The commerciality of the Falkland Islands Rockhopper Exploration’s Sea Lion oilfield development shouldn’t be significantly impacted by logistical problems arising from Argentina’s claim over the sovereignty of the Islands, according to analysts at the Royal Bank of Scotland.
An article published Monday by Proactive Investors-UK, under the heading of “Rockhopper Exploration: Sea Lion commerciality not significantly impacted by Argentina/Brazil shipping ban, says RBS” and written by Jamie Ashcroft refers to the political problems which may arise.
Just a week after Rockhopper confirmed that the Sea Lion oil discovery, in the waters surrounding the Falkland Islands, is big enough to support commercial production it seems that political issues may come into focus for investors.
According to a report in the Sunday Times, Brazil has fallen into line with Argentina by barring vessels from docking in its ports if they are flying the flag of the Falkland Islands and this could have negative implications for any development of the discovery.
Looking at the potential problems in a note to clients, RBS analyst Phil Corbett said: “To date, there has been no significant impact on the timing or logistics of exploration and appraisal drilling operations in the North Falklands Basin from Argentina's stance on the sovereignty of the Falklands.
“While it may make a development more complex and costly (i.e. we would imagine a significant contingency in terms of equipment and people may have to be stationed in the Falklands given long supply lines) it shouldn't significantly impact the commerciality of the project in our view”.
The RBS bank analyst points out that his valuation, which informs his ‘buy’ recommendation and 380 price target for the share, assumes a 250 million barrel development and it also incorporates a conservative view of both capital and operating expenditure.
The RBS analyst added: “If ongoing work continues to support the potential of Sea Lion (current mid-case of 325mmbbls recoverable) and the exploration upside on the licence then we simply don't believe that it will lie dormant because of political and/or development risk when attractive upstream opportunities are growing scarcer.”
RBS is currently one of the several part-nationalised UK banks as a consequence of the 2008/09 financial crisis. The latest results from RBS, which were broadly in line, however failed to provide any support for the bank. Broker Nomura upped its rating for the group from “reduce” to “neutral” on valuation grounds and said it remained highly cautious on the group’s prospects.