Rockhopper drills a dry well, has a share placing and buys more acreage from Desire.
Mid-cap oil explorer Rockhopper Exploration (LSE: RKH) has been very busy in the past two days.
Drilling a dry well
Yesterday, Rockhopper announced the results of its latest drilling in the vast Sea Lion prospect in the North Falkland basin of the South Atlantic.
Rockhopper's latest well (14/10-8) investigated reservoir and hydrocarbon presence within Sea Lion, as well as exploring the Casper and Kermit prospects. Although the well encountered "good quality, thick reservoir packages in all three targets", all sands were water wet and the well was a dry hole.
Even so, thickness of the reservoir encountered in the well gave Rockhopper confidence that a good-quality reservoir is likely to be found in similar areas. As a result, the explorer updated its estimates for Sea Lion to between 844 million and 1,428 million barrels of oil STOIIP (stock tank oil initially in place).
Placing faith in the Falklands
This morning, Rockhopper took a strategic leap, increasing its bet that Sea Lion will prove to be a company-changing find.
The firm announced a placing of up to 25.8 million shares -- up to a tenth of its existing share capital -- with institutional shareholders. (Yet again, private investors are ignored when a company goes for growth!)
The number and price of these placing shares will be agreed at the close of a book-building process undertaken by joint book-runners Canaccord Genuity and Merrill Lynch. Rockhopper expects the new shares to be admitted to AIM on or around next Monday, 17 October. The firm's directors will subscribe for shares worth £405,000, with other senior employees stumping up £80,000.
The reason for this placing is simple: Rockhopper wishes to acquire more acreage in the Sea Lion prospect.
The explorer's latest seismic data indicate that Sea Lion extends into part of licence PL004 owned by Desire Petroleum (LSE: DES), which could add 10% to 15% to the prospective resources at the high end of Rockhopper's estimates. In addition, Desire's licence may include two other attractive prospects dubbed Jayne and Beverley.
Hence, this fresh cash will be used to farm-in these three prospects. In effect, it's a 'land grab for cash' agreement between Rockhopper and Desire.
Under this agreement, Rockhopper will pay the full cost of drilling 'Area 1', adding a 52.5% stake to its existing 7.5% ownership. The drilling of the well will also give Rockhopper another 17.5% of 'Area 2' to add to its 7.5% stake, though Desire will remain the operator of this area.
We need partners
Rockhopper's immediate goals are to:
- finish appraising its 100% acreage on Sea Lion by drilling wells 14/10-8 and 14/10-9;
- pay 100% of the cost of one well on Area 1;
- pay 25% towards of the cost of Desire drilling one well on Area 2;
- finalise the engineering design and investment decision for Sea Lion;
- finish interpreting the mapped prospects elsewhere within its licences; and
- provide an updated Competent Person's Report in early 2012.
To fully fund its Sea Lion development, Rockhopper will need to raise yet more cash, which it expects to do by seeking industry partners and debt providers.
Clearly, the explorer's future prospects and share price depend on the outcome of this latest round of drilling and negotiating. As I write, its shares are up 1.5p at 193p, valuing the group at close to £500 million.
While Rockhopper is no longer a tiddler, it still needs a bigger partner if it is to step up to the big time. No doubt investors await the outcome of this horse-trading with bated breath!
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