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Hi Tom - maybe I should caveat that the AB holding might put others off as they may consider it gives him too much control. I listened to the last analysts presentation of RRE and it threw up other differences.
RRE is main market - we are premium listed and held to greater transparency and governance.
They have a tax paid history that means for every £10 of decomm they get back a rebate of between £4 and £6 from HMRC - we are in deficit but maybe worth remembering for Malaysia?
Lot of emphasis on DSA and surety bonds- we've moved away from that market and our commitment is relatively small.
Malcy attended - that's usually enough for me to lose interest.
I get the feeling that RRE was never going to set the world alight but it would have been a better investment than EnQuest. I think it is a poor comparison but it is all we have at this time. We are pretty bespoke in many ways and we may get better indicators from PMO (another Premium listing) when they sort out their pending debt maturities.
Romaron. I accept most of your points. I think another year or two more catching a likely upswing in oil and gas prices would have added a healthy clip to the consideration. RRE operating capability is not even close to Enquest or a high quality NS gas player like Serica (who's management and Chairman i greatly admire). Gas or oil, adjust the breakeven and ultimately the game comes down to whether your finding cost per barrel is low enough (including price paid for assets and decomm liabilities). March 2020 was a freak event and panic in the oil and gas equities presented the largest margin of safety in the sector I am ever likely to see. I think your point on ownership is fair. The owner of RRE closed the tab and called last drinks at bar. We dont know the reason but 1) not enough proven operating credibility to back himself or in fact access the capital markets to continue buy and build 2) higher breakeven in low oil environment and significant decomm liabilities 3) potential to be backed in the private markets from a PE player.
I am staying with Enquest but perhaps not as calm as you are. I have great respect for AB and way more comfortable he has big money in the game. That said, there can be zero slip ups on the production side and Brent needs to be at our backs for sure.
"I don't think the near 15% owned in house by EnQuest is always appreciated.".....yes i agree its always comforting and i demand skin in the game now in everything i go into.
Hi londoner7. There is no one formula and a raw net asset figure can be a good sense check. It can be knocked off course depending on the accuracy of reserve valuations, impairments, goodwill and management's ability to account for liabilities correctly. The key is to arrive at a somewhat accurate measure of NAV/share and then observe whether management is able to grow that NAV over time. The exact way to value an E&P company would be to do a risk adjusted DCF of each oil well, but that is incredibly difficult as an outsider to do. The after tax PV10 of 2P is a calculation of the net present value of revenues that will be derived from Proved and Probable reserves minus all cash outflows (production costs, development capex, well abandonment and reclamation costs, and royalties) using a 10% discount rate, at a given moment in time. I then take the after tax PV10 of proved and probable reserves (2P) at the year end 2017 measuring date, minus debt outstanding and divide it by the fully diluted shares outstanding.
With RRE, i found it difficult to do because the Marathon UK Acquisition in 2019 increased their reserves and resources by 82% and that came with huge long dated decommissioning liabilities. In addition op costs per barrel are higher than ENQ Per their 2019 accounts "On a proforma basis unit opex costs were $39/bbl for oil and $14/boe for gas in 2019 operating costs per barrel in 2019". That said, the marathon deal was a well executed cheap deal, they had good hedging in place, a boat load of cash of which alot of it was going into surety bonds for decomm. It got down to £60-70m of MCAP at the end of March so there was a huge margin of safety....................I invested in ENQ years ago when i knew nothing hahaha. I have paid the price for learning about margin of safety later in my career
You may be comparing concrete to silk for all I know but I think it's a great deal for RRE judging from the chart of their stock price. There has been a collapse in the price of oil and Covid so to come out of that intact speaks volumes. I think there are other factors to consider as well.
RRE is 53/47 oil/gas and doesn't have tax credits that I know of. It appears to me that as long as you don't drop a ricket and survive the cycle oil production is highly profitable. There is an element of buying tired assets and making a quick turn on EBITDA out of them because the majors usually leave a little meat on the bone for the next owner. However, this is a safety first approach in some ways and you cannot expect the multi-baggers of an exploration success or a capex heavy project. We have survived Alma/Galia and we lost a fortune. That set us back for sure but aginst that you have Kraken and Magnus succeeding in difficult times.
Good luck with trying to extract markers from this deal but I have a feeling that this was capitulation by RRE because they'd taken it as far as they could. They have no debt and that could be a problem. Raising new finance in this market could prove near impossible and achieving a decent credit rating might be harder than most people imagine. Sometimes not having a credit history can work against you.
I think another point missed is that a third of the equity belongs to the executive and is another limiter for raising finance. I don't think the near 15% owned in house by EnQuest is always appreciated.
Nothing here has changed my view of EnQuest but it's always nice to see the NS still has a pulse.
Hi Tom8080, you say, "I find PV10 based on the 2P reserves more accurate than net assets."
I'm not going to argue. Your 'NS price mark' comment got my interest so I made a simple assessment based on latest net asset values. I felt it should provide a ballpark guide.
RockRose
Net assets Dec 2019 = $154m
Value of offer = £248m. @ $1.25/£ = $310.
Premium to net assets = 310/154 = 2
Enquest
Net assets Dec 19 = $560m.
Applying offer premium, $560m x 2 = $1,120m. @ $1.25/£ = £896m.
Current Mkt Cap = £249.
(896/240) x 14p = 52p.
I'm trying very hard not to get into Rockrose details but looking again at your comments, is PV10 alone a sufficient metric? Do you take account of sunk costs to develop 2P resource? All of Enquest 2P is in production. I don't think the same is true for RockRose 2P.
*I should also caveat, the below assumes the same netback for PV10. I do not think RRE are running at near the same operating costs p/b as ENQ. Our discounted cash flows per barrel for that 2P should therefore be higher. Still........its a horrible offer assuming RRE produce some cash for ever barrel out the ground....
Londoner7. I find PV10 based on the 2P reserves more accurate than net assets. ENQ assets and operating capability are superior to RRE. However, a rudimentary calculation based on 2P reserves as at 31 December 2019 independent of capital structure. RRE: 60.8 of 2p (MMBOE), offer today/consideration = £250m. Based on £/MMBOE and taking ENQ 2P @ 31/12/2019 of 213 (MMBOE) you get £876m in EV. Not sure how you are getting to 52p based on the Rockrose offer. Are you taking off Enquest debt?
Tom8080, you say, "I sincerely hope that is not a price mark in NS"
I'm not familiar with Rockrose assets or prospects, but just taking raw numbers I calculate that a similar multiple applied to Enquest net assets would equate to a SP of 52p. (I hope I haven't dropped a decimal place ;-)
That's a quick and dirty estimate and I'm sure there are lots of other considerations but apples for apples that's the relative value of the 'balance sheet'. I'd say net asset value is more applicable than year end cash in the bank.
Offer accepted is very low indeed. Its close to cash at hand per share. Notwithstanding potential operating cost issues on old Marathon Oil assets, hefty maintenance capex and decom liabilities i.e. inferior assets to Kraken and Magnus..I sincerely hope that is not a price mark in NS. Looks like owner-CEO has just sold out and stuck his fingers up at the public markets. They cite access to the capital markets as a problem. Is there any benefit to being public as a decent producer of hydrocarbons atm. Feels like a thankless task....getting beat up by ESG ideologues in institutions who current enjoy their 100 p/e multiple on Amazon (we will see how long that lasts) and an every-increasing regulatory costs. It just shows how levered ENQ is to Brent and steady production. There is little fat to cut and the capital markets are not there atm thats for sure.