Rockhopper Exploration plc, the oil and gas exploration and production company with key interests in the North Falkland Basin, is pleased to announce its audited results for the year ended 31 December 2020.
• Detailed transaction terms agreed with Navitas Petroleum LP to farm-in for a 30% interest in the Sea Lion project
• Recently completed merger of Premier Oil plc with Chrysaor to create Harbour Energy plc, resulting in a materially larger and financially stronger operator of the Sea Lion project
•Extension of the Company's North Falkland Basin Petroleum Licences, including the Sea Lion Discovery Area, to 1 November 2022
Corporate and financial
• Ombrina Mare arbitration Tribunal confirms "deliberations and the drafting process have both advanced very considerably"
• Disposal of Rockhopper Egypt Pty Limited to United Oil & Gas plc completed in February 2020
o Subsequent sale of the Group's entire shareholding in United Oil & Gas plc in August 2020 raised proceeds of US$4.0 million
• Initiatives implemented to further materially reduce corporate costs
• US$222.6 million one-off non-cash impairment, based on a decision, in line with the Sea Lion operator, to write off the historic exploration costs associated with the resources which will not be developed as part of the Sea Lion Phase 1 project
• Cash resources of US$11.7 million as at 31 December 2020
• Targeting completion of the Navitas farm-in
• Outcome in relation to Ombrina Mare arbitration expected in July 2021 - seeking significant monetary damages
Keith Lough, Chairman of Rockhopper, commented:
"The Company will continue to work closely with all stakeholders to maximise the chance of securing the Navitas farm out and project sanction of Sea Lion. The Board believes that the opportunity to invest in a world-scale fully appraised and engineered project with material additional upside at this point in the cycle presents a compelling opportunity, and one which would lead us towards unlocking the value within the project long-awaited by all stakeholders."
2020 has been a year of unprecedented uncertainty, volatility and challenge, both from a human and economic perspective. The COVID-19 pandemic caused a sharp economic slowdown with a resultant collapse in oil prices during the first half of the year. Through a combination of OPEC+ supply cuts, relaxation of restrictions related to COVID-19 and positive news related to vaccines, oil prices recovered strongly through the second half of the year and into 2021. With the global balance of oil supply and demand now converging, the outlook is more positive.
Notwithstanding increasing concerns over climate change and the energy transition, absent material advances in technology or radical changes in lifestyle, most external forecasters predict significant oil demand continuing for decades. It is highly unlikely existing oil fields will be able to satisfy such demand and therefore new oil and gas developments, such as Sea Lion, will be required. Against that backdrop, it is our belief that new projects will need to demonstrate not only superior economic and financial returns but also outline how they support the energy transition and support their stakeholders' commitments to achieve net zero.
It is in this context that Environmental, Social and Governance ("ESG") continues to be a key focus for Rockhopper which is committed to developing Sea Lion on an environmentally sensitive basis. Such a commitment is expected to be achieved through a combination of reduced emissions from the use of best-in-class technologies and the offsetting of emissions through investment in nature-based carbon-offsetting projects both in the Falklands and elsewhere.
SEA LION PHASE 1 DEVELOPMENT
Rockhopper has been operating offshore the Falkland Islands since 2004. We are a long-term partner of the Falklands and our aim has always been to support the rights of the Falkland Islanders to develop their natural resources for their own economic benefit.
Having completed the technical definition of the Sea Lion project, at the outset of 2020 the priorities for the year ahead included securing senior debt financing for the project, completing the farm down to Navitas Petroleum LP ("Navitas") and submitting a Field Development Plan for the Sea Lion project to the Falkland Islands Government ("FIG").
However, in response to the unprecedented fall in the oil price experienced in March 2020, a decision was made in early April 2020 to reduce costs and scale-back headcount and activity on the project. Through the rest of the year, a reduced team continued to progress a number of regulatory and commercial workstreams, including the development of Sea Lion's net zero emissions plan and finalising the terms of the Navitas farm-in.
The recently completed merger of Premier Oil plc ("Premier") and Chrysaor Holdings Limited ("Chrysaor") to create Harbour Energy plc ("Harbour") results in a materially larger and financially stronger operator of the Sea Lion project. Navitas has confirmed that it remains committed to the proposed farm-in. However, in order to enable the new management of Harbour to make a firm decision on the Sea Lion project, Rockhopper, Premier and Navitas agreed to extend the exclusivity period for the farm-in to 30 September 2021. While there can be no guarantee around Harbour's future intentions for Sea Lion, Harbour has publicly stated a desire to pursue international growth with a preference for material operated positions and with capital allocated to those projects which best fit its investment strategy.
Rockhopper's Board remain confident the Sea Lion project benefits from robust economics (at $65/bbl Brent - NPV10@FID ~$1.8bn; break-even ~$42/bbl; life of project free cash flow ~$4.2bn with material upside at higher oil prices) and that it compares favourably to other investment opportunities which may be available in the current environment.
In March 2021, the Company was pleased to announce that, following discussions between the joint venture partners, Harbour and FIG, FIG has agreed to extend each of the Group's North Falkland Basin Petroleum Licences, including the Sea Lion Discovery Area, until 1 November 2022, with no additional licence commitments.
OMBRINA MARE ARBITRATION
Rockhopper commenced international arbitration proceedings against the Republic of Italy in relation to the Ombrina Mare field in March 2017. The hearing took place in early February 2019 in Paris. In June 2019, the Tribunal rejected Italy's request for the suspension of the arbitration and Italy's related intra-EU jurisdictional objections.
Post-hearing briefings were submitted in October and November 2019. The Tribunal confirmed in May 2021 that it anticipates being in a position to render its award in the course of July 2021.
Rockhopper continues to believe it has strong prospects of recovering very significant monetary damages - on the basis of lost profits - as a result of the Republic of Italy's breaches of the Energy Charter Treaty. All costs associated with the arbitration are funded on a non-recourse ("no win - no fee") basis from a specialist arbitration funder.
The Group continues to actively manage its corporate costs and has reduced G&A by circa 50% over the last five years. In light of the sharp reduction in oil prices experienced in the first half of 2020, initiatives to further reduce corporate costs commenced in May 2020 with a target to reduce costs by a further 30%. These measures include, but are not limited to: permanent reduction to executive director base remuneration; employee headcount reductions including certain roles transitioning to part-time; reductions to adviser and contractor costs; and a decrease in head office costs through the relocation to premises outside of London.
The disposal of our Egyptian business, including the subsequent sale of our shareholding in United Oil & Gas plc ("United"), generated a healthy return on investment with sale proceeds of US$15.5 million and free cash flow during our period of ownership of circa US$4.0 million, against an original investment of US$11.9 million in 2016.
As outlined above, ESG, and Corporate Responsibility more generally, continues to be a key focus for Rockhopper.
As an oil and gas exploration and production business our role is to produce hydrocarbons in an environmentally responsible manner.
As part of this strategy, FIG has recently established an independent environment trust to receive and administer future off-setting payments from the Sea Lion project and distribute those funds for activities aimed at ensuring a positive environmental legacy in the Islands.
Once FID on Sea Lion has been achieved, the Company commits to define measures, report transparently, and mitigate our own emissions as far as practicable.
In addition, the Company will in 2021 be undertaking a review of its broader ESG framework to ensure it remains appropriate to its business and increasing stakeholder interest in this area.
The human and economic impact of COVID-19 has been very significant. The health and wellbeing of our staff remains a priority. We have adapted our working practices to ensure business continuity. We thank our staff and wider stakeholders for their continued support.
At 530 million barrels of 2C recoverable resources, Sea Lion is a world-class oil field with the scale and potential to create huge value for Rockhopper, its partners and the Falkland Islands as a whole.
The merger of Premier and Chrysaor to create Harbour results in a financially stronger operator of the project. This, combined with the proposed entry of Navitas to the Sea Lion joint venture, creates a solid operational and financial foundation giving the project the strongest possible chance of progressing.
Based on recent guidance from the Tribunal, an outcome in relation to the Ombrina Mare arbitration is now expected in July 2021. The Company remains of the view it has strong prospects of recovering very significant monetary damages.
Finally, we thank the Falkland Islands Government for its continuing support and will continue to work closely with all stakeholders to maximise the chance of securing the Navitas farm out and project sanction of Sea Lion. The Board believes that the opportunity to invest in a world-scale fully appraised and engineered project with material additional upside at this point in the cycle presents a compelling opportunity, and one which would lead us towards unlocking the value within the project long-awaited by all stakeholders.
From a finance perspective, the most significant events in the year include:
• Detailed transaction terms agreed with Premier/Harbour and Navitas in relation to the Sea Lion project
• Disposal of Rockhopper Egypt Pty Limited to United - completed in February 2020 - and subsequent sale of the Group's entire shareholding in United - completed in August 2020
• In response to the COVID-19 pandemic, and the dramatic fall in oil and gas prices experienced through 2020, significant cost reduction programmes implemented both at the Sea Lion project level and corporately at Rockhopper
The revised funding arrangements with Premier/Harbour ensure that Rockhopper is funded for all pre-sanction costs related to Sea Lion (other than licence fees, taxes and project wind down costs). As such, the Company believes the above events materially strengthen the Company's financial position in the short and medium term and significantly enhance the prospects for a successful project financing for Sea Lion once markets recover.
RESULTS FOR THE YEAR
For the year ended 31 December 2020, the Group reported revenues of US$2.8 million and loss after tax of US$236.5 million. The loss after tax primarily arose as a result of non-recurring non-cash impairments associated with previously incurred exploration costs in the North Falkland Basin. The decision was made, in line with the operator, to write off historic exploration costs associated with the resources which will not be developed as part of the Sea Lion Phase 1 project.
The Group's revenues of US$2.8 million (2019: US$10.3 million) during the year relate entirely to the sale of oil and natural gas in the Greater Mediterranean (Egypt and Italy) region. The reduction in revenues from the comparable period reflects the completion of the disposal of the Group's Egypt portfolio in February 2020 as well as a decline in production and gas prices in Italy.
Working interest production averaged approximately 316 boepd during 2020, a reduction over the comparable period (2019: 1,284 boepd), again related to the disposal of the Group's Egyptian portfolio during the period.
During the period, the Group's gas production in Italy was sold under short-term contract with an average realised price of €0.10 per scm (2019: €0.17 per scm). Gas was sold at a price linked to the Italian "PSV" (Virtual Exchange Point) gas marker price.
In Egypt, all of the Group's oil and gas production was sold to Egypt General Petroleum Company ("EGPC").
Cash operating costs, excluding depreciation and impairment charges, amounted to US$2.1 million (2019: US$4.6 million). Again, the reduction in operating costs reflects the disposal of the Group's Egypt portfolio during the period.
The Group continues to manage corporate costs, having achieved an approximate 50% reduction in general and administrative ("G&A") cost, excluding non-recurring expenses related to restructuring and acquisitions, over the last five years. In light of the sharp reduction in oil prices experienced in the first half of 2020, initiatives to further reduce corporate costs commenced in May 2020 with a target to reduce costs by a further 30%. G&A costs decreased to US$4.0 million in 2020 (2019: US$5.3 million), excluding non-recurring expenses related to restructuring and acquisitions and divestments. During the year approximately $2.0 million of recurring annual corporate costs were identified and removed permanently from the business. The full impact of such cost reduction initiatives is expected in 2021.
Following the decision in February 2016 by the Italian Ministry of Economic Development not to award the Group a Production Concession covering the Ombrina Mare field, in March 2017 the Group commenced international arbitration proceedings against the Republic of Italy. All costs associated with the arbitration are funded on a non-recourse ("no win - no fee") basis from a specialist arbitration funder.
CASH MOVEMENTS AND CAPITAL EXPENDITURE
At 31 December 2020, the Group had cash and term deposits of US$11.7 million (31 December 2019: US$17.2 million).
Following signature of a Heads of Terms in January 2020, Rockhopper's share of pre-sanction costs from 1 January 2020 (other than licence fees, taxes and project wind down costs) are funded by Premier/Harbour and/or Navitas. During 2020, the Group paid US$12.9 million of Sea Lion costs related to the period prior to 1 January 2020. Post period end, the Company received and subsequently paid a significantly larger than expected tax liability of US$1.4 million associated with the 2015/16 Falklands drilling campaign. The amount was fully accrued for as at the year-end and, going forward, limited further costs related to the period prior to 1 January 2020 are expected.
Miscellaneous includes non-recurring restructuring costs, foreign exchange and movements in working capital during the period.
IMPAIRMENT OF OIL AND GAS ASSETS
Rockhopper has tested the carrying value of its assets for impairment. Carrying values are compared to the value in use of the assets based on discounted cash flow models. Future cash flows were estimated using a long-term Brent oil price assumption of US$62.5/bbl (in "real" terms) (2019: US$70/bbl real). A post-tax nominal discount rate of 10% and 12.5% was used for the Group's Greater Mediterranean and Falkland Islands assets respectively.
Despite the reduction in the long-term oil price assumption, no impairment arose on the Sea Lion Phase 1 project. A range of sensitivities have been considered as part of the impairment testing process. In the event of a US$2.5/bbl reduction in the Group's long-term oil price assumption, an impairment of $5 million on Sea Lion Phase 1 arises. No impairment would arise if the Group assumed project sanction was delayed by a further year.
A decision was made, in line with the operator, to write off historic exploration costs associated with the resources which will not be developed as part of the Sea Lion Phase 1 project. This impairment has no impact on the Group's long-term strategy for multiple phases of development in the North Falkland Basin but instead reflects the limited capital which will be invested outside of the Phase 1 project in the near-term. A reversal of the impairment is expected once the Phase 1 project has been sanctioned and investment resumes on the Phase 2 project.
MERGERS, ACQUISITIONS AND DISPOSALS
On 23 July 2019, Rockhopper announced the disposal of Rockhopper Egypt Pty Limited which holds a 22% working interest in the Abu Sennan concession to United.
The consideration payable to Rockhopper under the transaction comprised:
• cash of US$11.5 million; and
• the issue of 114,503,817 Consideration Shares representing approximately 18.5% of United's enlarged ordinary share capital.
The transaction was subject to satisfaction of customary conditions precedent including United shareholder approval, completion of the readmission of United to trading on AIM and receipt of Egyptian government approvals. The transaction completed on 28 February 2020.
In August 2020, the Group disposed of its entire shareholding in United, realising a further US$4.0 million of cash proceeds.
On 8 April 2015, the Group agreed binding documentation ("Tax Settlement Deed") with FIG in relation to the tax arising from the Group's farm-out to Premier.
The Tax Settlement Deed confirms the quantum and deferment of the outstanding tax liability and is made under Extra Statutory Concession 16.
As a result of the Tax Settlement Deed, the outstanding tax liability was confirmed at £64.4 million and is payable on the earlier of: (i) the first royalty payment date on Sea Lion; (ii) the date of which Rockhopper disposes of all or a substantial part of the Group's remaining licence interests in the North Falkland Basin; or (iii) a change of control of Rockhopper Exploration plc.
During the first half of 2017, as a result of the Group receiving the full Exploration Carry from Premier during the 2015/16 drilling campaign, the Falkland Islands Commissioner of Taxation agreed to reduce the tax liability in line with the terms of the Tax Settlement Deed. As such, the tax liability has been revised downwards to £59.6 million. The outstanding tax liability is classified as non-current and is discounted to a period-end value of US$40.7 million.
Full details of the provisions and undertakings of the Tax Settlement Deed are disclosed in note 20 of these consolidated financial statements and these include "creditor protection" provisions including undertakings not to declare dividends or make distributions while the tax liability remains outstanding (in whole or in part).
LIQUIDITY, COUNTERPARTY RISK AND GOING CONCERN
The Group monitors its cash position, cash forecasts and liquidity on a regular basis and takes a conservative approach to cash management, with surplus cash held on term deposits with a number of major financial institutions.
At 31 December 2020, the Group had cash resources of US$11.7 million and $10.0 million as at the end of Q1 2021 (unaudited). Following the sale of Rockhopper Egypt Pty Limited in 2020, the Group generates limited revenue and cash flow from the sale of oil or gas.
Historically, the Group's largest annual expenditure has related to pre-sanction costs associated with the Sea Lion development. However, following signature of Heads of Terms in January 2020, Premier/Harbour and/or Navitas have a legally binding obligation to fund Rockhopper's share of all Sea Lion pre-sanction costs from 1 January 2020 (other than licence fees, taxes and project wind down costs).
With the recently completed acquisition of Premier (operator of the Sea Lion project) by Chrysaor to create Harbour, management's base case forecast assumes a final investment decision on the Sea Lion development during 2022, with the Group's costs funded by Premier/Harbour and/or Navitas during this period.
Management has also considered a number of downside scenarios including (1) the farm-out to Navitas does not proceed and the Heads of Terms lapses; (2) the Sea Lion project does not achieve sanction (which could be due to a number of factors including funding not being achieved or; (3) Premier deciding to withdraw from the Sea Lion Development) which could ultimately result in relinquishment of the acreage. In this scenario the Sea Lion project would need to be wound down including the decommissioning of assets in the Falklands and the Group would be liable for its share of these project wind down costs with no funding support from Premier and/or Navitas.
Under the base case forecast, the Group will have sufficient financial headroom to meet forecast cash requirements for the 12 months from the date of approval of these consolidated financial statements. However, in the downside scenarios, in the absence of any mitigating actions, the Group may have insufficient funds to meet its forecast cash requirements. Potential mitigating actions, some of which are outside the Group's control, could include collection of arbitration award proceeds, deferral of expenditure or raising additional equity.
Accordingly, after making enquiries and considering the risks described above, the Directors have assessed that the cash balance held provides the Group with adequate headroom over forecasted expenditure for the following 12 months - as a result, the Directors have adopted the going concern basis of accounting in preparing these consolidated financial statements.
Nonetheless, these conditions indicate the existence of a material uncertainty which may cast significant doubt on the Group's and Company's ability to continue as a going concern. The financial statements do not include the adjustments that would be required if the Group and Company were unable to continue as a going concern.
PRINCIPAL RISK AND UNCERTAINTIES
A detailed review of the potential risks and uncertainties which could impact the Company are outlined elsewhere in this Strategic Report. The Company identified its key risks at the end of 2020 as being:
•oil price volatility;
• access to capital;
• joint venture partner alignment; and
• failure of joint venture partners to secure the requisite funding to allow a Sea Lion Final Investment Decision.
In 2020, the environmental impact of oil and gas extraction (e.g. climate change) was added to the risk register, reflecting the increased focus on ESG issues which could have an adverse impact on investor and lender sentiment towards the Company and the Sea Lion project.