There are few oil companies one can feel very positive about in the current stock market and oil price environment. Rockrose Energy (RRE) has updated the market, but following FCA guidelines has delayed full year accounts. The market liked the update, with the shares significantly up against a backdrop of lower share prices for other producing oilers. I though see the update in a negative light...
Gary Newman reviewed this company only a week ago and concluded, while the time to buy the shares may not have arrived, he could see the potential as a good recovery play. As things stood then I was generally in agreement with much of Gary’s opinion. But the latest update, and what has emerged more widely over the last week, has changed my view. When the company updated us on the 7th January, it advised its “active hedging” position stood at 455,000 barrels for Q1 2020. It has confirmed this but there is no mention of any oil hedging post Q1 so one can clearly conclude the company is now fully exposed to market oil prices moving forward. Gas hedges for the current year again look unchanged from the position declared in January, but 2021 and 2022 hedging is now in place. I find the absence of an increased oil hedge position very troubling and far from active!
Considering the company prospects in recent weeks, I was led by the guidance on opex declared in the half year accounts issued in September 2019. This declared opex at $22.1 / barrel prior to the Marathon asset acquisition, increasing to a pro-foma $28 / barrel post acquisition. Today we are guided to expect c.$30 / barrel. I would further note the gas assets acquired from Dyas had a declared opex of $12.7 per boe. That clearly implies the oil asset opex is above that $30 / barrel average. Oil price is $27 / barrel as I type, so I would conclude the company is losing money at the opex level currently, and perhaps significantly on some assets. I articulated my general views on the outlook for the oil price last week, concluding that far lower oil prices could be expected over the coming months. Nothing has changed my view. The destruction of demand is clear for anyone to see – for example we have had lovely clear skies in the southern England, unspoilt (one could argue) by aircraft con-tails! On the demand side, I see a number of well-informed commentators moving from an expected worldwide 10 million bpd reduction to 20 million bpd. With changes like India imposing a full lock down, I can see that 20 million moving lower still. I also read about serious concerns for Jet fuel storage. It is just not being used but many refinery runs produce it – the storage wall may well bite here first before expanding more widely. The company has guided that capex will reduce for the expected start of the year figure of $200 million to $150 million, with that focused on the Arran gas condensate field. No detail is provided on where the cuts will occur, but I would bet the Tain field operated by Repsol due for FID this year will be deferred. But that still leaves $150 million to flow out this year.
The company makes great play of having substantial cash at bank, with £287 million (£248 million unrestricted), equal to £21.89 per share. Compared to the share price of £7.06 and a £77 million market cap it looks like a bargain. I think not. The real risk here is with decommissioning liabilities. These stood at a discounted $370 million at the half year stage. The actual liability if all production stopped today would be higher when that discount is unwound. Of course elements of decommissioning costs relate to the gas assets, which have low operating costs and forward production hedged. The oil assets have to be at risk currently. I would note that Rockrose is not the operator on these assets and while it can clearly influence any abandonment decision, the partners are in the main large international oil companies who will be looking to reduce all non-cash generative production. The North Sea is a high cost area, especially for late life low volume fields. There was a very good reason why international oil companies have paid Rockrose to take on these assets – low oil price risks. In my view those risks are now coming into play. There is a further risk worth noting. It has been reported that suspected Covid19 cases had occurred on the Brae platform, which represents some 30% of Rockrose production. I note this has not been confirmed by the company, but clearly the risk to production is clear. One could of course argue that shutting in a field losing cash at the operating level is no bad thing, but as I have noted before substantial parts of the opex remain along with the risk to production levels on re-start. For me the confirmation that the company is still expecting to pay the final dividend of 25p per share is the final red flag. With the oil market as it is and the absence of forward oil hedging, this seems to me to be the height of folly. So while I did not disagree with Gary’s opinion last week, the world has moved on in only 7 days. This issue to me is will this company still be around in years to come to see the upswing in oil price or will it have drowned in decommissioning and committed capex liabilities in the meantime? I can only conclude this is a Sell at the current time.
Filed under: Rockrose Energy, Bearcast, Next, Yourgene, Octagonal, Nilesh Jagatia, Ariana Resources
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