personal finance

Buys at Rockhopper follow farm-out deal

If you invest in oil majors it would be reasonable to assume a lower level of execution risk, simply because at any given time they will be involved in multiple projects.

Whereas if you are looking to exploit the junior end of the oil and gas market, you are probably doing so in expectation that production, once achieved, will have a disproportionate effect on profitability and cash flows. Concentration of capital increases risks and potential rewards — think of EnQuest’s travails with its flagship Kraken field.

You might also point to the decade-long experience of Rockhopper Exploration and its 1.7bn barrel Sea Lion prospect in the North Falklands Basin. Over time, the driller’s interest has been whittled down, as a combination of geological challenges, regional politics and flat oil prices pushed back the timeframe for “first oil”.

First phase capital expenditure in the lead-up has been estimated at $1.8bn (£1.38bn), with operating expenses (including the floating production system lease) at $25 a barrel. That provides sufficient headroom, with Brent crude averaging $64.09 a barrel through 2019, especially if production eventually plateaus at 80,000 barrels a day.

Management at Tel Aviv-listed Navitas Petroleum LP apparently believes that the potential rewards at Sea Lion outweigh the risks. The company has farmed in for a 30 per cent interest, bringing it in line with Rockhopper’s stake, with the remainder in the hands of Premier Oil.

Rockhopper Exploration v Brent crude performance

A week after the announcement, three principals in Rockhopper — chief executive Sam Moody, Keith Lough, chairman, and Stewart MacDonald, chief financial officer — signalled their faith in the new arrangement by collectively adding another 285,000 shares to their holdings. The deal promises to ease any near-term funding anxieties for Rockhopper as it will effectively be de-risked by its partners for all pre- and post-sanction costs not met by senior debt through a combination of carry and loans. 

The reality is, however, that we are only marginally closer to the execution phase than when the Sea Lion discovery marked the first contingent oil resource in the Falkland Islands. For investors, there might be more attractive options closer to home when you consider that average operating costs on the UK Continental Shelf came in at $15.50 a barrel through 2018.

The chief financial officer of Impax Asset Management has sold almost £100,000-worth of shares in the environmental, social, and governance specialist fund manager, a day after the group announced a first-quarter update on assets under management (AUM).

Charlie Ridge, who has been in the post since 2008, cashed in 28,333 shares on January 9 at an aggregated price of 350p, in his second disposal in as many months. On December 17, Mr Ridge joined a sale by chief executive Ian Simm when he disposed of £216,671-worth of restricted shares, at an average price of 325p. The finance chief also sold a further 5,000 shares gifted to him by his wife Carol.

The most recent sale came one day after another strong quarterly update from the group, whose sustainability-focused mandates saw net inflows of £771m and positive market movements of £289m in the three months to December.

That performance — which contrasts with recent outflows for Aim-listed peers including Polar Capital and Premier Miton — caused total assets under management to rise 7 per cent to £16.1bn by the end of December. In turn, that equates to an annual growth rate of 40 per cent since the start of 2018.

This week, analysts at Peel Hunt lifted its target price to 380p, but moderated its recommendation on the stock from “buy” to “add”, after it climbed to an enterprise value-to-operating profits ratio of 23. However, the broker noted that an AUM target of £17.5bn for the September year-end looks “comfortably achievable” should the current rate of investment flows continue.

On current evidence, the wind is certainly blowing forcefully in that direction. On Monday, BlackRock pledged to double the number of its sustainability-focused exchange traded funds, expand its active investments in the transition to a low-carbon economy, and develop screening tools for passive investors to exclude fossil companies from their portfolios.

That the world’s largest fund manager is repositioning itself as a champion of more sustainable investing is both a compliment and — dare we say it — a longer-term challenge to Impax. Finally, competition might be heating up. At 390p, Impax’s market price now equates to 3 per cent of Peel Hunt’s forecast AUM, which is a massive premium to the broader sector.


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