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Rockhopper Exploration shares are good value, says Oriel analyst

The Falkland oil explorer has come a long way in the past year thanks to the successful appraisal of the Sea Lion oil discovery. Investors today looked to the positives of a mixed drilling update which revealed a ‘dry’ hole but also a resource upgrade. 

At current prices Rockhopper Exploration (LON:RKH) shares are good value as investors price in overly bearish concerns over financing and the commerciality of the Sea Lion field, according to analysts at Oriel Securities.

The Falkland oil explorer has come a long way in the past year, thanks to the successful appraisal of the Sea Lion oil discovery, and last month it unveiled a US$2 billion plan to kick start oil production in the south Atlantic by 2016. 

Investors today looked to the positives of a mixed drilling update which revealed a ‘dry’ hole but also a resource upgrade. 

In opening trades the stock slumped around 6 per cent as a knee jerk to the obvious disappointment of the failed well, however as investors digested the revised oil-in-place figures – which increased the mid-case resource by around 20 per cent – the shares rebounded into positive territory.

At 14:00 the explorer’s shares were trading at 185p, up 15.25p or 9 per cent.

The 14/10-8 exploration well targeted a potential extension of the Sea Lion discovery as well as two exploration targets known as Casper and Kermit. It found what Rockhopper describes as good quality thick reservoir packages in all three targets, but these reservoirs contained water rather than oil, so the well has been chalked up as a ‘dry’ hole. It will now be plugged and abandoned.

The 14/10-8 exploration well targeted a potential extension of the Sea Lion discovery as well as two exploration targets known as Casper and Kermit.

In a note to clients Oriel Securities analyst Richard Rose highlighted that while the 14/10-8 result is disappointing it won’t have a lasting impact on the development of the Sea Lion oilfield.

“In terms of appraisal of the Sea Lion Man Fan, the well penetrated an area that is separated from the Main field area by a fault to the north and therefore does not have significant implications for the volumes in the P50 and P10 cases,” Rose explained.

Rockhopper’s disappointing drill report did however come with a notable silver lining. Rockhopper said that, following a review of recent well data, it has revised its understanding of the oilfield. Consequently Rockhopper and its technical consultants have now made changes to the oil in place estimates for the Sea Lion field. 

In the low case the Sea Lion is now estimated to contain 844 million barrels of oil, meanwhile the medium and high case has increased oil in place to 1.297 and 1.428 billion barrels respectively.

“(The upgrade) is principally due to interpretation that reservoir is well developed outside of areas of high amplitudes on seismic, confirmed by both well results,” the Oriel analyst added.

“Using the revised OIIP estimates and a (conservative) 30 per cent recovery factor would imply recoverable resources of 390 million barrels (vs previous planning estimates of 325-350 million barrels).”

Next the Ocean Guardian drilling unit will move on to drill well 14/10-9, nearly 6 kilometres to the south west of initial Sea Lion discovery well.  

“The well is designed to investigate reservoir presence and hydrocarbon charge within the SLMC towards the southern edge of the company's acreage and is also an exploration well on the Eastern side of the Casper prospect,” Rockhopper said.  

 

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