14 10 24 Oriel Falkland Island Explorers.pdf

8/10/2019 14 10 24 Oriel Falkland Island Explorers.pdf

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THIS DOCUMENT INCLUDES RESEARCH WHICH IS A MARKETING COMMUNICATION. It is not investment research and has not been prepared in accordance with legal requirements designedto promote investment research independence and is also not subject to any prohibition on dealing ahead of the dissemination of investment research. Where a stock is indicated with *, OrielSecurities has designated research as Connected. Please refer to the back of this document for important disclosures and our research disclaimer.

The Falkland Islands ExplorersInitiation of coverage and Sector review Oil & Gas - E&P

24 October 2014

Once more unto the breach, dear friends MULTIPLE RECS

Unconnected research

TheFalklandIslandsE xplorersMultiplerecommendations OrielSector Report- Oil&GasE&P

2015 will see the first Falklands exploration drilling in three years. Ahead of

the campaign, we initiate coverage on the regions three key small-cap stocks.

Falkland Oil & Gas is fully funded and has material upside, making it our top

pick. Peers face more obstacles but stand to benefit from drilling success.

Falkland Oil & Gas (BUY, TP 41p)

Falkland Oil & Gas (FOGL) is the only company with exposure to both the northern and

southern legs of next years drilling campaign, with a stake in five firm, fully-funded

wells. We especially like the fact that FOGL now offers equity market exposure to this

campaign more cheaply than industry has already proven itself willing to pay.

This industry read-through valuation forms the basis of our pre-drill target price.

Two of FOGLs 2015 wells will target very significant exploration prospects in the South

Basin, in partnership with US independent Noble Energy (not rated). Furthermore,

FOGL has greater leverage than peers to attractive exploration in the North Basin. As

such, the company is our preferred way to play the upcoming drilling campaign.

Borders and Southern Petroleum (HOLD, TP 18p)

While Borders has a strong understanding of its geologically de-risked, high potential

South Falkland Basin licence, it is, in our opinion, hamstrung by a requirement for

additional funding. We would expect the shares to bounce towards our target price

should the company secure a slot in next years drilling campaign, and even this offers

>100% upside at the current level. However, there is certainly a risk that Borders will

have to sit it out next year, in our view, while any read-across from third-party success

would only apply should its neighbours drill a Darwin-lookalike prospect, something

which is by no means guaranteed.

Rockhopper Exploration (HOLD, TP 212p)

Rockhoppers investment case is dominated by the potentially stalled Sea Liondevelopment, and as such, exploration is of secondary importance for now. While

theoretically funded to first oil at Sea Lion, we expect Rockhoppers equity interest to

be diluted since the project is challenged under the current commercial arrangement

and distinctly vulnerable given the oil price outlook. We do not expect a resolution to

the structure of the joint venture until after the upcoming drilling campaign, likely

delaying sanction beyond the current target (mid-2015). Leaving the macro picture to

one side, we think Sea Lions attractiveness to a third party will, in part, depend on

exploration results in the North Basin next year, with nearby incremental volumes

capable of altering the story somewhat. HOLD through to drilling.

Stocks reviewed

BORDERS & SOUTHERN PETROLEUM PLC

Initiated: Recommendation HOLD

Price 8.63

Target price 18.00

FALKLAND OIL AND GAS LIMITED

Initiated: Recommendation BUY

Price 28.00

Target price 41.00

PREMIER OIL PLC

Recommendation BUY

Price 268.10

ROCKHOPPER EXPLORATION PLC.

Initiated: Recommendation HOLD

Price 72.00

Target price 212.00

All data as of close 23 October 2014

All sources unless otherwise stated: Company data, Factset,Oriel Securities

Contributing analysts$IsPrinted$

Sales

Robin Haworth Dragan Trajkov UK Sales desk

+44 (0)20 7710 7628 +44 (0)20 7710 7623 +44 (0)20 7710 [email protected] [email protected]


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Table of contents

Investment case: once more unto the breach...................................................................... 3

The 2015 campaign .......................................................... ........................................................................ 3

Falkland Oil & Gas (BUY, TP 41p) .......................................................................................... 4

Investment thesis ....................................................... ........................................................ ....................... 4

Valuation .................................................................................................................................................. 4

Risks to our thesis .................................................................................................................................... 5

Borders and Southern Petroleum (HOLD, TP 18p)............................................................... 6


Valuation .................................................................................................................................................. 7

Recommendation ..................................................................................................................................... 7

Rockhopper Exploration (HOLD, TP 212p)............................................................................ 8


Valuation .................................................................................................................................................. 9

Recommendation ................................................................................................................................... 10

The South Falkland Basin..................................................................................................... 11

Darwin paves the way ............................................................................................................................ 11

At least two wells in 2015 ................................................................................................ ....................... 14

The North Falkland Basin...................................................................................................... 16

A new oil play needed ....................................................................... ..................................................... 16

2015 drilling: a balance of risk ......................................................................... ....................................... 16

Appendix 1: Fiscal regime and asset model....................................................................... 19

Falkland Islands Economy and Fiscal Regime ....................................................................................... 19

Sea Lion Asset Model ................................................. ........................................................ .................... 19

Appendix 2: Argentina and the Falklands........................................................................... 20

Politics .................................................................................................................................................... 20

The Vaca Muerta as an exploration destination ..................................................................................... 20

Appendix 3: Selected Board and Management................................................................... 21

Borders and Southern Petroleum ................................................... ........................................................ 21

Falkland Oil & Gas ...................................................... ....................................................... ..................... 21

Rockhopper Exploration ......................................................................................................................... 22

Recommendation history, Disclosures on interests and Certifications ....................... ............................ 23

Disclaimer ........................................................ ........................................................... ............................ 24


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Investment case: once more unto the breach

In June of this year, Premier Oil contracted a rig for a major exploration campaign in the Falkland

Islands in 2015. The waters surrounding the Islands have so far yielded two significant discoveries, but,

with neither project yet sanctioned for development, the areas promise is yet to be realised. With six

firm wells next year, upcoming drilling could revitalise a region that has seen interest wane amidst high

drilling costs and out-of-favour exploration. In this note, we discuss the prospects for three small-cap

companies in the region, as well as the underlying geological story that will form the backdrop to drilling.

Falkland Oil & Gas (FOGL) has the greatest exposure to next years campaign, both in terms of well

numbers and share price leverage, and as such it represents our preferred way to invest in the region.

In Noble Energy it has a first-rate technical partner and the company is fully funded for its five firm wells.

Meanwhile, as a function of its larger market cap and lack of exposure to the high-impact South

Falkland Basin (SFB), Rockhopper Exploration (alongside mid-cap partner Premier Oil, not discussed in

this note) stands to benefit less directly from exploration. We see the main benefit to it being via the

addition of resource near Sea Lion, potentially improving the economics of the seemingly stalled project

and its attractiveness to a much-needed farm-in partner. Meanwhile, Borders and Southern Petroleum(Borders) and Argos Resources (not rated) have yet to secure funding to drill in the upcoming

campaign. Borders has a significant condensate discovery and could benefit materially if it concludes a

farm-out that enables drilling, although there is now a risk that it will not do so, in our view.

Figure 1: Exposure to exploration upside by company

Gross Net Net prospective Risked ENAV*, Unrisked ENAV*, YE14e net cash Estimated drilling cost

Company wells, # wells, # resource, mmbbls % of current s.p. % of current s.p. US$m net of carry, US$m

Premier Oil 4 1.7 221 9% 57% (1526) (156)

Rockhopper Exploration 4 1.1 147 48% 174% 213 (53)

Falkland Oil & Gas 5 2.3 586 390% 1871% 106 (100)

Borders and Southern - - - - - 20 -

Argos Resources (not rated) - - - - - 2 -

Source: Oriel Securities estimates

The 2015 campaignOf the six-plus wells to be drilled next year, most interesting, in our view, are the two wildcats that Noble

and FOGL will drill in the deepwater South Basin. Humpback, a potential 510 mmbbl slope fan, will be

the first prospect to be tested and the second will be confirmed in due course. These two wells will be

sandwiched between Premiers four wells in the North Basin, a highlight of which will be the testing of

one of the Norths few remaining stand-alone exploration targets, Isobel.

Figure 2: The 2015 drilling campaign as it stands

Mid case prospective Estimated gross

Well Order Operator (interest) Licence Type Partners resource (mmbbls) well cost, US$m Key risk factor

North Falkland BasinZebedee 1 Premier Oil (36%) PL04b Exploration FOGL (40%), RKH (24%) 165 50 Seal

Isobel 2 Premier Oil (36%) PL04a Exploration FOGL (40%), RKH (24%) 243 50 Reservoir

Sea Lion gas cap / Chatham 5 Premier Oil (60%) PL032 Appraisal / exploration RKH (40%) 79 50 Reservoir

Jayne E 6 Premier Oil (36%) PL04c Exploration FOGL (40%), RKH (24%) 73 50 Seal

South Falkland Basin

Humpback 3 Noble Energy (35%) SFB South Exploration FOGL (52.5%), Edison (12.5%) 510 110 Seal

Well 2* 4 Noble Energy (35%)* SFB South* Exploration FOGL (52.5%), Edison (12.5%)* 240* 110 tbc

Source: Oriel Securities estimates, company data. *The second SFB target is yet to be confirmed. Resource estimate for SFB well 2 is an average of the remaining prospects.

The rig contractor is Ocean Rig, whose Eirik Raudesemi-submersible is a dynamically positioned harsh

environment setup capable of drilling in the deep waters south of the Falklands. Despite the fact that the

same rig will be used throughout, differences in complexity and expected duration of the wells means

that those in the North Basin are expected to be significantly cheaper, at c.US$50m, than those in the

South Basin (c.US$110m). Operations are expected to commence in late Q1 or early Q2 2015 and thefirm campaign is expected to take around 240 days. The sixteen contingent drilling slots comprise eight

options that can be exercised prior to rig mobilisation and up to eight further options that can be elected

during the drilling campaign.


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Falkland Oil & Gas (BUY, TP 41p)

Investment thesisFOGL is the only company with exposure to both the northern and southern legs of next years drilling

campaign, with a stake in five firm, fully-funded wells. Two of these will target significant explorationprospects in the South Falkland Basin (SFB), where the company is drilling in partnership with US

independent Noble Energy (not rated). Furthermore, FOGL has greater leverage than peers to the

reasonably attractive exploration upside in the North Falkland Basin (NFB). As such, the company is

our preferred way to play the upcoming drilling campaign. We especially like the fact that, at the

current level, exposure can be gained at a cheaper price than industry has proven itself willing to pay.

In our view, FOGL owes its strong current position to two key transactions. First was a prudent farm

down to Noble Energy mid-way through the last drilling campaign in August 2012. As well as providing

a high quality technical partner, we estimate that FOGL has received c.US$70m in directly carried

exploration costs from the deal. It also served to reduce the companys working interest in non-carried

expenditure to a more manageable, yet still material 40-52.5% (from 75-87.5% previously). Noble

became operator of the licences in 2013, acquiring three large 3D seismic surveys (totalling 12,000 sq

km) over the main prospective areas of its SFB acreage position. Second was the all-share acquisition

of Desire Petroleum (at an implied value of 61m), which gave the company a stake in contingent NFB

oil resources and allowed for it to receive a partial carry on three exploration wells in the basin.

In the SFB, we think the last two years focus on 3D seismic acquisition, interpretation and processing

is a critical part of FOGLs investment case. All three of FOGLs pre-2013 exploration wells were drilled

on 2D seismic due to the cost obstacle of acquiring basin-scale 3D on a sole risk basis; however,

stratigraphic prospects such as those drilled in prior campaigns can be highly ambiguous on 2D,

significantly adding to exploration risk. The last of the new 3D surveys was completed in February and

the interpretation of the entire dataset is now nearing completion: the partner group is currently at the

stage of working up drilling targets with a view to finalising a contingent drilling schedule by year end.

ValuationIn line with our valuation methodology for exploration companies, our pre-drill target price for Falkland

Oil & Gas is based on the read-through value of the companys farm-in transactions (farm-in value), the

remaining value of exploration expenditure carried by partners and FOGLs cash position. This sums to

41p/shr and, accordingly, we set our target price at this level. From this we conclude that the equity

market valuation of FOGL is less than the industry valuation of the same assets, which we do not think

is sustainable. That the upside to our valuation, expressed in terms of the risked value of exploration

drilling, as shown in Figure 4, below, is significantly higher. Importantly, FOGLs net cost exposure to the

entire firm drilling campaign is funded from anticipated YE cash resources of US$106m and outstanding

cost carries from partners. The firm drilling programme is anticipated to cost c.US$100m (net) andadditional wells (or, potentially, significant cost overruns) may therefore require further funding.

Figure 3: Target price derivation

US$m p/sh

North Falkland blocks farm-in value 56 6

South Falkland blocks farm-in value 97 11

Cash at end 2014 106 12

Remaining promote 98 11

Implied market cap 358 41

Other assumptions

Long-term FX assumption, US$/ 1.65Implied market cap, m 217

Shares outstanding, millions 534



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A methodological note: our farm-in value, above, is calculated based on two transactions: firstly, the

companys August 2012 farm out of its two South Basin licences to Noble Energy, which saw the latter

pay an estimated US$70m in aggregate exploration carries for a 35% stake. This implies a gross value

for the blocks of c.US$200m, or US$97m net to FOGLs 40-52.5% stake (FOGLs June 2012 farm-out

transaction with Edison SpA implies a slightly higher value of US$213m). Secondly, in December 2013,

FOGL completed a transaction with Rockhopper Exploration and Premier Oil in which it agreed toreceive a full carry on two wells in the North Basin, valuing the blocks at US$47m each, or an aggregate

US$56m net to FOGLs 40% stake.

At this stage we have included no value in our target price for a potential unitisation of the Sea Lion

oilfield, which from 3D seismic and well data is known to extend into FOGLs North Falkland Basin PL04

licence. This is because there can be no certainty on whether unitisation will proceed and on what terms

since, although hydrocarbon regulation in the Falklands has largely followed UK precedent to date, the

Falkland Islands Government is an independent body and is under no obligation to continue to do so.

However, it is worth noting that Rockhopper Exploration sees Sea Lions Phase II development as

accessing c.90 mmbbls of gross PL04 resources, which net to FOGLs 40% stake would be worth

c.15p/shr on a fully un-risked basis. Should there be material progress in on-going unitisation

negotiations between the parties, or if the existing JV were to succeed in farming out Sea Lion, this

would bring the issue into sharper focus and could provide material upside.

In Figure 4, below, we calculate the risked and un-risked value of next years exploration drilling

campaign. This table shows the very substantial potential upside (111p risked / 533p unrisked)

associated with exploration south of the Falkland Islands in particular. We do not use this calculation as

the basis for our pre-drill target price. At US$80 oil, the risked value of exploration diminishes by 30%.

Figure 4: Exploration NAV summary (US$100 oil)

Country Asset Interest GCoS* Unrisked net NPV NPV NPV risked Unrisked NPV

% % mmboe US$/boe US$m p/sh p/sh

Falklands Zebedee 40% 35% 66 3 80 9 26

Falklands Jayne E 40% 25% 29 3 25 3 11

Falklands Isobel 40% 20% 97 3 67 8 38

Falklands Humpback 52.5% 20% 268 10 548 62 311

Falklands South Falklands well 2 52.5% 20% 126 10 258 29 147

Exploration assets 586 8 978 111 533

Source: Oriel Securities estimates. *GCoS = geological chance of success.

Risks to our thesisClearly, the key risk to a positive view on FOGL is a lack of success in the forthcoming exploration

campaign, particularly in the South Basin which is associated with much of the upside to our current

valuation. For a discussion of the specific subsurface risk factors relating to South Basin exploration,

see page 11. We believe the frontier exploration risk associated with the South Basin is mitigated to

some extent by FOGLs material equity stake in the lower-risk North Basin, which offers upside but

which is not yet regarded by the market as a core part of the companys value proposition.


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Borders and Southern Petroleum (HOLD, TP 18p)

Investment thesisBorders requires additional funding for further activity on its large South Falkland Basin (SFB) acreage

position. The company has a proven condensate discovery, Darwin, with c.260 mmbbls of recoverableliquids. However, further appraisal or near-field exploration is needed to demonstrate the commercial

viability of the resource base and the continuing absence of a farm-out suggests disconnection between

management expectations and what a potential partner is willing to pay. The Darwin follow-on potential

is both volumetrically significant and comparatively low risk, and would expect the shares to benefit

should the company secure a slot in next years drilling campaign. However, there is a risk that the

company will have to sit it out next year, while third party drilling may not focus on the Darwin area,

meaning that there could be limited read-through from the campaign.

Borders and Southern can fairly claim to have opened the SFB, making the key hydrocarbon discovery

of the 2012 campaign. The companys technical understanding is, in our view, of very high quality, with

the proven play fairway reasonably well understood and known to contain several follow-on drilling

targets. In addition, management has identified prospects in the deeper stratigraphy that may offer

additional running room (the prospect inventory is illustrated in Figure 5, below). For these reasons, we

believe that the continuing absence of a farm out is not necessarily related to the prospectivity of the

acreage but, rather, the companys unwillingness to accept the required degree of either asset or

corporate-level dilution.

Figure 5: Borders and Southern Petroleum prospect map

Source: Borders and Southern Petroleum

There is, of course, a caveat that the deep-water Darwin discovery is a gas condensate rather than oil

field, and therefore something of an unknown development proposition in this remote area. The valuable

condensate would have to be stripped from the gas upon extraction, and while this might well be

technically feasible, there are few analogue developments worldwide and, to our knowledge, none that

operate standalone in equally deep water. There are encouraging indications for an oil charge in the

basin, and an upside case exists in which a down-dip oil leg is present at Darwin. However, this cannot

be proven from existing data and would require further appraisal to test. As such, we are cautious over

whether a potential farm in partner would take the risk ahead of third party drilling in the region, which

might allow for some of the uncertainties to be resolved at others expense.


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ValuationWe base our target price for Borders and Southern on the implied value of near geographical neighbour

FOGLs southern licences in the SFB, US$120m. We calculate this value via a read-through from the

latters farm-out transaction with Noble Energy in 2012, which we estimate provided FOGL with carried

exploration costs of c.US$42m (relating to its southern SFB licences alone) for a 35% stake. This plus

cash sums to 18p/shr. In contrast to our FOGL target price, it is of course worth noting that Borders has

not executed such a transaction as yet. As such, while we would expect the shares to re-rate to the level

of our target price in the event that a deal is executed, there can be no certainty that this will occur.

Indeed, given Borders current balance sheet position, a farm-out on these terms would likely allow the

company to drill just one appraisal or exploration well without recourse to additional, potentially highly

dilutive equity financing. Since this would not represent the kind of comprehensive, 3+ well drilling

programme that would be needed to fully evaluate the potential resource in Darwin and nearby

structures, we question whether management would approve such a transaction (although there is of

course an opportunity cost to missing next years campaign, which we have not attempted to quantify).


US$m p/shSouth Falkland block farm-in value 120 15

Cash at end 2014 20 3


Other assumptions

Long-term FX assumption, US$/ 1.65

Implied market cap, m 85



We do not ascribe any value for the Darwin discovery itself in our target price, given that the field

requires at least two appraisal wells before commerciality can be established, for which, as noted

above, Borders does not currently have sufficient funding. This is in contrast with the Sea Lion

discovery, for instance, which thanks to its largely appraised status we do include in our Rockhopper

target price despite the development being far from assured. Nevertheless, we do regard a Darwin area

condensate development as being potentially highly attractive if sufficient volumes can be aggregated,

for instance in the case that discovery is made at the nearby FOGL/Noble prospects Scharnhorst

(188mmbbls) or Nurnburg (where the partners technical evaluation is still on-going). Figure 7 illustrates

the potential net asset value of the Darwin discovery alone, which is theoretically very significant.

Figure 7: Darwin NAV summary (US$100 oil)

Country Asset Interest Risk Unrisked net NPV Risked NPV Risked NPV Unrisked NPV


Falklands Darwin 100% 10% 263 10 258 32 323

Contingent assets 263 10 258 32 323


RecommendationWe initiate coverage with an HOLD recommendation. This is based on the fact that Borders fate is not

in its own hands until it farms out. While in the continuing absence of a transaction it may offer passive

exposure to attractive South Falkland Basin exploration drilling by third parties, the read-through may be

limited in the case that third parties decide not to target Darwin-lookalike prospects (i.e. if the two firm

wells are both located in the Diomedia area). Either a farm-out or third party drilling success in the

Darwin area would offer upside, while we think the downside is limited to the 3p/shr of cash.


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Rockhopper Exploration (HOLD, TP 212p)

Investment thesisRockhoppers investment case is dominated by the potentially stalled Sea Lion development, and as

such, exploration is of secondary importance for now, other than to increase the resource base nearSea Lion and therefore the likelihood of a farm-out. The project looks challenged under the current

commercial arrangement so, while Rockhopper is theoretically funded through to first oil via a carry

and financing facility from partner Premier Oil, we expect its interest to be diluted by an incoming third

party, from 40% now down to c.20%. In the current oil price environment, a farm out could be a lengthy

process and we do not expect a resolution until after 2015 drilling. However, incremental volumes from

exploration are capable of providing a useful boost to project economics.

Principally a commercial rather than technical challenge

From the two drilling campaigns to date, the only commercial discovery in the North Basin is Sea Lion,

a field of c.300 mmbbls (recoverable) that was found in 2010 by Rockhopper. In 2012, Rockhopper

sold operatorship and a 60% stake in the asset to Premier Oil in exchange for a US$722m

development carry and access to Premiers balance sheet in the form of a standby financing facility to

first oil. At this point, now envisaged as being in 2019 but likely to slip, in our opinion, the asset is

expected to generate over US$2bn in gross annual operating cash flow.

In January, facing the risk of taking up to 100% of Sea Lions costs onto its balance sheet, Premier

stated its intent to reduce its equity in the project. The US$5bn+ of capex represents more than twice

Premiers market capitalisation, a fact poorly received in a weakening macro environment. In

particular, the fall in Rockhoppers share price since the transaction in July 2012 reflects the fact that

the viability of the project under the current fiscal arrangement is in some doubt. This realisation has

adversely affected sentiment in the North Falkland Basin, with implications for the other operators.

Equity story on hold until a second farm out completedSince entering the project, Premier has matured the Sea Lion project to the front end engineering

design (FEED) stage. The concept is likely now technically robust, with a tension leg platform (TLP)

development having emerged as the preferred option over a floating production, storage and

offloading vessel (FPSO). The principal technical consideration, seemingly, is that in a TLP

development the production wellheads are located at surface (dry trees), meaning that well

intervention is easier and cheaper than in an FPSO scenario, where the wellheads are at the seabed.

While Premiers engineering work may have mitigated many of the technical concerns, we

nevertheless understand that Premiers commercial position has hardened to the point where it is

unlikely to sanction the project without bringing in a new partner to defray cost. This would necessitate

a second farm-out of the asset. It is understood that there were a small number of candidate farminees

the first time around, with politics, logistics and the perceived technical challenges of the asset all

playing their part in reducing the level of competition. It is perhaps likely that any deal will have to wait

until the end of next years exploration drilling so that the remaining basin potential is better

understood. This could delay the final investment decision (FID) beyond mid-2015. Furthermore, there

is a question mark over the projects viability at US$80 oil, as discussed further below.

Modelling a second farm out of Sea Lion

We would expect a second Sea Lion farm-out to involve both existing partners selling down equity in

the project to an incoming partner. Given that this would distort the value of Premiers existing

US$722m carry, we also envisage a reduction in the degree to which Premier carries Rockhoppers

costs (one means by which this could be achieved is if Rockhopper finds an alternative to using the

Premier standby financing facility agreed at the time of the original deal). Thus, we see the transactionas an opportunity to reset the commercial arrangement to one that works for all parties.

As such, from Rockhoppers perspective the potential outlines of a deal can be modelled very simply.

Its key criterion is how much of the asset it is able to retain and still receive a full carry on remaining


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net capital expenditure. Our highly idealised scenario, below, suggests that retention of c.20-25%

equity in the project would represent a reasonable outcome to this second farm-out process. This

conclusion is illustrated graphically in Figure 8, below. Meanwhile, the problematic structure of the

existing arrangement can be illustrated by comparing this idealised transaction with the original deal

between Premier and Rockhopper, in which the latter effectively received a full carry (via access to a

standby financing facility from Premiers balance sheet), yet was able to retain 40% of the asset.

In modelling an idealised transaction, our starting point is to assume that the Sea Lion project NPV of

c.US$2.1bn (at US$100 oil) is fungible with cash, and can therefore be transferred between parties in

exchange for the acquirer paying an equivalent amount in project capex on behalf of the seller. To

calculate the degree of equity transfer needed for a sellers retained capex to be zero (i.e. for it to

receive a full carry), it is necessary to equate the NPV sold with the level of capex retained.

Expressed mathematically, this is found by solving the equation {(1-r)NPV = rcapex} for r, where r is

the equity retained by the present owner and both NPV and capex are gross (i.e. whole project). Given

our estimate of Sea Lion capex (US$5.8bn) and NPV, we conclude that Rockhopper should have had

to sell down c.70-75% of the asset to pay for the remaining 25-30% of capex (i.e. r = 25-30%), while a

greater proportion of equity would have to be sold at lower oil prices (we estimate c.85% at $80 oil).

Figure 8: Carry modelling at Sea Lion [see text for explanation]

(7,000)

(6,000)

(5,000)

(4,000)

(3,000)

(2,000)

(1,000)

-

1,000

2,000

3,000

100 95 90 85 80 75 70 65 60 55 50 45 40 35 30 25 20 15 10 5 0

US$m

Sea Lion equity retained, "r" (percentage points)

Pro-rata gross capex NPV exchanged for capex carry Net capex exposure

Full carry


ValuationSea Lion sensitivity to oil prices

It is worth noting that Sea Lion exhibits a relatively high degree of cost sensitivity to oil prices, dueprincipally to the Falklands tax and royalty regime and the front-loaded capex structure. Our estimate of

gross project NPV/bbl under differing oil price scenarios is presented in Figure 9, below. These figures

exclude the US$722m cost carry that Rockhopper is set to receive from Premier Oil, which would

significantly enhance Rockhoppers economics (and diminish Premiers) compared to the numbers

presented. Our Sea Lion asset model is discussed in more detail in Appendix 1. As an illustration, at the

current level Rockhopper is trading at an EV/2C barrel of c.US$2.4.

Figure 9: Sea Lion gross project NPV, US$/bbl

Discount rate, % Brent oil price, US$/bbl:

6.9 80 100 120

10% 4.9 9.2 13.5

12% 3.3 6.9 10.514% 2.1 5.1 8.1



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Exploration risked NAV

For Rockhopper, we think the primary significance of 2015 exploration is in proving up additional

volumes in the northern NFB (Chatham, Zebedee and Jayne East) to improve the long-term value of the

Sea Lion project, rather than in play-opening exploration. This derives from the fact that, on a risked and

un-risked NAV basis, as per Figure 10, below, its most valuable well is Chatham, a joint exploration and

appraisal well which will have a direct impact on Sea Lion economics (the well is discussed in moredetail on page 18). Note that we do not use exploration risked NAV as a basis for our target price.

Importantly, Rockhopper is fully funded from existing resources for its share of the firm drilling

campaign, which we estimate at c.US$53m net of carried expenditure.

Figure 10: Exploration NAV summary (US$100 oil)

Country Asset Interest GCoS* Unrisked net NPV Risked NPV Risked NPV Unrisked NPV


Falklands Chatham 40% 50% 32 7 109 23 45

Falklands Zebedee 24% 35% 40 3 48 10 28

Falklands Jayne E 24% 25% 18 3 15 3 13

Falklands Isobel 24% 20% 58 3 40 8 42

Exploration assets 147 5 212 44 128

Source: Oriel Securities estimates. *GCoS = Geological Chance of success

RecommendationTarget price derivation

Given our view that the Sea Lion commercial arrangement is likely to be reset in a second farm-out,

we value Rockhoppers 40% stake in the project using the un-carried NPV/bbl value of US$6.9, rather

than a carried per-barrel value which would be significantly higher. This yields a value of US$809m at

US$100 oil. We value its 24% stake in NFB exploration licences at US$34m based on the implied

value of its farm-in to PL04, in which it, alongside Premier Oil, agreed to carry FOGL for two

exploration wells. We value the Mediterranean Oil & Gas assets at cost. Net of corporate items, this

sums to 212p/shr and we set our target price at this level. Although this does offer significant upside,

we believe the key price driver will be a commercial resolution at Sea Lion, which may have to wait for

the completion of exploration drilling. Furthermore, Sea Lions sensitivity to oil prices is such that, at

US$80 oil, our target price would fall to 124p/shr, c.40% below our US$100 oil target price. Both of

these facts suggest that a re-rating could be some way off, and as such we initiate at HOLD.


US$m p/sh

NPV12 of 40% of Sea Lion development 809 168

North Falkland blocks farm-in value 34 7

Mediterranean Oil & Gas acquisition (at cost) 48 10

Cash at Mar-15 213 44

Net exploration promote 26 5Falklands CGT liability -107 -22


Other assumptions

Long-term FX assumption, US$/ 1.65

Implied market cap, m 620



Risks to our thesis on Rockhopper Exploration

The key risk to a positive view on Rockhopper is that Sea Lion cannot be farmed out and that the

asset is not sanctioned for development, which we think would be taken extremely negatively by the

market. Less significant risks include schedule and cost risk at Sea Lion and a lack of success in the

upcoming North Basin drilling campaign. If Rockhopper does successfully farm out the asset then the

stock offers significant upside.


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The South Falkland Basin

The South Falkland Basin (SFB) is a proven deep water hydrocarbon province. We think the geological

potential is encouraging: from just five wells, one sizeable liquids discovery has already been made and

there is scope to infer the key play elements across a large swath of acreage. In both proven and

unproven parts of the basin, potentially very significant drilling targets have been identified on newly-

acquired 3D seismic data and, as it currently stands, two wells will be drilled in the basin next year. In

our view, unlike in the North Falkland Basin, the large area of the SFB means that it would likely attract

industry attention should an unambiguously commercial discovery be made.

Figure 12: The South Falkland Basin

Loligo (FOGL)Tertiary target

Scotia (FOGL)Gas shows in tight L.Cretaceous reservoir

Stebbing (B&S):Gas shows in Tertiary reservoir

1,000mwater depth

2,000mwater depth

Falkland Islands

200 km

500m waterdepth

FOGL Southern licences:Noble Energy (35% + operator), FOGL

(52.5%), Edison (12.5%)

Likely location offirm 2015 well

Toroa (FOGL)Good L. Cretaceousreservoir but dry hole

Darwin (B&S): L. Cretaceousgas & condensate discovery

FOGL Northern licences:Noble Energy (35% + operator), FOGL(40%), Edison (25%)

Borders and Southern licence:Borders (100% + operator)

Figure *

Figure *

Dry hole / shows

Discovery

Source: company data, Oriel Securities

Darwin paves the wayThe key well in the South Falkland Basin is Darwin East-1, drilled in 2012 by Borders and Southern

Petroleum. This discovered a gas condensate accumulation estimated to contain c.260 mmbbls of

recoverable liquids. While the field is significant and potentially offers appraisal upside, to our

knowledge there are no analogues for a stand-alone condensate stripping project in deep water, as

would be required to develop Darwin. For this reason, we think further exploration will be needed to

aggregate a sufficient volume of hydrocarbons to make a development attractive. Nevertheless, Darwin

is extremely important in demonstrating the potential of the South Basin, proving good quality sands and

the potential for liquid rather than gaseous hydrocarbons.

Figure 13 illustrates the results of Darwin and the other four wells to have been drilled to date. A prolifichydrocarbon system is clearly present and widespread (including beyond the Darwin area), with four of

the five having encountered hydrocarbons. Below we discuss the key remaining technical uncertainties.


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Figure 13: Drilling history of the South and East Falkland Basins

Well Date Operator Target Prospect type Result Oil / Gas shows Reservoir quality

Toroa Jul-10 Falkland Oil & Gas L. Cretaceous Stratigraphic Dry Minor Good

Darw in East Apr-12 Borders & Southern L. Cretaceous Structural Gas condensate n/a Good

Stebbing Jul-12 Borders & Southern Tertiary Structural Dry Yes Fine grained

Loligo Sep-12 Falkland Oil & Gas Tertiary Stratigraphic Dry Yes Fine grained

Scotia Nov-12 Falkland Oil & Gas L. Cretaceous Stratigraphic Dry Yes Fine grained

Source: Company data

Reservoir quality is proven on the shelf but not in deep water

One of the key outstanding issues is whether good quality reservoir rock is widespread in the South

Basin. To date it has only been found at two locations, Darwin and Toroa (Figure 13), but if it were more

extensive the large acreage position east of the Islands would become highly attractive.

At this early stage of exploration, the key reservoir seems to be the Lower Cretaceous (Aptian) interval:

of the three wells to have penetrated the section, two have encountered high quality reservoir sands.

Darwin East contains a high porosity if texturally immature sandstone which operator Borders and

Southern estimates could flow at a theoretical rate of 70 mmscf/d. If delivered, this would make it aworld-class reservoir. We understand that the Toroa well, drilled on the feather edge of the basin some

85 km northeast from Darwin, found a similar reservoir, and the two can be correlated on seismic data

suggesting that it is laterally extensive. Accordingly, we think the shelf looks promising for reservoir

quality, as we illustrate in our indicative reservoir map in Figure 14. There remains some uncertainty

over the deep water facies that lies outboard and which has only been penetrated once, at Scotia, in the

last well of the 2012 campaign. At this location it was found to be poor but, at this stage and from public

data, it cannot be said with confidence whether this is a local issue or more widespread.

Figure 14: Schematic representation of the Lower Cretaceous reservoir fairway in the South and East Falkland Basin




1,000mwater depth

2,000mwater depth

Falkland Islands

200 km

500m waterdepth

? faciesuncertainty ?

L. Cretaceous shelfreservoir (Oriel

estimate)

Deep waterVolunteer Basin

Burgess & Bute slopefans (schematic)

Key reservoir uncertainties:

How far North does good L. Cretaceous reservoir extend? [Not proven by Scotia / Loligo] Is the Darwin shallow water sandstone widespread and of good quality across the South? Is the slope fan play viable, either in B&S or FOGL acreage? (Is there any reservoir potential in the Tertiary section?)

??

Shelf sand

Slope sand

Deep water Fitzroy Basin

Diomedia area slope fans(schematic)




Source: Oriel Securities estimates; Falkland Oil & Gas; Borders and Southern Petroleum


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As shown in Figure 13, the basins two Tertiary tests, Loligo and Stebbing, found hydrocarbon-bearing

but fine-grained sand intervals of limited thickness and did not flow on test. These results cast doubt on

the Tertiary prospectivity and we do not think it will be an important target of the upcoming campaign.

Gas is seemingly widespread, but can more liquids be found?

Another notable result of the 2012 drilling campaign was the abundance of gas rather than oil: gas riskis damaging in light of its limited commercial potential in the Falklands. An indicative source rock

maturity map is presented in Figure 15, below, based on FOGLs published work. Beneath the Tertiary

fold belt to the south of the Islands, the source rock is deeply buried, seemingly generating a late gas

charge that is probably responsible for the gas at Darwin (the well found a highly liquids-rich condensate

that Borders suspects to be the product of early oil migration followed by late gas). The prospects for oil

in this area may be tested by the second South Basin well next year, although the drilling schedule has

yet to be confirmed (we think a decision by Noble to drill in this area would be encouraging for

neighbour Borders and Southern, as it would suggest the US company sees commercial potential in this

seemingly condensate-prone area). Meanwhile, based on geothermal data from Loligo, it is anticipated

that the Fitzroy Basin, in which the Humpback prospect is located, will be oil prone.

Aside from the geology, the abundance of gas may, in part, be a consequence of the drilling strategy

employed to date: all four 2012 wells targeted prospects exhibiting bright seismic amplitudes, since this

geophysical signal is a potential indicator of hydrocarbon charge and therefore a risk reduction

measure. However, the brightest amplitudes will tend to signify gas and it may therefore be that gas

fields are systematically over-represented in the drilling results. The difficulty is that oil generates a more

subtle seismic response than gas because its physical properties are closer to the background fluid,

water. It is not yet clear that this subtle response can be reliably detected, but the log calibration

provided by a number of well penetrations gives hope that the two fluids can indeed be distinguished.

Figure 15: Indicative representation of the Lower Cretaceous source rock maturity in the South and East Falkland Basin




Falkland Islands

200 km

500m waterdepth

Deep waterVolunteer Basin

(gas mature)

Source rock is gas maturebeneath fold belt

Key petroleum systems uncertainties:

Is there black oil (as opposed to gas and condensate) in the Darwin area? Is the undrilled deep water Fitzroy Basin mature for oil or gas? Is there any potential for an oil charge in the Volunteer Basin?

Oil-mature area

Gas-mature area

Deep water Fitzroy Basin(maturity unknown)


1,000mwater depth

2,000mwater depth



Thrust front

Source: after Falkland Oil & Gas


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At least two wells in 2015At this stage, there are slated to be at least two wells drilled in the South Falklands next year. Both will

be operated by Noble Energy, in partnership with FOGL and Edison SpA (not rated), the Italian utility. It

seems likely that both of these wells will target prospects in FOGLs southern licences (FOGL 52.5%),

although the target of the second well has yet to be confirmed. Borders and Southern is currently

looking to farm out its acreage to secure funding to drill in the campaign.

Humpback: the slope fan play

Set to be the first well in the South Basin next year, Humpback is a stratigraphic detached slope fan

prospect with estimated prospective resources of 510 mmbbls (gross, mid case). It is located in deep

water (1,300m) and its reservoir is thought to consist of Cretaceous-age turbidite sandstones. Investors

will be familiar with this slope play from the West Africa transform margin, where drilling has met with

mixed success: despite a number of discoveries, commercial accumulations have thus far proven tricky

to locate. A significant learning from West Africa has been that the integrity of the up-dip seal is critical:

all too often the best quality sands have been water-bearing, an observation that has been interpreted

to mean that a seal is absent. Furthermore, those wells finding oil have tended to find it in poor quality

reservoir, in units perhaps more likely to shale out up-dip (providing a seal). We therefore see these tworelated risk elements, reservoir and seal, as being the most important for Humpback.

To this end it is worth noting that the mapped up-dip pinch-out of the Humpback prospect sits just off the

break of the continental shelf (hence the fan being detached), as shown in Figure 16. Detachment of

the fan should limit the risk that good quality sands will continue up onto the shelf, somewhat reducing

trap risk. The right panel of Figure 16 illustrates FOGLs belief that the source rock lying immediately

under the prospect should be in the oil window, although there remains significant uncertainty on the

geothermal gradient in this area, as discussed above.

As well as Humpback, FOGL and Noble Energy have identified several other prospects and leads. The

interpretation of four other prospects has advanced as far as the stage of determining volumetrics, as

shown in Figure 16, below. These have an average size of c.240 mmbbls.

Figure 16: Prospect map and Cretaceous source rock maturity (for location see Figure 12)

Source: Falkland Oil & Gas


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The tilted fault block play

The second main play in the South Basin is that represented by the Darwin gas condensate discovery,

made by Borders and Southern in 2012. A prospect in this play is a candidate for FOGLs second well,

although the drilling schedule has yet to be confirmed and is likely to be contingent upon results of the

first well. Tilted fault block in this instance implies that hydrocarbons are sealed behind a fault, a

mechanism generally regarded as being lower risk that a seal based on a change in rock type as in astratigraphic prospect such as Humpback, above. By analogy to Darwin, the reservoir is anticipated to

consist of shelf rather than slope sands, which we think is also slightly lower risk than deposits on the

slope. However, the key negative at this close proximity to Darwin is the risk of gas and/or condensate,

the economics of which are likely more challenged than for oil: from regional tectonic considerations, it

is likely that the Tertiary fold belt to the south of the Falkland Islands has pushed the basins main, early

Cretaceous source rock down into the gas window. Falkland Oil & Gas has identified three prospects

and several leads in this play and sees 188 mmbbls (oil case) of prospective resources at one of them,

Scharnhorst North.

Figure 17: Tilted fault prospect inventory and amplitude extraction (for location see Figure 12)

Source: Falkland Oil & Gas


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The North Falkland Basin

A new oil play neededAs we discuss in detail in our investment case for Rockhopper Exploration, the equity story for the North

Falkland Basins upstream participants is dependent on Rockhopper and partner Premier Oil bringing ina partner for Sea Lion. The significance would come via a reduction in Premiers exposure to the

US$5+bn capital cost of the development, allowing it to proceed with reduced equity and therefore de-

risking Rockhoppers current 40% stake. In our view, one factor that could increase industry interest in

the basin and prompt a third party to farm in would be meaningful exploration success: however, beyond

the Isobel prospect there is probably only limited geological upside in the known plays. A new play is

likely needed, for instance an oil discovery in the deeper stratigraphy that has been only lightly explored

to date, but unfortunately for this thesis all four of next years wells will target the basins only proven oil

play, the Cretaceous F sands in which the Sea Lion field is reservoired (the F designation is a local

stratigraphic term and does not have wider geological significance). The fact that no new plays will be

drilled is somewhat discouraging, in our view, and effectively limits the possibility for transformative

exploration success in the North Basin next year to the Isobel well.

2015 drilling: a balance of riskPremier Oil will operate at least four wells in the North Falkland Basin, with the potential for additional

drilling in the event of success. Three wells will seek to de-risk oil volumes close to Sea Lion and would

either support a second phase of the development or, potentially, a standalone project. The remaining

well will test the lightly-explored southern part of the North Basin where the key undrilled prospect lies.

Figure 18: Firm North Falkland Basin wells in 2015

Source: Premier Oil


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Step-out exploration: Isobel area (55-243-933 mmbbls)

We think the likely commercial threshold for a second NFB development would be comparable to that of

Sea Lion, i.e. c.300mmbbls. As such, we think the highest impact exploration well in the North Basin

next year is that targeting Isobel Deep and under/overlying sands. As illustrated in Figure 19, the well is

targeting a southern sediment entry point into the NFB that is separate from the northern system seen at

Sea Lion, and is as yet undrilled. As such, it is one of the few remaining locations in the North FalklandBasin that could potentially yield a second Sea Lion and support a standalone oil development.

In our opinion, at a distance of some 20km, this prospect stack will be too far from the Sea Lion facility

for it to be tied back to it: a subsea flow line would have a high degree of operational risk given the

waxiness of the crude and the temperature of the surrounding water. Although there are encouraging

indications from seismic, given that the prospective reservoir interval has yet to be penetrated in this

southern part of the basin, the key risk on the well relates to the presence and quality of reservoir in this

southern sediment entry point. Meanwhile, we see the geological risk on prospect seal and charge as

being fundamentally similar to the proven part of the North Basin, i.e. moderate and low/nil respectively.

Figure 19: Isobel Deep geophysical characteristics

Source: Premier Oil

Near-field exploration: Zebedee stack (61-165-432 mmbbls)

The Zebedee prospect stack lies in the PL04b licence approximately 10km south of the anticipated

location of the Sea Lion tension leg platform (TLP). We think it likely that any hydrocarbons in this region

could be tied back to the Sea Lion TLP if it were to be designed with sufficient topsides flexibility. It is on

the west side of the regional saddle that continues into the Sea Lion area and contains eight stacked

exploration objectives in the Cretaceous F sands, with mid-case prospective resources of 165 mmbbls.

Figure 20: Zebedee prospect stack

Source: Rockhopper Exploration


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Near-field exploration: Jayne East stack (23-73-232 mmbbls)

Located some 7km south east of the anticipated location of the Sea Lion TLP and in licence PL04c, the

Jayne East well will target a series of five stacked sands that are anticipated to contain low, mid and

high case gross prospective resources of 23-73-232 mmbbls. According to Falkland Oil & Gas, the key

geological risk on the prospect is the competence of the up-dip seal in this stratigraphic trap. We

understand that at this distance, the field could be tied back to the Sea Lion TLP.

Figure 21: Jayne East prospect stack


Appraisal: does Sea Lion have a gas cap? (60 mmbbls)

The key remaining uncertainty over the potential oil volume at Sea Lion is whether or not a gas cap

exists in the sparsely appraised western flank of the field. Gas has been identified in structural highs to

the south, for instance at Beverley (well 14/15-4), but not yet in the fields main reservoir. The presence

of oil instead of the currently-assumed gas would add c.60mmbbls to the current 308-mmbbl Sea LionPhase I resource estimate and would therefore have a direct impact on development planning at the

asset. If the well confirms a gas cap, the area would be instead be used for gas disposal. The well will

also provide further data on the stratigraphy and reservoir quality at the feather edge of the field.

In addition to resolving the gas cap uncertainty, it is planned to deepen the well into the F3 interval to

test a relatively small (4-19-80 mmbbls gross) potential reservoir interval known as Chatham.

Figure 22: Sea Lion gas cap appraisal / Chatham



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Appendix 1: Fiscal regime and asset model

Falkland Islands Economy and Fiscal RegimeThe Falkland Islands economy generates GDP of c.US$165m (2007 estimate) and is based largely

upon squid fishing (52.5%), tourism and services. The Islands have a population of around 3,000, givingper capita GDP of US$55,000, and are a British overseas territory, self-governing and fiscally

independent from London. The Falkland Islands Government (FIG) has a budget of c.US$90m and is

projected to run a deficit of c.US$6-8m/yr to 2019, the year before we anticipate that the Islands first oil

development, Sea Lion, comes on stream (the operators projections are a year more optimistic). Due to

the very small size of the existing economy, oil development is set to have a transformative effect on the

finances of the Falkland Island Government. As an illustration, we estimate that the Sea Lion project will

generate at least six years of taxation revenue in excess of US$400m.

As a result of the potentially outsize influence on the public finances, FIG has been able to implement

an attractive oil and gas fiscal regime in an attempt to make the Islands a viable destination for oil and

gas exploration and development. Like its UK counterpart, FIG uses a tax and royalty system rather

than production sharing contracts, meaning the benefits (and costs) of oil price volatility will tend to

accrue to the operator. While this has the advantage of simplicity, in an uncertain oil price environment,

we think the potential volatility is a negative factor in perceptions of the region as an investment

destination. Nevertheless, with a royalty rate of 9% and a 26% corporate tax rate, by international

standards the resultant government take of 44% (for Sea Lion at US$100 oil) is still extremely low.

Sea Lion Asset ModelWe currently model the Sea Lion tension leg platform reaching first oil in 2020. This assumes a one-

year delay relative to current operator estimates. In our model we have assumed capital costs of

US$5.8bn (US$19/bbl) for the 308 mmbbl Phase I development, consisting of US$4.1bn in surface

facilities and topsides and US$1.7bn in drill ing costs. This is around 10% more pessimistic than operator

estimates. We forecast fixed opex of US$200m/yr and variable opex of US$2/bbl. We have assumed a

field-specific oil price discount of 6.5% to Brent. At US$100 oil, our assumptions yield a per-barrel NPV

of US$6.9 at a 10% discount rate. Production and contractor cash flow profiles are shown in Figure 23,

below. A sensitivity table of NPV to oil price and discount rate is shown in Figure 9.

Figure 23: Sea Lion production and CF forecast

-60

-40

-20

-

20

40

60

80

100

120

(2,000)

(1,000)

-

1,000

2,000

3,000

4,000

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

2034

2035

2036

2037

2038

2039

2040

2041

2042

2043

Pro

duc

tion,

kbbls/d

Con

trac

tor

CF

,US$m

/yr

Contractor cashflow Oil Production, kbbls/d



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Appendix 2: Argentina and the Falklands

PoliticsUnder the administration of Christina Fernandez de Kirchner (2007-present), the question of Falkland

Islands sovereignty within Argentina has become a politicised topic, to some degree. The extent ofnationalist sentiment over the issue reached a high in 2012, with a significant, British-led oil exploration

campaign taking place and that year also representing the 20th

anniversary of the Falklands conflict.

While a number of acts made headlines, including the proposed re-naming of the countrys football

league after General Belgrano, as well as an Olympics-related viral video, the actual political fallout was

relatively limited. Argentine efforts to create a degree of Latin American unity on the issue were largely

unsuccessful, with Mercosur, a regional trade block, failing to implement an economic blockade of the

Islands and the issue failing to gain much traction at the United Nations. Furthermore, the entry of US

company Noble Energy to the region in 2012 was perceived as providing a degree of State Department

backing for the status quo. Islanders held a referendum in March 2013 to illustrate their desire to retain

their position as a self-governing British overseas territory, with 99.8% of voters in favour.

Despite two years of relative calm, the sovereignty question may be expected to arise once again as an

exploration drilling rig sails over the horizon next year. The topic will come before Mercosur again in

November 2014, with Argentina expected to lobby heavily for members to show a unified front (the

second topic up for debate at this session is the vexing issue of vulture bond funds). Nevertheless, we

think there is limited potential for political actions alone to have a meaningfully disrupting effect on oil

operations, at least within the exploration phase.

Effect on the oil & gas industry

As a result of the sentiment described above, Argentinas official position is hostile to Falklands

operating companies, as well as their investors and advisors. The most tangible way that this hostility is

manifested is via a logistical impediment to the transport of manpower and materiel. Oil and gas

operations cannot be supported from the South American mainland and, due to the preponderance ofBritish companies active to date, have thus far tended to be supplied from Aberdeen. While for normal

activity this makes very little difference, it does have the effect that emergency resupply (in the case of

damaged or missing equipment, for instance) is a more costly affair than normal.

As a means of reducing costs, Noble Energy and Premier Oil have begun construction of a temporary

floating dock facility in Stanley Harbour, which effectively consists of a barge (known as the Noble

Frontier). This allows Stanley to act as a more effective forward supply base for exploration activities.

The Vaca Muerta as an exploration destinationDiscounting questions of logistics, perhaps the most significant above-ground threat to Falklands

exploration, in our view, relates to Argentinas Vaca Muerta shale in the Neuquen Basin. This thickdeposit represents one of the pre-eminent unconventional oil resources outside of the United States. It

offers an alternative and, given the above, in all likelihood mutually exclusive destination for international

oil companies (IOCs) to spend exploration dollars, and with a number of such companies (ExxonMobil,

Shell, Chevron and, potentially, Gazprom) already present, we think the rest of the big players could

seek to avoid the Falklands for now.

While this is a potential problem for both the North and South Falkland Basins, we think that, due to the

unique capital requirements of deep water exploration and development, it is a more significant

impediment for the South Basin in particular. In our view, this could restrict the calibre of farm-in partner

to those in the larger mid-tier, for instance Noble Energy which already has a stake in the basin in

partnership with FOGL. As the discoverer of big gas fields offshore Israel, it is perhaps no exaggeration

to suggest that Nobles exploration model has been to go where its IOC peers fear to tread.


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Appendix 3: Selected Board and Management

Borders and Southern PetroleumHarry Dobson, Non-Exec Chair:Harry Dobson is a former investment banker and senior partner of

Yorkton Securities. He currently engages in various merchant banking and venture capital activities inNorth America and Europe, and has acted as Chairman of a number of resource companies (including

American Pacific Mining Company Inc. and Lytton Minerals Limited). He is currently the Chairman of

Kirkland Lake Gold Inc. (a Toronto Stock Exchange and AIM quoted company) and Rambler Metals and

Mining plc (an AIM quoted company). He is experienced in the organisation and funding of resource

projects, including those located in inaccessible locations.

Howard Obee, CEO: Howard Obee was appointed Chief Executive when the Company was

incorporated in June 2004. He has a PhD in structural geology from Imperial College and has spent 29

years in the oil industry, initially with BP (19851992), and subsequently with BHP Billiton (19922004).

He trained as an exploration geologist and has held numerous technical and commercial roles,

incorporating exploration, new ventures, strategic planning and business development. He has

experience of executing seismic and drilling programmes in frontier basins, including those in deep

water.

Peter Fleming, FD:Peter Fleming has over 22 years of upstream oil and gas experience, the majority

of which was gained at BHP Billiton both in London and Melbourne. Whilst at BHP Billiton, Peter held

senior positions in exploration and business development, investment evaluation, acquisitions and

disposals and strategic planning. Prior to joining BHP Billiton, he worked for Bridge Oil and Banque

Indosuez. He holds masters degrees in business administration and finance.

Falkland Oil & GasRichard Liddell, Non-Exec Chair:Operations Director on the Board of Premier Oil from 1999 before

joining the Board of FOGL in March 2005. He has many years experience in the oil and gas industry

and prior to Premier Oil; he spent two years as Director of Development at BG Exploration and

Production. He previously held a number of senior international positions during an eighteen year

career at Phillips Petroleum.

Tim Bushell, CEO:Tim Bushell joined FOGL in January 2006 and the Board in February 2006 from

Paladin Resources plc where he was Managing Director, Norway, from 2001. Tim joined Paladin

Resources from Lasmo where he worked for 10 years, including spells as Manager of Lasmos North

Sea assets and General Manager of its South Atlantic business unit, which included the drilling

campaign in the North Falklands Basin in 1998. Prior to joining Lasmo, Tim spent time at Ultramar,

British Gas and Schlumberger. A qualified geologist, he has over 30 years experience in the oil and gas

industry. He is also a non-executive director of private Norwegian oil and gas company Core Energy.

Colin More, Exploration Director: Colin More joined FOGL in April 2006 and has over 30 years

experience in the oil and gas industry. He joined FOGL from Paladin Resources plc where he was the

Exploration Manager in the UK. Prior to Paladin, he was the Exploration Manager at Cairn Energy,

initially responsible for China, before moving on to India. Colin has previously worked in technical

positions at Conoco and Scott Pickford. He joined the Board of FOGL in March 2009.

Timothy Jones FCA, Non-Exec Director: Timothy Jones qualified as a Chartered Accountant with

Price Waterhouse where his clients included a major UK offshore oil and gas operator. He left Price

Waterhouse to join a client as Financial Director before founding his own accountancy and consultancy

practice. He now has clients in a range of business sectors and sits on the boards of a number of

companies, including AIM-quoted Xcite Energy, of which he is the Chairman.


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Rockhopper ExplorationDr Pierre Jungels CBE, Non-Exec Chair: Dr Jungels, a certified engineer with a PhD from CALTECH,

was CEO of Enterprise Oil Plc from 1996 to 2001, MD of Exploration and Production for BG Plc in 1995

and has worked for 23 years with Petrofina SA including eight years on the main board. He is a non-

executive Director of Baker Hughes Inc. and is Chairman of AIM-quoted Velocys plc. He was twice

President of the Institute of Petroleum, from 1987 to 1989 and 2002 to 2003.

Sam Moody, CEO: a co-founder of Rockhopper and responsible for building and managing the group

from its formation in early 2004. He previously worked in several roles within the financial sector,

including positions at AXA Equity & Law Investment Management and St Pauls Investment

Management.

Fiona MacAulay, COO: Fiona MacAuley isa geologist with over 25 years of experience in the oil and

gas industry including time at Mobil, Amerada Hess and BG. She joined Rockhopper in 2010

immediately following the Sea Lion discovery and was an integral member of the team which managed

the appraisal of the Sea Lion field and discovered the Casper, Casper South and Beverley fields. Ms

MacAuley was appointed to the Board in March 2013.

Stewart MacDonald, CFO: Prior to joining Rockhopper, Mr MacDonald was a Director in Rothschild's

global oil and gas group and spent twelve years advising clients in the sector on a range of M&A

transactions as well as debt and equity financings.He was appointed to the Board in March 2014.


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Recommendation history

Premier Oil plc Falkland Oil and Gas Limited Borders & Southern Petroleum plc

Date Recommendation Date Recommendation Date Recommendation

As at 23-Oct-2013 BUY Initiated today: BUY Initiated today: HOLD

Rockhopper Exploration plc.

Date Recommendation

Initiated today: HOLD

Disclosures on interests

A contributing analyst, or a relevant employee who had or could reasonably be expected to have access to the substance of the research recommendation prior to itsdissemination, has a personal shareholding or other significant financial interest in the securities of the following issuer(s): Premier Oil plc and Rockhopper Explorationplc.Oriel Securities is a market maker or liquidity provider in the securities of the following issuer(s): Borders & Southern Petroleum plc, Falkland Oil and Gas Limited andPremier Oil plcOriel Securities has been lead manager or co-lead manager over the previous 12 months of a publicly disclosed offer of securities of the following issuer(s): Falkland Oiland Gas LimitedOriel Securities is party to an agreement with the following issuer(s) relating to the provision of investment banking services (including, for example, broking and financialadvisory roles) and the agreement has been in effect over the previous 12 months or has given rise during the same period to a payment or to the promise of payment:Falkland Oil and Gas LimitedOriel Securities is party to an agreement with the following issuer(s) relating to the production of research, although the timing and content of the research is exclusivelythe preserve of the analyst: Falkland Oil and Gas Limited

Certifications

I, Robin Haworth, certify that the views expressed in this research report accurately reflect my personal views about the subject securities or issuers, and I, Robin Haworth,

certify that no part of my compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this research report.


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Documents

14 10 24 Oriel Falkland Island Explorers.pdf