In early January 2016, the results of the Isobel-2 re-drill were announced, confirming a large total oil column in the Isobel Deep reservoir (more than 480m) and hydrocarbons across four other horizons. Rockhopper has concluded that Isobel is “highly likely to contain a commercially viable quantity of recoverable oil”. This resource base adds to the Sea Lion development, which has benefited from falling service costs. With largely unchanged capital investment, the project should see a sharp increase in Phase 1a recoverable volumes, reducing the break-even price. The merger with FOGL, completed on 18 Jan, has streamlined the ownership of the assets and makes a potential farm-out easier for RKH and PMO. We have adjusted our valuation for substantial changes since our last note, arriving at a core NAV of 104p/share (was 147p) and RENAV of 133p/share (178p).
Although the deal is immediately dilutive for RKH shareholders, the new company should enable a much easier execution of a farm-down with a third-party entrant, giving greater financial firepower to the area and higher confidence in the development overall. We would also point to the cost of the deal – at less than $1/boe for existing contingent resources, it is low by global standards.
The success of the Isobel-2 well has de-risked a complex of fans that management estimates contains more than 500mmboe. The initial partial success of the Isobel-1 well proved up to 24m of oil column, but drilling issues intervened. The 4km stepout of Isobel-2 was designed to better understand the reservoirs and explore down dip. Results suggest a gross oil column of more than 480m. Isobel could be larger than Sea Lion, while reservoir properties may be better
Since our last note, we have made a number of changes which have the net effect of moving RKH’s core NAV to 104p/share (from 147p/share). This is primarily due to the increased share count, offsetting a relatively small contribution from FOGL assets to the NAV at this point (given risking) and value increase due to a recent revision to the development plan (Phase 1a has been expanded on a largely unchanged cost base). The value of the company is based on the development of Sea Lion, which should be eased by the FOGL merger. Our RENAV is 133p/share. We note this value is highly geared to the oil price – a fall in our long-term oil price assumption to $70/bbl (from $80/bbl) would reduce the core NAV by 25%.