Rockrose Energy; thoughts ahead of return from suspension and listing on main market this morning

Rockrose Energy (RRE.L, Market Cap £103m, Suspended at 815p, 4.1% of JIC Portfolio and 0.0% of JIC Top 10)

Return from suspension and listing on the main market tomorrow!

The first things to say is that there are a lot of much cleverer people out there than me, (including the person who first brought RRE to my attention). I have done a lot of reading over the last few days, and my thoughts here are informed by much of that ‚Äúexpert‚ÄĚ input.¬†

The prospectus was published on Friday which made interesting reading yesterday, all 200 odd pages.

A couple of things stood out. Rockrose is very clear that it plans to do further deals, but¬†in July next year, it loses¬†‚Äúoperator status‚ÄĚ of the fields being acquired. That means it will not be in control of the time table re-decommissioning of the fields. It also means that without being an operator, it may have to jump through greater regulatory hurdles when it comes to future acquisitions. Expect,¬†therefore, an acquisition before July 2020 to maintain its status as an operator.

This morning, one of its two brokers published a note with a target price of 3679p.  That’s all very nice but seems to be extremely conservative. For a start, one of my experts points out that the note stops modelling cash flow at 2025, (by which stage it will have net cash of $1.25bn). That seems odd given that the lives of some of the acquired fields continue until at least 2030 and at that stage, it will still have 26m barrels of P1 and P2 reserves. It will also have contingent reserves, some of which will hopefully be proved up. He also believes that the Whitman Howard note fails to take account of the cash flow it generates from ownership of the network of pipelines.  Also, he reckons that it has over-estimated, by £211m, the net decommissioning charge to Rockrose. He thinks that they have failed to adjust the charge for its deferred tax asset (Petroleum Revenue Tax can be offset against decommissioning charges).

Another way of looking at it is to say that net cash should be $500m by the end of next year and that should cover future decommissioning charges. If you then value its 54m barrels reserves at $10 per barrel and contingent reserves at $2 per barrel, and then put a PE of 7.0x on its pipeline cash flow and add the deferred tax asset of $257m, you get to a valuation of £43 per share. That does not include the potential to add value through deploying generated cash in further value-enhancing deals or through field life extensions and upgrades to reserves.

For what its worth Simply Wall Street reckons it is worth £85 per share based on future cash flows!

The main risk is a collapsing oil price, which would mean that fields became less economically, viable. That would mean the free cash generated would be less and that decommissioning would be brought forward; a double whammy hit! Also, although so far it has made what looks like value-enhancing deals it could in future, slip up.

It should be an exciting day, and as the prospectus warns, the shares may be very volatile. Andrew Austin, the CEO, owns 27.21% and other directors a further 4.07%. I do not see them selling any shares, so that’s 31% tied up. Cavendish Asset Management own 13.87% and Macquarrie, 5.7% and along with some private investors, may decide they have too much and might be a source of selling. No one knows where the share price will open, where it will go intra-day and where it will close. To my mind, the best approach is to worry about where the share price might be in six months or so. I would hope, based on the current oil price, that it will be around £50 per share. 

In the short term, including tomorrow, the only thing that will cause me to reduce my position will be its proportion of the portfolio. i.e. risk control. (Remember I already have 4.4% in Serica Energy and 3.1% in Diversified Gas & Oil)

My plan:
All things being equal, if the share price hits £24, it will be 11.0% of the Portfolio. Given that I think it would be giving the shares away at that level, I’ll stick. At £32, it would be 14.1%; at around that level, I will look to sell about 20% of my holding. If it pushes on towards £40 per share, I will look to sell another 20.0%ish. It would still be well over 10.0% of the portfolio. 

There is a risk that I do nothing tomorrow if the share price only gets to £20, for instance. After all, when it was suspended in February, although it had some momentum the shares looked very undervalued. As an aside, since being suspended 149 days ago, it has generated another £70m of cash or over £5 per share! There is no guarantee that the market will not again, undervalue the shares, although given its status as a major North Sea producer post the Marathon acquisition, and its listing on the main market, there should be much more interest.  

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