Pessimism virus infects Rockhopper - great for a Contrarian!

I have been thinking about my Rockhopper (RKH) investment quite a bit recently as the share price continues its rapid decent following the 14/10-3 well result. Following the euphoria of Rockhopper's Sea Lion discovery on May 6th, 2010 not much has gone right for the Falkland Island oil explorers. Desire Petroleum exemplified the issues with wild oscillations in its share price, which inevitably lost most private investors money, and culminating in the disastrous Rachel North 14/15-2 well which was announced as an oil discovery on December 3rd 2010 and then 3 days later, news came it was actually water.

Its easy to fall in love with a share and when it comes to the Falkland Island explorers I do not fall into this camp. I generally have a massive degree of scepticism. Though I was lucky enough to benefit from Rockhopper's Sea Lion discovery, I manage my investments in the Falkland Islands oil explorers on fundamentals not on luck.

So looking at Rockhopper you have to reexamine the facts to be sure that your investment is not just a speculative no hoper.

Rockhopper has:

• 170 million barrels of oil confirmed reserves following a CPR at Sea Lion (14/10-2) which is commercial on a standalone basis
• Current market capitalisation of £700 million underpinned by Sea Lion find
• Around £200 million in cash for at at least 6 further wells in the North Falkland basin
• Live oil shows found 8km from Sea Lion with 14/10-3 well (though non commercial on a stand alone basis). The well encountered good quality reservoir; hydrocarbons were present; and the sands were charged. (see FT.com note below)
• Given the proximity of the next well 14/10-4 (2 km from Sea Lion) high probability of success
• Full programme of 3D seismics due by second half 2011

At the end of last week Sam Moody was pitching the story to the City, particularly the prospects for the next well (14/10-4) which is due to spud next week. It seems things went well, probably because the facts speak for themselves. The froth has left the Falkland Island oil shares and excessive pessimism is the watch word for now. Rockhopper is still risky and a lot rides on the next well but the probability of success looks enticing and Moody is almost laying his reputation on the line with the comments he was using last week. Though I was not at the meeting, I have a good source and he was impressed with the story, lets hope the market is next week!

Note:
Correction: Rockhopper Sea Lion discovery

Published: February 14 2011 04:47 | Last updated: February 14 2011 04:47

http://www.ft.com/cms/s/0/545dbce6-37e6-11e0-b91a-00144feabdc0.html#ixzz1EXNa0TZT
Saturday’s FT incorrectly stated that Rockhopper’s Sea Lion discovery was uncommercial on a stand-alone basis. Instead Rockhopper’s announcement on Friday referred to a recently drilled exploration well, 14/10-3, which it considered to be uncommercial on a stand-alone basis, despite encountering live oil.

Rockhopper soars on Falkland Island oil discovery

North Falklands basin oil explorer Rockhopper Exploration (RKH) is currently up 143% to 91p on news that oil has been discovered at the Sea lion prospect. Great news for the Contrarian Investor portfolio given the average purchase price of 42p.  I have taken profits on a large slug of the holding and await further news from the testing programme. It was a case of "nerves of steel" yesterday as Rockhopper's price dropped to around 36p on the general market fall and presumably market makers filling their boots at these low levels in anticipation of an announcement. News clearly leaked this morning before the official RNS as the price had already climbed over 10% by mid morning.

The RNS released at noon today said "Rockhopper Exploration, the North Falkland Basin oil and gas exploration company, is pleased to announce that well 14/10-2on the Sea Lion prospect has reached a depth of 2,744 metres. Initial data collected indicate that this well is an oil discovery, which would be the first in the North Falkland Basin. The Company has run a suite of wireline logs and logging data collected thus far indicate that the well has encountered a 150 metre gross interval of sand and shales. The data show that the well has 53 metres of net pay distributed in multiple pay zones, the thickest of which has a net pay of 25 metres. These pay zones have an average porosity of 19%. Rockhopper now intends to collect additional logging information prior to making a decision whether to plug and abandon the well, or to suspend the well for future testing. The Company is also considering whether to drill an appraisal well on Sea Lion later during the current drilling campaign. Further information will be distributed in due course. It remains the intention of the Company to drill the Ernest prospect in the fourth slot of the overall Falklands Drilling programme.Samuel Moody, Managing Director, commented: "We are extremely excited by the results of this well. While we are presently acquiring additional data, current indications are that we have made the first oil discovery in the North Falkland Basin. We will now focus on analysing inmore detail the data gathered from the well, in addition to continuing preparations for thedrilling of our Ernest prospectlater in the year."