Joel’s Resource Report (23 Aug 2019) – Not all bleak! #RRE #ARCM
Like Michael, who has a weekly Cube column, I’ve now agreed to do one – focused on resources. As I’ve been away for a while, I’ll cover a few companies that had news while I was away.
RockRose Resources (RRE) – it’s never been cheaper
RockRose is an oil and gas production company with assets in the North Sea and the Netherlands which I first covered for cube on the 25th September last year at a £4.50 share price. This was a 900% increase on the admission price of 50p and I explored whether there was more to come. The answer has been a resounding yes as the shares are currently at £17.50 at the time of writing. At the beginning of July, RockRose had £17.20 per share in unrestricted cash on the balance sheet which will only have grown since then given the 22k boepd production.
How has RockRose achieved such significant growth?
The UK government has a strategy in place to maximise the economic recovery of UK petroleum. The following extract is from page 95 in RockRose’s most recent readmission document:
What next for RockRose?
With over $279m in net cash at readmission, I expect RockRose to do one of three things:
- Share buyback – I view this as unlikely due to Andrew Austin, Executive Chairman, owning over 27% of the shares as well as options. He won’t want to be tipped over the 30% mark and forced into making an offer for the entire issued share capital.
- Dividend – possible but I’d prefer the company to use its cash for growth.
- Another acquisition, likely for the following reasons.
- Historical speed of acquisitions:
- Andrew Austin stated back in January that “The recent decline in the oil price, combined with the strength of our balance sheet and absence of any debt, potentially presents further value accretive acquisition opportunities.”
- RockRose is now an operator of assets which enables them to look at taking over other operating assets.
- Andrew Austin has stated “Every deal we’ve done so far has been bigger than the last so watch this space”.
My hope would be that RockRose make another large acquisition this year. Even if this doesn’t happen, the shares look cheap to me and in the absence of acquisition opportunities, RockRose could pay healthy dividends. I should mention that RockRose has decommissioning liabilities which from memory amounted to about 25% of EBITDA prior to the Marathon deal, at last year’s oil and gas prices.
A significant drop in the oil price could cause RRE issues. However RockRose’s business model is to survive and grow even at sub $50 oil prices. And the oil price dropping should allow for more attractive acquisition terms so I’d actually view it as positive at this stage.
Arc Minerals (ARCM) – bonanza grades and huge targets
Arc Minerals is gold/cobalt/copper exploration company with projects in Zambia, Slovakia and the DRC. Since covering Arc Minerals last November, the shares have been volatile, (latest share price 3.75p ask, market cap £27 million).
Arc had high-grade results from its Cheyeza East target including 25m over 1%, 13m at 2.31% copper and 7.6m at 4.15% copper. If Arc continues to have such high-grade intercepts which are relatively shallow, I believe its projects could be worth significantly more than the company’s current market cap.
The company’s driller seems to think that Arc shares may be worth more in the future than they are today and has agreed to have 50% of drilling costs paid for with equity.
Gold’s recent surge could assist in selling Arc’s Slovakian/DRC gold assets which would be used to accelerate drilling in Zambia. 2019 is shaping up to be Arc’s best ever year and as a shareholder I look forward to near term news flow.
Update – since writing the above Arc has come out with its latest drilling results which weren’t quite what the market was hoping for, myself included. The shares ended the day down about 15% which I view as silly given the number of targets and drill rigs currently deployed.
Chairman Nick von Schirnding commented in the most recent “The drilling programme thus far at Cheyeza East has been highly encouraging and continuing at pace. While we await the results of several new holes at Cheyeza East, investors should also look forward to maiden drilling at Lumbeta and West Lunga – two significant new targets which we are extremely excited by”. I look forward to updates over the coming weeks and months.
JKX Oil & Gas (JKX) – winter is coming
JKX Oil & Gas is an oil and gas production company with assets in Ukraine and Russia. The share price has nearly halved from its highs, (latest share price 35.6p ask, market cap £59 million):
I see two reasons for JKX’s SP dropping. Firstly, at the AGM, a load of the directors were given the boot (there are some large Ukrainian billionaire shareholders), and secondly European gas prices have dropped. Should the gas price increase over the winter and suitable directors be appointed, I think that JKX shares could be looking rather cheap.
Balance sheet – has never been stronger
Despite the falling gas price, JKX’s balance sheet is in good health due to increased production.
Of the $10m in inventories, the following are for sale:
- Gas inventory up to 25 MMcm at 30 June 2019 (31 Dec 2018: 4 MMcm) with estimated value of $5.4m
- Oil inventory of 46 Mbbl at 30 June 2019 (31 Dec 2018: 39 Mbbl) with estimated value of $2.6m
Net assets are more than two times the current share price.
Production – ever increasing
JKX has large reserves and is focused on converting them into production. Production in the first half was up 16% year on year and daily production on the 30th June was up to 11,872 boepd. Since then the IG142 well has been drilled and “was tested at a rate of 709 bpd of oil and condensate and 152 Mcmd of gas (1,606 boepd) with a wellhead pressure of 2,300 psi”.
As a holder in JKX for nearly a year I remain happy with the progress the company is making and look forward to where the company will be in another 6 – 12 months.
Till next week!
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