Member Info for Stevo12

Arfur - ultimately FIG just want a non Argentinean funded company to progress Sealion with or without Rockhopper. Their relationship is with the Premier team that will be part of Harbour and, as a double bonus, the £60m deferred tax payable by Rockhopper at first oil becomes immediately payable to FIG.

Agree that on a positive OM outcome shares should be at least 20p but June is realistically the earliest the case will be finalised. All I am saying is that there is a risk that Rockhopper could be taken out by Harbour before value is outed. I struggle to see our major shareholders saying no to an offer that is 3 times current share price.

If i was Harbour ‘s CEO and decided to progress Sealion, I would be negligent if I did not take Rockhopper out with a cheeky offer. Rockhopper will make no financial contribution to development yet will take 30% of the upside. I would have to come to terms with your displeasure.

I meant to add that if Harbour decide to progress with Sealion, the logical first step would be to takeover Rockhopper before you announce FID, given Harbour and Navitas will have to fund Rockhoppers share of development costs.

An offer of 20-30p per share for Rockhopper in newly listed harbour shares would given them a further 30% of Sealion for peanuts. Why would they let all that value (potentially over a $1b) accrue to Rockhopper shareholders.

My gut feel is that at that price most Rockhopper shareholders would accept.

Buying premier is going to be the deal of the century for harbour. Perfect timing and to think they have all those tax losses, 80k bpd of production, Talmount coming on stream and lots of Prospects for a bargain price. I wish I was a harbour investor!!.

I have also listened multiple times to presentation by Harbour and agree that they will not invest further in Zama as they were clear that ring operator is a key criteria. They clearly want to expand their footprint beyond the North Sea but they were also clear that they are targeting proven oil basins with infrastructure in place.

They would be taking a huge bet in committing towards the $1.8b needed to first oil at Sealion but the rewards are also huge with an NPV10 of $4b. if you break it down it is probably $300m per annum for harbour for next 3 years.

My gut feel is that the availability of financing for this project will be determining factor. If UKEF comes in then probability rises dramatically. However this does not look good given Boris’s green agenda and application not yet formally submitted.

There could still be options if Harbour walk away and oil price continues to rise on back of vaccines surprising Covid. Hate to start farm out process again but there might be interest if Navitas stay onboard.

Ultimately at 8p per share Mr Market is telling us there is less than 20% chance of FID. I am staying long as limited downside with OM settlement in play and huge upside. After being in for many years, I couldn’t bear to miss out on upside. Emotion over experience.

ARCM have approximately 60m shares shorted and they will receive approx 300m shares as part of creditor settlement. Accordingly they will close their short and still have 240 million shares remaining. What they do with these shares will be Interesting and my bet is they will be looking to place across a number of institutional investors.

You can see why creditors are so supportive of harbour bid compared to refinancing. Ultimately huge value transfer from Premier equity holders to debt holders. I am afraid that is the law of the jungle if you overstretch yourself. All goes back to failed Solan project in which interestingly Harbour were Premier’s partner and they pretty much walked away from the project. A few years later they pick up the whole group at a huge discount and even more frustrating when premier will currently be kicking off huge amounts of cash at $60 oil ($50m per month) which harbour gets 75% of!
Irony at its best..

Solder - retail bonds are now at 84p to buy per £1 nominal which increases the equity cost of shares of creditor shares awarded to 13p.

As you note the specialist holders of the debt will be doing the same calculations. They will receive 61p per £1 of nominal value of debt. Interest up to completion date (3p ish) and 1.6 shares which is worth 32-33p. Accordingly they will recover 96-99p per £nominal at a share price of 21p.

Ultimately they will be weighing up the best time to exit their equity holding and most will be placed with Institutional investors. They will not want to depress the share price by flooding the market.

The retail bond is traded and a good indicator of the value of the debt. The retail bonds are currently trading at 81p per £1 of nominal. I have been buying retail bonds over last 3 weeks and interesting arbitrage opportunity. Basically for each retail bond your buy (cost 81p) you get 63p back in cash and interest on 31 March and 1.6 shares. This translates to a cost per share of 11p or a roughly 50% discount to today’s share price. Some risk involved if deal does not complete but minimal and clearly cash tied up for a couple of months.

Solder. The restriction on selling post deal (over 3% of total equity) will only apply to ARCM and possibly not even ARCM if they use some of their creditor shares to close their shorts.

There will be an interesting market in the weeks post merger with a potential free float of 4b shares (current shareholders plus 3b creditor shares). With a market cap of £4b at current prices and being the largest listed independent oil company on the market, there will be institutional and tracker fund demand. Many of the shares of the large creditors will be placed off market to institutional investors but the shares allocated to the retail bond holders (250 million shares) might find their way to the market in due course.

One factor that would drive huge institutional demand is Harbour entering FTSE100. With oil price and removing deal uncertainties at 30p, Harbour market cap would easily qualify for FTSE 100 by market value but I recall there is some restriction by free float and Harbour might not qualify for FTSE100 until the restrictions on original harbour shareholders from selling is removed March 2022) . Does anyone have a better understand of FTSE100 entry requirements?

UKEF was always going to be key to unlocking this project and I fear we have missed the window. I struggle to understand why PMO have not submitted an application yet and I cannot see Boris making an exception because it is FI.

My gut feel is Harbour will not be up for this project. I truly hope I am wrong but their strategy and business model is focussed on buying producing assets in proven basins. Why would they take on the risk of a new development when there are so many opportunities to buy producing assets at relatively low cost from super majors (or in the case of PMO from disgruntled creditors). They have picked up PMO for less than the $1.8b it would cost to develop Sealion phase 1.

I agree that if Sealion is sanctioned, Rockhopper would be worth at least 10-15x current share price at First Oil. Accordingly Mr Market is telling us that the probability of development is very low. The big question is can RKH find another partner is HArbour pulls out. Possibly if we get a good settle from OM to buy us some time and FIG are supportive.

Ultimately Sealion at $1.5b for

Good summation ovets. I have been long since Sealion discovery and ultimately there were very few potential partners with Argentina threatening to blackball any investors in falklands. RKH did a great job during discovery and assessment phase but it has been a disaster post farm out and the board have capitulated so many times to appease PMO.

My gut feel is that Harbour will not be up for a major falklands investment. It just does not fit their strategy. They buy producing assets in established oil plays and there are many opportunities out there as the super majors divest. In particular they want to realise the value of PMOs tax losses in UK. I hope I am wrong but this would be a massive shift in business model and they seem a very disciplined and focussed bunch.

So what are the alternatives. Take back license and start farm out process again? Would FIG government support this? RKH should have access to all FEED data and info but would probably need a good settlement from OM to give it cash and time. I am sure FI oil will get developed at some point, but will it be with RKH?

Pmo got so close to a refinancing before HE bid. With Brent at $60 and had the refinancing gone ahead as proposed, the share price would have been back close to £1.

However I can’t blame the creditors for accepting the cash out offered by harbour. The real sin was not taking out substantial hedges when oil was $60+ in late 2019 and removing much of the downside risk, as well as throwing money away on Alaska exploration. Ultimately PMO were also unlucky - got very close to selling Zama before unitization issue arose and timing of Covid could not have been worse for refinancing. The value is still there but it will now largely accrue to PMO creditors and Harbour investors - real shame.

The current share price of PMO is effectively what the market believes 5% of the merged group will be worth as opposed to what 100% of PMO’s business is worth. The current share price implies a market cap of the combined group of £3.7 billion.

The most comparable quoted business is BP Aker which has same production 200k bpd and identical net debt (£3.2b) and is valued at £7b today. BP Aker is well established and pays a significant dividend and my estimate is that the merged group should attract a similar value once established, paying a regular dividend and having flushed though the creditor shares. This will take at least 6-12 months and there could be a lot of volatility in early months as creditors seek to sell their shares.

So my personal target is 35-40p by 1 April 2022 with oil at current prices. Hopefully oil rises back to mid 60s which would naturally add to share price. my short term target is 25-30p over next 2 months as the various creditor approvals are received and deal risk removed.

My personal position is that I invested in shares and retail bonds last summer hoping there would be a successful refinancing. I am down on shares but up on retail bonds.

The majority of the shorts are held by the bond holders as a Hedging strategy and they will received more than enough shares when the merger completes at.end of March to close their shorts. They will not need to go to market to buy shares and cause a “shorts squeeze”.

I am no fan of ARCM but they have played a very profitable game. They have made a fortune on the debt they bought for 35p in the £1 and they then (as a hedge) shorted PMO at between 60-70p. so are significantly in the money there as well.

Without Covid they could have lost big time on shorts as price was heading well north of £1.

Post merger they will be one of largest shareholder and once their debt is repaid in March their interests will be aligned to getting share price up prior to their exit.

I don’t disagree with you that FI is a great opportunity with quality oil and low taxes. The problem is that it has no existing infrastructure and is a long way from anywhere. Harbour have been very disciplined to date in their investment strategy and have focussed on buying producing assets with immediate returns, as opposed to projects which will not yield cash for 3-4 years.

I am hopeful that they will change strategy, but as with most Private Equity type businesses they have to date been focussed on short term cash generation.

What I believe is becoming clear is that there has been a massive underinvestment in upstream oil and gas over last 5 years and Covid has reduced investment further. Even with increased renewables, we are likely approaching an oil shortage in 2023-2026 and Sealion could look very attractive in a year or so. The question is will Rockhopper survive long enough to join the party.

Agree with Jenni. ARCM and most of other large shorters are debt holders and they will have more than enough shares from the creditor shares they will be awarded on merger to close their shorts without going to the market. So no short squeeze I am afraid.

However removing shorts always has a positive on sentiment.

Roll on relisting at end of March. It is going to be fascinating to see whether there will be more institutional demand than creditor shares up for sale. Could be very bumpy for first few weeks. Shame we will not enter FTSE100 until 2022.

I would add that the agreement with Falkland Island Gov to defer tax on farm out to premier (£60m) is triggered if RKH is sold or their interest in Sealion falls below 20%. Accordingly this is a bit of a poison pill for any bidder for RKH as this liability would have to be paid in addition to any offer price tonRKH shareholders.

I was hoping this would have been renegotiated as it is effectively the tax on the $700m development carry agreed with Premier that will no longer be received. RKH have given up the $700m plus a further 10% of Phase 1 and much more of later phases in an attempted to keep Premier interested. Not sure this has achieved much and I am also struggling to see what Navitas bring to the party. It appears to me they have been given 30% for free and they have just have to fund there share of the development costs.

My gut feel is that if Harbour are interested in developing a new oil frontier they will bin navitas and either look for a better or retain a larger %. There is good chance they will walk away as Linda Cook has stated that their priority is to invest in regions with developed infrastructure and they prefer producing assets to development projects. Equally they want to be operator as opposed to investor and Sealion gives them this.

Agree with sentiment that if Sealion achieves FID, RKH will be 50p minimum and would likely be £2 on first oil in 3-4 years time. The fact that share price is under 10p tells you there is a high probability that Sealion will not get developed. Nothing I would like more than to see Sealion developed but just being realistic.

Timing of arbitration will be key, looks like case will be closed by end of Q1 and a decision and award then due within 120 days. So we should know by 30 June at latest. If this is a reasonable amount (£25m+) and oil price has risen, it gives RKH a stronger bargaining position.

IMHO Mexican government consent is not going to block the deal and Harbour can agree to waive this requirement. Commercially there is not sufficient value in Zama to prevent the deal from happening and the company can continue any negotiations with Mexico post deal. This is a “nice to have” rather than deal critical and it is common on most big international mergers not to have all gov consents completed pre deal - essential to have key territories signed off. Mexico is important, but it is not a deal breaker.

Jenni

Jenni
Thanks for the analysis. It makes the pmo retail bonds an interesting opportunity. Creditor restructuring pays 61p in cash plus 1.7 shares per £1 of retail bonds (shares worth 36p at today’s price) which gives 97p return. Retail bonds currently 80- 82p.

Jenni

Agree with share valuation of approx $8b (with $3.2m of debt) which would still be a 10-15% discount to relative valuation of BP Aker.

I hold PMO shares and retail bonds and I am expecting 1.5 shares per £1 of debt. How did you calculate 1.25?

I was doing a bit of digging into when Newco would enter the FTSE100. It appears that as a result of the lock in restrictions on the Harbour shareholders, there will only be 20-23% of shares available to trade. Accordingly due to limited free float, Premier Newco will not qualify for FTSE100 until lock in restriction expire in March 2022. Does anybody else have a view on this?

JenniferE - you are correct re creditor shares. Other than possibly ARCM, the other creditors will be able to sell their allotted shares on listing. This will result in potentially 20% of share capital available to buy / sell (assuming ARCM are restricted). This is a relatively small free float for a ftse 100 size group but could provide volatility both ways in early April. In the medium term, the relatively small free float should be positive for share price.