Rockrose Energy Share Discussion Threads

[farnesbarnes] 06/3/2020 08:42

How on earth you get 1092 support from that chart?

[pugugly] 06/3/2020 08:35

Yes re 5021 Crossrail. Way over budget -

[costax1654x] 06/3/2020 08:31

1092 support

[fardels bear] 06/3/2020 08:09

Oh I see. Another megabuckfest for London then.

[dunderheed] 05/3/2020 23:38

Pug ugly decomm projects have been coming in lower than original estimates so far in my limited experience and assessment. Admittedly still a relatively new area of work but I'd guesstimate a lot of companies have over estimated?
Out of interest which projects are you aware of, (of scale) that have exceeded the budgeted costs?

[pjackson2] 05/3/2020 23:09

FB
Think he may have been talking about crossrail

[gooner1886] 05/3/2020 21:50

I can see us trading at £14/15 untill this virus BS is all sorted

[simoore89] 05/3/2020 21:46

How much we opening down tomorrow?

[fardels bear] 05/3/2020 21:20

Who is getting a new tube line?

[pugugly] 05/3/2020 21:04

Brent closed ex FT at $49.91 down 2.39% - If falls continue at thsi rate will make a significant hole in the bottom line - Also decomissioning costs have a habit of exceeding estimates - A bit like Hi Sped rail and the new tube line, so imo the cash pile may erode much faster than expected.

[jon123] 05/3/2020 20:45

one thing that article didn't mention is the cap ex for the next 2 yrs

[dragon35] 05/3/2020 19:33

Thanks for sharing.

[gooner1886] 05/3/2020 19:30

Interesting read certainly. I remember an AA interview on proactive i think it was, saying the share price was way off where it should be , at around £16 ( 5 months ago)Il be holding look back in 12 months and be smiling

[bountyhunter] 05/3/2020 19:23

Wow, I'll revisit that next time I have trouble sleeping ;-)
...some interesting points though!

[1vrod] 05/3/2020 19:13

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.

[dragon35] 05/3/2020 19:10

Yes I wonder big he saw the pension liability case where RRE have a net liability of about £5m from memory. He states £500m so maybe the decimal point is wrong?

[farnesbarnes] 05/3/2020 18:26

Stockopedias main product leaves a lot to be desired, and their journos don’t add much value either. Mr C is the only thing worth reading in the morning.

[dragon35] 05/3/2020 18:21

Can you access the article? In not registered with them but on a summary view I think his analysis is wrong. Hard to challenge it without seeing the article though.

[1vrod] 05/3/2020 18:18

@Jacky boy' is an analyst at Stockopedia. would not doubt his integrity, as it would rebound an Stockopedia;s image in Financial Markets.

[bountyhunter] 05/3/2020 17:58

Spurs season tickets might not be very useful soon!

[gooner1886] 05/3/2020 17:51

Jacky boy trying to get in a little bit cheaper?

[1vrod] 05/3/2020 17:02

Jack Brumby , Stockopedia, has recently updated his review today on the company. His conclusion " 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."

[lukead] 05/3/2020 16:30

Both been dire of late, don’t like the weird one, the sooner Levy pays him off with another £12M the better
PS even going to list our tickets for the next home match vs Man U, watching it on the telly instead!

[gooner1886] 05/3/2020 16:25

Better to hold RRE than spurs season tickets surely :-) Good old Jose

[dunderheed] 05/3/2020 16:10

lol, I was thinking the same - I think he's referring to living in Tottenham but it could be holding rre of course!!