With oil prices remaining buoyant and this trend looking likely to continue going forwards, there are still plenty of opportunities to invest in companies in this sector. Rockrose Energy (RRE) still looks a very good bet to me, despite trading towards the up end of its share price range, as it has been increasing its daily production and adding to its reserves. The shares havn’t risen a great deal since I last covered the company as a buy back in May, but since then it has continued to make further progress and is in the process of completing its two most recent acquisitions which should see production rise to around 11,000boepd.
It has just released its interim results up to the end of June 2018 and during that period it averaged 5,176boepd, of which the bulk was oil, and once the Dyas BV acquisition is completed – which now looks a formality – that will more than double. Back in May it signed a deal for 100% of Dyas in return for €107 million, and these assets in the Netherlands, which are mainly comprised of gas, will add in excess of 5,000boepd and add 13 million barrels of developed reserves, along with plenty of further upside from further development, and is expected to take 1P reserves to over 23 million barrels of oil equivalent. Additionally, it recently signed a deal to acquire 30.43% of the Arran field, which is yet to be developed – this will be funded through its existing cashflow – and that is expected to add around 5,200boepd, along with a further 8.5 million barrels of 2P reserves.
The company appears to be making some good deals and growing both production and reserves at a fairly rapid rate, and this will be even more so if it is able to convert contingent resources into reserves moving forwards. Some of the deals that it has made have come along with fairly high potential liabilities in terms of decommissioning costs, especially at some of its fields which have a very limited remaining life. The latest set of financials shows that the company is expecting these decommissioning costs to be around 20-25% of EBITDA over the next five years – for the six month period it accounted for around $5 million, and the company made a net profit of just over $5 million. The company is only currently valued at around £62 million, at a share price of 430p to buy, and although on a net asset value basis that looks about right, allowing something for its potential, if the recent acquisitions prove to be as successful as it expects that they will be, then I think that there is plenty of value and upside from this level.
Currently it has decommissioning liabilities on its books in excess of $250 million, but I think that there is every chance that the government could make these costs more favourable in the future, given that it is seeking further investment into offshore UK fields. It is always worth looking at the cash flow being generated by this type of company, and for the first half of 2018 it had net cash flow from operations of nearly $10 million. There are of course risks still involved – if there weren’t then the shares wouldn’t be trading at this level, but barring a collapse in oil and gas prices again, I believe that it remains a long term buy and hold, and could prove to be very profitable if the company can achieve its rapid expansion plans that are already underway.
Filed under: Rockrose Energy, ShareProphets cyber attack, Abcam, Randgold, Versarien, Draganfly
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