Member Info for Stevo12

Values
There are 130m shorts outstanding and creditors will receive over 3 billion shares. Accordingly the closing of the shorts will absorb less than 5% of the creditor shares. There will be 18.5b shares in issue post merger and lock in restrictions apply to those who hold more than 500m shares (2.7%). Accordingly the lock in restriction will apply to creditors who held £333m of debt and take up the creditor shares - which I think the majority will. Lockin may not even apply to ARCM once they close their shorts.

My response to your question. Yes I am concerned that the number of creditor shares looking to find a new home will potential disturb the market in the first few months. There will be a lot of effort going on at the moment to create institutional demand. The increase in oil price and recent positive sentiment will help and the majority of this transfer from creditors will be off market. The creditors will want out, but they will want an orderly exit which does not trash the share price.

What I am confident about is that this will all have flushed through by end of the year. Also if shares get to 32p then we will be a FTSE100 company on 1 October, which will drive an additional level of demand from trackers etc. Might be opportunities along the way to pick up additional shares if creditors dump.

I cannot see Monday’s confirmation by the creditors as a major price mover, but it is one of the steps to unlocking real value. The announcement by Boris will likely have a bigger impact on sentiment. The big movers for me are:

1. At a macro level - Clarity that vaccines and improving medical treatments will put an end to lockdowns across the major oil consuming countries and we see planes in the air again. The resulting return of oil demand to somewhere near 2019 levels will provide a floor under the oil price in the mid 60s.

2. Admission to trading and clearing of the creditor share overhang, resulting in approx 20% of equity held by institutions. Might take a couple of months.

3. Confirmation of dividend - nailed on with oil above $50pb and expect a minimum yield of 5% . This will come pretty soon after 1 April

4. Release of half year results to end of June demonstrating profitability and cash flows of combined business - End August/ Early September

5. Admission to FTSE 100 on 1 October

Each of these events should each yield a few pence on the share price.

LTT

Human nature will always result in cycles of investment on / investment off, particularly in highly capital intensive and long life commodity assets and all the ingredients are in play for another price spike once Covid is under control. We saw the roaring 20s as a response to the last global pandemic in 1918. we are by nature social creatures who crave human contact and once the handcuffs are off we are going to Spend, Spend, Spend.

Premier and Rockhopper have spent close to $1b on progress FI Oil to date and it would be a tragedy for both investors and FI citizens if Harbour decides to walk away. Harbour are not naturally drawn to large development projects, particularly in virgin oil basins. They like to buy producing fields with developed infrastructure. However with oil prices rising, Sealion becomes more attractive and the cost of producing assets are going to increase. However Mr Market is telling us that the probability of Sealion being sanctioned is low, although this could all change with a nod from Harbour. I think we will know their intentions by end of June.

The question is do Rockhopper have a plan B? Would Navitas and Rockhopper try to find another partner with expertise and deep pockets as operator. There was clearly not a lot of interest when Premier were looking for a partner and Navitas were given a 30% stake for free!

Interesting times ahead.

They should be generating $100m per month of EBITDA at current prices as we have limited hedges. If Harbour had stayed away, PMO would be 70p heading back to £1. Battlefields are littered with “Ifs and Buts” and kudos to Harbour in getting their timing perfect.

Very poor performance by PMO board in firstly not taking out material hedges when prices were in the 70s and then trying to invest in growth rather a relentless focus in paying down debt. If they had done either of the above we would still be independent and in a great position.

Still we will have 5% of the upside! Feeling a little bitter this morning but there is definitely still upside with Harbour but just not the same quantum.

Auson

It was covered in parliamentary questions and details are in Moggers post of 6 Feb.

Good news in that the shares subject to lock in will rank in the FTSE weighting which will require tracker funds to hold more Harbour shares. The Bad news is that we won’t be admitted to FTSE until September as opposed to June.

There is more than a good chance than it will be FTSE100 as opposed to FTSE250 which would drive another level of institutional investment. As of today, a share price of 32p would make us a FTSE100 company and with oil looking good for second half of the year, a real possibility.

Auson

Rockhopper loan from Harbour to fund its share of development costs is interest free. If rockhopper borrows additional monies to payFIG tax then that will bear interest. However tax not payable until 12 months post first oil and rockhopper could borrow from many sources given rockhoppers share of EBITDAX willthen be $600m per annum.

I still can’t understand how the tax payable to FIG has not been renegotiated given it relates to the original investment carry which Rockhopper will no longer receive.

I hope you are right re UKEF but government has stated no more UKEF hydrocarbon funding post June 21 and an application has not yet been submitted. There are already more than a dozen applications being considered and I worry that we have missed the window.

If harbour made a bid, it would likely be for paper rather than cash. They are issuing over 18b of shares as part of reverse takeover of premier and another 200-300m shares to take Rockhopper out would not even scratch the surface.

LTT

Rockhopper will effectively not be taking on any of the risk as Harbour and Navitas are funding their share of development costs via interest free loan. Accordingly having Rockhopper on board does not provide any derisking for Harbour. If they took Rockhopper out or diluted their share of Sealion further, they at least have an option of find a partner who can fund their share of development and share risk.

I truly hope that firstly Sealion Is developed and secondly Rockhopper gets its fair share of the spoils. However we need to be realistic and it remains a possibility rather than a probability. With UKEF on aboard the odds of FID were good but I sense that option has now passed.

LTT

I have been asking myself the same questions and I agree with some of your conclusions and not others.

Firstly I agree that while harbour will want operatorship if they proceed with Sealion, they will want to share the funding and risk with at least one other well capitalised business. Navitas just about scrap into the definition but not ideal partner. A US mid-cap would be much better and Harbour is well connected with US Oil players.

Without being disparaging, Rockhopper has got very little to add to the development of Sealion. We will not provide any funding for development phase, we have no real balance sheet which can absorb problems and the technical knowledge and relationships with FIG sit with Premier.

The NPV of Sealion is $4.1b and so you have to ask yourself why would Harbour allow Rochhopper to take 30% of that value if (and that’s a big if) they decide to progress Sealion. The only logical thing to do would be to acquire Rockhopper for a fraction of the value of 30% of Sealion phase 1, let alone the follow ons. There is a catch 22 to all of this in that once Harbour confirms FID the share price will rise significantly, so the offer would need to come ahead of FID.

There is one alternative I have considered, namely Harbour offers Rockhopper a 10% free carry or they walk away. How would our glorious Board respond. They have already given away our $700m development carry, 10% of Sealion and a big chunk of Isobel and other follow ons. They would get to keep their board positions and salaries and there logic would be 10% of Something is worth more than 40% of nothing. They are not very good poker players and my bet is they would fold.

Not the worst case outcome as a 10% free carry on Sealion would be $120m a year of free cash flow to Rockhopper from phase 1 and would result in a very attractive share price.

All just conjecture .

100% agree with Soders. The reasons they will not close their shorts pre the award of creditor shares are;

1. The shorts are a hedge against their gain on buying debt and they will want to exit debt and shorts concurrently and, as Soders notes, it would drive price up in a thin market.

2. They would need to deploy capital today to buy the shares and it would leave them with more creditor shares post merger. They will want to exit their shareholding as soon as possible and reinvested into other distress debt. It’s what they do.

3. There is no certainty of the share price immediately post merger and while I agree the fundamental value here is close to 40p at $65 Brent. There are over 3 billion creditor shares for the market to absorb and this could take a number of months for the price to stabilise at underlying value.

I view my investment in Premier/ Harbour (which is mainly via the private retail bonds) as a 6-9 month timespan. By the way debt holders are being offered an opportunity to buy surplus harbour shares at 8 pence so why would they buy in the market at 23p to close shorts.

Kraken

Shareholder have already accepted the offer and the only thing standing in the way is formality of creditor approval. Given the creditors are getting 95p in the £ at today’s share price, and more than enough shares to close their shorts, why would they not approve. Also more than75% have given their irrevocable commitments.

Accordingly no real prospect of another offer and there will be no significant short closing. The shorts will wait fir their creditor shares and then close in April.

Shares are on their march, along with other Oil Cos, to higher value as confidence of beating Covid rises. HE/ PMO still has some catching up to do

The trackers will be forced to buy HE shares by June 21, but only proportionate to the free float of HE relative to the free float of aggregate of the rest of FTSE 250.

Hope that helps.

FYI. The way the FTSE 100 and FTSE 250 is calculated is to firstly to take the total market cap of each constituent company and to then weight the index relative to the free float of each of those companies.

For Premier / HE, if our market cap on 1 April is £4b and we have a free float of 25% then HE market cap for FTSE weighting purposes will be £1b . As an example, the aggregate market Cap of the FTSE250 is £300b and, accordingly, the tracker funds will be required to hold 0.33% of their portfolio in HE shares (£1b/£300b). This will increase to 1.33% in April 2022.

HE will enter the FTSE250 in June 2021.

What I have not been able to calculate is the total value of holdings by FTSE tracker funds. If someone had the time to aggregate the value of the FTSE 250 tracker funds you could calculate the number of shares which will need to purchased when HE enters FTSE 250. As an example if tracker funds hold 10% of FTSE 250 they would collectively need to purchase £100m of Harbour shares (£30b x 0.333%) or roughly 10% of the Free float.

I am sure HE are also actively marketing to other institutional holders and most of the institutional purchases will be off market with the large creditors who are not restricted.

Solders

Very useful analysis and I would add that if you look to the 2019 results of Premier and Harbour (when average oil price was $65pb) harbours EBITDAX was $1.8b and Premiers $1.2b - so total of €3b at $65pb. Harbour EBITDAX for first 6 months of 2020 was $950m but benefited from hedges that gave them an average $64pb during first 6 months of 2020.

Accordingly with oil prices stabilising in mid $60pb we can look forward to an EBITDAX of Around $3b which should yield an enterprise value in the $12-15b range and market cap of €9-12b. This translates to share price in the 38p-48p range.

However a number of steps needed to unlock this such as announcing dividend policy, clearing creditor share overhang, reporting first set of results for six months to June 21, confidence in oil price as global oil consumption rises with Covid under control etc.

Each of the above will unlock a step from current 20p. I would add that I also expect share price of BP, Shell and Total to increase by 50-70% during the same period as oil price find new levels in the mid $60s.

Each €5 movement would add approx €400m of EBITDAX. Group

Unfortunately that valuation was pre the merger. If we had managed to refinance and remain independent, the £2 per shares was very possible on a rising oil price and reducing debt.

However post merger, a £2 share price would translate to a valuation of approaching £40b and be not far beyond BP!

If we hit and maintain a €70 pb oil, share price upside possibly 40-50p but everything would have to align.

Kraken. The short shares are indeed borrowed as you state. However the creditor (who have shorted to hedge the gains on their debt) will receive a huge number of shares (3 billion) as compared to the 1billion of PMO shares currently in issue and approx 200 million shares borrowed for shorts. All that will happen is that the creditors will hand back 200m shares of the 3billion shares they will be given which will close their shorts (assuming all the shorter are also debt holders).

The bigger question is what will happen to the other 2.8b shares? Will there be enough institutional demand to buy the shares that hit the market. the tracker funds will have to buy and I am sure Harbour are marketing to other IIs. Over time the specialist debt funds will want to liquidate their shares, but they won’t want to crash the market. Most shares will move to the IIs through off market purchases.

Hope the above helps.

Kraken

The shorts are also debt holders and they will get more than enough creditor shares to close their positions without going to the market. As an example ARCM have approx 60m short shares and they will receive over 200m shares as part of the creditor settlement. Accordingly there will be no short squeeze and the shorts have no real impact on current share price.

The current share price is effectively an early valuation of 5% of the value of post merger harbour, which implies a valuation of the new group of approx £3.6b. This is approximately a 60% discount to its piers (Aker BP, Lundin) and this discount should close as the deal uncertainties are removed, dividend policy announced and first quarter results are disclosed (which will be excellent if Brent holds at $60+).

There is a clear road map from 20p to 30p+ but it has nothing to do with current PMO business or shorts.

With Harbour sitting at the upper end of FTSE 250, the various tracker funds will be required to buy Harbour shares and together with other less ESG centric institutional investors will create demand for shares post deal completion. Whether this will balance the shares being sold by creditor shares is anyone’s guess.

Ultimately the market will find a balance through the share price.

In 2020 Bp Aker generated Ebitda of $2.2b, net debt of $3.6b and an Ev multiple of 6 times.

They paid dividend of $450m in 2020 down from $800m in 2019 and have set $450m as minimum dividend as long as oil does not fall below $40 pb and will double dividend with oil at €65pb.

Accordingly your estimate of 5 times EBITDA is a reasonable range, but I think Harbour might need to announce its dividend policy first and release first quarter results in early summer. Due to Norwegian tax regime (tax rate goes up as oil prices increase) we should rate higher than BP Aker in a higher oil price environment.

A $450m dividend from Harbour (minimum acceptable) would be 1.9p per share and would certain support a share price of 30p+.

I think we all agree this is a relatively binary outcome; our interest in Sealion and other FI oil is worth nothing or a huge amount. My concern is if it is the later and Harbour goes to our major shareholders with the offer of “the project does not work with Rockhopper retaining 30% interest and not contributing to development costs - sell us your shares for 20p or we close down project and RKH has to pay its share of wind down costs”. What do you think the large investors will do? Will they call Harbour’s bluff? Would RKH board recommend such an offer? Will Harbour try to negotiate a reduced carry instead?

When there is huge values at play do not underestimate the ruthlessness of PE businesses like Harbour.

We are all guessing while we wait. The good news is we will know one way or another this year. Hold on tight this is going to be an interesting ride