Rockhopper tension builds

I haven't posted much on North Falklands basin oil explorer Rockhopper this week despite buying a few spread bets over the last week or so. Most of the rumours coming out of the "pub in Port Stanley" brigade don't seem to hold any credence and after all the nonsense relating to Desire Petroleum and the huge swings in share price purely on a couple of bulletin board posts I'm taking everything with a big "pinch of salt".

Unlike other Falkland Oil drillers, Rockhopper isn't a complete shot in the dark i.e. not a binary bet of betting on exploration success. Goldman have RKH as a conviction buy with a 12 month target gives so the current £3.68 share price, because of the the Sea Lion discovery with its 200 million barrel reserves. This offers downside protection to any failure on the current well drill.

If the 14/10-3 well has a positive hydrocarbon result this will be transformational for Rockhopper. The new well is around 8km from the Sea Lion discovery, and oil will confirm the geology of the oil structure in the North Falklands basin. It is likely in this event that recoverable reserves could be closer to 1 billion barrels not 200 million. This would make it an exceptional commercial opportunity and move the share price many multiples higher.

So in summary I like Rockhopper's risk/reward ratio because £3.68 is protected on the downside by 200 million barrels of oil and the upside is £10-20. This is different from Desire for this key reason, the company already has oil and plenty of cash in the bank for additional wells and seismics if 14/10-3 fails. I believe a buy below £4 with news expected any day now, is not foolhardy by any means and not a roulette wheel gamble. I understand the caution after a lot of smaller investors lost buckets of money on Desire Petroleum, but we have a different much sharper animal here! Good luck all holders, I'm glued to the RNS screen.