve announced the placing to raise approx £200m after the close of business.
Its to be done as a bookbuild so it'll be a good guage fo demand in the market.
Some broker comments from FT alphaville this morning.
A chaotic day for both shares yesterday following a somewhat surprising reserves downgrade from RKH's competent (incompetent?) person. Having initially been marked down 25% to 343p/share, RKH bounced intraday to a peak of 418p/share before fading towards the end, closing down 21% at 363p/share.
I suspect a big part of this fall came from the feeling that the group is facing an imminent equity fund-raising, and the hedge fund community may be shorting the stock in anticipation of this
However even allowing for this the fall looks overdone, with our revised NAV on RKH now standing at 545p/share, i.e. 50% above the current share price. The DES price reacted similarly yesterday, closing down 19%, and now looks like it is in buying territory. Bear in mind that DES is 17 days into the drilling of the 35-day Rachel well, a lookalike structure to Sea Lion. If successful this 250m barrel prospect would be worth in excess of 300p/share net to DES's 92.5% interest (and around 50p/share net to RKH). With a COS of around 25%, the risk/return is starting to look interesting - especially as the group has two further back-to-back slots on the rig following Rachel. I'd buy DES for a punt.
Can't say I'm tempted by DES - even after the correction.
Great model - Thanks!
Sounds about right, though I wouldn't consider buying above 200p maybe even 150p
RKH RNSs http://www.investegate.co.uk/Index.aspx?searchtype=3&words=RKH
RHK Today http://www.investegate.co.uk/Article.aspx?id=201010130700092872U
I see that todays RNS contains a statement from RKP that the CPR, were it issued today, would contain numbers for Sea Lion OIIP and 2C Resources 30% less than those indicated in June 2010.....due to lack of data (appraisal drills, more seismic).
SP opened up at 350p and has recovered to 400p or so. RKH need to drill some more wells here to firm up the numbers and evaluate upside of the stacked fan reservoir that have not been penetrated yet via drilling .
So the exuberance following the June 2010 volumetric numbers and subsequent test result data of Sept 2010 that lead to 550p is begining to take its toll as reality bites. This mornings RNS is just another dose of reality IMO. However some investors will now have lost confidence in management statements and this confidemce is hard to get this back, Also RKH need to raise cash for drilling/seismic and with SP now <400p then a pacing at <300p looks a possibility with potentially $200m needed in near term (£135M or 45M new shares@300p or 20% dilution).
Also I don't foresee any early oil type developments here for a while, certainly not witihin a 3-4 yr timeframe given the drilling requirements to prove this up pre FDP.
Based on implied resources reduction numbers, and with glass half empty outlook, 350p is looking more than fair value at the moment. II's will want this at a discount hence teh 300p number used above. Anyoen else got any opinion ofwhat the placing price might be?
JPGH
I suppose that the big uncertainty is how big will the RI be and will a farm down be another potential source of funding?
A 3+upto 5 well programme with the seismic work will not come cheap.
The problem here is, as some have said, there is a hell of a lot of work needed to be done to bring this into any production and no one likes uncertainty. Add in the concerns that some will have following the comments about the CPr and the contrast with the much bigger numbers bandied around and I can see a big discount being called for by anyone looking to put money in. 35% discount ? I dont think that your 300p would be at all unreasonable. If anythign Id be surprised if it went at that level.
I note a broker comment that pretty much sums up my view:
I note a broker comment that pretty much sums up my view:
Which broker ?
Pretty surprising RNS really when you consider all the positive noses that were coming from the AGM just two weeks ago.
http://www.iii.co.uk/articles/articledisplay.jsp?section=Markets&article_id=10119512
Chief executive Sam Moody told the audience he was "delighted" that the first ever discovery on the North Falkland Basin proved much more attractive that pre-drill estimates had initially suggested.
The question now is... just how big might it be?
"When we drilled we encountered greater net pay than anticipated and have since upgraded our recoverable oil estimates to 242 million barrels from the earlier 170 million," Moody said.
While he acknowledged that the company could only determine the full extent of oil present through drilling more wells, he noted that good results to date lead it to believe that it will "encounter thicker reservoir and higher flow rates going forward."
"There is a huge amount still to go for here," he boomed to his enchanted audience.
Can't say I'm impressed by the apparent turnaround - much more of that and I'd be more than happy to further reduce my position having skimmed off twice from my original 63p buy.
FWIW I think the current price level of 370p to 400p is just about OK given the possible fund raising issues and interim ?reserves write down. As usual with Falkland oilers month to month sentiment can swing wildly with commonsense valutions often going out the window.(I don't think by the way I've ever seen a more ridiculous write down of a share price after the first Desire well failure sent RKH down to 40p odd when the implied EV then was really quite minimal for a possible oil find.)
I get the slight impression that the fund raising isn't going to be anytime soon -with the Rachel well result due shortly if I was thinking about lending I think I'd want to see the results from that before committing.
I notice there was some comment on FT Alphaville today - the ML comment one of the more bullish remarks.
As widely expected, RKH confirmed that it is looking for additional funding for an
extensive 3D seismic programme and to secure a rig to drill 3 firm wells (+ 5
optional) in early 2011. We estimate the total cost of the plan at US$100-150m.
Cut NAV by 115p to 585p; risk/reward still positive – Buy
Reflecting lower contingent resources for SeaLion’s base case (-136p) partially
offset by newly identified exploration upside (+21p), we cut our NAV/PO by 115p
(-15%) to 585p. Whilst the news are clearly disappointing near term, we continue
to believe that SeaLion could ultimately become larger and more valuable than
the market appears to price in. As such we still see the medium term risk/reward
skewed to the upside and maintain our Buy rating.
I'm content to hold for the time being .And I wouldnt be averse to doing another quick and dirty trade with ARG if the Rachel well is a failure .
ran the breakeven case (for those who like this sort of thing, open the excel spreadhseet contained in the article link and use "Goal Seek" function to set DCF (Gross) = 0 by varying WTI assumption price. The breakeven is WTI = $48/bbl (or FI price of $43/bbl as I am assuming a discount of $5/bbl to WTI due to unknown/uncertainties in Sea Lion crude assay). This is high but given location this is not surprising. (Brazil Sub Salt stuff also has a high breakeven ($45/bbl apparently)).
Also, Murakami if you are reading this note I dont have a position in RKH as I missed the boat here on numerous occasions as RKH SP made its way up since discovery in April/May. I would add to the JPGH portfolio though if RKH comes off a bit to
good luck to all holders though.
JPGH
Interesting stuff, as you say its a share you wouldnt want to be out of, if all the signals are to be believed- largest Fan in the NFB, and if DES hit oil I think that this price will go into orbit.
The AGM should hopefully give us all a better insight as to which way this share is going , and we should be able to attach some sort of time scale to it more accuratley.
I am cautiously VERY optimistic :))