Rockhopper (RKH) has announced that, together with Premier Oil, it has signed Heads of Terms with Navitas Petroleum to farm down a 30% interest in the Sea Lion project. The deal increases confidence that project debt financing to the joint venture can be secured successfully for Sea Lion Phase 1 of development, while Rockhopper maintains a material 30% stake in Sea Lion, and Premier 40% and operatorship. Rockhopper’s share of project costs will now be covered from 1 January 2020 through to Phase 1 completion, pending sanction. Meanwhile, partner Premier has announced a series of significant North Sea M&A deals, which materially strengthen its balance sheet and further support the Sea Lion project financing discussions. We update our valuation to account for the farm-down deal and roll forward the discount date, resulting in a risked valuation of 53.7p/share, down from 79.6p/share.
The entry of Navitas into the Sea Lion joint venture (JV) brings incremental equity and debt financing to the project, leading to greater certainty that project financing can be delivered. Rockhopper has protected its balance sheet while retaining a 30% stake and is now funded by a combination of Premier Oil and Navitas Petroleum interest-free loan from 1 January 2020 to Phase 1 project completion.
Premier’s UK North Sea M&A deal will provide additional cash flow that will accelerate the company’s debt reduction, increasing the likelihood that project finance can be secured for Sea Lion Phase 1. Meanwhile, the preliminary information memorandum (PIM), submitted by the Sea Lion JV to potential providers of senior debt project finance in August 2019, is now also likely to progress, having been held up in Whitehall due to the general election.
Our valuation suggests that the equity market is more optimistic towards Sea Lion Phase 1 sanction, implying an increased chance of success of 30% vs 20% at the time of our last note. Our updated risked valuation accounts for the new Heads of Terms, consequent participating interest readjustment and new interest-free loan to fund Rockhopper towards Phase 1 project completion. Our risked valuation now stands at 53.7p/share based on a Sea Lion Phase 1 CoS of 55%. We provide sensitivities to Phase 1 CoS and will publish a more detailed review once funding has been secured.