Rockhopper Exploration (LON: RKH), the Falklands oil exploration company, shares have risen 24.5% this morning on news of a reorganisation of the possible exploitation of the North Falklands Basin.
The Rockhopper announcement is here. The essence is that the pathway to exploitation of Sea Lion, the basin the exploration has discovered, is now simpler and more organised.
Rockhopper is an oil exploration company with licences in the North Falklands Basin. The history has been somewhat fraught, as you might imagine. Argentina not only claims the islands but the waters around them out to the 200-mile limit. So, that country doesn't recognise, formally, the rights of the islands to allocate oil exploration – and certainly not production – licences. Much of the rest of the world insists this was all sorted out 40 years ago.
After that oil exploration itself is a risky business. There might be oil there, might not is a statement that’s true of any possible resource. There might even be oil but not in economic quantities.
Finally, there’s the ability of any particular company being able to finance extraction on the basis that oil is there. So, for any exploration company, there are a number of moving parts and all need to operate together to ensure success.
Rockhopper has drilled exploration tests in that North Falklands Basin and claims economic quantities of oil to be extracted. The problems now become that ability to build the infrastructure to do so. The South Atlantic is not an easy environment, there’s much work that needs to be done.
The announcement today is that the structure to make this possible has been rejigged. The previous arrangement was that Rockhopper and Harbour Energy would work together to bring the plan to fruition. Harbour is now exiting the project and is replaced, on mutually agreed terms, by Navitas Petroleum.
This all clarifies responsibility lines and clears up who is to do exactly what.
Of more importance perhaps are the financial arrangements. Rockhopper requires finance to continue to operate. There is also the need to finance the ongoing exploration and drill testing work. Finally, it’s necessary, once the decision to fully exploit is taken, to finance Rockhopper’s part of that. The financing arrangements are that Navitas provides this with the payback from Rockhopper’s share of revenues further on down the line. Or rather, in detail finances that part which isn’t third party financed.
One way to think of the jump in Rockhopper’s share price is simply that it’s a resolution of uncertainty over whether such arrangements would be successfully concluded. It’s long been known that such were under discussion. What matters next is what is the general view of the details of what has been agreed.
There is significant risk still over many of the contributing parts of the operation as a whole. The resolution of one part of the complex could change the sentiment to wholly positive, or could just be seen as one step on a road. The trading opportunity is to take the right side of that change in opinion.
Should you invest in Rockhopper Exploration shares?
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