Premier Oil’s (PMO’s) FY17 results highlighted progress made by the Sea Lion project operator in securing vendor/debt financing, a key hurdle ahead of the final investment decision (FID). Premier’s proposed financing structure proposes a combination of vendor finance ($375m), senior debt ($750m) and equity ($375m) to fund the $1.5bn gross capex bill ahead of first oil. We had previously heavily risked Sea Lion Phase 1, given perceived uncertainty over Premier’s commitment to the project. We believe deleveraging of Premier’s balance sheet, the materiality of Sea Lion in the context of Premier’s development portfolio and progress made with regard to project finance significantly increase our confidence in the project reaching FID. We risk Sea Lion Phase 1 at a 40% chance of success (up from 20%), increasing our valuation of Rockhopper (RKH) from 44.2p/share to 62.9p/share (+42%).
In this note, we describe the events that lead us to believe that Sea Lion Phase 1 is more likely to be developed than we had previously assumed. Higher prevailing oil prices and lower capital costs are key elements behind the operator’s renewed confidence in progressing the project through to FID in 2018. Premier estimates net economics, on a leveraged basis, and assumes a 10% cost of equity at $1bn ($65/bbl oil). We use more conservative assumptions, with RKH’s weighted average cost of capital at 12.5% and first oil deferred to 2023 (operator 2022). Based on a $70/bbl long term oil price, our risked valuation of RKH stands at 62.9p/share.
The economics of Sea Lion remain sensitive to our underlying oil price assumption and cost of capital. For example, a $5/bbl increase/decrease in our long-term oil price assumption (from $70/bbl Brent) has a c 19% positive/negative impact on our RKH risked valuation. Premier Oil estimates that its net economics are break-even at c $45/bbl.
Key catalysts in 2018 include finalised funding terms with providers of vendor and debt finance. This will be followed by project FID towards the end of the year. We expect both of these to further de-risk Sea Lion Phase 1 from our current 40% chance of commercial success.