RockRose Energy (RRE) – The gift that keeps giving!
Since first covering RockRose Energy two months ago (here), the shares are up over 45%. RockRose has just completed a share buyback via a tender offer for nearly 20% of its issued share capital (link). The purchased shares will be cancelled. So every remaining share has its EPS increased by nearly 25%!
There have been large sellers suppressing the share price over the past few months. But 95% of the tender offer was subscribed for, so they should have been removed. The share price reacted favourably to the announcement today:
Upon cancellation there will be 12,590,403 shares in issue, at £6.60 to sell that gives RockRose a market capitalisation of £83 million. Coincidentally this is exactly the same market cap as when I last covered RockRose (here).
Oil price – 50% hedged
Approximately 50% of RockRose production is oil. However, 50% of that is hedged (at $67) meaning that only 25% of revenues are linked to the oil price. This hurt Q3 revenues whilst the oil price was very high but has the effect of reducing earnings volatility. Andrew Austin appears to have learnt from his time at IGAS where a low oil price caused significant problems for the company.
Lower oil prices are good for RockRose
High oil prices are good for revenues but they also increase competition for assets and reduce the number of distressed sellers. Lower oil prices should allow RockRose management to continue its acquisition strategy with less competition.
I’ll repeat myself – hilariously cheap?
Ignoring cash generated since the 23rd October, after buying back £16m of shares the unrestricted cash balance should be about £30 million. Discounting that unrestricted cash from the market cap gives an enterprise value of £53 million. Given that oil and gas prices have generally been higher than when RockRose gave its 2018 guidance, after discounting 25% for decommissioning costs and using the top end EBITDA estimate, Rockrose should generate about £68 million this year which is more than its enterprise value.
Now that the tender offer has been completed, over the next few weeks I expect the company to announce progress that has been made across the portfolio including a recently spudded well. As the largest position in my portfolio I hope that the market will continue to re-rate what I consider to be hilariously cheap shares.
At the time of publication, the author holds a long position in RRE.