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New Sea Lion agreement good for Rockhopper, says broker

Last updated: 21:18 21 Nov 2014 AEDT, First published: 22:18 21 Nov 2014 AEDT

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Falkland Islands oil explorer Rockhopper (LON:RKH) has stayed on the buy list at broker Liberum after its amended deal with Premier Oil (LON:PMO) to develop the Sea Lion field.

The revised development plan, announced last week, is a pragmatic and sensible way to unlock the value in Sea Lion in a low oil price environment, added the broker.

The difference from earlier plans is that the field will be developed in two parts (known as Phases 1a and 1b), each of which will recover roughly half the reserves.

Sea Lion will now come on stream utilising a leased floating platform, reducing capital costs significantly while still achieving first production in 2019.

As a result, a farm-out by Premier is no longer a pre-requisite for project sanction and Rockhopper will retain its full 40% interest while benefiting from a development carry.

While Liberum has trimmed its target price to 214p from 236p, the deal has significantly increased the probability that Sea Lion will be developed and is a big step forward for Rockhopper, it said.

The current share price for Rockhopper implies the market sees less than a 20% chance of the project happening, but those odds may have now become more favourable.

A drilling unit should arrive in the Falklands in the first quarter of next year to start a four well programme for Rockhopper and Premier and this exploration campaign should lead to fuller recognition of the value of Rockhopper’s assets, Liberum adds.

Premier estimates recoverable reserves are 308mln barrels (mmb) oil with upside of an additional 60 mmb if the Chatham well shows that a gas cap is not present in the western side of the field.

Later in 2015, meanwhile, in Italy, Rockhopper should see first gas from the onshore Civita project and a side track on Guendalina is possible in late 2015/early 2016. Together these could add 75 – 100% to current production.

Buy is the broker’s recommendation. Shares today were 80.5p.

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