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UPDATE - Rockhopper and Premier play to their strengths in Falkland Islands deal

Published: 10:40 12 Jul 2012 EDT

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The US$1 billion deal between Premier Oil and Rockhopper Exploration has the potential to spark the next wave of exploration in the north Falkland basin.

Today’s deal effectively sees Rockhopper (LON:RKH) taking a back seat for the remainder of the Sea Lion oil field development.

Receiving a US$722 million funding commitment, Rockhopper is now covered for its share of the development costs until first oil – and a further US$1.2 bln standby facility means it may not tap further finance at all.

First though, it will receive a significant US$230 million cash payment. And investors are likely to be asking themselves what’s next for Rockhopper?

Well, one likely answer is that it will get back to what it knows best – exploration.

For starters, Premier (LON:PMO) is already prepared to back a three well drill programme across the North Falkland basin ‘the next few years’. 

Notably Premier, with a poor track record when it comes to pure exploration, is leaving Rockhopper in charge of this part of the venture.

Meanwhile, the prospect of a suitable exploration drilling rig in the North Falkland basin is good news for fellow explorers Argos Resources and Desire Petroleum.

Both companies have prospective acreage neighbouring Sea Lion – indeed the discovery has already been proven to extend into Desire’s territory.

And both companies have also sought new funds and exploration partners. 

Beyond that, the new tie-up with Premier Oil could also see the Rockhopper team operating in more hospitable waters.

In a conference call today, Premier explained how they can approach similar in formation  to the North Falkland basin.

Such features are likely to exist off the South African coast, according to Premier’s exploration director Andrew Lodge.

Premier and Rockhopper unveiled the US$1 billion tie-up this morning. And for Rockhopper investors such a deal had been hotly anticipated.

However. despite a bright start to the day, in which it gained about 20 per cent, trading in shares has rather underwhelmed.

This afternoon the stock was actually down over 13 per cent on the day at 236.5p and it is actually trading at its lowest point for over 6 months.

Closer inspection of the farm-out arrangements reveals that at US$4.46 a barrel the deal prices the Sea Lion oil at a discount to its estimated value – which analysts would put at around US$10 a barrel under different circumstances.

Analysts believe that it is a reasonably fair price given the fact that it is effectively a ‘stranded’ discovery and the crude is waxy, which means it requires extra engineering to recover.

Also Premier’s own view of the development differs somewhat from the Rockhopper competent person’s report which was completed by Gaffney Cline in April.

Premier believes the project will cost more to develop at an estimated gross capex of US$5 billion, versus the US$4.8 billion Gaffney Cline estimate.

That said, Premier also believes it can produce more oil than the CPR envisioned with it targeting peak production of 80,000 – 85,000 barrels per day, versus the report’s 70,000 barrel estimate.

The company believes that operationally the Sea Lion project is a good fit with its expertise, particularly because it is involves floating storage production and offloading (FSPO) facilities.

Indeed, with four FPSO developments under their belt – as well as the planned Catcher FPSO development in the North Sea, the Sea Lion development plan plays into Premier’s strengths.

Chief Simon Lockett said that Premier had been looking for new opportunities where it could best use its specific skill set.

“This is the best opportunity that we have seen come up that we can do that with in the last couple of years.”
The company also played down some of the challenges of operating the isolated part of the South Atlantic.

It says that the ten wells drilled in the North Falkland basin between April 2010 and January 2012 not only found and proved a new hydrocarbon system, but importantly it demonstrated that a continuous work programme could be run effectively, from thousands of miles away in Aberdeen.

As operator of the Sea Lion project, Premier now has until April 2015 to submit the field development plan to the authorities – but it says it is aiming for submission in the first half of 2014 which would then kick off a three year develop programme.




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