RockRose Energy (RRE) has been one of the real success stories amongst smaller oil and gas producing companies in recent times and has grown its business at an incredible rate via a number of acquisitions. It has come an awful long way since I first covered it as a buy here back in April 2018 at around the 350p level, and has just relisted following a deal which constituted a reverse takeover of the Marathon UK and Marathon West of Shetland assets for $140 million. At around the 1,900p level with a market cap of circa £240 million, it represents a profit of nearly 450% for anyone who followed my original buy recommendation.
This company has rapidly gone from being one that few had heard of to being a firm favourite with PIs, and anyone sat on a large profit has quite a few different factors to consider now, in terms of whether or not they cash in any of their profit at this stage. The shares are currently up around 130% from the level at which they were suspended at and there are quite a number of factors which will influence the future share price direction - and given these variables it is very hard to predict where it will go from here. Looking at the current level of production – 24,000boepd for 2019 – and the level of cash generated from these, plus the fact that it has 62.9mmboe of 2P reserves across all of its assets, of which 42.6mmboe are 1P reserves, it would appear to be incredibly cheap and the current market cap makes little sense. When you look further into the future though it becomes clearer why the market isn’t pricing the shares higher currently, as the fields that it has acquired over the last couple of years come with high decommissioning costs in some cases, and a few only have a limit lifespan remaining and will cease production in the next year or two.
Most of these fields with a short lifespan are the smaller ones amongst the Rockrose assets – although East Brae, which came as part of the Marathon acquisition, is due to cease production in 2021 and has a net £40 million decommissioning liability attached to it. That is why when you look at the enlarged balance sheet for the new group, as at the end of 2018, net assets stand at just $68 million, as decommissioning provisions now total nearly $1.2 billion. Currently most of that liability is an awful long way off in the future, nearly 20 years in the case of some fields, and even the ones which are imminently due, such as Balmoral, Beauly and Burghley, which are due to cease production this year and will cost £30 million in decommissioning, could continue for a few more years yet, depending on whether or not the current agreement in place on them is renewed (it expires this year). A lot can change during that time, and for RockRose it will all be about what the oil price does, as if it remains at this sort of level or higher then all will be well, but if it was to collapse then the company would find itself in trouble as and when these liabilities became due. Planning for this will also have an impact on likely future returns for shareholders by way of dividends. There is also a chance that legislation could change, and if it does it is likely to be more favourable as the government wants to make the most of the resources that it has in the North Sea, and that may ultimately reduce the decommissioning liabilities.
Financially, the company is currently in a strong position, as it had $269 million in cash and equivalents at the end of 2018, although CAPEX costs up to the end of 2020 are expected to total £174 million. Since the last set of accounts it will have been generating strong cash flow from its operations and should continue to do so. One slight negative that emerged during the completion of this deal and relisting was the loss of operatorship of the Marathon assets, which was taken over by TAQA Bratani. This won’t have any effect on the income generated from these licences, but does mean that it will be harder for RockRose to make more acquisitions where it would become an operator, as it would have to go through regulatory approval from the OGA to achieve that status. The admission document runs to well over 200 pages, and although I have read it, there is too much to cover everything in the space that I have available here – but I would highly recommend that any holders here do have a read of it.
My own conclusion is that in the near term the share price will likely be driven by the levels of production, plus revenue and cash flow generation, and as long as the oil price stays high I wouldn’t necessarily be rushing to cash in if you held the shares prior to relisting. There is plenty of risk here, whatever people will try to tell you, due to the amount of decommissioning liabilities on the books, but that is a some way off and will only really become an issue in the next few years if the oil price was to drop significantly lower. So, for now I would continue to hold as, after the initial profit taking on re-listing, it could still have the legs for a further rise over the coming months, especially as the freefloat isn’t huge, with chairman Andrew Austin owning over 27% of the stock.
Filed under: RockRose, ShareProphets Radio, Woodford, Mortgage Advice Bureau, Sage, gold
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