Premier Oil’s (LON:PMO) US$1 billion Falklands foray has prompted one City house to downgrade, though others are much more optimistic about the potential of the deal with Rockhopper Exploration (LON:RKH).
Premier announced yesterday it is acquiring a 60 per cent stake and operatorship of Rockhopper’s Sea Lion field with an initial down-payment of US$231 million.
It has also agreed to pay exploration and development costs running to US$770 million.
“[The] assets change Premier's risk-reward profile, reducing leverage to exploration, pushing positive free cash flow out to 2017 and increasing exposure to one Falklands field development,” said Liberum Capital’s Andrew Whittock, as he moved Premier to ‘hold’ from ‘buy’.
A better reflection of opinion in the Square Mile came from Will Arnstein, oil and gas analyst at FinnCap who raised his target price by 30 pence to 410 pence and repeated his ‘buy’ advice.
He described the acquisition as “highly attractive”, saying it added significant discovered resources at a very low up-front cost.
“While geographically distant from its existing operations, the assets complement the strategy, adding future production growth at a time when the existing portfolio is forecast to go into decline – thereby removing reinvestment risk without stretching the balance sheet today,” Arnstein said.
Elsewhere, RBC Capital Markets said the Sea Lion development segued well with the Premier’s cash flow profile.
The field is expected to be on-stream 2017 (and will produce 80,000 barrels at its peak), which means the majority of the estimated US$2 billion capex required for development will be needed from 2015 onwards.
“This fits with Premier's maximum cashflow generation with production at 100,000 barrels of oil a day from the existing portfolio,” said RBC’s Nathan Piper.
He rates the stock a ‘buy’ and has raised his price target to 750 pence a share from 680 pence previously after adjusting his net asset valuation of the company in the wake of the deal.
“The transaction clearly sets a marker for Falklands valuations and appears to assume a 15 per cent cost of capital,” said Liberum’s Whittock.
“This is consistent with the higher risks attached to the projects and is consistent with the internal rate of return repayment conditions attached to the financing facility Premier is making available to Rockhopper.”
Separately, Premier’s chief executive Simon Lockett said he thought “long and hard” about the deal and in particular the threat of Argentine action over the Falkland Islands.
In an interview with the Telegraph newspaper today he said: “Our conclusion was that this is a risk worth taking. It would be foolhardy of us to dismiss the risk as nothing.”
The British government has robustly denounced claims by Argentina to the islands, or the oil in the treacherous South Atlantic waters around the Falklands.
The Sea Lion field alone could deliver more than US$9bn of tax and royalties to the Falklands, Edison Investment Research estimates.