Small-cap oil explorer,Rockhopper Exploration(LSE: RKH) has seen its share price jump by as much as 16% today, after alower cost development solution for its Sea Lion field was unveiled. The development plan was put together in conjunction with Rockhoppers partner on the Sea Lion project,Premier Oil(LSE: PMO).
As oil prices have slumped over the past few months, the viability of the Sea Lion project has been brought into question. Todays news shows that it still makes commercial sense to develop the prospect.
Under the new plan,Premier and Rockhopper have decided to develop only thenorth-east part of the project with a reduced well count for a cost of less than $2bn. After this initial expenditure, it is expectedthat field will start to generate its own cash flow, whichwill allow further development to take place.
According to Premier, under the reduced cost scheme, the project is expected to recover 160m barrels of oil over a 15 year period, at a rate of 50,000 to 60,000 barrels of oil per day. Assuming everything goes to plan, first oil is expected from the field during 2019. With any luck oil prices will have recovered by then, allowing Premier and Rockhopper to further the development of the field.
Todays news has removed some uncertainty about the development of the Sea Lion field and gives Rockhoppers shareholders some clarity on where the company will be heading next. However, there are still plenty of problems that Rockhopper will have to overcome as it progress with the project.
Indeed, while Rockhopper isfully financed at present, it remains to be seen how the company will fare if low oil prices persists. Todays announcement regarding the Sea Lion project was issued alongside Premiers interim management statement for the ten months to 31 October. In this update Premiers management states that new projects will only be sanctioned if:
they are robust at our long term oil price which is currently $85/bbl
At time of writing, the price of Brent crude, the international oil benchmark, is only $79/bbl. If the price of oil remains depressed this could throw Premiers and Rockhoppers development plans into disarray.
Still, according to Premiers CEO the cost per barrel of oil produced at Sea Lion is expected to be in the region of $35, compared to the North Sea, where the cost is closer to $60 per barrel. So, even if the price of oil drops further, the Sea Lion prospect could remain attractive.
That being said, if the price of oil remains depressed Premier is likely to put all development plans on hold as it tries to save cash.
A risky business
Overall, even though todays news regarding the development of Sea Lion is positive, theres still much to do before Rockhopper and Premier can relax. Discovering oil is easy but getting a well up and running, on time and on budget is the difficult part. Theres still plenty that can go wrong.
On the other hand, if everything goes to plan, Rockhopper’s shares could surge. And the best way to invest in high-risk, high-reward companies like Rockhopper isto use a basket approach. A basket of risky high-growth shares andreliable dividend-paying stocks, reduces risk and allows you to sleep soundly at night.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.