Penny stocks are high-risk, high-reward investments. Accordingly, they’re not for faint-hearted investors who aren’t prepared to embrace considerable volatility. However, some also offer big potential for huge share price appreciation, provided all goes to plan.
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.
