Sunday Times articles cast doubt on Premier Oil commitment to Falkland Islands

The Falklands Islands oil campaign has always been controversial for all sorts of reasons. First there’s the aggitation of the Argentinian government and especially from President Cristina Fernández de Kirchner‎ who argues that companies have no right to produce oil since sovereignty of the Falklands should be Argentine not British. Then there was all the drilling ups and downs with Desire Petroleum (now part of Falkland Oil and Gas), and Rockhopper Exploration. The latter benefitted from finding a significant amount of oil in the North Falkland basin at Sea Lion on 6th May 2010 using the Ocean Guardian rig. The shares peaked at over £4 in the following period as Falklands Island oil fever hit but which dampened over the following years after drilling failures in both the North and South Falklands basins meant that Sea Lion proved to be the only major oil discovery, though gas/gas condensate have followed.

There was plenty of buzz on the Rockhopper Exploration bulletin boards on Sunday/Monday following a “Inside the City” article in the Sunday times by Journalist Danny Fortson called “Over a barrel on Falklands” and another piece called “Oil chief’s departure casts doubt on Falklands boom.”.  The shares dropped 5% to 121.5p yesterday as the articles seem to have spooked some private investors. Last Thursday the shares rose 9% on news from a Premier Oil Capital markets day giving further details of the development of the North Falklands basin, Sea Lion development.

Fortson’s articles discuss the recent departure of Simon Lockett from Premier Oil and advises readers “If I were Rockhopper, I’d be very worried indeed. If I were an investor, I’d get out.” Lockett has been a firm believer in the Falkland Islands dream and was instrumental in delivering the farm in with Rockhopper in 2013. His departure following a series of production problems which have hit output at Premier Oil and there are concerns that his successor might take notice from proponents of a rethink of the whole Falklands Islands adventure. The article says “Lockett left amid growing investor unrest; Premier’s shares have sunk by a third over the past two years. Investors are clamouring for a big return of cash through a share buyback and, potentially, a change of strategy. The $5.2bn bill for developing Sea Lion is more than twice Premier’s market value.”

The naysayers include Schroders Andy Brough who believe that the Sea Lion development is too expensive given the technical complexities and lack of local infrastructure and risky because of the constant political overtures from Argentina.

The Sunday Times piece also discussed the approach being used by Premier oil to develop Sea Lion, the Tension Leg Platform (TLP solution) and the fact that farm out partners would need specialist knowledge and that companies like BP and Shell who use this technology have interests in Argentina and would be unlikely to want to be involved with Premier/Rockhopper.

Last week Premier gave more detail on the Sea Lion development with Rockhopper. It is estimated capital costs (gross) for Phase 1 of the Sea Lion development will total $5.2 billion comprising $3.5bn for surface facilities and $1.7bn for drilling. Capital expenditure to first oil is expected to be $3.8bn. Annual operating expenditure (gross) is expected to average $260 million including Floating Storage Unit rental and well interventions.

Premier Oil is expected to award the FEED (Front End Engineering and Design)contracts in 2Q 2014 and to submit the draft Field Development Plan at the end of this year. Also at the end of this year, Engineering Procurement and Construction contracts will be awarded. Field sanction is anticipated in 2Q 2015. Rockhopper continues to anticipate first oil 3½ to 4 years after project sanction. Phase 1 of the Sea Lion Development is expected to recover 293 mmbbl over 25 years.

Though the Sunday Times articles may have annoyed many with plenty of inaccuracies in the stories particularly relating to the Tension Leg Platform plan, it has done little to improve battered investor sentiment. At these sort of price around £1.20, Rockhopper’s shares are barely higher than the early days after the Sea Lion discovery. If Premier Oil’s new Chief Executive does decide to walk away, it would certainly raise contractual issues but with the Final Investment Decision (FID) still to be made, this could offer Premier a get out clause. If they do walk it would be a great shame for the Falklands Islands dream and given the scale of Sea Lion of nearly 300 million barrels recoverable resources it would certainly significantly dent Premier’s and Rockhopper’s production aspirations even though first oil is not expected until 2018/19. Lets see if Premier has the balls to bat the institutional investors away that are wanting a return of cash to shareholders and in the meantime Rockhopper investors will be waiting with baited breath for confirmation on the investment and also on drilling which is expected to start in the first quarter of 2015 and will hopefully add to the oil resources in the North Falkland basin.

Plenty of fun as usual on the Falklands oil story!

Contrarian Investor UK

IMPORTANT: The posts I make are in no way meant as investment suggestions or recommendations to any visitors to the site. They are simply my views, personal reflections and analysis on the markets. Anyone who wishes to spread bet or buy stocks should rely on their own due diligence and common sense before placing any spread trade.