A new Falklands farm-out can provide a spark for Rockhopper (LON:RKH) shares, according to City broker Liberum, but first the AIM firm may need to make some concessions for a deal to be done.
With an upgraded target price of 272p the broker’s buy recommendation implies some 209% of upside to the current price of 88p.
“Recent presentations and updates by both Rockhopper and Premier Oil have drawn attention back to the Falklands,” Liberum analyst Andrew Whittock said.
“Premier is progressing its plans for Sea Lion and exploration drilling should resume in the North Falklands Basin (NFB) by the middle of 2015.
“We believe there will be growing focus on Premier's farm-out process, the outcome of which will, in our view, have a significant impact on the value of both Premier and Rockhopper shares.”
Whittock says that whilst SEA LION is sufficiently valuable to attract a partner warns the ‘population of companies interested in the Falklands’ could be limited.
Also points to an ‘over supplied’ asset market as he claims completing a conventional farm-out could be challenging.
“we expect that Rockhopper will come under pressure to sweeten the terms of its carry and allow some perceived asset value to transfer to the incoming partner.”
That said, the analyst alludes that this would not necessarily be a bad thing.
“Given the share price currently appears to be discounting only a 20% chance of the project proceeding, we would welcome a reasonable reduction in Rockhopper’s asset value in return for certainty that the project will move ahead.”
Lifting his target price slightly, increasing by 5p to 272p, Whittock says a farm out deal would be critical in moving the oil share higher, though he sees the risk to the share price if a deal is not secured.
“Clearly, there would be downside to the Rockhopper price if the farm-out process is unsuccessful.
“But if it succeeds, as we expect, there should be very significant upside.
“Rockhopper should receive a fuller recognition of the asset’s value and the greater certainty over its future financing will also enable management to consider options to grow and diversify the company, including further acquisitions.”