Despite the apparent setback there is plenty of upside for investors in the Falklands story, analysts said. In particular, they hold out hope for Rockhopper Exploration (LON:RKH) as it tries to follow up the success of last year’s Sea Lion discovery.
In May 2010 the original Sea Lion put the North Falkland basin on the map as a credible new oil frontier. Rockhopper subsequently set the discovery’s recoverable resource estimate at 242 million barrels.
The result lit the blue-touch paper under a group of explorers with assets in the region - Rockhopper, Desire Petroleum (LON:DES) and Argos Resources (LON:ARG).
However efforts to build on this initial oil discovery have resulted in something of a riddle for the companies as well as top analysts in the Square Mile.
On Friday Rockhopper revealed the result of the second well to target the Sea Lion prospect in the North Falkland basin, but once again the enigmatic oil frontier caught investors off-guard by throwing up another complicated result.
The 14/10-3 well was drilled to 2,830 metres - 8 kilometres away from the original Sea Lion discovery well - and it hit four separate reservoir section with 64 gross metres of ‘good quality’ reservoirs. Oil and gas shows were detected throughout drilling and live oil was recovered to surface, however on further testing three of the four reservoirs were found to have high water saturation (above 90 percent).
Meanwhile in the remaining reservoir Rockhopper has recovered samples – via a mini drill stem test (DST) - with 20 percent live oil, which is indicated to be medium gravity. This reservoir, referred to as Sand 3, had 64 percent water saturation.
Although Rockhopper described the results as encouraging they clearly fell short of expectations. On Friday the shares fell more than 17 percent and finished the session at 278 pence. Also a glance at the chart also suggests that some investors had already started to second guess the negative result. After closing last Monday’s session at 386 the stock fell for four consecutive says, shedding more than 100 pence a share.
As each well comes and goes it seems that Rockhopper and Desire are finding more questions than answers.
Here we take a look at what two of London’s respected oil analysts have to say about this conundrum that has everyone scratching their heads in the South Atlantic.
Richard Slape, oil analyst at Cannacord Genuity, highlighted that the result provides ‘plenty of encouragement but not much oil’.
In a note to clients Slape notes that the well encountered good quality reservoirs, and as such some encouragement can be gleaned from an otherwise disappointing result.
“Given that reservoir quality is regarded as a significant risk in the area, Rockhopper said it was pleased to have encountered a thick sequence of sand with average porosity of 18-20% and peaks of up to 25 percent,” Slape said.
He adds: “The result of 14/10-3 is disappointing but investors should not forget that it was an exploration well located 8 kilometres from the Sea Lion discovery.”
The analyst reckons the sell off that followed Friday’s disappointment has created a buying opportunity.
“So, while it now seems unlikely that the upper end of the previous range of resource estimates (669 million barrels on a P10 basis) for the field will be realised, we do not think this will have an adverse impact on earlier P50 resource estimates,” Slape said.
He adds: “Assuming it contains reserves of 170 million barrels, we estimate the Sea Lion oil field is worth equivalent of 402 pence per Rockhopper share ... adding an estimated 92 pence a share of net cash increases the total to 494 pence, which is our target.
The Cannacord Genuity analyst rates Rockhopper as a ‘buy’.
Fox-Davies analyst Lionel Therond said: “the large 8km out-step from the initial discovery well was always more exploratory in nature than pure appraisal.”
“Accordingly, the results of this second well on the Sea Lion complex are difficult to interpret in the context of the first well, and more questions seem to have been raised than answered.
Therond reckons a more thorough and complete interpretation will help Rockhopper gain ‘invaluable insights’ in its understanding of the Sea Lion field and indeed of the North Falkland basin.
Like Slape, Therond is keeping his faith in the current P50 resources estimates for the overall Sea Lion discovery and he also believes the share price weakness presents a buying opportunity.
He also looked to the bright side as the analyst maintained his earlier forecast for the Sea Lion.
“We remain of the view that in the short-term the P10 resources estimate is impacted by these latest drilling results but that the P50 and also P90 should be largely unchanged.”
The analyst adds: “The next well is located closer to the initial discovery well and is more of an appraisal of the extent of the Sea Lion structure. As such, the results will be more critical for firming up resources estimates.”