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Company Analysis UK30 July 201
This research note is produced by Canaccord Genuity Limited which is authorized and regulated by the Financial Services Authority (FSA).
This is non-independent research and a marketing communication under the FSA Conduct of Business rules. Please see the Important Disclosures section in the appendix of this note which are a
integral part of it or v isit Canaccord Genuitys Online Disclosure Database http://www.canaccordgenuity.com/en/ODD/pages/disclosures.aspxfor more information.
Rockhopper Exploration
RKH: 177p
Buy
Target: 553p
Charlie Sharp +44 20 7523 [email protected]
Thomas Martin +44 20 7523 838
KEY CHANGESKEY CHANGESKEY CHANGESKEY CHANGES
TP EPS FY0 EPS FY1
6.0% 0.0% 0.0%
COMPANY STATISTICSCOMPANY STATISTICSCOMPANY STATISTICSCOMPANY STATISTICS
Shares Out (m): 284
Market Cap: 502m
EV (m): 438
SHARE PRICE PERFORMANCESHARE PRICE PERFORMANCESHARE PRICE PERFORMANCESHARE PRICE PERFORMANCE
Rockhopper Exploration Rel to FTSE AIM All-Share
Source: Thomson Datastream
Oil & Gas - Oil & Gas Producers - Exploration & Production
Premier farm in the real value story
Investment case
We think that Premier Oils farm-in to 60% of Rockhoppers Falkland Islands licence
represents a very appealing deal for Rockhopper, delivering a highly competent and
motivated development operator, a significantly strengthened balance sheet with no
short-term cash calls, and an enhanced exploration outlook as Premier effectively
carries three further exploration wells. Rockhopper is now a very strong value play,
with the financial resources to deliver the Sea Lion development, and still significantupside potential through further carried appraisal and exploration.
Sector context
The E&P sector is trading at an average 58% of our fair value. Yet, Rockhopper is
trading at only 31% and with a very strong balance sheet and a highly credible
development partner in Premier Oil (once the companys farm-out of its Falkland
Islands licences completes). We believe that the discount compared with its peers is
unjustified. Indeed, in our view, post the Premier transaction, Rockhopper should
trade above the average rating in the sector.
Company fundamentals
Rockhopper Exploration is farming out a 60% operated interest in its Falkland
Islands licences to Premier Oil. The deal will leave Rockhopper with estimated cash
of $331m (excluding CGT) and a 40% working interest in the licences (net 2C
resources of 142 mmbbls, and fully carried up to first oil in H1 2017 assuming an
FPSO lease and gross capital costs of $1.8 billion). Further standby financing from
Premier is set aside, if the costs are greater. We think this transaction leaves
Rockhopper in a much stronger position than before, and with around 150 mmbbls
net resource upside potential.
Valuation
We value Rockhopper at 553p/share, underpinned by a core valuation, for the Sea
Lion development together with a balance sheet adjustment, of 410p/share.
Share performance catalystFormal completion of the Premier farm-in, which is anticipated in September, should
provide impetus to the stock. More details and timing on the restart of exploration
drilling and the specific targets, and further updates from the new operator on
progress towards FDP submission (expected in H1 2014), are also likely to be share
price catalysts.
http://www.canaccordgenuity.com/en/ODD/pages/disclosures.aspxhttp://www.canaccordgenuity.com/en/ODD/pages/disclosures.aspxhttp://www.canaccordgenuity.com/en/ODD/pages/disclosures.aspx -
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Executive Summary
Whats in the price
We expect Rockhopper to have net cash (after adjustments) of 55p/share (155m,
$248m) and no debt, once the Premier farm-in completes. Assuming net cash is given ful
value, which we think is reasonable as Rockhoppers cash outgoings for the foreseeable
future in the Falkland Islands are negligible, then the implied market valuation for the
underlying assets is 119p/share (338m, $541m). We value Sea Lion resources for
Rockhopper at $14.6 per barrel so the market is effectively discounting 37 mmbbls
resources for Rockhopper, compared with net Sea Lion 2C resources of 123 mmbbls, and
total net 2C resources (including Casper, Casper South and Beverley) of 142 mmbbls. The
market, then, in our view, is valuing the fully financed developments, to be undertaken
by a well-established operator, at 30% of the net Sea Lion resources alone and 26% of th
total 2C net resources.
The Canaccord Genuity viewThe E&P sector is trading at an average of 58% of our fair value, but Rockhopper is
currently trading at only 31% of our fair value. We believe the Premier farm-in to
Rockhoppers licences is good for both companies but is especially beneficial for
Rockhopper. Though Rockhoppers working interest declines to 40% in the Sea Lion
development post transaction completion, the terms of the deal translate, in our view, to
a 55% net economic interest to the company. The farm-in, once completed, should
significantly strengthen Rockhoppers balance sheet, and the prospect of fully financed
and competently developed assets should reassure investors. In addition, Rockhopper
will have effectively a three-well exploration carry, with still substantial upside for both
partners.
Valuation and recommendationOur core asset valuation for Rockhoppers Sea Lion resources, post completion of the
farm-in is 356p/share, which increases to 410p/share after financial adjustments.
Including the upside from additional appraisal resources and the Sea Lion deterministic
resource case, results in a central valuation of 499p/share and a total valuation of
553p/share with exploration. We maintain our BUY rating with a target price of
553p/share (down from 586p/share as a result of an adjusted anticipated ramp up of
production from Sea Lion).
Risks to investment case
The primary risk is that the deal does not complete, although we see that as a slim
probability following the signing of an SPA. Oil price weakness may impact market
sentiment, though with no production expected for several years there will be no direct
impact.
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ValuationOur valuation for Rockhopper is based upon the assumption that Sea Lion is developed
as a standalone field via a leased FPSO, coming onstream in H1 2017, with a ramp up of
production as new wells are drilled in the first two years of production, and reaching a
peak average production level of 84,000 bopd in 2019/2020.
Figure 1: Rockhopper Exploration sum-of-parts valuation
Country Field License Gross WI Post WI Unrisked Valuation CoS Unriske
Unrisked Farmout Reserves Value
mmboe % (mmboe) $m $/bbl % $m m p/share p/shar
Development
Falkland Islands Sea Lion SL10 PL032 84 40.0% 33.6 491 14.6 90% 442 276 97 10
Sea Lion SL10 PL04b 24 24.0% 5.8 84 14.6 90% 76 47 17 1
Sea Lion SL20 PL032 204 40.0% 81.5 1,191 14.6 90% 1,072 670 236 26
Sea Lion SL20 PL04b 9 24.0% 2.1 31 14.6 90% 27 17 6
Total Development 320 122.9 1,797 1,617 1,011 356 39
Financials PV Overheads -16 100% -16 -10 -4 -
Net current Cash 100 100% 100 63 22 2
Up front Payment 231 100% 231 144 51 5
PV CGT liability -83 80% -67 -42 -15 -1
Total Financials 231 248 155 55 5
Core NAV 2,028 1,865 1,166 410 44
Appraisal/Development
Falkland Islands Casper PL032 19.3 40.0% 7.7 113 14.6 70% 79 49 17 2
Casper PL04b 1.8 24.0% 0.4 6 14.6 70% 4 3 1
Casper South PL032 2.4 40.0% 1.0 14 14.6 70% 10 6 2
Casper South PL04b 36.6 24.0% 8.8 128 14.6 70% 90 56 20 2
B15 East PL032 0.7 40.0% 0.3 4 14.6 70% 3 2 1
SL05 PL04b 4.6 24.0% 1.1 16 14.6 70% 11 7 2
Sea Lion Deterministic upside 70.5 40.0% 28.2 412 14.6 50% 206 129 45 9
Total Appraisal/Development 135.9 47.5 694 403 252 89 15
Total Core + Appraisal ('Central' Value) 2,722 2,269 1,418 499 59
Exploration
Falkland Islands SL30 PL032 13 40.0% 5.2 53 10.2 20% 11 7 2 1
Casper South PL032 6.2 40.0% 2.5 25 10.2 15% 4 2 1
Casper South PL04c 8.1 10.0% 0.8 8 10.2 15% 1 1 0
Beverley West PL04b 12.8 24.0% 3.1 31 10.2 30% 9 6 2 Beverley PL04c 5.4 10.0% 0.5 6 10.2 20% 1 1 0
B15 West PL032 10 40.0% 4.0 41 10.2 50% 20 13 5
George Central PL032 29.3 40.0% 11.7 120 10.2 10% 12 7 3 2
George South A PL032 34.3 40.0% 13.7 140 10.2 10% 14 9 3 3
George South B PL032 51.8 40.0% 20.7 212 10.2 10% 21 13 5 4
George North PL032 17.7 40.0% 7.1 72 10.2 10% 7 5 2 1
Berkeley PL032 28.6 40.0% 11.4 117 10.2 10% 12 7 3 2
S2 PL032 50.5 40.0% 20.2 207 10.2 20% 41 26 9 4
Chatham PL032 30.9 40.0% 12.4 126 10.2 25% 32 20 7 2
Chatham East PL032 47.7 40.0% 19.1 195 10.2 20% 39 24 9 4
Chatham South PL032/04b 25.5 32.0% 8.2 83 10.2 25% 21 13 5 1
Total Exploration 371.8 140.6 1,439 246 154 54 31
Total Core + Upside 4,161 2,515 1,572 553 91
Risked NAV @ 10%
Source: Canaccord Genuity Limited Estimates, Brent oil price assumption for 2012, $90/bbl, escalating at 2% per annum, discount rate 10%.
We value SeWe value SeWe value SeWe value Sea Lion net to Rocka Lion net to Rocka Lion net to Rocka Lion net to Rockhopper, including the benefithopper, including the benefithopper, including the benefithopper, including the benefit ofofofof the development carry,the development carry,the development carry,the development carry,at $14.6at $14.6at $14.6at $14.6 per barrelper barrelper barrelper barrel.... We value Sea Lion net to Premier, including the impact of the
development carry, at $10.2 per barrel.
We still see some timing and subsurface risk related to theWe still see some timing and subsurface risk related to theWe still see some timing and subsurface risk related to theWe still see some timing and subsurface risk related to the Sea Lion development, soSea Lion development, soSea Lion development, soSea Lion development, sowe risk the project atwe risk the project atwe risk the project atwe risk the project at aaaa 90% chance of success.90% chance of success.90% chance of success.90% chance of success. This translates to a risked Sea Lion
valuation net to Rockhopper of $13.1 per barrel.
Assuming the FPSO were to be purchased, we estimate that Rockhopper would requiran additional $450m net capital (in excess of the hard carry of $722m), which would
be funded either directly by Premier, or could be derived from alternative sources.
However, our modelling indicates that a purchased FPSO development, although
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requiring a greater level of upfront capital for both Premier and Rockhopper, would
value Sea Lion resources at $14.8 per barrel (risked value $13.3 per barrel).
Our core value, on the leased FPSO projection, which includes only the Sea lion fieldOur core value, on the leased FPSO projection, which includes only the Sea lion fieldOur core value, on the leased FPSO projection, which includes only the Sea lion fieldOur core value, on the leased FPSO projection, which includes only the Sea lion fielddevelopment and bdevelopment and bdevelopment and bdevelopment and balance sheet aalance sheet aalance sheet aalance sheet adjdjdjdjustments, is 410ustments, is 410ustments, is 410ustments, is 410p/share.p/share.p/share.p/share.
Our total valuation including appraisOur total valuation including appraisOur total valuation including appraisOur total valuation including appraisal and exploration upside is 553al and exploration upside is 553al and exploration upside is 553al and exploration upside is 553p/share.p/share.p/share.p/share.Stripping out exploration results in aStripping out exploration results in aStripping out exploration results in aStripping out exploration results in a valuationvaluationvaluationvaluation ofofofof 499499499499pppp/share./share./share./share.
Another way to view this transaction is to assess the economic interest of both
Rockhopper and Premier in the Sea Lion field development after completion.
Figure 2: Working Interest vs. Economic Interest
PremierPremierPremierPremier RockhopperRockhopperRockhopperRockhopper
Working InterestWorking InterestWorking InterestWorking Interest 60%60%60%60% 40%40%40%40%
Net 2C Sea Lion Resources (mmbbls) 184 123
Valuation ($/bbl) 10.2 14.6
Asset Valuation ($m) 1,886 1,797
Additional cost/gain of entry ($m) -231 231
Total Value ($m) 1,655 2,028
Economic Interest (%)Economic Interest (%)Economic Interest (%)Economic Interest (%) 45%45%45%45% 55%55%55%55%
Source: Canaccord Genuity Limited Estimates; Gaffney Cline & Associates
We have assumed just the net Sea Lion 2C resources of 307.4 mmbbls (to the Premier
Oil/Rockhopper Exploration partnership) determined by Gaffney Cline & Associates in its
Competent Persons Report (CPR) of April 2012. Our valuation shows that though
Rockhopper will have a 40% working interest, the transaction gives the company an
overall 55% economic interest in the Sea Lion development.
The transaction
Premier Oil is to farm-in to 60% of all Rockhopper Explorations Falkland Islands licences
and become operator of all those licences that Rockhopper presently operates. There arethree elements to the transaction.
1. Upfront cash payment of $231m to Rockhopper on completion of transaction2. Sea Lion development carry of $722m net to Rockhopper ($1.8 billion gross)3. Exploration carry of $48m net to Rockhopper ($120m gross)
The upfront repayment is a return of substantially all the Premier pro-rata explorationand appraisal costs so far incurred by Rockhopper in the Falkland Islands.
The gross development carry of $1.8 billion capital expenditure is designed to takeRockhopper to first oil from Sea Lion assuming the lease of an FPSO. If further
financing is required then Premier will provide that, up to an additional maximum of
$1,278m, equivalent to gross capital expenditure of $5 billion. For example, if thedecision is to purchase rather than lease an FPSO, then total development costs to
first oil would be about $3 billion. Rockhopper could then choose the Premier facility
to fund its share of that, which we estimate would be about $450m. Premier would
then take an increased proportion of initial cashflows until it achieves a post-tax IRR
of 15% on its investment. We think that the presence of Premier Oil as operator, and
the already significant level of carry, could lead to other potential bank loan financing
options.
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The exploration carry of $48m equates to a gross exploration programme of $120mand this should be sufficient for three wells including mobilisation and demobilisation
costs. As the primary prospects are already covered by 3D seismic data, we expect
that almost all this carry will be applied to drilling costs. Rockhopper will take thesubsurface lead on this exploration, and already has three drill ready prospects. The
timing and programme has not yet been decided.
In addition, Premier Oil and Rockhopper Exploration have announced an AMI covering
southern Mozambique, South Africa and Namibia. This could be an exciting part of
Rockhoppers portfolio in the mid and long term, but it is not likely to feature heavily in
the near term, either in time or costs spent.
Capital Gains Tax
The company expects this transaction will be subject to Capital Gains Tax (CGT). The
application of this tax, which is charged at 26%, is subject to change as the Falkland
Islands Government (FIG) is reviewing its application. Rockhopper has received formal
notification that the end result of this review, which may not be completed until 2013,
will not be worse than the current legislation, and may be less onerous.
CGT is applied to the transaction value less the applicable costs. At present the
transaction value is considered to be the total of the cash element of the farm-in together
with the discounted value of the development carry (exploration is excluded). The
applicable costs are deemed to be the remaining pro-rata Rockhopper interest costs
incurred so far (rather than the more intuitive pro rata costs attributable to Premiers
share).
The CGT would be repayable in two tranches. The first, eight months following
completion of the farm-in; and the second the earlier of five years after completion or at
first oil. This results in an overall estimated undiscounted CGT of $128m ($83m
discounted at 10%).
Figure 3: Rockhopper Exploration estimated CGT calculation
($m)($m)($m)($m)
Cash element of farm-in 231
Discounted value of carry 445
Total Transaction valueTotal Transaction valueTotal Transaction valueTotal Transaction value 676676676676
Applicable costs to date 185
Gain 491
CGT payable (@26%)CGT payable (@26%)CGT payable (@26%)CGT payable (@26%) 128128128128
Initial instalment of CGT mid 2013 44
Balance payable sooner of 5 years or 1st oil 84
NPV10 CGTNPV10 CGTNPV10 CGTNPV10 CGT 83838383
Source: Canaccord Genuity Limited Estimates, Rockhopper Exploration
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The Sea Lion developmentThe Sea Lion field has independent gross 2C resources of 321 mmbbls (Gaffney Cline &
Associates GCA, April 2012), with additional 2C resources in the Casper, Casper South
and other accumulations.
The fields remoteness is not really an issue. The current oil facilities onshore the
Falkland Islands can be quite easily expanded to allow for storage, workshops,
communications and other shore based requirements. The field itself lies in a water
depth of 450m, similar to the water depth at the Foinaven FPSO development to the west
of the Shetland Islands. The weather, though, to the north of the Falkland Islands, is less
extreme than the conditions found in the central North Sea.
Figure 4: Sea Lion Field and satellite discoveries
Source: Rockhopper Exploration
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Figure 5: Gaffney Cline CPR information, April 2012
FieldFieldFieldField GGGGrossrossrossross Net 2C ResourcesNet 2C ResourcesNet 2C ResourcesNet 2C Resources Net 2C ResourcesNet 2C ResourcesNet 2C ResourcesNet 2C Resources
2C Resources2C Resources2C Resources2C Resources Pre FarmPre FarmPre FarmPre Farm----outoutoutout Post FarmPost FarmPost FarmPost Farm----outoutoutout
(mmbbls)(mmbbls)(mmbbls)(mmbbls) (mmbbls)(mmbbls)(mmbbls)(mmbbls) (mmbbls)(mmbbls)(mmbbls)(mmbbls)Sea Lion 320.5 307.4 123.0
Casper 21.1 20.4 8.2
Casper South 39.0 24.3 9.7
B 15 East 0.7 0.8 0.3
SL 05 4.6 2.8 1.1
TotalTotalTotalTotal 385.9385.9385.9385.9 355.7355.7355.7355.7 142.3142.3142.3142.3
Source: Gaffney Cline & Associates, Rockhopper Exploration, Canaccord Genuity Limited
Both Premier and Rockhopper believe that the resource estimates are reasonable and
that no further appraisal drilling on Sea Lion is required. Premiers own presentation on
the transaction stated that the deal adds approximately 200 mmbbls net discovered 2C
resources, in line with the CPR, and 175 mmboe net prospective resources.
We expect the handover of operatorship to be accomplished shortly after transaction
completion, which is expected in September, following which the anticipated
development plan will be refined and perhaps modified. However, it would be surprising
if the development were to be substantially altered from that already envisaged by GCA.
That included the drilling of a total of 34 wells comprising 21 producers, 6 dual
producer/injectors and 7 injectors, in four subsea clusters, with production of around
70,000 bopd into an FPSO.
At present the only notable differences have been Premier Oils initial estimated gross
peak production of 80,000-85,000 bopd higher than the CPR projection; with first oil
expected in H1 2017 about a year later that the CPR report indicated. However GCAs
production profiles included downtime of 10%, and production is not expected to be
limited by well productivity.Dealing with Sea Lion wax
Rockhopper has spent considerable time, together with various consultancies including
Genesis Oil & Gas Ltd., assessing the best means of developing the field, particularly in
view of the crude oils wax content and its flow characteristics.
Figure 6: Sea Lion Crude Key Parameters
API gravity 29
GOR (scf/bbl) 265
Reservoir temperature (C) 88
Viscosity (cP at reservoir temp) 7.2
Wax content (%) 22Wax appearance temperature (oC) 72
Bulk wax appearance temperature (oC) 50
Pour point (oC) 20
Gel point (C) 8
Source: Rockhopper Exploration, Gaffney Cline & associates
The table above illustrates the key parameters of Sea Lion crude. Firstly, it is important
to point out that the crude is of medium weight, and sweet, resulting in a likely sale price
at the field of a 2-3% discount to Brent.
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The keys to the development, in our view, are the wax and gel management strategies.
The 22% wax content is quite high, though not exceptionally so (many Brazilian crudes
have a higher wax content), and is quite typical of oil generated from a lacustrine source
rock. Wax may be formed on pipe walls when crude oil is flowing or in the body of thecrude oil when there is no flow, if the temperature drops sufficiently. There are a numbe
of ways around this problem - the addition of wax inhibitors, pour point depressants,
heating, and insulation being the primary methods. All the work carried out by
Rockhopper and its advisors has indicated that a combination of heating and insulation i
the best solution for Sea Lion.
Producing, storing, and transporting Sea Lion crude oil at temperatures above 72C will
eliminate the formation of wax. At 72C and down to 50C some platelets of wax will
begin to form on pipe walls, but the build-up will be very slow. Below 50C (the bulk wax
appearance temperature) wax build-up will increase substantially. The answer then is to
maintain temperatures at least above 50C.
The SolutionThe SolutionThe SolutionThe Solution ---- Artificial liftArtificial liftArtificial liftArtificial lift, heating and insulation, heating and insulation, heating and insulation, heating and insulation The low GOR and medium viscosity
of the Sea Lion crude require the application of artificial lift to assist production.
Rockhopper and its consultants have determined that the use of downhole hydraulic
submersible pumps (HSPs) is the best means of providing that lift. HSPs operate by
pumping water down the well bore, turning a turbine, lifting the crude, which is then
delivered with the water to the surface. For Sea Lion the water will be heated to around
75C before pumping, and this water forms a colloid with the crude oil, which itself is at
88C (the formation temperature), before returning to the FPSO through insulated flow
lines and riser. This process has multiple benefits. It results in production of a water and
crude oil mixture which flows more easily than crude alone, it provides improved well
productivity, and it maintains the flowing mixed liquids temperature above 72C. Once
on the FPSO, the produced liquids are processed, the water is extracted, and then
reheated prior to reinjection.
If the field has to be shut in for any reason then the crude oil in the production system
will begin to cool until eventually it reaches the gel point at around 8C. This is the
temperature at which wax forms within the crude oil and this could result in plugging of
the pipe and flowlines. However, through use of insulated pipe-in-pipe technology,
Rockhopper expects that there would be more than enough time to flush the system with
hot water to clear the crude and eliminate the risk.
Hydraulic Submersible PumpsHydraulic Submersible PumpsHydraulic Submersible PumpsHydraulic Submersible Pumps HSPs have a long and successful track record on the UK
North Sea Captain field, which has heavier and more viscous crude than Sea Lion (13-21
API, viscosity of 88 cP). The HSPs have operated over a wide variety of conditions
(including substantial gas volumes) with great reliability (the mean time to failure on
Captain was 12 years for HSP pumps). This reliability is attributed in part to the HSP
pump design, which requires no downhole electrics. The power required to operate thesepumps and heat the water will be derived from associated gas produced as a result of the
crude production.
FPSOFPSOFPSOFPSOs and tankerss and tankerss and tankerss and tankers - It is standard policy to heat crudes within the FPSO and offloading
tankers to nullify the onset of wax production. For example production from the
Peregrino field (operator, Statoil) offshore Brazil, which has much heavier (12-14 API),
and lower viscosity, crude than Sea Lion, is processed on board the FPSO at a
temperature of around 150C, and then maintained at a temperature of 65C on board,
before transfer to heated tankers for refinery delivery.
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Upside potentialWe see considerable upside potential both in the Sea Lion field itself, the satellite
discoveries, and further exploration. Overall, we see around 150 mmbbls additional
upside beyond the current Sea Lion 2C resources in the current primary areas of
exploration, appraisal and development.
Figure 7: Net Rockhopper upside in the current primary projects
AssetAssetAssetAsset Net Pot. additionaNet Pot. additionalNet Pot. additionalNet Pot. additional
ResourcesResourcesResourcesResources
(mmbbls)(mmbbls)(mmbbls)(mmbbls)
Sea Lion field 38.6
Casper South discovery 25.0
George prospects 53.2
Chatham prospects 39.6
TotalTotalTotalTotal 156.4156.4156.4156.4
Source: Canaccord Genuity Limited Estimates
Figure 8: Schematic Field and Prospect Cross Section
Source: Rockhopper
Sea Lion field
The GCA CPR, dated April 2012, followed the traditional probabilistic evaluation
methodology to determine both oil-in-place and recoverable resources. However, the
company also provided a deterministic assessment of oil-in-place. The deterministic
approach yields a bottom up technically based view of the resources rather than
employing a probabilistic method, which can lead to skewed results.
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Figure 9: Sea Lion Main Complex (sands SL10 & SL20) CPR oil-in-place determinations
MethodMethodMethodMethod ClassificationClassificationClassificationClassification STOISTOISTOISTOIIPIPIPIP CommentsCommentsCommentsComments
(mmbbls)(mmbbls)(mmbbls)(mmbbls)
Probabilistic 1C 650 Limited to 0.5 km radius around Sea Lion wellsProbabilistic 2C 1,067 Full field areal extent but inferred reduced reservoir quality/thickness towards boundaries
Probabilistic 3C 1,563 Full field areal extent but 'normal' reservoir quality/thickness towards boundaries
Deterministic Best 1,303 Most likely bottom up technical approach
Source: Gaffney Cline & Associates, STOOIP = Stock Tank Oil Originally In Place
Drilling results from the 2010-2011 campaign on Sea Lion were generally a very close
match to the pre drill estimates, and together with the presence of high quality 3D
seismic over the field, we think it reasonable to believe that the probabilistic 2C oil-in-
place figure could be overly cautious. This is supported by the deterministic oil-in-place
assessment. In any case, as development wells are drilled on Sea Lion, assuming oil
reservoir is found, then the 1C case will increase due to the addition of further resource
halos around each well, and this would positively impact the 2C case.
Assuming the anticipated mid-point field recovery factor of 30% (the CPR gave a range o
20-40% and stated that 30% is the most likely estimate), the deterministic approach
would result in gross Sea Lion (sands SL10 & SL20) resources of 391 mmbbls, compared
with the probabilistic 321 mmbbls. That would result in additional gross Sea Lion
resources of 70 mmbbls, or 28 mmbbls net to Rockhopper post farm-down.
There is also potential in the additional sand intervals, SL05, SL30 and B15, just above
and below the two main Sea Lion sand units (SL10 and SL20). Gaffney Cline identified
gross 5.3 mmbbls contingent and gross 23 mmbbls prospective resources in these
reservoirs. Clearly these sands need further appraisal/exploration drilling, but we think
that is unlikely until field development drilling gets underway.
Figure 10: Sea Lion Resource Evaluation
Sea Lion UnitSea Lion UnitSea Lion UnitSea Lion Unit ClassificationClassificationClassificationClassification NetNetNetNet
ResourcesResourcesResourcesResources
(mmbbls)(mmbbls)(mmbbls)(mmbbls)
SL10 sand unit Contingent 2C 39.4
SL 20 sand unit Contingent 2C 83.6
Upside potential to SL10&SL20 Deterministic 28.0
SL 05/B15 East Contingent 2C 1.4
SL30 Prospective Best 5.2
B15 West Prospective Best 4.0
Total PotentialTotal PotentialTotal PotentialTotal Potential 161.6161.6161.6161.6
Source: Gaffney Cline & Associates, Assumed net resources post farm-down to Premier Oil. SL30 GCoS 22%, B15 West GCoS 53%.
Satellite fieldsCasper and Casper South are the two most significant discoveries other than Sea Lion in
the North Falkland Islands basin. The CPR has assigned combined gross contingent
resources to these discoveries of 60 mmbbls, net 18 mmbbls (post farm down to Premier
Oil). Both discoveries need further appraisal.
Rockhopper believes that the CPR resource determination for Casper is reasonable, but
the company sees upside to the Casper South CPR resources in both the discovery sand
and other undrilled potential reservoirs.
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The CPR assigns net unrisked prospective resources to Casper South of about 3 mmbbls,
but Rockhopper views that as a conservative estimate, and the company believes that
Casper South could have 25 mmbbls resources. Casper South looks to be a good
candidate for appraisal/exploration drilling.
Exploration
A number of other similar fan prospects have been evaluated in the CPR, with geological
chances of success (GCoS) assessed at between 8% and 34%. Of these Rockhopper is mos
excited by the George and Chatham groups of prospects.
Figure 11: Key Exploration prospects groups
Prospect GroupProspect GroupProspect GroupProspect Group Gross UnriskedGross UnriskedGross UnriskedGross Unrisked Net UnriskedNet UnriskedNet UnriskedNet Unrisked GCoSGCoSGCoSGCoS
Best CaseBest CaseBest CaseBest Case Best CaseBest CaseBest CaseBest Case
(mmbbls)(mmbbls)(mmbbls)(mmbbls) (mmbbls)(mmbbls)(mmbbls)(mmbbls) (%)(%)(%)(%)
George 133.1 53.2 11%
Chatham 104.1 39.6 24%
Total 237.2 92.8Source: Canaccord Genuity Limited Estimates, Net potential is post completion of farm-down to Premier Oil; George is a synthesis of four separateidentified targets, Chatham is a synthesis of three separate identified targets. Some of these individual prospects are stacked.
Rockhopper believes that two of the individual prospects, George South and Chatham
South, could be drilled by a single vertical well. This then would target about 25 mmbbls
net prospective resources, and such a well could form part of the exploration drilling
campaign.
The 2010-2012 drilling campaign focused on basin floor fan plays, but Rockhopper has
identified a number of additional play types, including basin margin pinchouts,
downthrown closures, inversion trends, and traditional structural highs. The
interpretation of the 2011 acquired 3D seismic data covering a number of these plays
type, both in Rockhoppers northern and southern acreage is ongoing.
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APPENDIX: IMPORTANT DISCLOSURESAnalyst Certification: Each authoring analyst of Canaccord Genuity Limited whose name appears on the front page of this research
hereby certifies that (i) the recommendations and opinions expressed in this research accurately reflect the
authoring analysts personal, independent and objective views about any and all of the designated investments orrelevant issuers discussed herein that are within such authoring analysts coverage universe and (ii) no part of the
authoring analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendations
or views expressed by the authoring analyst in the research.
Site Visit(s): An analyst has not visited the issuer's material operations.
Price Chart(s):*
____ Stock price____ Stock price____ Stock price____ Stock price ____ Target price____ Target price____ Target price____ Target price
Source: Thomson Reuters and Canaccord Genuity
Date Analyst Rec. Target price
30/07/2009 Richard Slape Speculative Buy 67p
22/09/2009 Richard Slape Speculative Buy 103p
05/02/2010 Richard Slape Speculative Buy 142p
10/03/2010 Richard Slape Speculative Buy 182p
08/04/2010 Richard Slape Speculative Buy 172p
07/05/2010 Richard Slape Speculative Buy 433p
11/06/2010 Richard Slape Buy 563p18/08/2010 Richard Slape Buy 490p
07/10/2010 Richard Slape Buy 641p
13/10/2010 Richard Slape Buy 545p
26/11/2010 Richard Slape Buy 494p
15/08/2011 Richard Slape Buy 871p
11/10/2011 Richard Slape Buy 880p
31/10/2011 Richard Slape Buy 536p
08/12/2011 Richard Slape Buy 517p
13/12/2011 Richard Slape Buy 531p
20/02/2012 Richard Slape Buy 677p
20/04/2012 Charlie Sharp Buy 644p
12/07/2012 Charlie Sharp Buy 586p
30/07/2012 Charlie Sharp Buy 553p
Distribution of Ratings:
Global Stock Ratings
(as of 03 July 2012)
Coverage Universe
Rating # % IB Clients %
Buy 590 60.9 30.5Speculative Buy 88 9.1 51.1
Hold 263 27.1 11.8
Sell 28 2.9 3.6
969 100.0
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Canaccord Ratings
System:
BUY:BUY:BUY:BUY: The stock is expected to generate risk-adjusted returns of over 10% during the next 12 months.
HOLD:HOLD:HOLD:HOLD: The stock is expected to generate risk-adjusted returns of 0-10% during the next 12 months.
SELL:SELL:SELL:SELL: The stock is expected to generate negative risk-adjusted returns during the next 12 months.
NOT RATED:NOT RATED:NOT RATED:NOT RATED: Canaccord Genuity does not provide research coverage of the relevant issuer.
Risk-adjusted return refers to the expected return in relation to the amount of risk associated with the designated
investment or the relevant issuer.
Risk Qualifier: SPECULATIVE:SPECULATIVE:SPECULATIVE:SPECULATIVE: Stocks bear significantly higher risk that typically cannot be valued by normal fundamental criteria.
Investments in the stock may result in material loss.
Canaccord Research Disclosures as of 30 July 2012
Company Disclosure
Rockhopper Exploration 1A, 2, 3, 4, 7
1 The relevant issuer currently is, or in the past 12 months was, a client of Canaccord Genuity or its affiliated
companies. During this period, Canaccord Genuity or its affiliated companies provided the following services to the
relevant issuer:
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B. non-investment banking securities-related services.
C. non-securities related services.
2 In the past 12 months, Canaccord Genuity or its affiliated companies have received compensation for Corporate
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manager or co-manager of a public offering of securities of the relevant issuer or any publicly disclosed offer of
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relevant issuer or in any related derivatives.
6 In the past 12 months, Canaccord Genuity, its partners, affiliated companies, officers or directors, or any authoring
analyst involved in the preparation of this research has provided services to the relevant issuer for remuneration,other than normal course investment advisory or trade execution services.
7 Canaccord Genuity intends to seek or expects to receive compensation for Corporate Finance/Investment Banking
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8 The authoring analyst, a member of the authoring analysts household, or any individual directly involved in the
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the relevant issuer, the value of which increases as the value of the underlying equity increases.
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research (as disclosed above).
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13 As of the month end immediately preceding the date of publication of this research, or the prior month end if
publication is within 10 days following a month end, the relevant issuer owned 1% or more of any class of the total
issued share capital in Canaccord Genuity or any of its affiliated companies.
14 Other specific disclosures as described above.Canaccord Genuity is the business name used by certain subsidiaries of Canaccord Financial Inc., including
Canaccord Genuity Inc., Canaccord Genuity Limited, and Canaccord Genuity Corp.
The authoring analysts who are responsible for the preparation of this research are employed by Canaccord
Genuity Limited, which is authorised and regulated by the Financial Services Authority (FSA).
In the event that this is compendium research (covering six or more relevant issuers), Canaccord Genuity and its
affiliated companies may choose to provide specific disclosures of the subject companies by reference, as well as its
policies and procedures regarding the dissemination of research. To access this material or for more information,
please refer to http://www.canaccordgenuity.com/en/ODD/pages/disclosures.aspx.
The authoring analysts who are responsible for the preparation of this research have received (or will receive)
compensation based upon (among other factors) the Corporate Finance/Investment Banking revenues and general
profits of Canaccord Genuity. However, such authoring analysts have not received, and will not receive,
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activities, or to recommendations contained in the research.Canaccord Genuity Limited and its affiliated companies may have a Corporate Finance/Investment Banking or other
relationship with the company that is the subject of this research and may trade in any of the designated
investments mentioned herein either for their own account or the accounts of their customers, in good faith or in
the normal course of market making. Accordingly, Canaccord Genuity Limited or their affiliated companies,
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For the purpose of UK regulation Canaccord Genuity Limited produces non-independent research which is a
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The information contained in this research has been compiled by Canaccord Genuity Limited from sources believed
to be reliable, but (with the exception of the information about Canaccord Genuity) no representation or warranty,
express or implied, is made by Canaccord Genuity Limited, its affiliated companies or any other person as to its
fairness, accuracy, completeness or correctness. Canaccord Genuity has not independently verified the facts,
assumptions, and estimates contained herein. All estimates, opinions and other information contained in this
research constitute Canaccord Genuity Limiteds judgement as of the date of this research, are subject to change
without notice and are provided in good faith but without legal responsibility or liability.
Canaccord Genuity salespeople, traders, and other professionals may provide oral or written market commentary or
trading strategies to our clients and our principal trading desk that reflect opinions that are contrary to the opinions
expressed in this research. Canaccord Genuitys affiliates, principal trading desk, and investing businesses may
make investment decisions that are inconsistent with the recommendations or views expressed in this research.
This research is provided for information purposes only and does not constitute an offer or solicitation to buy or sell
any designated investments discussed herein in any jurisdiction where such offer or solicitation would be
prohibited. As a result, the designated investments discussed in this research may not be eligible for sale in somejurisdictions. This research is not, and under no circumstances should be construed as, a solicitation to act as a
securities broker or dealer in any jurisdiction by any person or company that is not legally permitted to carry on the
business of a securities broker or dealer in that jurisdiction. This material is prepared for general circulation to
clients and does not have regard to the investment objectives, financial situation or particular needs of any
particular person. Investors should obtain advice based on their own individual circumstances before making an
investment decision. To the fullest extent permitted by law, none of Canaccord Genuity Limited, its affiliated
companies or any other person accepts any liability whatsoever for any direct or consequential loss arising from or
relating to any use of the information contained in this research.
For Canadian Residents: This research has been approved by Canaccord Genuity Corp., which accepts sole responsibility for this research
http://www.canaccordgenuity.com/en/ODD/pages/disclosures.aspxhttp://www.canaccordgenuity.com/en/ODD/pages/disclosures.aspxhttp://www.canaccordgenuity.com/en/ODD/pages/disclosures.aspx -
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and its dissemination in Canada. Canadian clients wishing to effect transactions in any Designated Investment
discussed should do so through a qualified salesperson of Canaccord Genuity Corp. in their particular jurisdiction.
For United Kingdom and
European Residents:
This research is for persons who are Eligible Counterparties or Professional Clients only and is exempt from the
general restrictions in section 21 of the Financial Services and Markets Act 2000 (or any analogous legislation) on
the communication of invitations or inducements to engage in investment activity on the grounds that it is being
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For United States Residents: Canaccord Genuity Inc. and Canaccord Genuity Securities LLC, US registered broker-
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Copyright Canaccord Genuity Corp. 2012. Member IIROC/Canadian Investor Protection FundCopyright Canaccord Genuity Limited 2012. Member LSE, authorized and regulated by the Financial Services
Authority.
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