Here, Michael Taylor – experienced investor and author at shiftingshares.com – takes a look at the opportunity on offer at RockRose Energy (LSE:RRE). This article first appeared on Cube Investments, which can be found here:
RockRose Energy is a popular stock.
Unlike most popular stocks, this is 1) a real business and not a hope or dream, and 2) management actually own stock rather than appear on paid promotion platforms (with shareholder cash) telling existing and potential shareholders how good the business is despite not owning any stock themselves.
Why do they own so much?
Perhaps it has something to do with the fact that for 2018, the enlarged entity is looking at pro forma profit after tax of $230 million. That’s just over £184 million at today’s spot prices. The current market cap? £102.6 million.
That’s a PE of 0.56.
It’s either fraudulent, or it’s incredibly cheap. Personally, I think it highly unlikely that it will open on Wednesday at the same price it closed at – given that nearly six months have passed and cash has been building away in the background, as well as this transformative acquisition.
If we re-rated the business to a PE of 5 (a near ten-fold earnings re-rating) then we’d be looking at a market cap of over £1 billion and a share price of 8150p (current price 815p). However, Rockrose Energy has lost its operator status and therefore lost control of the timing and pricing estimates of its decommissioning costs. This is a blow to the company though despite this it still warrants a re-rating on the deal alone.
That’s because on page 28 of the document, it clearly states that the decommissioning obligations have been audited by ERC Equipoise and are based on estimates from relevant operators where available. These amount to £456.9 million for UK assets. That’s a lot, but across the life and cash flow of the assets – it’s not much.
What value will we see on open?
The short answer: I have no idea. However, we can use this document to at least try to put value on the shares.
Unrestricted cash is £227 million. There is no debt. So, we can work out the cash per share at least (that way we get the cash flow producing assets for free).
Taking Andrew Austin’s shareholding and dividing to get the full share issue we get 13,197,163 shares. Taking our £227 million and dividing by the share capital we get a total of 1720p of cash per share.
It’s only now that the size of the deal becomes truly transparent. At the 815p current share price there is over 100% upside just to get to the cash value.
Some have tried to calculate but with many likely to be making sizable returns on relist there will be plenty of both buyers and sellers. I expect large volatility over the coming weeks.
Management have shown that they are capable of executing, and it shouldn’t come as a surprise that the strategy is stated on page six as likely to involve further acquisitions. However, the company duly notes that there will be an increased competition risk in future. So, whilst we may not see many acquisitions as game-changing as this one, it’s likely we will see another acquisition at the least.
You can learn more by downloading Michael’s fantastic free book How to Make Six Figures in Stocks. This can be downloaded from his website – https://www.shiftingshares.com/