Rockhopper Exploration — Update 21 April 2016

Rockhopper Exploration — Update 21 April 2016

Rockhopper Exploration

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Rockhopper Exploration

Egypt hops from Beach to Rocks

Deal re-started

Oil & gas

21 April 2016

Price

30.75p

Market cap

£140m

US$/£0.7

Net cash ($m) at end December 2015

110

Shares in issue

456.5m

Free float

99%

Code

RKH

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

0.0

9.8

(52.1)

Rel (local)

(3)

(2.1)

(48)

52-week high/low

79.5p

24.2p

Business description

Rockhopper is a London-listed E&P with fully funded development of Sea Lion, a 500+mmbbl field in the Falklands. The Isobel Deep/Elaine complex could add a further 500mmbbl (or more). It also holds assets in the Mediterranean and has an Egyptian asset deal pending.

Next events

CPR

Q216

Egypt acquisition close

Mid-2016

Analysts

Will Forbes

+44 (0)20 3077 5749

Elaine Reynolds

+44 (0)20 3077 5713

Ian McLelland

+44 (0)20 3077 5756

Rockhopper Exploration is a research client of Edison Investment Research Limited

Rockhopper (RKH) has announced it is to purchase a stake in the Abu Sennan asset from Beach Energy. This is a rekindling of the deal first announced in August 2015 (then cancelled due to pre-emption). The deal agreed has better headline prices ($11.9m/$2.7/boe 2P+2C vs $22m/$4.5/boe) and, despite the lower commodity prices, returns metrics (IRR of 23% vs 22%). The acquisition gives Rockhopper valuable low-cost production and exposure to appraisal and exploration at Abu Sennan and El Qa’a Plain. Until closing, we do not include the proposed deal in the NAV, but our modelling indicates that it would add $15m or 2.3p/share. We have remodelled Sea Lion to account for larger volumes indicated by Premier, which increases the core NAV to 90p/share. This indicates notable upside for investors with a long-term outlook.

Year end

Revenue
($m)

PBT*
($m)

Operating cash
flow ($m)

Net (debt)/
cash ($m)

Capex
($m)

12/14

1.9

(7.4)

(11.2)

199.7

(10.6)

12/15

4.0

(39.9)

(6.9)

110.4

(80.3)

12/16e

10.3

(9.4)

1.2

64.9

(37.4)

12/17e

13.9

(16.8)

0.2

50.4

(14.7)

Note: *PBT is normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. Financials assume closure of the acquisition in mid-2016.

Beach assets

The acquisition is dominated by the production assets at Abu Sennan (90% oil), operated by Kuwait Energy. It started commercial production in 2012, and will contribute 1mboe/d (net) to RKH and 3.5mmboe net 2P+2C reserves. Rockhopper points to substantial upside in exploration with near-term drilling programme. Additionally, Qa’a Plain (25% WI) should drill by the end of 2017.

Remodelling of Sea Lion – 500+mmbbl field

We have remodelled the Sea Lion development to be in line with PMO’s declaration of a 300mmbbl Phase 2 (we had previously had this spread across a number of intervals, totalling 267mmbls). We continue to model first oil in 2021 for Phase 1a, but note that delays (a new partner could easily require more time to sign-off on a development concept/budget) are a key risk. The longer that the oil price remains both low and volatile, the longer a farm-out/FID is likely to take.

Valuation: NAV increases, long-term upside

We have adjusted our NAV to reflect the new phasing of Sea Lion, increasing Phase 2 volumes to 300mmbbls (Phase 1a volumes remain at 220mmbbls). This results in an increase in the core NAV to 90p/share and RENAV to 103p/share. Until the deal closes (expected mid-2016), we exclude the value of the Egyptian producing assets, though note that initial modelling indicates that the NPV12 would be $15m (2.3p/share). We note that the working interest/value that RKH may retain in any farm-down deal is a material uncertainty.

Beach Energy deal resurrected

Exhibit 1: Headline metrics

Headline consideration

$11.9m for 22%, $9.1m for 17% (if sold on to Dover). There is an agreement (LOI signed) to sell 5% of the acquisition to Dover once the asset has been acquired from Beach. RKH will retain the full 25% WI in Qa’a Plain concession

Cash/equity

All cash

Estimated 2015 Egypt production

1,000boe/d (assuming 17% interest)

Estimated Rockhopper production (post-closing)

1,500-1,800boe/d

2P+2C resources (net to RKH)

3.5mmboe (assuming 17% interest)

Implied acquisition cost

$2.7 per boe (2P+2C)

Payback period from completion

Around 3 years (Edison estimate, using 2016-2018 Brent prices of $40, $50 and $63/bbl respectively

Edison modelled IRR (excludes working capital movements)

23%

Completion date expected

Mid-2016 (in our modelling we assume start Q316)

Source: Rockhopper Exploration, Edison Investment Research

The resurrection of the deal sees Rockhopper paying substantially less than was originally announced ($22m in cash and shares) in August 2015. As a result, the $/boe (2P+2C) figure has fallen from $4.5/boe to $2.7/boe. While the oil price has fallen, the asset is cash generative even at oil prices of $35/bbl (opex is $8/boe) and the deal provides better returns.

Our modelling of the asset in September 2015 indicated an IRR of 22% (on the then oil price assumptions of $60/bbl in 2016 and $70/bbl in 2017) while the new deal sees an IRR of 23%. We expect a payback in around three years.

Working capital adjustments

Rockhopper will take on the receivables value of Beach Energy, passing on the receivables paid until the sum of $8.6m is paid. Alternatively, Beach can elect to receive 25% of the outstanding amount one year after completion in full and final settlement. We believe that the receivables have built (from $3m in August 2015 to $8.6m in January) as a result of Egypt de-prioritising payments given the sale of the asset. We would expect this to start to rebalance after the close of the deal.

Metrics

As seen below, the implied $/2P boe is very competitive vs past deals – this is not surprising given the collapse in the oil price.

Exhibit 2: Deal metrics for Algeria, Libya, Egypt and Tunisia

Source: 1Derrick, Edison Investment Research

History of Abu Sennan under Beach Energy

In December 2010, Beach (22%) and partners started a six-well exploration programme on the Abu Sennan in the Western Desert, Egypt. The first well (GPZZ-4) encountered hydrocarbons and was appraised and tested, and followed by three discoveries, flowing oil, gas and condensate at a combined rate of 12mboe/d (gross).

Development leases over the discoveries were granted in 2012, and the fields started production in February 2013, delivering Beach a total of 130mbbls in the year. A further three exploration/
appraisal wells and one development well were drilled. Two had hydrocarbon shows. In August 2013, the operator (Kuwait Energy) estimated gross 2P of 18.5mmbbls and 142bcf in the Kharita formation only. In total, 20 wells have been drilled, with 16 successful.

Gross production was 663mbbls (and 61mbbls net entitlement) for the year ended June 2014. Gross 2P reserves were estimated at 13.1mmbbls and 21.2bcf. For the half year ended 31 December 2014, production increased by 66% to 50mbbls, while production increased further by June 2015 as a gas pipeline from the El Salmiya field was commissioned. At the time of the first acquisition announcement in August 2015, Rockhopper gave estimates of future production, which we have assumed in our modelling. However, we note that the fields suffer from relatively high decline rates, so will require in-fill wells (gross costs of around $5m per well) to keep production at current levels.

The 2P and 2C resources given by Rockhopper are 3.5mmboe (across four fields), suggesting a 2P+2C reserve life of 12.8 years (assuming an average 2016 production of 4.4mboe/d).

Exhibit 3: Abu Sennan permit.

Exhibit 4: Effective annual rate (boe/d) – Abu Sennan concession

Source: Beach Energy

Source: Rockhopper Exploration

Exhibit 3: Abu Sennan permit.

Source: Beach Energy

Exhibit 4: Effective annual rate (boe/d) – Abu Sennan concession

Source: Rockhopper Exploration

Other opportunities

In 2015, Rockhopper pointed to substantial prospectivity in the licence – in excess of 100mmboe (gross) across a number of prospects – this is still the case. We do not believe that all of these will be drilled, and would expect that if initial wells planned are unsuccessful, no further wells will be drilled. At the moment, we do not know which will be drilled, but one could assume that the company will initially focus on those in the exploration areas (as opposed to the production areas) given the desire to convert the exploration areas into production areas. Of the leads/prospects in exploration areas (identified in 2015 but not yet in 2016), the top two contain 32mmboe, and the top four contain around 65mmboe, still substantial volumes. Some changes may have been made since 2015, but we would imagine that the top targets could be of similar size.

Exhibit 5: Leads and prospects (gross) for Abu Sennan

Exhibit 6: El Qa’a Plain concession

Source: Rockhopper Exploration (August 2015)

Source: Rockhopper Exploration

Exhibit 5: Leads and prospects (gross) for Abu Sennan

Source: Rockhopper Exploration (August 2015)

Exhibit 6: El Qa’a Plain concession

Source: Rockhopper Exploration

Other assets in Egypt

We assume that Rockhopper’s interest in the acquisition is predominantly in Abu Sennan. While the El Qa’a Plain is a larger acreage position (and Rockhopper will hold a larger WI at 25%), exploration is currently not valued by the market (or much by industry) and so we would see this entirely as an option (albeit one that will require some limited expenditure).

Further, we note that a partner in the block (Petroceltic, 37.5%) is in examinership in Ireland and may not be able to fund its portion of any wells (although we believe it may have ample Egyptian currency working capital, the group-level financial situation is poor). How this affects the block’s exploration activities is therefore uncertain, we think. Should Petroceltic default on this well, there is the possibility that Rockhopper will increase its working interest, and therefore net exposure to the well (costs and net risked value). If the PCI stake is apportioned according to current working interest, RKH’s interest may increase to 40%. We estimate current net drilling costs at $2-2.5m for the committed exploration well in 2016/17 (assuming WI of 25%).

Rockhopper indicates prospect sizes of potentially 50-100mmbbls in fault assisted traps, although the leads and prospects will benefit from the 2D/3D seismic being processed. We expect to more fully model the financial impact once this is better known. For now, we include the exploration costs in 2017 financials, but explicitly do not value any benefit from this drilling (even on a risked basis).

Valuation

We make a number of changes, including remodelling of the Sea Lion Phase 2 to 300mmbls (in line with PMO disclosure). We also make the broad assumption that these volumes are split equally between PL04 and PL32, although we note that as no guidance has been released about this split it is subject to revision over time. We assume first oil in 2021 (Phase 1) and 2025 (Phase 2).

As a result, our valuation increases. Our NAV increases to 90p/share, with RENAV moving to 103p/share. We have valued the producing assets at Abu Sennan at NPV12 of $15m, or 2.3p/share. We do not formally include the acquisition in NAV yet – we will wait until the deal closes. However, we do include the numbers in our financial forecasts to give investors an idea of the cash flow implications. Further value for exploration/appraisal will be given once the deal closes and the timing of drilling and size of targets are known. We note that the producing assets are valued at $4.4/boe in our modelling, well above the purchase metrics.

Exhibit 7: NAV summary

Asset

£/US$1.4

 

 

Recoverable reserves

 

 

 

 

 

 

Shares: 457m

WI

CoS

Gross

Net

NPV

Net risked value

 

 

 

Country

%

mmboe

$/boe

$m

/share

10%

15%

20%

Net (debt)/cash - December 2015

110

17

17

17

17

G&A (NPV10 of three years G&A)

(25)

(4)

(4)

(4)

(4)

2016 Exploration

(8)

(1)

(1)

(1)

(1)

Production

Guendalina

Italy

20%

100%

3.2

0.6

14.8

10

1.5

1.5

1.5

1.5

Civita

Italy

100%

100%

0.2

0.2

6.7

1

0.2

0.2

0.2

0.2

Development

SeaLion 1a

Falkland Islands

40%

45%

220

88

6.8

269

41

51

30

19

SeaLion Phase 2 in PL32 (50% assumed)

Falkland Islands

40%

45%

150

60

3.3

89

14

20

8

2

SeaLion Phase 2 in PL04 (50% assumed)

Falkland Islands

64%

45%

150

96

3.3

143

22

31

12

4

Core NAV

 

 

 

 

 

 

590

90

115

63

38

Isobel Deep

Falkland Islands

64%

23%

500

320

1.2

89

14

27

2

0

RENAV

 

 

 

 

 

 

679

103

142

66

38

Abu Sennan

Egypt

17%

100%

20

3.5

4.4

15

2.3

2.7

1.9

1.4

Cash component of acquisition of Egyptian assets

100%

100%

(9)

(1.4)

(1)

(1)

(1)

Source: Edison Investment Research

Financials

Rockhopper remains well capitalised, with $110m of cash at the end of 2015 (excluding $2m of restricted cash). The Beach Energy acquisition is an example of where a well-funded, patient buyer can make returns above the costs of capital in this low environment. With pro rata volumes (post-closing) of 1,500-1,800boe/d, the acquisition should provide valuable cash flows to offset G&A going forwards, as well as exposure to upside from appraisal/exploration.

As the service costs fall, the committed carry from Premier covers more and more of the capital required pre-first oil at Sea Lion, reducing the requirement for Rockhopper to seek more expensive financing from either the debt facility or external funding.

Exhibit 8: Financial summary

 

 

$'000s

 

2012

2013

2014

2015

2016e

2017e

Dec

 

 

 

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

 

0

0

1,910

3,966

10,336

13,898

Cost of Sales

0

0

(3,970)

(11,049)

(2,936)

(3,901)

Gross Profit

0

0

(2,060)

(7,083)

7,399

9,997

EBITDA

 

 

 

(12,924)

(16,948)

(5,845)

(38,178)

(2,710)

(3,365)

Operating Profit (before amort. and except.)

(13,191)

(17,230)

(8,031)

(40,922)

(9,965)

(16,827)

Intangible Amortisation

0

0

0

0

0

0

Exceptionals

58,668

0

0

0

0

0

Other

0

0

0

0

0

0

Operating Profit

45,477

(17,230)

(8,031)

(40,922)

(9,965)

(16,827)

Net Interest

1,640

1,499

657

975

543

32

Profit Before Tax (norm)

 

(11,551)

(15,731)

(7,374)

(39,947)

(9,422)

(16,795)

Profit Before Tax (FRS 3)

 

47,117

(15,731)

(7,374)

(39,947)

(9,422)

(16,795)

Tax

(122,359)

(62,542)

(5)

55,395

1,281

1,389

Profit After Tax (norm)

(133,910)

(78,273)

(7,379)

15,448

(8,140)

(15,406)

Profit After Tax (FRS 3)

(75,242)

(78,273)

(7,379)

15,448

(8,140)

(15,406)

Average Number of Shares Outstanding (m)

284.2

284.3

292.6

293.4

456.5

456.5

EPS - normalised (p)

 

 

(47.1)

(27.5)

(2.5)

5.3

(1.8)

(3.4)

EPS - normalised and fully diluted (p)

(47.1)

(27.5)

(2.5)

5.3

(1.8)

(3.4)

EPS - (IFRS) (p)

 

 

(26.5)

(27.5)

(2.5)

5.3

(1.8)

(3.4)

Dividend per share (p)

0.0

0.0

0.0

0.0

0.0

0.0

Gross Margin (%)

-107.9

-178.6

71.6

71.9

EBITDA Margin (%)

-306.0

-962.6

-26.2

-24.2

Operating Margin (before GW and except.) (%)

-420.5

-1031.8

-96.4

-121.1

BALANCE SHEET

Fixed Assets

 

 

152,540

154,009

227,816

279,098

318,586

319,854

Intangible Assets

151,957

153,656

204,164

256,658

292,229

293,497

Tangible Assets

583

353

12,146

12,637

16,554

16,554

Investments

0

0

11,506

9,803

9,803

9,803

Current Assets

 

 

299,582

249,723

207,979

120,495

74,976

70,061

Stocks

0

0

2,188

1,670

1,670

1,670

Debtors

1,559

1,932

4,681

6,199

6,199

6,199

Cash

297,741

247,482

199,726

110,434

64,915

60,000

Other

282

309

1,384

2,192

2,192

2,192

Current Liabilities

 

 

(34,921)

(110,140)

(119,797)

(30,466)

(30,466)

(30,466)

Creditors

(34,921)

(110,140)

(119,797)

(30,466)

(30,466)

(30,466)

Short term borrowings

0

0

0

0

0

0

Long Term Liabilities

 

 

(85,304)

(39,137)

(60,960)

(106,893)

(106,893)

(116,490)

Long term borrowings

0

0

0

0

0

(9,597)

Other long term liabilities

(85,304)

(39,137)

(60,960)

(106,893)

(106,893)

(106,893)

Net Assets

 

 

 

331,897

254,455

255,038

262,234

256,203

242,959

CASH FLOW

Operating Cash Flow

 

 

(14,029)

(12,834)

(11,237)

(6,856)

1,224

219

Net Interest

0

0

0

0

0

0

Tax

0

0

0

0

0

0

Capex

208,792

(41,312)

(10,588)

(80,302)

(37,443)

(14,730)

Acquisitions/disposals

0

0

(24,037)

0

(9,300)

0

Financing

535

34

(739)

(1,340)

0

0

Dividends

(3,918)

3,853

(1,155)

(794)

0

0

Net Cash Flow

191,380

(50,259)

(47,756)

(89,292)

(45,519)

(14,511)

Opening net debt/(cash)

 

(103,263)

(297,741)

(247,482)

(199,726)

(110,434)

(64,915)

HP finance leases initiated

0

0

0

0

0

0

Other

3,098

0

0

0

0

0

Closing net debt/(cash)

 

 

(297,741)

(247,482)

(199,726)

(110,434)

(64,915)

(50,403)

Source: Edison Investment Research, company accounts. Note: The financial forecasts here include the Egyptian acquisition.

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TP Group — Update 21 April 2016

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