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Rockhopper Exploration: A multi-bagger, or just running out of cash?

Witness Rockhopper's share price slide over the last four years, from just under four quid to 28p today. It's too easy to blame the harsh reality of US$50 crude.
A rockhopper penguin, a famous inhabitant of the Falkland Islands
What next for Rockhopper watchers?

One of the pocket rocket stocks of the last oil boom, Rockhopper Exploration Plc (LON:RKH) has lost a lot of its allure with private investors.

Witness the share price slide over the last four years from just under four quid to 28p today.

It is too easy to blame the harsh reality of US$50 crude, which has shaken up the entire exploration sector.

Rockhopper’s decline pre-dated this and started with a deal that should have been the making of the business.

In summer 2012 it signed a farm-out to ambitious mid-cap Premier Oil (LON:PMO) for the Sea Lion field in the waters north of the Falkland Islands.

It was worth more than US$1bn in development and exploration ‘carries’ and included an upfront payment of US$231mln.

For that Premier got 60% of Sea Lion, host to an estimated 500 million-odd contingent barrels of crude.

Yet as we sit here today, development is on hold.

Premier, having it seemingly bitten off more than it could chew, won’t press ahead with construction until it finds another partner to share the costs.

The investment required has come down US$300mln, but still weighs in at a very chunky US$1.5bn. 

So where does that leave Rockhopper – not quite between a rock and hard place.

In its interim results statement on Wednesday, the company said it would aid Premier in its search for a partner.

Otherwise, the focus now is on self-help and production.

The results statement revealed that output averaged around 600 barrels of oil equivalent a day in the first six months in the form of gas from Italy.

The firm’s recent acquisition of Beach Egypt for just under US$12mln will add a further 1,500 barrels a day.

The hope in the market is the added output will help generate revenues sufficient to cover the company’s running costs.

City broker SP Angel is worried Rockhopper won’t hit that crucial inflection point quickly enough.

As a result, it may be forced to eat into a cash pile estimated at US$75mln and, if exhausts these reserves, it would then be forced cap in hand to the market.

“We are increasingly concerned that the rate of growth in cash generation is falling behind the point where further near-term funding will be required from shareholders,” said SP Angel.

“While that point is at least two quarters away, we believe that this will need to be approached quickly.

“Nevertheless, we continue to believe that the company is the only safe way to play the Falklands currently.”

That last point isn’t lost on the savvy investors.

Rockhopper’s credentials as the preeminent play in this inhospitable corner of the South Atlantic have been enhanced with the all-share merger with neighbour Falklands Oil & Gas (FOGL).

However its 40% chunk of the Sea Lion field carries most of the value.

And according to broker Liberum, the market’s downer on Rockhopper has blinded investors to the value inherent.

Liberum didn’t quite express it that way, but reckons the stock is worth more than four times its current value, or 123p a share.

Approval to develop Sea Lion and some change in Premier’s predicament would likely focus investor’s minds on Rockhopper’s true potential.

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Rockhopper Exploration Plc Timeline

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