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05/8/2020
21:16 | thewheeliedealer: Hi all,
A few weeks ago my mate Peter @Conkers3 and myself did a ‘Twin Petes Investing’ Session as a ‘Live’ bit of the MelloVirtual Conference. This was a ticket-only gig but fortunately we have been allowed to share the Recording of the audio with our Listeners.
Among plenty of other things with an educational bent, part of our discussion includes RRE. Anyway, if you use Apple, Audioboom, Overcast or Spotify you can find it under the 'Conkers Corner' Channel (you want TPI Podcast 28) and you can find it on Soundcloud at the link below.
I hope you enjoy it and find it useful,
Cheers, WD
@wheeliedealer
hTTps://soundcloud.com/user-479955511/conkers3-wheeliedealer-mellovirtual-live-no28-boo-amzn-nxt-rre-gaw-fdev-asc-ftse-100
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06/7/2020
09:30 | cpap man: Perhaps a new home for all you rich RRE shareholders ?!?!?
Namely AIM listed UOG / LSE:UOG
In a new research note out today on LSE:UOG brokers Cenkos have increased their share price target from 7.3p up to 9.5p
We value United’s portfolio (minus Jamaica) at US$91.3m, c4.5x its current market cap. Unrisked, we value United’s entire portfolio at US$321.7m (including Jamaica) or 34.9p per share, >16x United’s current market cap. We set our target price in line with our risked valuation (minus Jamaica) at 9.5p, a 280% premium to the current share price and reiterate our BUY recommendation.
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22/4/2020
12:37 | newkotb1: Think the fact RRE are trading at 65% discount to CASH atm, has more than fed through to RRE. Sure CostaX will put me right has as he's on filter (for being a tool) I guess he has already today been going on about Brent and waiting for RRE to fall to his 100p entry and how oil is now dead and end of the world is upon us....lol... for reference you need to look at production mix, hedges in place, opex costs, the fact RRE has no debt to see where the share price will go from here, esp once AA does his next deal ... which could be ANY DAY NOW....atb aimo
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19/4/2020
14:06 | newkotb1: dragon, absolutely correct, buy now and without a doubt POO will be substantially higher in 12-24 months, the Saudi's and Russian's will ensure that imo. Having held through the fall and bought more on dips, never in my wildest nightmares would I have thought RRE would go sub £5 (pre Marathon deal), but she did and many lucky investors were able to jump aboard. I would be more than happy for RRE to do another RTO deal .... AA will be on the acquisition hunt that's for sure, just a matter of when not if ...Remember RRE currently trading at 65% DISCOUNT to cash in the bank.....atb
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16/4/2020
10:01 | newkotb1: "Coming from the guy who said: lol, RRE have $2bn in HMRC authorized tax rebate.." Absolutely correct .... for those that have taken the time to research RRE, you will find this is 100% correct. HMRC have authorized RRE to off-set $2bn of paid taxes against decom liabilities. Now, anything else you are worried about.
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08/4/2020
08:06 | tkamp: Pretty remarkable that RRE is still down ~60% from where it was before the Corona-crash began vs. ~35% 'only' for majors like Shell and Total. While RRE may have on average higher production costs per barrel than Shell or Total it has a huge amount of cash on its balance sheet, whose value is unaffected. The overall asset mix of RRE is much less risky than that of Shell or Total. If anything, RRE stock should be outperforming oil majors, not massively underperform.
I swore to never take a position in oil-companies and I looked at RRE before (about half a year ago) and like any other oil company I ever looked at I didn't like it enough to invest. A week ago I actually took a position in RRE though. As much as I hate investing in oil, these shares are just way too cheap. Too good an opportunity.
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26/3/2020
10:18 | tidy 2: Dont take any notice of that blurt RRE is future proof and hedged much higher than todays poo The Company has hedging in place to support its current capital expenditure commitments. RockRose hedged 455,000 barrels of oil hedged at $65.70 per barrel for Q1 2020 and 63 million therms of gas at EUR0.53 per therm (49p/therm) for calendar 2020. Looking further ahead, an additional 54 million therms has been hedged in each of 2021 and 2022 at EUR0.41 and EUR0.45 per therm (38p and 42p) respectively.The Company has previously guided that capital expenditure in 2020 would be c.$200 million, with much of that earmarked for the development of the Shell-operated Arran gas/condensate field. However, other discretionary spending is being reviewed and it is anticipated that at least $50 million of this capital expenditure will be deferred, a drop of 25% and in line with other businesses.Based on the strength of the Company's cash position, the hedging it has in place, and the flexibility of its capital expenditure commitments, the Board of Directors still expects to recommend the payment of a final dividend of 25p per share, bringing the total for 2019 to 85p.
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07/3/2020
16:38 | bobby1904: I've been reading so much amateur rubbish posted on RRE last few days that it's depressing. Some facts (rather than the usual fictional rubbish spouted) for people to dwell on:- RRE has no debt. It has c.$315m+ FREE cash (ie after deducting $55m restricted cash). It's average OPEX is c.$22 per barrel. Even after adding in CAPEX + ABEX (ie Abandonment costs) it still only goes to c.$44 per barrel. It's 2020 CAPEX programme + budgeted Abandonment expenditure would still leave it over £100m (sterling) even assuming the oil price never recovers and the return on this CAPEX is a whole year of progress on their 7 well programme (West Brae, Arran, etc) all of which add to their resources and work towards lifting 2021 production materially from the current level of 21,000 bblpd. However, the reality is that a mixture of the hedging they have in place and the likely recovery of the oil price at some point in the next 12 months, this picture can improve materially. They paid a dividend on 60p last autumn and due a further expected 25p after full year results. Andrew Austin (Exec Chairman) holds 27% of the shares so is extremely well aligned with Shareholders. People who have simply sold due to the oil price drop have massively misunderstood how undervalued the company was before the corona issue arose. At an share price of £18 it was already only trading at a price equivalent to its free cash balance (ignoring the rest of the business completely). I've seen comparisons made with Tullow and that just demonstrates the moronic and amateurish level of commentary here! Tullow is a totally different beast. It operates in completely different geographic/political/risk environments and is loaded to the hilt with a mountain of debt and its senior team just kicked out. For those with actual cash (as opposed to poxy margin traders) and with some patience to take a medium term view there aren't many better stocks than this in the O&G space at this sort of mkt cap. This share price is ludicrous (30% discount to its free cash!!) and even if it dips lower before recovering, there is a big upside to be made without the need to be concerned about cashflow/funding, etc.
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05/3/2020
19:13 | 1vrod: Rockrose revisited at 1.5 times forecast earnings
4:30 pm by Jack Brumby
4 comments •604 Reads
Since reaching a high of 2,230p on January 16th, the Rockrose Energy (LON:RRE) share price has tumbled by 35%. Today its market cap stands at £191m. Its recent update presentation shows a cash hoard of some $371m ($55m of which is restricted). Converted at current rates, that is £289m, or 151% of its market cap. Strip out the $55m of securitised cash, and the remaining $316m (£246.5m) is 129% of market cap.
Priced at just 1.5 times forecast earnings and 2.8 times trailing twelve month free cash flow, you’ll be hard pressed to find a cheaper stock than this North Sea oil & gas producer on an earnings and cash flow basis.
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When you find a company on this sort of valuation, usually it is either worth nothing or it is worth multiples of its current price.
Why is Rockrose so cheap? In a word: decommissioning. Rockrose is assembling a collection of mature north sea oil and gas operating assets. The key word here is mature. When oil and gas assets stop producing, wells need to be plugged up and pipelines must be cleaned. It’s an expensive business.
RockRose says in its most recent update to shareholders that it has an Abandonment Half-Life (the date at which half of RRE’s abandonment expenditure has been incurred) of 2030. Operators are quickly getting better at extending the lives of these assets, however.
The group says it has 82MMboe of 2P + 2C Reserves and is “designed to do business in the harsh environment of sub-$50 per barrel oil prices”. If you put that into practice then, and apply a price of $40 to its barrels of oil equivalent, you calculate that this £191m market cap company is sitting on about $3.28bn of proven and probable reserves.
RockRose could well be worth many times more than 1.4 times forecast earnings, but getting to grips with this quickly evolving company is tricky...
A step up in profitability... and uncertainty?
Halfway through 2019, RockRose purchased Marathon Oil. This was a material acquisition. Looking at the indicative financial statements presented in the 2019 prospectus (page 105), we can see that the Dyas and Marathon acquisitions would have changed FY18 income statement:
Revenue from $153m to $603m
Operating profit from $25m to $350m
Profit for the year from $39m to $230m
It also transformed its capital structure:
Cash went from $68m to $269m
Restricted cash grew from $53m to $103m
A c$500m pension fund (currently $83m in surplus) was inherited
Total provisions for liabilities (mainly decommissioning) grew from $370m to $1,243m
In January the group updated to say it has net cash of $371m, $55m of which is restricted.
What is becoming clear here is that accounting subjectivity might be weighing down the RockRose share price. Oil and gas reserves are subjective estimates. Decommissioning liabilities are subjective estimates. Pension fund liabilities are subjective estimates. And each of these estimates are worth hundreds of millions of dollars to RockRose.
This introduces a significant level of investment risk. To some, it will be a tolerable level of risk and to others it will be unacceptable. I see why RockRose shares are cheap, but are they too cheap?
Given RockRose’s relatively short track record and rapidly evolving profile, it is tricky to piece together an up-to-date picture of the underlying health and operations of the enlarged company. The timing of the Marathon acquisition is slightly frustrating as it falls just outside of the HY19 reporting period. Consequently, RockRose’s much-changed capital structure has yet to be confirmed in any official accounts.
Last year, RockRose released its annual report on the 30th of April so this suggests we will have more information on the enlarged group around that time.
Looking into the pension fund
The inherited pension fund is significant. As at 31 December 2018, on an accounting basis, the pension fund had:
$511m of liabilities,
$594m of assets, and
An $83m surplus.
In the 2019 Prospectus, RockRose says:
To manage and curtail risks associated with the DB Scheme the Company intends to advance proposals to move the DB Scheme to a full buy-out position in the near term. This involves transferring all of the DB Scheme to an insurance company who will, in return for a lump sum payment, take over the DB Scheme and all of its liabilities to the members. Completing a buy-out process is subject to certain specific risks, primarily the agreement of the cost of such a transfer and determining the agreement to such a process from the transfer of the DB Scheme.
For shareholders, this introduces more uncertainty. How much will this lump sum payment be? And if it is too much to pay, what then?
In note 24 of the 2019 Prospectus, we see that “MOUK agreed a funding plan with the trustees whereby annual contributions of £13,000,000 will be made until 31 December 2020.” I am assuming this commitment has been transferred to RockRose.
The fact that MOUK agreed to make annual contributions of $13m annually suggests the pension fund was in deficit at the last actuarial valuation (carried out on 31 March 2016). The fund is probably due another actuarial valuation now, and any changes to assumptions here could lead to a widening or narrowing deficit. This is more relevant than ever given increased talk of interest rate cuts.
There is no mention at all of any pension fund in RockRose’s January update. Unless I have misunderstood the situation here, I’m not sure this risk has been clearly communicated to investors. I would welcome greater clarity on this point.
Digging into decommissioning
The UK Continental Shelf (UKCS) is mature by global standards and this fact brings forward the specialised task of decommissioning assets at the end of their economic life.
The challenge is significant: it will cost billions and span decades. The government and various bodies are aware of this fact and there are powerful, coordinated forces trying to manage the issue. Estimates of scope, complexity and cost vary but there are over 320 fixed installations, over 3,000,000 tonnes of structure, over 75,000 tonnes of subsea structures, over 20,000km of pipeline and approximately 4,000 wells along the UKCS.
All of this must be decommissioned or re-used. According to the Oil and Gas Authority, the decommissioning activity is likely to peak in the early 2020s.
Source: OGA UKCS Decommissioning 2019 Cost Estimate Report
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The current mid-point cost estimate for UKCS decommissioning to 2050, prepared by an independent industry expert for the OGA and DECC, is approximately £47bn (in today’s money), with a stated uncertainty range of +/-40%.
There are some key players to be aware of when it comes to decommissioning, namely:
The Department for Business, Energy, & Industrial Strategy (BEIS)
The Offshore Petroleum Regulator for Environment and Decommissioning (OPRED), and
The Oil & Gas Authority (OGA)
The responsibility for ensuring that the requirements of the Petroleum Act 1998 are complied with rests with the Offshore Petroleum Regulator for Environment and Decommissioning (OPRED) which sits within the Department for Business, Energy and Industrial Strategy (BEIS).
The OGA works with BEIS to assess decommissioning programmes on the basis of cost, future alternative use and collaboration.
The OGA established an important document - The Maximising Economic Recovery Strategy for the UK (MER UK) - that seeks to significantly reduce decommissioning costs through increased efficiency, innovation, and industry transformation. In the graphic above, you can see that already 2019 cost estimates are lower than 2018 estimates.
The OGA has set an industry target to reduce the cost of decommissioning by some 35%, down from £59bn to £39bn. This cost reduction is consistent with other industries like automobiles and aviation. It goes into detail regarding how this might be accomplished on this microsite.
In July 2019, the OGA published a new cost estimate report. In it, the agency says that operators are rapidly getting better at providing greater certainty of actual UK decommissioning costs and several have already achieved significant cost savings. This all sounds positive for RockRose.
P50 cost estimates have fallen every year as the OGA strives to meet its cost reduction target:
2017 - £59.7bn
2018 - £55.7bn
2019 - £49bn
Is the government doing our due diligence for us?
The BEIS says, in Assessing the Financial Capability of Offshore Oil and Gas Companies to Deliver Decommissioning Obligations, that it must be confident that relevant parties are always capable of meeting their decommissioning liabilities.
The government therefore regularly assesses the financial capability of operators, their joint operating agreement partners and other parties with decommissioning liability to meet their decommissioning obligations, reviewing each field on its own merit.
Encouragingly, the BEIS says:
When an asset sale is agreed for a field, we will assess the financial strength of the company involved... Each assessment covers the individual fields as well as the portfolio of decommissioning liability. OPRED will also seek to meet with the new entrant to discuss our process for financial risk assessment and understand their plans going forward.
This activity is good news for prospective investors. There is a clearly defined regulatory regime controlling the decommissioning of offshore oil and gas installations. Every time RockRose buys an asset, it presumably gets vetted by the Offshore Petroleum Regulator.
The company says it has developed decommissioning programmes for all of its operating assets and that these are in accordance with the relevant legislation. You can dig into the details of the decommissioning programmes of the relevant assets in this table.
This sounds like a high level of due diligence conducted by government authorities. The BEIS does say, however:
If we conclude that there is a risk that the current parties with an interest in a field may be unable to meet their obligations... we may request financial security to be set aside, in an appropriate format, to meet the decommissioning liability associated with the field.
RockRose has so far set aside around $55m in securitised cash for this purpose.
January update
Going over the financial highlights of the group’s recent HY results for the six months to 31 December 2019:
Pro forma adjusted EBITDA of $116m
Net cash position of $371m ($55m restricted)
Total FY19 dividend of 85p/share anticipated (5.7% forecast yield)
60.8MMboe of 2P Reserves, 82 MMboe 2P + 2C Resources
The group also updated on the multiple steps it is taking to extend the operating lives of its assets - this is a key variable in deciding whether or not the group’s shares are cheap. It is an encouraging update, on the face of it.
RockRose does not update investors with regards to its pension fund or decommissioning liabilities, however. For this, we will have to wait for the group’s annual report.
The enlarged group does reference its $371m of cash. The unaudited pro forma statement of net assets of the enlarged group in the 2019 Prospectus contains a similar figure. It also records total provisions for liabilities of $1,243m. And then there is the inherited pension fund assets of $594m and liabilities of $511m.
There are some pretty large numbers flying around here. In my view, RockRose is wise to build up a cash pile - not just to acquire assets but as insurance against its decommissioning liabilities and its (hopefully) soon-to-be offloaded pension fund. Considering its liabilities, I think a cash cushion is a must.
Management clearly agrees:
Whilst the Group has paid all of its actual decommissioning costs on time and decommissioning activities to date have been completed on time and to budget, the Group continues to adopt a prudent and conservative approach to maintaining cash reserves to cover contingencies, it is possible that unexpected or unanticipated accelerated decommissioning costs might have a negative effect on the Group’s ability to pursue other acquisitions or development opportunities within its existing portfolio of licence interests.
Given the amount of subjectivity in RockRose’s accounts, I see why the shares are cheap. But are they too cheap at 1,430p? Quite possibly, given the group’s cash pile. What’s more, with government and industry forces aligned in trying to reduce decommissioning costs and extend asset lives, it is possible that RockRose’s provisions here will end up being too conservative. I do wonder why the company does not buy back any of its own shares at these levels, though...
I’m tempted to wait for RockRose’s annual report before making a more conclusive decision on this stock. Perhaps sitting on the fence for now will cost me, but I would happily trade some upside in exchange for more detail on the enlarged group’s decommissioning liabilities and pension fund status.
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05/2/2020
07:37 | maccamcd: Research from Hannam & partners
NAV summary (£/sh)
Asset Unrisked Risked
Oil & gas assets 63.1 53.2
Total cash 21.6 21.6
Liabilities -41.0 -41.0
Total NAV unrisked £44 risked £34
RockRose Energy
Low-cost Cotton gas field acquisition provides
long-term growth optionality
Acquisition of a 97bcf gas field with the potential to produce 70mmcf/d
RockRose announced the acquisition of 100% of the 97bcf (16mmboe) Cotton
gas field in the UK Southern Gas Basin, from private company Speedwell
Energy, for a nominal upfront consideration. This gives RRE the opportunity to
do some detailed technical work and assess the economics given the current
low gas price environment, without any significant financial commitment. A
larger, undisclosed consideration is payable upon a positive final investment
decision. The acquisition gives RRE a ~20% boost to its existing 2P+2C
reserves and resources and would provide significant production growth in the
mid-2020s, when its exisitng production is moving into to decline. Assuming
an NPV of US$5/boe the asset could be potentially worth ~US$80mm or
~£5/sh unrisked to RRE.
Subsea tie-back of 2 wells to existing infrastructure planned
A draft field development plan has been prepared by the existing operator,
which envisages 70mmcf/d (12kboe/d) of production from 2 producing wells
tied back into existing infrastructure. The existing operator identfied the
potential of the field 3 years ago. Given the work done to date, we estimate that
the field could be sanctioned as early as next year and given that it is a simple
tie-back it could potentially be on line by 2023. The field is located close to
existing infrastructure, in between the Kilmar and Garrow fields, known as the
Tors development, in which RRE holds a 15% interest. The fields are produced
through Normally Unmanned Installations. They are linked to the Perencooperated Trent Field and export gas via the Esmond Transportation System to
the Bacton terminal in Norfolk.
Original discovery was made in 2009 and flowed at a choked back 9mmcf/d
The original discovery, previously called Carna, was made a decade ago by
Venture Production. Venture was acquired by Centrica, which subsequently
relinquished the licence. The Carna well (43/21b-5/5z) commenced drilling
from the Ensco 92 drilling rig on December 26, 2008 and reached a total
measured depth of 11,500 feet on March 4, 2009. The well was designed to test
a Carboniferous fault block and a significant gas reservoir was discovered in
Namurian sandstones. Well log data indicated a gas column in excess of 1,490
feet TVD (true vertical depth) and net pay of 127 feet TVD. Porosities were
between 7 and 14% and permeabilities were less than 10mD. The well tested
gas at stabilised rates, in line with expectations, with a gross rate of 9mmcf/d
on a 48/64th choke. At the time, it was announced to be in line with pre-drill
expectations of estimated net gas in place of 95-185Bcf.
Valuation: ~80% upside to our risked NAV and on 2.5x EBITDA in 2020
We have included 25p/sh of value for Cotton on a highly risked basis which
leaves our £34/sh risked NAV unchanged ($70/bbl Brent long term and 10%
discount rate ) implies >80% upside from the current share price. Adjusting for
long-term liabilities in our EV calculation, we see RRE trading on a 2.5x
EV/EBITDA multiple in 2020E. We also estimate negative FCF of ~US$30mm
in 2020 as RRE focuses on its development projects. The company has
production growth over the next couple of years, as well as plenty of upside
potential from lowering its decommissioning liability, development of
25mmboe of 2C resources (excluding Cotton), and a funding-base supportive of
further M&A ambitions.
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PLUS1
