Ahead of new Falklands oil drilling next month City broker Canaccord says Rockhopper Exploration (LON:RKH) presents an attractive investment opportunity.
The new phase of exploration is set to reach top gear next month when work will start on the first of at least six wells in the South Atlantic.
Canaccord analyst Charlie Sharp says it will be a “a highly material” drilling campaign which has the potential to double Rockhopper’s resources in the Sea Lion field and its satellite prospects.
Rockhopper, alongside project operator Premier Oil, is involved in the four wells that are currently slated for the North Falkland basin.
These wells could potentially be drilled back to back, and the series will begin with the Zebedee well – it is then expected that the Isobeel Deep prospect will be next, and then possibly the Jayne and Chatham wells will follow.
Zebedee is estimated to host up to 282mln barrels of oil (an unrisked mean estimate) and it has considered to have a 19% chance of success.
Isobel Deep is one of several prospects within the Elaine/Isobel complex (which could contain up to 510mln barrels) and it is estimated at 72mln barrels with a 18% chance of success. Jayne is estimated at 87mln barrels with a higher chance of success at 26%.
Chatham, which includes a Sea Lion appraisal target, is believed to hold an estimate 127mln barrels and it has a 1-in-3 chance of success.
Rockhopper has a 24% working interest in the first three targets, while it retains 40% of Chatham.
“The source and migration paths for the oil in the area is well established as is the presence of a high quality reservoir,” Sharp said in a note.
“The key risks then are related to the trapping mechanism and to the hydrocarbon phase (gas or oil).”
Sharp also highlights that the economics of the Sea Lion field development project now look “rosier” as crude prices have recovered to US$60 (from lows of US$45) and because of more competitive market for procurement and drilling services.
“The oil price collapse and industry capex cuts have cut service costs markedly, particularly rig rates, and we can envisage cost reductions of at least 10-20%,” he added.
“A strong balance sheet (anticipated end '15 net cash of $130m), the declining cost level especially for drilling, and a compelling exploration programme, make Rockhopper an attractive opportunity.”
The analyst’s 170p target price – which implies some 140% upside to the current price of 68.5p – excludes any upside from the 2015 drill targets, except for the Sea Lion appraisal in the Chatham well.
Sharp estimates the drilling can add between 26p to 95p to his valuation, and he points out that even after this capex programme Rockhopper’s remaining cash resources are estimated to be worth about 30p per share.