Although a significant oil find would have been the optimal outcome from well 14/10-3, two out of three successful wells would be at the upper stretch of exploration odds. This aggressively located exploration well was testing the extent of the Sea Lion fan and located 8km from the Sea Lion discovery. We see some clear positives from the result: the well encountered good quality reservoir; hydrocarbons were present; and the sands were charged. Reservoir development looks encouraging in the northern lobe of the fan and potentially in the newly identified S2 feature. RKH will now focus on drilling a number of appraisal wells on the southern lobe of the Sea Lion feature. We do not believe this result has any impact on the P50 for Sea Lion. The work moves from exploration geology to development geology. The sharp fall in the share price presents an interesting opportunity ahead of the lower risk first appraisal well, located within the Sea Lion Discovery Area.
The long game: Significant work programme ahead
A second CPR could be coming in H211. The timing will allow for data from the current drilling campaign and the additional 3D seismic currently being shot to be incorporated. It leaves time for the work required to model the reservoir distribution across the multiple stacked fans in Sea Lion. The system has an aerial extent of over 50km2, with current seismic showing strong indications of good reservoir packages elsewhere in the fan, which appears to have been confirmed by this well. Rockhopper has indicated that up to six wells may be required to fully appraise the field, and discussions are progressing to agree a new contract consisting of a possible three firm wells and five option extensions.
Valuation: Covered by existing find, with exploration upside
The current EV is c $701m. Using an $8/boe value for a commercial discovery (the RPS Energy CPR uses $17/boe) would suggest the market is pricing in net reserves of 87mmbbls. RKH believes that Sea Lion is commercial as a standalone discovery. While there are some concerns about a waxy crude, associated gas could be used for power and heat for an FPSO and we do not believe this will prove to be a major issue. Borders & Southern has made similar indications around its acreage, suggesting that a 100mmbbl find would be commercial. As the RKH acreage is in significantly shallower water, drilling and operating costs are likely to be lower.
Note: Net cash = $374 million (estimated post November placing)
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