Today’s half-year results from Rockhopper (LSE: RKH) provide evidence that 2015 has been a strong year for the oil exploration company. For example, it has enjoyed success in its drilling programme, with two material oil discoveries in the North Falkland Basin. Both Zebedee and Isobel Deep have great potential to produce considerable production capacity in the medium term and, with further drilling yet to come later this year, the prospects for further finds seems to be encouraging.
In addition, Rockhopper is also aiming for production in the near term from its portfolio of assets in the Mediterranean, which would provide the business with a cash flow boost to aid in its development of assets off the Falkland Islands. Furthermore, a beneficial tax deal with the Falkland Islands government regarding a deferment of tax payable by Rockhopper from the farm-out to Premier Oil in 2012 has also boosted financial performance in the short term.
Of course, Rockhopper remains a loss-making business and, in fact, its losses have increased from $3.2m in the first half of 2014 to $5.1m in the first half of 2015. However, Rockhopper appears to have sufficient resources to continue its drilling programme, with the company having a cash balance of $160m. As such, its outlook appears to be positive and, with the company trading on a price to book (P/B) ratio of just 0.67, it seems to offer excellent value for money given its upbeat future prospects.
Clearly, Rockhopper’s share price has disappointed this year, with it falling by 33% since the turn of the year. Likewise, sector peers, Enquest (LSE: ENQ) and Ophir (LSE: OPHR) have also posted falls in their valuations, being down 22% and 40% respectively year-to-date.
Like Rockhopper, Enquest’s most recent results saw its profitability worsen, with EBITDA falling by around 20%. This was despite production increasing by over 17% during the period, with Enquest reiterating its full-year guidance for total production.
However, with a lower oil price likely to remain a feature of the oil sector, Enquest could struggle to turn a profit in the short to medium term – especially since its cost base is arguably less appealing than those of companies which operate in regions other than the North Sea. As such, and while Enquest has previously enjoyed a high level of profitability, news flow for Rockhopper could be more positive over the medium term.
Similarly, Ophir is also struggling to turn a profit given the low oil price. It is expected to move into loss-making territory this year and, while the company is expected to bounce back next year, this may not be sufficient to positively catalyse investor sentiment and push the company’s share price higher.
Certainly, Ophir has a relatively strong financial position and its P/B ratio of 0.55 holds appeal. But, with a major investor, Kulczyk Investments, selling its stake earlier this year, market sentiment could continue to worsen in the short to medium term. As such, and while Enquest and Ophir could be strong long term performers, the potential for improving news flow at Rockhopper indicates that it is the best buy at the present time due to there being a clear catalyst to improve investor sentiment.
