RockRose Energy (RRE) – Happy New Year!
I just covered RockRose (RRE) in an overview of my 2018 and top holdings. The company has now delivered another fantastic update to bring in the New Year (latest share price 645p, market cap £81 million. Note that the share count is 12.6 million after recent share buybacks – many platforms have not updated their numbers yet).
Total unrestricted cash has risen to $68.5 million or £54 million, leaving an enterprise value of £27 million after the favourable reaction to Wednesday’s update.
I continue to view the shares as materially undervalued for following two reasons:
1. Cash Generation – my approximation
Upon completion of the Dyas acquisition RockRose announced it had $111 million of which $58.5 million was unrestricted. Subsequent to this announcement RockRose spent £16 million ($20 million) buying back shares.
Therefore without any cash generation, unrestricted cash would have fallen to:
- $58.5 million – $20 million = $38.5 million
Given that actual unrestricted cash has improved to $68.5 million, we can estimate cash generation at c. $30 million (£24 million) during the past two months alone.
Even if we allow for the falling oil price and RRE’s 50:50 split between oil and gas (ignoring the hedging that is in place), continued cash generation at anything like this rate would be wonderful news for shareholders.
2. Acquisitions ability
CEO Andrew Austin in the update stated:
“We continue to invest in the organic growth of our portfolio, while also actively evaluating acquisition opportunities. 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 for RockRose.”
I believe RockRose’s ability to acquire assets is completely unfactored into the share price. Today’s statement reinforces my view that RockRose is in a strong position to continue aggressively growing the business and I expect to see another transaction this year.
My initial minimum fair value target
With the amount of cash in the bank and cash generation I continue to view RockRose as one of the cheapest shares I’ve ever seen and intend to hold all of my RRE shares until some semblance of fair value is achieved. I’d personally view this as a minimum of a 960p share price (c. £120 million market cap).
At the time of publication, the author has a long position in RRE. This article was edited after a numerical error was spotted.