30 May 2022

Rockhopper Exploration plc
(“Rockhopper”, the “Group” or the “Company”)

Full-Year Results for the Year Ended 31 December 2021

Rockhopper Exploration plc (AIM: RKH), 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 2021.

2021 Highlights

Sea Lion and the Falkland Islands

·  Definitive legally binding documents announced and, post-period, signed with Navitas Petroleum LP (“Navitas”) and Harbour Energy plc (“Harbour”)
o Navitas to acquire 65% interest in, and become Operator of, Rockhopper’s North Falkland Basin licences
o Harbour to exit the Falklands
·  Navitas to fund all of Rockhopper’s Phase 1 Sea Lion project costs* pre FID via 8% loan
·  Navitas to fund two-thirds of Rockhopper’s Sea Lion Phase 1 project costs* from FID to one year after first oil, or project completion if earlier, via interest free loan (for any costs not
met by third party debt financing)

·   Loans repaid from 85% of Rockhopper’s working interest share of Sea Lion Phase1 project cash flows (* This excludes licence costs, taxes, abandonment and decommissioning costs (including the Temporary Dock Facility) and contract termination costs incurred in connection with Harbour withdrawing)

Corporate and Financial

· Administrative expenses at lowest level since pre-Sea Lion discovery – G&A US$3.3 million
·   Cash of US$4.8 million as at 31 December 2021>

Outlook

·   Ombrina Mare Arbitration proceedings formally closed on 25 April 2022 – seeking significant monetary damages
o Tribunal has 120 days after closing to issue its Award, extendable by 60 days
·   Satisfaction of various conditions precedent to the Navitas and Harbour transaction required for deal completion, including various regulatory and other approvals required from the
Falkland Islands Government
·   Navitas to assume operatorship of Sea Lion and strengthen operating capability
·    ·   FID targeted 2023/24

Keith Lough, Chairman of Rockhopper, commented:

We are delighted to have signed legally binding documentation allowing Harbour a clean exit and bringing Navitas into the Falklands. At current oil prices and with an increased focus on security of supply, we believe a responsibly developed Sea Lion presents an exceptional chance to create very significant value for all stakeholders.
We look forward to working closely with Navitas on a lower cost development and associated financing plan for the project. With the Ombrina Mare arbitration result expected later in the year, we hope and believe that 2022 will be the start of a bright new chapter for Rockhopper

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
Tel. +44 (0) 20 7418 8900

Vigo Consulting
Patrick d’Ancona/Ben Simons/Kendall Hill
Tel. +44 (0) 20 7390 0234

Note regarding financial information disclosure

The financial information set out below does not constitute the Group’s statutory accounts for the year ended 31 December 2021, but is derived from those accounts. References within the document may refer to information in the statutory accounts and these will be sent to shareholders and published on the Company’s website imminently.

Chairman and Chief Executive Officer’s Review

Introduction

2021 saw the build-up to the outbreak of a major conflict in Europe for the first time in decades, with Russia invading Ukraine early in 2022. The most significant impact of the invasion has been and continues to be on the people of Ukraine, for whom Rockhopper’s Board express their support. A consequence of the invasion has been to place an increased focus on energy security of supply and the volume of oil and gas imported from Russia into Europe in particular. At the same time the COVID-19 pandemic continues to cause uncertainty around energy demand with China imposing new lockdowns as cases spike and economic uncertainty continues across the globe. Against this backdrop it is perhaps unsurprising that energy prices have seen material volatility. The price of a barrel of Brent Crude Oil is around $115 as at time of writing, having risen from a low of $21 per barrel in April 2020.

While worldwide moves to reduce GHG emissions and reduce reliance on hydrocarbons continue as we journey through energy transition towards net zero, we believe that responsibly produced oil and gas will continue to form a meaningful part of global energy supply for many years to come.

With a best estimate of over 500 million barrels of recoverable oil (ERCE 2016 report), Sea Lion represents a potentially secure, highly material source of supply for those countries seeking to reduce their dependence on Russian oil. Under Premier Oil plc’s (“Premier”) development concept, based on hundreds of millions of dollars and multiple years of engineering efforts, the series of development phases at Sea Lion were projected to produce in excess of 120,000 barrels per day. At that rate, Sea Lion alone could be capable of replacing a highly material proportion of the oil by volume imported into the UK from Russia, all from a politically stable UK Overseas Dependent Territory. Furthermore, significant UK content is possible within the project and the regulatory regime in the Falklands will ensure the development is undertaken with high regard to ESG issues.

Navitas brings renewed energy and proven financing capability to the project

The most significant news related to Sea Lion is the signing of definitive legally binding documentation relating to the entry of Navitas Petroleum LP (“Navitas”) to the Falklands. Navitas brings a new, dynamic energy to Sea Lion which was significantly delayed following Chrysaor Holdings Limited’s (“Chrysaor”) merger with Premier and the creation of Harbour Energy plc (“Harbour”). Navitas’ senior team’s exceptional ability to raise finance for challenging projects was clearly demonstrated as recently as last year when they successfully secured a US$1bn project financing for the Shenandoah field in the Gulf of Mexico.  In fact, Navitas has raised in excess of $1.4bn of equity and debt since 2017 and as we consider financing to be the main hurdle for Sea Lion’s development, we are particularly pleased to be welcoming them to the basin. Sea Lion will represent Navitas’ largest operated development opportunity, so is highly material to both partners.

Sea Lion

From 2012-2022, we estimate that Premier and Rockhopper spent in excess of US$300m on engineering and other non-drilling work relating to the Sea Lion project. Navitas and Rockhopper plan to build on this very significant bank of knowledge to create a lower cost development, potentially based around a re-deployed FPSO with fewer wells being drilled pre first oil. Given the amount of engineering already done, the timing is likely to be driven largely by interaction with the vendor community, most notably in finding a suitable FPSO, and the time taken to progress the financing.  Having said this, the target is to reach FID in 2023 or 2024 and to then have formal project sanction as early in 2024 as possible.

Rockhopper believes it is possible to materially reduce pre first oil capex from the previously estimated US$1.8bn (assuming a leased FPSO) and overall project capex by taking actions such as reducing the number of wells drilled pre first oil and reducing the number of drill centres.

As part of the transaction, Navitas commissioned Netherland, Sewell & Associates, Inc. (“NSAI”) to produce a resource report which used a different approach to the ERCE 2016 report. NSAI concluded that the 2C for Sea Lion is significantly larger than the 517mmbbls contained in the ERCE report. As this report was not produced for Rockhopper we will continue to refer to the ERCE numbers, but are delighted at this additional third party validation of the potential of the North Falkland Basin and Sea Lion to produce significant quantities of oil.

As Navitas have not formally become Operator and licence holder, they are yet to be in position to have substantive conversations with the contractor community as part of the working up of the new development plan for Sea Lion. That said, Rockhopper’s Board remain confident that the Sea Lion project will continue to benefit from robust economics, particularly at current oil prices. Based on the Premier Oil development from 2019-2020 at a real terms US$75 Brent, Sea Lion phase one only would have a pre-financing project NPV 10 of over US$5bn at first oil. Whilst the lower cost development concept is likely to see a lower number, we believe this demonstrates the enormous potential value represented by Sea Lion for all stakeholders, including the Falkland Islands Government.

Ombrina Mare arbitration

Having commenced proceedings against the Republic of Italy in 2017 and completed the first and second hearings during the course of 2019, the Tribunal confirmed that proceedings had been formally closed on 25 April 2022. Under ICSID Arbitration Rules, the Tribunal has 120 days after closing to issue its Award, extendable by a further 60 days (Rule 46). The 120 days rule means that we should receive the final decision, including the quantum of any award should we be successful, by 22 August 2022, or 22 October 2022 should the extension be required. The Company continues to believe it has strong prospects of recovering significant monetary damages.

Corporate matters

Following eight years at the Company, Stewart MacDonald stepped down from his role as Executive Director and Chief Financial Officer in January 2022. Stewart helped Rockhopper agree what we believe is a positive and exciting framework with Navitas that sees us fully aligned and committed to bringing Sea Lion to production, and the Board wishes him every success in his future career. William Perry, who has been working as Rockhopper’s Financial Controller since 2011, has stepped up to become the Company’s Interim Chief Financial Officer.

Following a series of material cost reduction initiatives, the Company’s G&A is now at its lowest level for over a decade. Decisions have included relocating the office to Salisbury and sub-letting the London office, materially reducing headcount and moving a number of key technical staff to part-time working in order to balance a reduction in cash burn whilst retaining required expertise and specific Sea Lion and Falklands knowledge within the Company.

ESG
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 noted last year FIG 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.

Outlook

With over 500 million barrels of recoverable oil, Sea Lion continues to represent a development with significant potential value for all stakeholders. Additionally, recent global developments have highlighted the importance of security of supply for energy, and hydrocarbons’ vital role in that.

The Board believes that the addition of Navitas, a committed and aligned partner with recent proven ability to access capital for oil field developments, represents the start of a bright new chapter in the history of Sea Lion, bringing with it a renewed energy and enthusiasm for the project. This new joint venture, along with a strong oil price and changing supply background, provides us with the best possible chance of seeing the project sanctioned.

Finally, we thank the Government and people of the Falkland Islands for their continued support as they move towards commemorating the 40th anniversary of the end of the 1982 conflict.

FINANCIAL REVIEW

OVERVIEW

From a finance perspective, the most significant events in the year include:
·   Announcement by Harbour in September 2021 that the Sea Lion project does not fit its corporate strategy and therefore that it will seek to exit the project and its North Falkland Basin licences
·   Detailed Heads of Terms signed with Navitas and Harbour for Harbour to exit the Falklands and for Navitas to farm-in to 65 per cent interest in the North Falkland Basin assuming operatorship
·   Detailed transaction terms agreed with Premier/Harbour and Navitas in relation to the Sea Lion project(the “Transaction”)
·   Finalisation of the corporate cost reduction programmes previously implemented

Assuming the Transaction completes the arrangements with Navitas ensure that Rockhopper is funded for all pre-sanction costs related to the Sea Lion Phase 1 development (other than licence fees, taxes and project wind down costs). As such, the Group believes the above events materially strengthen the Group’s financial position in the short and medium term and significantly enhance the prospects for a successful project financing for Sea Lion.

RESULTS FOR THE YEAR

For the year ended 31 December 2021, the Group reported revenues of US$0.8 million (2020: US$2.8 million) and loss after tax of US$7.8 million (2020: US$236.5 million). The significant reduction in loss after tax was driven by last year’s results including 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.

REVENUE AND COST OF SALES

The Group’s revenues of US$0.8 million (2020: US$2.8 million) during the year relate entirely to the sale of natural gas in the Greater Mediterranean (specifically 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. The Egyptian portfolio made up US$2.1 million of 2020 revenues. Gas was sold at a price linked to the Italian “PSV” (Virtual Exchange Point) gas marker price.

Cash operating costs, excluding depreciation and impairment charges, amounted to US$1.1 million (2020: US$2.1 million). Again, the reduction in operating costs reflects the disposal of the Group’s Egypt portfolio during the prior period.

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

OPERATING COSTS

Exploration and evaluation expenses are not material in the year. The reversal of impairment in the year relates to impairments against amounts over accrued in the prior year. As previously mentioned, the prior year expenses was mainly due to the write off of costs relating to areas of the North Falkland Basin which will not be developed as part of the Sea Lion Phase 1 project.

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. 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. The full benefit of these cost reduction initiatives were realised in 2021 resulting in G&A costs of US$3.3 million in 2021 (2020: US$4.0 million), excluding non-recurring expenses related to restructuring and acquisitions and divestments.

The foreign exchange gain in the year is US$0.8 million (2020: loss of US$1.4 million). As with last year, this is mainly movements in relation to the tax arising from the Group’s farm-out to Premier in 2012, a GBP£ denominated balance. Finance expense in the year of US$3.5million (2020: US$nil) also relate to adjustments in relation to this tax balance. This balance is discussed further below.

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 of the Group’s 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 2021, the Group had cash and term deposits of US$4.8 million (31 December 2020: US$11.7 million).

Cash and term deposit movements during the period:

 

US$m

Opening cash balance (31 December 2020)

11.7

Revenues

0.8

Cost of sales

(1.1)

Falkland Islands

(3.2)

Greater Mediterranean

(0.2)

Administrative expenses

(3.3)

Miscellaneous

0.1

Closing cash balance (31 December 2021)

4.8

 

During 2021, the Group paid US$3.2 million in relation to Sea Lion costs. This included the tax liability of US$1.4 million associated with the 2015/16 Falklands drilling campaign accrued for as at the prior year end.

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

IMPAIRMENT OF OIL AND GAS ASSETS

The Sea Lion development remains central to the Group’s plans. Whilst Harbour’s decision to exit the North Falkland Basin was disappointing, the Group is excited at the prospect of bringing in a new industry partner, in 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 are seeking licence extensions from the Falkland Island Government. 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. As such it was concluded that there were no current indicators of impairment for Phase 1 of the Sea Lion development.
In the prior 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.

MERGERS, ACQUISITIONS AND DISPOSALS

Post year end the Group announced Harbour and Navitas have signed legally binding definitive documentation in relation to Harbour exiting and Navitas entering the North Falkland Basin.

Ultimately the Transaction will align working interests across all the North Falkland Basin petroleum licences – Rockhopper 35% / Navitas 65% – subject to all necessary consents. The Group and Navitas will jointly develop and agree a technical and financing plan to enable the development of the Sea Lion project to achieve first oil on a lower cost and expedited basis post sanction.

Navitas will provide loan funding to the Group to cover;
>(i) 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”).
(ii)  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.

Whilst Transaction completion is still subject to receipt of various agreements, consents and approvals by the Falkland Islands Government , the Group is optimistic that these will be forthcoming.

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, 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$43.2 million.

Full details of the provisions and undertakings of the Tax Settlement Deed are disclosed in note 18 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 December 2021, the Group had cash resources of US$4.8 million. As at the end of April 2022 the Group had cash resources of $US3.4 million and as well as normal working capital requirements expects a number of non recurring costs in relation to the Transaction. Going forward projected recurring expenditure is 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. In April 2022, the Group signed definitive documentation to bring Navitas into the North Falkland Basin (the “Transaction”). The Transaction is subject to certain conditions precedent, the most important of which are certain consents from FIG which include, but are not limited to, a two year extension on the Licences being acquired, Navitas being approved as an Operator and certain tax clearances from FIG. Assuming completion, Navitas will provide loan funding to the Group for its share of all Sea Lion pre-sanction costs (other than licence fees, taxes and project wind down costs).

Management believe that the Transaction will complete before the end of the year. 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.

Even in the case of Transaction completion Management has determined that the Group will require further funding for working capital and to achieve Sea Lion FID, with FID estimated to be in early 2024. The Group believes that a funding solution is achievable, with options including the issue of equity in addition to the potential award of significant monetary damages with respect to international arbitration proceedings against the Republic of Italy in relation to the Ombrina Mare field which declared closed on the 25 April 2022.  At the time of writing, the final form and availability of funding is yet to be determined. Subject to market conditions we anticipate having raised sufficient funds by the end of Q3 2022.

In the event the Transaction does not complete then as well as working capital requirements it is possible that this could lead to the acceleration of Falkland Island infrastructure decommissioning costs currently estimated at US$4.0million (Group’s net share), for which the Group is not funded.

Accordingly, after making enquiries and considering the risks described above, the Directors have reviewed the Group’s overall position and given their belief, that raising funds will be possible, are of the opinion that the Group is able to operate as a going concern for at least the next twelve months from the date of approval of these financial statements.

Given the Directors’ confidence in their ability to complete a funding solution in the near term, the Directors believe that the Group will be sufficiently funded and believe the use of the going concern basis is appropriate. Nonetheless, for the avoidance of doubt, in the downside scenarios in which either the Transaction does not complete or a funding solution is not completed and in the absence of potential mitigating actions, a material uncertainty exists that may cast significant doubt on the Group’s ability to continue as a going concern. The Consolidated and Parent Company financial statements do not include adjustments that would result if the group was unable to continue as a going concern.

PRINCIPAL RISK AND UNCERTAINTIES

A detailed review of the potential risks and uncertainties which could impact the Group are outlined elsewhere in this Strategic Report. The Group identified its key risks at the end of 2021 as being:

1             oil price volatility;
2             access to capital;>
3             joint venture partner alignment;
4             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.

CONSOLIDATED INCOME STATEMENT
FOR THE YEAR ENDED 31 DECEMBER 2021

 

 

Year

ended

31 December 2021

Year

ended

31 December 2020

 

Notes

000

000

Revenue

3

839

2,754

Other cost of sales

(1,141)

(2,109)

Depreciation and impairment of oil and gas assets

(667)

(2,692)

Total cost of sales

4

(1,808)

(4,801)

Gross loss

(969)

(2,047)

Other exploration and evaluation expenses

(398)

(2,431)

Impairment of exploration and evaluation assets

273

(223,280)

Total exploration and evaluation expenses

5

(125)

(225,711)

Non recurring restructuring costs

(614)

Recurring administrative costs

(3,263)

(4,010)

Total administrative expenses

6

(3,263)

(4,624)

Charge for share based payments

9

(824)

(1,840)

Foreign exchange movement

10

789