Hartshead Resources NL (ASX: HHR): Delivering a re-rating farm-in transaction

• Hartshead is farming out 60% WI of its UK assets to RockRose Energy for a combination of cash (US$34.4 mm/A$52.9 mm) and net free carry (US$61.8 mm/A$95 mm) for Phase I. A further US$5.9 mm cash payment is contingent on the NSTA approval of the FDP for the Phase II Lovelace or Hodgkin. RockRose currently produces ~27 mboe/d in the UK North Sea.
• The fact that a proportion of the proceeds is in cash (US$34.4 mm/A$52.9 mm) allows Hartshead to directly fund a larger share of capex and capture the generous tax benefits on UK capex. ~90% of UK capex can be deducted from payable taxes. If this amount had been provided as net carry, RockRose would have kept the associated tax benefit (~US$31 mm/A$48 mm).
• Hartshead is also raising A$20 mm of new equity priced at A$0.04 per share to boost the balance sheet.
• The total cash and net carry that Harshead is receiving amounts to ~US$96 mm/A$148 mm or A$0.053/sh. This is well above the price of the equity raise. Adding the tax benefits would lead to overall net proceeds for the Phase I farm-out of ~US$128 mm/A$196 mm of A$0.07/sh.
• The read through value of the retained 40% in Hartshead’s UK assets is US$64 mm/A$99 mm (A$0.035-0.047/sh).
• Overall, this transaction provides an industry valuation on Harsthead’s equity of A$0.088-0.117/sh, which is well above the current share price. it also provides Hartshead with enough funding to reach first gas.
• As we incorporate the impact of the farm out and the equity issued in the placing, we have changed our target price to A$0.17 per share.

Cash flow waterfall and capex programme
Hartshead will receive US$7.9 mm/A$12.2 mm on completion of the farm-out. From FID, expected in 3Q23, RockRose will carry Hartshead’s net development cost for up to US$61.8 mm/A$95 mm. At FID, RockRose will also pay Harthead A$9.8 mm with a further cash payment of A$31.7 mm on FDP approval later in 2023. Gross capex to first gas is ~£200 mm/US$250 mm (£80 mm/US$100 mm) net to Hartshead which can be funded by the proceeds from the divestment and the equity raise. A further £150 mm/US$185 mm (£60 mm/US$75 mm net to Hartshead) is required post first gas to fully develop the field. This will be funded by a combination of debt and cashflow.

Valuation
The NPV of the farm-out is very close to what we were assuming. As we now increase the chance of Phase I development to 100% but incorporate the impact of the equity raise, our new Core NAV is A$0.13/sh with a ReNAV including Phase II of A$0.17 per share.