Rockhopper Regulatory News (RKH)

29 September 2022

Rockhopper Exploration plc

("Rockhopper" or the "Company")

Half-Year Results for the Six Months Ended 30 June 2022

Rockhopper Exploration plc (AIM: RKH), the oil and gas company with key interests in the North Falkland Basin, announces its unaudited results for the six months ended 30 June 2022 ("H1 2022").

Year to date highlights

Sea Lion

· Completion of transaction for Harbour Energy plc ("Harbour") to exit and Navitas Petroleum LP (through its UK subsidiary) "Navitas" to enter the North Falkland Basin with a 65% stake in, and operatorship of, all of Rockhopper's North Falkland Basin licences

· Rockhopper retains material 35% working interest in North Falkland Basin licences

· Extension of all North Falkland Basin licences to 1 November 2024

· Improved alignment in the Sea Lion Joint Venture, with Rockhopper benefitting from an attractive funding package from Navitas

Ombrina Mare

· Successful arbitration outcome with unanimous decision in Rockhopper's favour

· Compensation of €190 million

· Interest at EURIBOR + 4% accruing annually from 29 January 2016

· Temporary four-month pause in interest from date of award

· Italy has 120 days to apply for an annulment of the award, which can only be annulled in limited circumstances

Corporate and financial

· Successful capital raise of US$10.4 million by way of placing and open offer

· Warrants issued to provide additional upside to holders and future potential balance sheet strength

· Continued focus on costs

Outlook

· Lower upfront cost Sea Lion development being worked up and financing sought

· Arbitration award, after collection, will make a material contribution towards Rockhopper's share of Sea Lion development costs

· Sea Lion FID targeted 2023/24

Keith Lough, Chairman of Rockhopper, commented: 

"Following completion of our transaction with Navitas, the capital raise, and the successful arbitration outcome, we stand on the cusp of what we believe will be the most exciting period at Rockhopper for some years, culminating, we hope, in the development of a material scale energy resource in a British Overseas Territory.

We have a committed and capable partner with proven financing capability, which has recruited an exceptional and highly experienced development engineer to run the Sea Lion project.

Amidst continued global uncertainty and material domestic pressures, we continue to believe a responsibly developed Sea Lion oilfield could provide both a meaningful source of financial benefit to the Falkland Islands, and a strategically and financially important resource to the United Kingdom.

Furthermore, Sea Lion is not a one-off project. We have very material low-risk exploration upside, providing potential additional benefits to all stakeholders.

We thank our stakeholders and the Falkland Islands Government for their continued support as we strive to reach project sanction and unlock material value for all involved."

Enquiries:

Rockhopper Exploration plc

Sam Moody - Chief Executive Officer

Tel. +44 (0) 20 7390 0234 (via Vigo Consulting)

Canaccord Genuity Limited (NOMAD and Joint Broker)

Henry Fitzgerald-O'Connor/Gordon Hamilton

Tel. +44 (0) 20 7523 8000

Peel Hunt LLP (Joint Broker)

Richard Crichton/Georgia Langoulant

Tel. +44 (0) 20 7418 8900

Vigo Consulting

Patrick d'Ancona/Ben Simons/Kendall Hill

Tel. +44 (0) 20 7390 0234

CHAIRMAN AND CHIEF EXECUTIVE OFFICER'S REPORT

Introduction

Rockhopper's strategy is to create value for all our stakeholders through the safe and responsible development of our assets in the North Falkland Basin. The Company has been operating offshore the Falkland Islands since 2004 and discovered the Sea Lion oilfield in 2010. We are a long-term partner of the Falkland Islands Government ("FIG"), and our aim has always been to support the rights of the Falkland Islanders to develop their natural resources.

Sea Lion development

We believe that the Sea Lion oilfield represents a material strategic resource both for the Falkland Islands and the wider United Kingdom. With more than 500 million barrels of recoverable oil in the Rockhopper ERC audit and some 700 million barrels in the Navitas NSAI CPR, we believe this field alone is larger than Cambo and Rosebank combined.

Having spent many years as 100% owner and operator exploring and appraising the field, we have an unrivalled depth of knowledge of both Sea Lion and operating in the Falklands. In fact, we have carried out more oil and gas operations in the Falklands than any other company, all with an exemplary HSE record and strong operational performance. Our track record in the Sea Lion area includes eight successful wells from ten, which we believe stands in comparison to many significantly larger companies in the industry and provides encouragement for the potential for additional discoveries in the region.

The years spent working with Premier Oil (now Harbour) in our Joint Venture have not been wasted. Hundreds of millions of dollars and tens of thousands of hours have been spent engineering Sea Lion to a point where we are entirely confident that a responsible and high-quality project is deliverable using proven industry technology.

The addition of Navitas, with its exceptional recent track record of financing offshore developments others believed would never come to fruition, combined with a favourable oil price outlook and increased focus on security of energy supply, brings the potential value of the Sea Lion field into sharp focus. 

Premier previously confirmed that the field could produce in excess of 120,000 barrels per day over two phases, representing a potential increase of between 10% and 15% in UKCS oil production from Sea Lion alone. Many low-risk near field prospects have been identified and the potentially large Isobel / Elaine discovery approximately 30km to the south of Sea Lion provides additional long-term potential. Shell's well 14/15-1, drilled in 1998, encountered a large gas column in a low-quality reservoir. Although not without risk, we have always believed that the potential exists for a multi TCF gasfield in the Falkland Islands, with associated strategic implications for the Falklands and the United Kingdom. Significant UK content was planned by Premier in the development potentially bringing billions of dollars of wider UK benefits.

We look forward to working with Navitas, with whom we have already developed a strong relationship, as they build on all our existing work and knowledge to engineer an appropriate development concept and put together a financing package which could allow FID to be taken at Sea Lion during late 2023 or 2024.

Ombrina Mare arbitration

The successful outcome of the Ombrina Mare arbitration is a vindication of our belief in the strength of our case, which we have articulated to shareholders since we commenced the arbitration process back in 2017. The Panel unanimously decided in Rockhopper's favour and awarded what we believe to be a fair and equitable compensation for the loss of our asset which, at current oil prices, would be enormously valuable. Compensation of some €190 million with appropriate interest has been awarded.

Under the relevant rules, Italy has 120 days to apply for an annulment of the award; such awards can only be annulled in limited circumstances. At the date of this report, we have not heard from the Italian Republic regarding its intentions. For our part, we have written requesting immediate payment and reminding Italy not only of its obligation to settle the full amount, but of our rights to pursue all available remedies against Italy and its representatives in any forum without any further notice should they fail to fulfil their obligations to us.

We hope and believe Italy will act in accordance with their obligations but we will have no hesitation in seeking to enforce this award in multiple jurisdictions should they fail to do so. The entire situation is deeply regrettable as, had we been allowed to develop the asset in accordance with Italy's own relevant legislation, not only would we now be producing at high oil prices, but, perhaps more importantly, Italy would have benefitted from material local well-paid employment along with taxes and a domestic source of oil at a challenging time for many. It should be noted that Italy continues to produce material volumes of hydrocarbons within 12 miles of its coastline.

Costs associated with the arbitration proceedings were funded on a non-recourse ("no win - no fee") basis from a specialist arbitration funder. After payments due to the arbitration funder and success fees due to the Group's legal representation, Rockhopper expects to retain approximately 80% of the award (assuming full recovery of the award). Further analysis is required to establish the tax treatment on any payments related to the award.

Corporate Matters

We were delighted to receive the support of our existing and new shareholders in the US$10.4 million capital raise completed in the early part of the summer. We undertook the additional cost and effort required to proceed with an open offer to ensure that existing individual shareholders were given the opportunity to participate in the capital raise on identical terms as institutional investors. We offered those participating in the capital raise warrants, giving them the right to purchase shares at 9p to be exercised at any point until 31 December 2023, providing them with additional potential upside and Rockhopper a stronger balance sheet should those warrants be exercised.

During what has been a difficult and challenging time for the industry and for our business, we are delighted to have found what we believe is the right way to balance a very significant cost reduction with retaining the key knowledge we have accumulated in the Falklands. Recurring G&A is now down over 70% when compared to 2014, and we believe some further savings are possible as we continue to run the business in the best interests of all stakeholders.

Environmental, Social and Governance

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 discover and produce hydrocarbons in an environmentally responsible manner.

As noted previously, the Falkland Islands Government 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 Falkland Islands.

Once FID on Sea Lion has been achieved, the Company commits to defining measures, reporting transparently, and mitigating our own emissions as far as practicable.

Outlook

Sea Lion is an oilfield with the scale and potential to create very material value for Rockhopper, its partners, and the Falkland Islands as a whole, in addition to providing the UK with a secure and significant source of supply for years to come.

Since the start of this year, we have achieved three major milestones which, when taken as a whole, puts the Company in the best shape we have been in for many years.

We thank the Falkland Islands Government for its continued support and we will continue to work closely with all stakeholders to maximise the chance of unlocking the value within the project, long-awaited by all stakeholders.

FINANCIAL REVIEW

Overview

From a finance perspective, the most significant events in 2022 to date are:

· Detailed transaction terms agreed with Harbour and Navitas in relation to the Sea Lion project (the "Transaction") - completed post period end in September 2022

· Successful fundraising through Placing and Subscription raising net proceeds of US$6.3 million in June 2022

· Additional US$2.8 million net proceeds raised post period end through Open Offer in July 2022

· Successful ICSID arbitration award in respect of Ombrina Mare. Compensation of €190 million plus interest at EURIBOR + 4%, compounded annually from 29 January 2016 until time of payment

With the Transaction completing post period end the arrangements with Navitas ensure that Rockhopper is funded going forward for all pre-sanction costs related to the Sea Lion phase one development (other than licence fees and taxes). This, combined with the fundraising, materially strengthens the Group's financial position in the short and medium term and significantly enhances the prospects for a successful project financing for Sea Lion.

The arbitration award was made in September 2022 and, as such, has no impact on the results for the period to 30 June 2022. Assuming full recovery of the award, after payments due to the arbitration funder and success fees due to the Group's legal representation, the Group expects to retain approximately 80% pre-tax. Further analysis has begun to establish the tax treatment on any payments received.

Results for the period

For the period ended 30 June 2022, the Group reported revenues of US$0.5 million (H1 2021: US$0.3 million) and a loss after tax of US$0.7 million (H1 2021: loss of US$3.3 million). The reduction in loss after tax was driven mainly by net foreign exchange gains on GBP denominated balances. In particular, the weakening of the GBP against the USD resulted in a US$4.4 million gain on the current carrying value of the tax liability with FIG.

Revenue and cost of sales

The Group's revenues of US$0.5 million (H1 2021: US$0.3 million) in H1 2022 relate entirely to the sale of natural gas in the Greater Mediterranean (specifically Italy) region. Gas was sold at a price linked to the Italian "PSV" (Virtual Exchange Point) gas marker price.

Revenue and cost of sales are not expected to be material going forward.

Operating costs

The Group continues to manage corporate costs and has achieved significant reductions in recurring general and administrative ("G&A") costs over the last five years. The full benefit of these cost reduction initiatives was realised last year resulting in a relatively stable G&A cost of US$1.5 million in H1 2022 (H1 2021: US$1.6 million).

The foreign exchange gain in the period of US$3.4 million (2021: loss of US$0.3 million) is mainly in relation to the tax balance arising from the Group's farm-out to Premier in 2012 offset by a loss on GBP denominated assets, such as cash and debtors. The finance expense in the year of US$2.0 million (2021: US$nil) also relates, in the main, to adjustments in relation to this tax balance.

Cash movements and capital expenditure

At 30 June 2022, the Group had cash of US$9.1 million (31 December 2021: US$4.8 million).

Cash movements during the period:

Miscellaneous includes foreign exchange and movements in working capital during the period.

Oil and gas assets

The Sea Lion development remains central to the Group's plans and we are excited at the prospect of bringing in a new industry partner, Navitas, especially given their experience in financing projects of a similar scale to Sea Lion.

As part of the Transaction to bring Navitas onto the licences we have been granted a two-year licence extension from FIG. This should allow the newly formed joint venture to leverage the extensive engineering work carried out to date and pursue a lower upfront cost development.

The Transaction aligns working interests across all the North Falkland Basin petroleum licences - Rockhopper 35% / Navitas 65%. Work between the Group and Navitas had already begun pre completion and will continue with the aim to jointly develop and agree a technical and financing plan for the Sea Lion project. Current work targets delivering a project that achieves first oil on a lower cost and expedited basis post sanction.

Navitas will provide loan funding to the Group to cover the majority of its share of Sea Lion phase one related costs from Transaction completion up to Final Investment Decision ("FID") through a loan from Navitas with interest charged at 8% per annum (the "Pre-FID Loan"). Subject to a positive FID, Navitas will provide an interest free loan to fund two-thirds of the Group's share of Sea Lion phase one development costs (for any costs not met by third party debt financing). 

Certain costs, such as licence costs, are excluded in both instances. Funds drawn under the loans will be repaid from 85% of Rockhopper's working interest share of free cash flow.

Taxation

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 and the Group receiving the full Exploration Carry from Premier during the 2015/16 drilling campaign, the outstanding tax liability is confirmed at £59.6 million. This 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.

The outstanding tax liability is classified as non-current and is discounted to a period-end value of US$40.7 million (31 December 2021 US$43.2 million).

Full details of the provisions and undertakings of the Tax Settlement Deed are disclosed in note 7 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.

At 31 August 2022, the Group had cash resources of US$10.9 million (unaudited). While there are still some Transaction costs and the Group's share of Harbour wind down costs to come, going forward projected recurring expenditure is currently expected to be around US$4.0 million per year.

Historically, the Group's largest annual expenditure has related to pre-sanction costs associated with the Sea Lion development. Following the completion of the Transaction, Navitas will provide loan funding to the Group for its share of all Sea Lion pre-sanction costs (other than licence fees and taxes). Based on previous correspondence with FIG, management does not believe the Transaction completion would constitute a substantial disposal and therefore will not accelerate the deferred CGT liability related to the 2012 farm-out.

Given the above, the Directors believe that the Group is sufficiently funded and that the use of the going concern basis is appropriate.

Principal risk and uncertainties

A detailed review of the potential risks and uncertainties which could impact the Group are outlined in the Strategic Report of the Group's annual consolidated financial statements. The Group identified its key risks at the end of 2021 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 Group and the Sea Lion project.

CONDENSED CONSOLIDATED income statement

for the six months ended 30 June 2022

CONDENSED CONSOLIDATED statement of comprehensive income

for the six months ended 30 June 2022

CONDENSED CONSOLIDATED balance sheet

as at 30 June 2022

These condensed consolidated interim financial statements were approved by the directors and authorised for issue on 28 September 2022 and are signed on their behalf by:

Samuel Moody

Chief Executive Officer

CONDENSED CONSOLIDATED statement of changes in equity

for the six months ended 30 June 2022

for the six months ended 30 June 2021

CONDENSED CONSOLIDATED CASH FLOW STATEMENT

FOR THE SIX MONTHS ENDED 30 JUNE 2022

Notes to the condensed CONSOLIDATED group financial statements

for the six months ended 30 June 2022

1 Accounting policies

1.1 Group and its operations

Rockhopper Exploration plc ("the Company"), a public limited company quoted on AIM, incorporated and domiciled in the United Kingdom ("UK"), together with its subsidiaries (collectively, "the Group") holds interests in the Falkland Islands and the Greater Mediterranean. The Company's registered office address is Warner House, 123 Castle Street, Salisbury, SP1 3TB.

The interim condensed consolidated financial statements for the six months ended 30 June 2022 were authorised for issue in accordance with a resolution of the directors on 28 September 2022.

1.2 Statement of compliance and basis of preparation

The interim condensed consolidated financial statements for the six months ended 30 June 2022 have been prepared in accordance with IAS 34 Interim Financial Reporting.

The Group has prepared the financial statements on the basis that it will continue to operate as a going concern. The Directors consider that there are no material uncertainties that may cast significant doubt over this assumption. They have formed a judgement that there is a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future, and not less than 12 months from the end of the reporting period.

The interim condensed consolidated financial statements do not include all the information and disclosures required in the annual financial statements, and should be read in conjunction with the Group's annual consolidated financial statements as at 31 December 2021.

1.3 New standards, interpretations and amendments adopted by the Group

The accounting policies adopted in the preparation of the interim condensed consolidated financial statements are consistent with those followed in the preparation of the Group's annual consolidated financial statements for the year ended 31 December 2021, except for the adoption of new standards effective as of 1 January 2022. The Group has not early adopted any standard, interpretation or amendment that has been issued but is not yet effective. Several amendments apply for the first time in 2022, but do not have an impact on the interim condensed consolidated financial statements of the Group.

1.4 Period end exchange rates

The period end rates of exchange actually used were:

2 Revenue and segmental information

Six months ended 30 June 2022 (unaudited)

There are no material additions to segment assets.

Six months ended 30 June 2021 (unaudited)

There are no material additions to segment assets.

All of the Group's worldwide sales revenues of oil and gas US$523 thousand (H1 2021: US$347 thousand) arose from contracts to customers. Total revenue relates to revenue from one customer (2021: one customer).

3 Taxation

4 Basic and diluted loss per share

Shares issued in the period all relate to the Placing and Subscription completed just prior to the period end. Numbers do not reflect shares issued as part of the Open Offer as this complete post period end. Details of the Open Offer are included in Note 8.

The weighted average number of Ordinary Shares takes into account those shares which are treated as own shares held in trust. As at the period end the Group had 3,131,000 Ordinary shares held in an Employee Benefit Trust which have been purchased to settle future exercises of options. As the Group is reporting a loss in the year then in accordance with IAS33 the share options are not considered dilutive because the exercise of the share options would have the effect of reducing the loss per share.

At the period end, the Group had the following unexercised options and share appreciation rights in issue.

Warrants were issued as part of the Placing. Each Warrant gives the holder the right to subscribe for one new Ordinary Share at a price of 9 pence per Ordinary Share at any time from the issue of the Warrants up to (and including) 5.00 p.m. on 31 December 2023.

Additional Warrants were issued after the period end as part of the Open Offer. Details of the number of warrants issued post period end are included in note 8. These warrants have the same exercise terms as those issued as part of the Placing.

5 Intangible exploration and evaluation assets

During the period there have not been any material additions. The balance carried forward is predominantly in relation to the Sea Lion project.

At 30 June 2022, the Group reviewed its intangible exploration/appraisal assets for indicators of impairment, with no indicators of impairment being identified. No impairment tests were therefore performed.

6 Property, plant and equipment

During the period there have not been any material additions. The movement in the period mainly relates to depreciation.

7 Tax payable

On the 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 is confirmed at £59.6 million and 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.

Management in reviewing the carrying value of the tax liability have had to make key judgements about both the timing of the liability and the discount rate applied. Management believe the most likely timing of payment is in line with the first royalty payment. As such the tax liability has been classified as a non current liability and has been discounted. At the period end payment is anticipated to be in 5.0 years (31 December 2021: 5.5 years) and a discount rate of 12% (31 December 2021: 12%) has been applied.

As completion of the Transaction happened post period end, no adjustments were made to the liability in relation to this. Based on correspondence with FIG, Management does not believe that the Transactions completion would constitute a substantial disposal under the Tax Settlement Deed and therefore will not accelerate any liability.

The movement in the balance in the period is made up of a finance expense of US$1.8 million offset by a foreign exchange gain of US$4.4 million.

8 Post balance sheet events

Results of Open Offer 

On 5 July 2022, the Company announced it had received valid acceptances from Qualifying Shareholders in respect of 39,652,160 Open Offer Units, representing a take-up of over 69 per cent. of the 57,310,264 available Open Offer Units. Accordingly, the Open Offer has raised total gross proceeds of approximately US$3.4 million (£2.8 million).

Each Open Offer Unit subscribed for comprises one Open Offer Share and, for every two Open Offer Shares subscribed for, one Warrant. Accordingly, 39,652,160 Open Offer Shares and 19,825,849 Open Offer Warrants will be issued pursuant to the Open Offer. 

Successful arbitration outcome

On 24 August 2022, the Company provided the following update on its ICSID arbitration with the Republic of Italy:

· Successful arbitration award

· Compensation of €190 million

· Plus interest at EURIBOR + 4%, compounded annually from 29 January 2016 until time of payment

· Temporary four-month pause in interest from date of award

The arbitration panel unanimously held that Italy had breached its obligations under the Energy Charter Treaty entitling Rockhopper to compensation. The award is final and binding on the parties. Italy has 120 days to apply for an annulment of the award, which can only be annulled in limited circumstances. Under a legal agreement with the Falkland Island Government Rockhopper is prevented from making any form of distribution.

Costs associated with the arbitration proceedings were funded on a non-recourse ("no win - no fee") basis from a specialist arbitration funder. After payments due to the arbitration funder and success fees due to the Group's legal representation, Rockhopper expects to retain approximately 80% of the award (assuming full recovery of the award). Further analysis is required to establish the tax treatment on any payments related to the award.

Transaction

On 23 September 2022 the Company announced the transaction enabling Harbour to exit and Navitas to enter the North Falkland Basin with a 65% stake in, and operatorship of, all of Rockhopper's North Falkland Basin licences, has completed.

9 Related party transactions

Pursuant to the Subscription, the following Directors subscribed for the following Units comprising Subscription Shares and Warrants