Rockhopper Exploration, the oil and gas company with key interests in the North Falkland Basin, announces its entry into a funded participation agreement with a  regulated specialist fund with over $4bn in investments under management that has experience in investing in legal assets to monetise its ICSID Award, in relation to the arbitration against the Republic of Italy relating to the Ombrina Mare oil field. The Award was previously announced on 24 August 2022.

Key terms of the Agreement

• Rockhopper to retain legal and beneficial ownership of the Award
• Under the terms of the Agreement, the Specialist Fund will make cash payments to Rockhopper in up to three tranches:

Tranche 1 - Rockhopper will retain approximately €15 million of an upfront payment of €45million on completion. As previously disclosed, Rockhopper entered into a litigation funding agreement in 2017 under which all costs relating to the Arbitration from commencement to the rendering of the Award were paid on its behalf by a separate specialist arbitration funder (the "Original Arbitration Funder"). That agreement entitles the Original Arbitration Funder to a proportion of any proceeds from the Award or any monetisation of the Award. Rockhopper has entered into an agreement with the Original Arbitration Funder to pay €26 million of the Tranche 1 proceeds to discharge all of its liabilities under the agreement with the Original Arbitration Funder. In addition, Rockhopper is due to pay certain success fees to its legal representatives. After making these payments, Rockhopper will retain approximately €15million of the Tranche 1 payment and 100 per cent of all Tranche 2 and 3 payments.

Tranche 2 - Additional contingent payment of €65 million upon a successful annulment outcome. Should the Award be partially annulled and the quantum reduced as a result, then Tranche 2 will be reduced such that the amounts under Tranche 1 and Tranche 2 shall be adjusted downward on a pro-rata basis. For example, if the quantum of the Award is reduced by 20%, then the amounts under Tranche 1 and Tranche 2 shall be reduced by 20%. For the avoidance of doubt, the amounts under Tranche 1 and Tranche 2 shall not reduce below €45m in any circumstance.

Tranche 3 - Potential payment of 20% on recovery of amounts in excess of 200% of the Specialist Fund's total investment including costs.

• Tax will also be payable on Rockhopper's share of the proceeds from the monetisation of the Award. These calculations are complex and are unlikely to be resolved for some months but Rockhopper currently estimates that the approximate effective tax rate of between 10-15% is likely.

The Specialist Fund will cover all costs related to the Arbitration from the date of this announcement.

Benefits of the agreement

• Materially strengthens Rockhopper's balance sheet with no dilution to shareholders
• De-risks the Award process while maintaining potentially significant upside
• Removes future costs associated with the Award
• Accelerates monetisation when compared to Rockhopper challenging the annulment itself and seeking to enforce against the Republic of Italy, which could take several years
• Allows Rockhopper to focus on its core opportunity in the Falkland Islands

Proceeds from the monetisation will be used by Rockhopper for both working capital, general corporate purposes and towards Rockhopper's equity funding requirements in relation to developing the Sea Lion oil field

Under the terms of the previously announced arrangements with the Falkland Islands Government, it remains the case that Rockhopper is prevented from making distributions, including any form of dividend or share buyback.

Samuel Moody, Chief Executive of Rockhopper, commented:
"We are delighted to be able to announce this transaction which provides near-term certainty for Rockhopper and de-risks our exposure to the annulment process, while maintaining potentially significant upside exposure both to a successful annulment outcome and eventual recovery.   

In the meantime, work continues refining the phasing of the Sea Lion development in the Falklands and we will make further updates to the market as appropriate. We are hopeful that this new funding will largely or entirely fulfil our equity requirements for Sea Lion which will only become clear once the project and financing have been finalised."

Simon Thomson, Non-Executive Chairman, commented:
"We are aware of a number of international arbitration awards against the Government of Italy where payment remains outstanding.  Given this background, and the circumstances of our own dispute, we are therefore pleased to have entered into this agreement, allowing us to secure material value now and remain exposed to future upside in the hands of experienced professional litigators. We look forward to redeploying this capital in Sea Lion which continues to offer significant value for shareholders."

KeyFacts Energy: Rockhopper Exploration Italy country profile