broker note22 Nov 2018 12:03
RockRose has quickly managed to establish itself as a
significant North Sea player, with an acquired portfolio of assets which were non-core to the sellers but material for a company of RockRose’s size. We initiate coverage with a BUY recommendation and a TP of 1460p, representing significant potential upside of 156% from the current share price, a gap we believe will close quickly once investors realise RockRose is trading at a sharp discount to fundamental value.
M&A has created value: RockRose has astutely and boldly managed to take advantage of North Sea M&A dynamics, completing five deals since its IPO in 2016, which leave it with YE17 pro forma 2P+2C reserves of c56mmboe, 2018 expected production of 11.3kboepd (oil 54%), and YE18 net cash of c$90m on the balance sheet (post tender offer). Crucially, our economic analysis of the deals suggests that RockRose has created significant value, in part helped by the oil price, but also due to the mechanics of the rationalisation process of larger companies, which means deals can be made which make commercial sense for both buyer and seller. Impressively, RockRose has already returned £1.50/share to shareholders, and recently announced a proposed tender offer of up to 20% of the company at 560p per share.
Tangible, compelling valuation: Assuming full take up of the tender offer, our DCF of RockRose’s producing assets defines a core NAV of 1122p, significantly above the current share price. Our risked NAV of 1460p attributes some risked upside to the Tain and Arran development and a potential FPSO extension and low risk drilling around RockRose’s key assets, which could nearly double existing 2P reserves. Our unrisked NAV is a lofty c2370p. Our valuation is supported by peer analysis (implied valuation range c1700-3100p) and an independent CPR valuation.
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