Personally, I like stocks with momentum. So, is Rockhopper Exploration a hidden gem on the UK stock market?

Why is the stock rising?

Rockhopper Exploration’s stock is on the rise, fuelled by a series of exciting developments in its flagship Sea Lion oil field project. Partnering with Israel’s Navitas Petroleum, Rockhopper has reported significant development in the North Falkland Basin.

In November, the company said that it now expects the Sea Lion project to yield 55,000 barrels per day when peak production is reached. Rockhopper’s update also noted a 16% increase in recoverable oil resources, now estimated at 917m barrels, improving the project’s economics despite an uptick in projected capital expenditures to $1.4bn.

In October, the firm also secured a crucial extension of its petroleum production licences in both the North and South Falkland Basins until December 2026, providing continued exploration and development rights.

With first oil from Sea Lion expected in Q4 2027, the extension not only secures the company’s future in the region but also strengthens investor confidence, and resultantly, the share price.

Exciting, but be prepared to wait

I actually wrote my PhD about the journey to first oil in a frontier hydrocarbon nation. And one overriding lesson is that if you think drug discovery is a slow process, the progression from hydrocarbon discovery to first oil can take even longer.

As such, we shouldn’t be misguided into thinking that in a few years Rockhopper will have become a profitable oil producer with positive cash flows. The company is still very much in the development stage, partnering, securing licenses, and increasing its oil resource estimates.

And while Rockhopper is forecasting first production in 2027, there may be speed bumps. For one, some reports have suggested that the Falkland’s government will be in conflict with the UK government following a ban on new oil and gas licences.

However, it’s important to note that London lacks the authority to stop the Falklands exploiting resources in its territory. These resouces could also have a profound impact on the territory’s wealth.

Worth investing in?

Well, as I said, I like companies with strong momentum, but I fear we may be running low on predictable catalysts for now. Rockhopper is still exploring other opportunities in the Falklands. Beyond Sea Lion, there’s potential in fields like Humpback and Isobel, but they’re smaller, and significant production from these assets remains many years out.

We also have to keep in mind that oil prices fluctuate, and this will have a significant impact on the profitability of Rockhopper’s assets. If oil prices stay high or increase, it could mean that Rockhopper is undervalued, particularly if you have a bullish outlook on oil. However, given the volatility of oil prices and the long timeline before we see significant production from Sea Lion, I’m not willing to make an investment based purely on these assumptions.

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These are companies that normally focus on one or two parts of the oil and gas value chain — normally exploration and production.

By comparison, vertically integrated oil and gas companies, often called ‘international oil companies’ (IOCs) will have operations from exploration to forecourt sales.

What are they?

Rockhopper Exploration is a UK-based oil and gas company with its sights firmly set on the Falkland Islands. It made waves in 2010 with the discovery of the world-class Sea Lion oil field, a potential game-changer for the region’s energy resources.

Rockhopper is currently navigating development plans for Sea Lion, facing hurdles like environmental concerns and volatile oil prices.

Despite the challenges, Rockhopper remains a key player in the Falkland Islands’ oil and gas scene, with the potential to unlock significant economic benefits for the islands.

Meanwhile, Predator takes a different approach to the oil and gas game. This UK-based company focuses on smaller, near-term production projects, aiming for quicker returns and lower risks.

Predator has operations in Trinidad, Morocco and Ireland. Only the former operation is offshore. While the company has a diverse portfolio, the focus is enhanced oil recovery opportunities using carbon dioxide injection in Trinidad.

Prospects

Predator’s investment thesis is certainly less risky. It has a diverse portfolio and its business model requires less capital outlay compared to drilling new development wells.

That’s because it focuses on extracting oil and gas from previously drilled wells using CO2 enhanced oil recovery (EOR). This means it’s much more likely to generate cash flow in the near term.

While EOR often has elevated costs versus standard extraction techniques, none of its operations are as remote as the Falklands.

Rockhopper’s operations were dealt a blow in 2016 when oil prices crashed. It was thought that exploration in the Falklands generally requires oil prices to be above $45 a barrel. And that hasn’t consistently been the case over the last eight years.

However in the latest update, the company said cash costs had been reduced to less than $30 a barrel.

First oil still isn’t expected until 2027, another three years despite the recent entry of Israel-listed Navitas Petroleum on the Sea Lion project.

The bottom line

Both these companies have very interesting prospects. However they’re both, to varying degrees, relatively speculative given fluctuations in the oil price, and the perennial challenges and project timespans of the oil and gas sector.

Rockhopper’s base case scenario, assuming cash costs of $30 a barrel and an achieved price of $77 a barrel, with a target of 80,000 barrels a day, sounds very attractive. However, it may be some time before that’s realised.

Predator’s path to profitability is less risky. So while it’s not exactly the data-driven process I like to follow, Predator may be the better investment for me.

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At 10.5p per share, Rockhopper Exploration (LSE: RKH) still has some way to go. But if the price carries on the way it has over the past few years, we could see some nice gains.

We’re looking at a 55% fall in the past five years, though that does cover the pandemic. But since the lows of late 2020, Rockhopper shares have doubled.

Oil price

The rising oil price will be partly behind the Rockhopper share price rise. And it does show one thing that I’ve been convinced of for some time.

Everyone’s talking about renewable energy, and how it’s going to completely replace fossil fuels some day. But I reckon it’ll surely take a lot longer than people might think. It’s a long-term risk.

The main attraction has to be the size of Rockhopper’s potential resources. In September last year, the firm estimated its peak production volume at around 80,000 barrels per day. And that’s with costs of under $30 per barrel.

Still risky

The company seems to have a decent amount of cash, though there’s no actual profit yet.

Now, if oil should fall closer to that $30 again, Rockhopper could be in trouble. And it did fall way below that in 2020, remember.

But I’m keeping my eye on Rockhopper this year, and I think it could be a good one. FY 2023 results should be with us in April or May.

Soaring share price

The Empire Metals (LSE: EEE) share price took off like a rocket in late 2023, meaning it’s up more than 500% in the past 12 months.

It’s been way higher in the past, though. So it’s clearly made it to the penny stock ranks by starting off well and then hitting hard times.

Still, at today’s 11p price, the shares have nearly doubled in the past five years. So, are we in for a growth stock rebound here?

What does it do?

Empire digs for a number of metals, including copper, gold, and what it describes as other high-value minerals.

Copper prices seem to be holding up. And there’s big demand for all sorts of rare metals these days.

But the big excitement is Empire’s 2023 titanium discovery. In November, the firm announced a big find in Australia, including a good depth of high-grade titanium dioxide.

What’s the risk here?

That sounds good, but investors do face some risks.

For one thing, Empire is still making losses — of £1.04m in the first half of 2023. At the time, it had £1.4m in cash and equivalents on the books.

It has, though, achieved that reasonably healthy position thanks to new share issues. This means we face a risk of dilution if we buy now.

Still, with titanium in such critical demand, I think the firm’s market cap of just £70m does not look stretching. I think this could be another to watch in 2024.

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One stock market minnow that caught my eye recently is Rockhopper Exploration (LSE:RKH). This AIM-listed oil and gas exploration business currently trades for 13.15p per share and has a market cap just shy of £77m.

Here’s my take on the outlook for the company.

Black gold

Oil‘s demise has long been predicted by many stock market analysts, economists, historians, and climate campaigners. Yet it seems the world still can’t shake its dependence on the fossil fuel.

That’s good news for Rockhopper Exploration, which has operated in the waters surrounding the Falkland Islands since 2004. The company discovered the Sea Lion oil field to the north of the British Overseas Territory in 2010.

This petroleum reservoir contains around 500m barrels of recoverable resources according to independent auditors.

Last year, the company reached an important agreement with Israel-based Navitas Petroleum. This firm replaced Harbour Energy as its partner in the project. Rockhopper has a 35% interest with Navitas claiming the remaining 65%.

The firm benefits from two loans issued by Navitas and progress is well under way. In March 2023, the company announced “a material and hugely impressive improvement in the project costs and economics“. It has managed to reduce cash costs to less than $30 per barrel, according to the latest update.

The potential rewards from extracting Sea Lion’s oil are huge. After all, the UK government continues to import energy from overseas, often from countries with lower environmental standards than the Falklands. The consequences of the Russia-Ukraine war on global commodity markets have brought the importance of energy security into the spotlight.

In addition, Britain has a strategic interest in promoting the islands’ economic independence. This makes the Falklands an attractive place from which to source oil. Development work continues and a final investment decision for the project could be reached next year.

Risks

There are major risks facing the company, however. A global push to achieve net zero is an obvious one. Although the world is still highly dependent on oil today, the future could look dramatically different. Widespread adoption of electric vehicles and improvements in renewable energy technology might hurt long-term demand for the commodity.

In addition, there are political challenges the firm has to grapple with. The Argentinian government continues to dispute the British claim to sovereignty over the Falkland Islands. Last year, China backed Argentina’s territorial claim.

If Sea Lion proves to be as lucrative as Rockhopper Exploration believes, that could cause further antagonism.

Why I’d buy this stock

Despite some notable risks, Rockhopper looks like a penny stock with considerable potential in my view. I wouldn’t want to take too large a position in the company, as I generally prefer to own shares in bigger businesses.

However, this small-cap stock could provide a nice boost to my returns if the Sea Lion project proves to be a success. If I had spare cash, I’d buy today.

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The Rockhopper (LSE: RKH) share price has fallen by around 30% over the past month. So the stock has pinged on my radar as a potential buy. After all, with the share price near 10p, it’s up by around 78% since this time a year ago.

Potential in the Falklands

It seems the longer trend (over a year) for the stock has been up. But will that move continue? In the short term, the answer to that question could depend on the effects of speculation. But in the long term — as with all shares — it will take progress in the underlying business to keep the share price moving higher.

But before you read on, a word of caution. Rockhopper Exploration is a tiny stock market business. Right now, the market capitalisation is only just above £57m. And the company is engaged in the oil and gas exploration and production business. But operations remain unprofitable. I’d classify the stock as highly speculative. And, to me, that means if I dabble in the shares, there’s a high chance of losing some, or all, of my money.

There was a buzz of excitement around Rockhopper some 12 years ago. Back then, it seemed as if shareholders might get rich on discoveries of hydrocarbons in the Falkland Islands region. In September 2010, the share price shot up to around 500p — a far cry from today’s lowly double-digit figure. And I’m thanking my lucky stars I didn’t get sucked into the story back then when the shares were peaking.

Imminent operational breakthrough?

But the long haul since the heady days of 2010 demonstrates how difficult it can be to commercialise discoveries of oil and gas. And that’s particularly true if the company owning the assets doesn’t have deep financial pockets. Sadly, Rockhopper’s story so far is a familiar one. And the directors estimated the most recent fundraising event in July will have given the company “sufficient working capital to the end of June 2023″.

However, Rockhopper really could be on the cusp of an operational breakthrough with its flagship Sea Lion oilfield project in the Falklands. The company recently brought in a company called Navitas as operator of the North Falkland Basin licences. 

Navitas will own 65% of the project and the plan is for the company to “engineer an appropriate development concept and put together a financing package”. However, even now, the directors don’t expect the final investment decision (FID) to be taken for Sea Lion until “late 2023 or 2024”.

The long haul towards monetisation

The grind towards monetising the assets continues. And it has been a long and expensive journey. Rockhopper previously worked in a joint venture with Premier Oil (now Harbour Energy). And during that time “hundreds of millions of dollars and tens of thousands of hours” were spent engineering Sea Lion towards being a high-quality project “deliverable using proven industry technology”.

Back to the central question for me: should I buy some of the shares now? I think Rockhopper stock could become a multi-bagger one day. But it’s unclear whether that may occur from today’s level or much lower. So for me, the solution is to keep watching and waiting. But I’m not buying just yet.

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This company might not be a household name, but that hasn’t stopped it. Beazley (LSE: BEZ) is one of the largest specialist insurance businesses in the UK. And with operations around the world, the business is truly a play on not just UK, but international economic growth as well.

Over the past 10 years, shares in the company have produced a total annual return for investors of 21.7%, turning every £1,000 invested into £7,127.

And I believe that this outstanding record of performance is set to continue.

Explosive growth 

After a rough 2017, when some of the biggest hurricanes ever to hit the United States caused billions in damage, which insurers like Beazley had to pick up the bill for, analysts are expecting the firm to return to growth this year. Earnings per share (EPS) are projected to rise 42% to $0.34 (26p) giving a forward P/E of 22. 

Growth is only expected to accelerate for 2019. Analysts have pencilled in EPS growth of 64% to $0.56 (43p). Based on this estimate, the stock is trading at a 2019 P/E of 13.4.

As well as breakneck earnings growth, Beazley has attractive dividend credentials. The dividend yield of 2.1% might not be the highest around, but the payout of $0.16 (12p) per share is covered twice by EPS. To me, this high level of cover suggests that the distribution is shielded from earnings volatility — one of the critical factors I like to consider when evaluating a firm’s dividend potential. Analysts are expecting the payout to hit $0.22 (17p) next year, providing a more lucrative yield of 2.9%.

Overall, looking at the company’s record of producing returns for investors, coupled with its growth outlook, I believe Beazley won’t let you down.

Low risk, high potential reward 

If you’re looking for an investment with more growth potential for your portfolio, you might want to consider Rockhopper Exploration (LSE: RKH). 

There’s lots to like about this oil minnow. For a start, the company is one of the few early-stage oil businesses with positive free cash flow.

According to half-year figures, published today, Rockhopper generated cash flow from operations of $4.9m during the first six months of 2018. With cash operating costs of $11 per barrel of oil produced, this looks set to continue.

Rockhopper’s funds are essential to support the development of its flagship Sea Lion development in the Falklands. Management is targeting year-end net cash of $30m (down from $46.4m at the end of the first half) and is planning to secure further financing for the prospect towards the end of 2018. Its partner on the $1.5bn project is Premier Oil which is pushing ahead with the development of Sea Lion. It could yield as much as 1.7bn barrels of oil in the best case.

What I like about Rockhopper is that the company is already self-sustaining but has huge upside potential if Sea Lion proves to be as good as expected. If everything goes to plan in the Falklands, Rockhopper could be a multi-bagger investment for shareholders.

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Off the back of this rally, a lot of oil stocks have already recovered significantly from their 2016 lows. However, not all companies have recovered to the same degree. Here are three stocks that I believe could have further to go.

Uncertainty prevails 

Tullow Oil (LSE: TLW), Enquest (LSE: ENQ) and Rockhopper (LSE: RKH) all seem to have missed out on the wider oil sector rally over the past 12 months. It appears the reason why investors have been slow to return is due to the uncertainty hanging over these businesses.

Tullow and Enquest are both struggling under an enormous mountain of debt while Rockhopper’s future is dependent upon the development of the Sea Lion Field in the northern waters of the Falkland Islands.

Rising oil prices are already starting to lift the uncertainty for Tullow and Enquest.

Last year, Tullow returned to profit for the first time in three years, and for 2018 the producer is projecting free cash flow generation from operations of $650m — a significant figure. During the first half, the group churned out $300m of cash pushing net debt down to $3.1bn.

Compared to Tullow’s market value of £3bn ($3.8bn) this debt mountain is enough to scare away even the most risk-tolerant investors. Still, at the beginning of 2018, the group had net debt of $3.5bn, so the balance is rapidly moving in the right direction. Although a legal dispute with rig operator Seadrill has cost the company $250m, I expect to see a substantial reduction in net debt for the firm at the end of 2018.

Enquest is heading in the same direction. The firm is projecting production to hit between 50,000-58,000 boe per day in 2018, that’s up from 37,000 boe per day in 2017. 

Increased output at a higher oil price should enable the company to start chipping away at its near $2bn debt pile. Indeed, management is confident that higher output, coupled with low levels of capital spending will allow the group to do just that. 

Last year, City analysts predicted that Enquest could generate free cash flow of $700m a year at the higher output rate, which would be more than enough to reassure investors that the company can maintain its obligations to creditors. 

Project green light 

As Enquest and Tullow start to reduce debt, sentiment towards the two companies should improve as the level of risk reduces. I believe this should drive a re-rating in the shares pushing them significantly higher.

Meanwhile, the rising price of oil makes it more likely that Rockhopper’s Sea Lion project will get the green light from its development partner Premier Oil (Rockhopper currently owns 40%). Premier is also set to report a jump in cash flow this year, giving the group more capital to fund development projects.

If all goes to plan, Rockhopper’s management has stated that it believes Sea Lion could be sanctioned by the end of 2018, which would be a significant development for the company. Investors are bound to return when this colossal project gets the green light. After construction begins, it will only be a matter of time before the profits start flowing. 

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Currently, the conditions are perfect for the company. After years of slashing costs and investing heavily in production capacity, this year the group is well placed to produce healthy cash flow from operations, which should allow it to reduce debt and soothe concerns about its balance sheet substantially. 

A transformational year

Alongside its full-year 2017 figures, Tullow said it expects production in 2018 to be between 86,000 to 95,000 barrels per day, compared to last year’s 94,700 bbl/d. While the lower production figure is disappointing, higher oil prices should more than make up for the fall. 

For example, last year the average realised oil price for the company was $58.3 bbl. Today, the price of Brent crude is nearly 20% higher at just under $70 bbl. What’s more, Tullow reported a 22% drop in its underlying cash operating cost to $11.1 bbl last year, which only adds to the investment case. 

It is also unlikely that Tullow will see a repeat this year of the operational problems that it experienced in 2017. Due to a maritime boundary dispute between Ghana and the Ivory Coast, Tullow was unable to drill wells at its flagship Ten field off the coast of Ghana. The situation has now been resolved and the group has plans to begin “a multi-year incremental drilling programme” this year.

Cash cow 

All of the above indicates to me that Tullow is on track to beat last year’s free cash flow generation of $543m, giving it scope to make a substantial dent in its net debt balance of $3.5bn as reported for the end of last year. And as group fiscal stability improves, I believe the market will award the Tullow Oil share price a higher valuation.

As well as Tullow, I believe that higher oil prices also bode well for small-cap explorer Rockhopper Exploration (LSE: RKH).

Binary bet 

Rockhopper is essentially a binary play on the colossal $1.5bn Sea Lion field development in the Falklands. This project, which is operated by Premier Oil was put on ice as the price of oil has languished, but with prices heading back to $100 bbl, it’s becoming more likely that Premier will be able to access the funds to press ahead. 

Rockhopper expects the final decision on development will be made towards the end of 2018.

While the firm waits for Premier to start Sea Lion’s development, Rockhopper’s production base in the Greater Mediterranean is keeping the lights on. 

According to the group’s full-year figures, published today, production from this region averaged 1,200 bbl/d during 2017, producing revenues of $10.4m and a cash flow of $1.6m. There’s also $50.7m of cash on the balance sheet to help fund any future developments as well “new venture opportunities” to help improve production and cash flow.

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However, with the oil price having risen significantly in recent months, the prospects for the industry appear to be relatively positive. Certainly, volatility may continue to be high, but there could be capital growth potential on offer. With that in mind, here are two stocks that could be worth buying today.

Improving outlook

Reporting on Monday was Rockhopper Exploration (LSE: RKH). The oil and gas company provided an update on its Greater Mediterranean portfolio, with it delivering improved production from Abu Sennan. Current production is 4,000 barrels of oil equivalent per day (boepd), with the company seeing continued strong realised pricing. It has been able to sell oil from the area at a small discount to Brent.

Looking ahead, the company is set to engage in an active exploration and development drilling programme across both of its licenses in Egypt. It is seeing an improvement in the payment situation in Egypt, with it having reduced receivables significantly. Its historic liabilities to Beach Energy are also now satisfied.

While Rockhopper Exploration continues to be a relatively speculative business which could offer volatile performance, its capital growth potential could be high. If the oil price continues to increase or at least remains close to current levels, then the company’s forecasts may improve. This could lead to impressive future returns for less risk-averse investors.

Return potential

Also offering the potential for improving share price growth over the long run is Soco International (LSE: SIA). The company has experienced a relatively challenging period, with its financial performance coming under severe pressure. The Vietnam-focused company has endured a number of challenges in recent years, with a lower oil price making its trading conditions even more difficult. However, under its current strategy it appears to have the potential to generate improving financial performance.

Encouragingly, the company appears to have a relatively strong balance sheet. This could provide it with a degree of stability in what remains a relatively uncertain industry. And with it having no debt at the present time, it may offer less risk than some of its sector peers.

As mentioned, a higher oil price would be likely to have a positive effect on the oil and gas industry. With Soco in the process of developing its asset base through continued investment, the prospects for the business appear to be relatively bright. As such, and while its share price performance could be relatively volatile, now could be a good time to buy it for the long run.

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The company has been slowly chipping away at its debt and although it still stood at $2.7bn at the interim stage, it’s coming down as Premier targets a leverage ratio of three times EBITDA by the end of 2018.

The Catcher project is still on schedule for the delivery of first oil in December, and that should generate more cash for reducing debt further. And total production is expected to meet Premier’s raised target of 75-80 kboepd for the full year.

On top of that, there’s a new agreement signed for the supply of gas to Vietnam, and the sale of the Wytch Farm field to Perenco UK has been finalised for a total value of $275m. 

Shares up

Since a 2017 low in June, Premier shares have regained 59% to 70p, and what’s most likely to be driving that is an uptick in the oil price. After being stubbornly stuck at around the $50 level for a couple of months, it’s pushed up to $58 per barrel as I write, and every uptick should provide a geared-up benefit to Premier Oil.

It’s too soon to assume higher long-term oil prices, and a loosening of OPEC restrictions could possibly lead to a new short-term supply glut. But I’m optimistic we’ll see a price of around double the low point of early 2016 before too much longer — about $65.

There’s still a risky year ahead, but I really see my glass as more than half full now.

A winner too?

If Premier Oil recovers as well as I hope, I can’t help feeling that Rockhopper Exploration (LSE: RKH) could very well share in the success. The much smaller explorer has had its shares battered during the oil price crisis, as have many of its sector compatriots. At 23.4p we’re looking at an 85% fall over five years — and that’s one of the smaller oilies that I thought would do well back then.

Rockhopper is expected to record small losses for this year and next, but first-half results revealed cash resources at 30 June of $62.5m and no debt — with a $337m development carry from Premier for the development of Sea Lion Phase 1 playing a part.

And that’s the big connection — Premier took a 60% interest in the Sea Lion field north of the Falkland Islands in 2012, with Rockhopper retaining the remaining 40%. And Premier is aiming at 2018 for a sanction date for the project.

Relatively safe

Meanwhile, the partners are working on the financing for it, via a proposed $800m senior debt deal.

Rockhopper also has interests in a number of other resources around the world, which should lessen its risk compared to some other smaller explorers for whom a single asset could be make or break.

And, as the oil price has been creeping back up again, so has the Rockhopper share price. Since the middle of August we’ve seen a 29% gain, largely echoing the rise in the price of a barrel of crude from that $50 level to $58.

Could 2018 be the year of the great oil stock comeback? I do hope so.

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