Put some power in your portfolio – with the North Sea’s oil and gas
A ROCKROSE is a tough, evergreen shrub, capable of growing fast whatever the external climate. Oil and gas group RockRose Energy is designed to follow suit.
The company was founded in January 2016, when the oil price appeared to be in freefall, having tumbled from more than $110 (£86) to little more than $30 in just 18 months. Many energy companies were panicking, weighed down by too much debt and a plethora of loss-making wells.
That was the environment in which Andrew Austin decided to set up RockRose. From the start the strategy was relatively straightforward – buy cheap oil and gas assets around the North Sea, invest t i me and money in t hem and thereby improve their productivity, efficiency and life expectancy.
The approach has worked well. In less than four years, RockRose has become a business that is very different from most of its peers. Where they focus on exploration, RockRose focuses on development and production. Where they swallow cash, RockRose is profitable. And where they frequently ask shareholders to help fund their growth, RockRose uses its own cash to grow and manages to pay regular dividends too.
The shares are £17.35 and should increase in value as the business expands and profits increase.
The North Sea oil and gas landscape has changed considerably in recent years – and it continues to do so. Large US players are turning their attention to domestic operations. Japanese groups, which once saw the UK as a springboard to Europe, are no longer sure whether that notion holds water. And several UK firms are laden with debt.
That means assets are up for sale, often at bargain basement prices. RockRose has completed six t r ansactions s i nce i t was founded and several more are in the pipeline. Just because there are willing sellers however, that does not mean the assets themselves are unattractive. They are simply neglected, offering plenty of potential f or i mprovement under more caring owners.
And RockRose is a caring owner. From a standing start, the company is now producing more than 20,000 barrels of oil equivalent per day (including gas). It is profitable, has around £220 million free cash and is keen to deploy that money both to reward shareholders and buy new assets.
Big investors are enthusiastic and the shares have performed well. However, there is plenty of room for further gains. The free cash alone is equivalent to almost £17 per share, which suggests that the oil and gas acreage is substantially undervalued.
This is likely to change. RockRose has already proved that it can drive down costs and improve productivity. Crucially too, the company is adept at extending the life of newly acquired assets. As a result, fields are expected to produce oil and gas for longer and the cost of decommissioning them falls. Over time, the group’s track record is likely to win over even more investors, supporting share price growth.
At the same time, business conditions in the North Sea are improving. Operational costs are lower and the oil price is higher than when RockRose was founded – and regulations around decommissioning are changing, so those costs are reducing too.
Austin declared an interim dividend of 60p at the half-year results, and said he would pay a 25p final dividend, making a total of 85p for 2019 and putting the stock on a yield of nearly 5 per cent. Further payouts are expected next year and beyond and there is always the possibility of one-off, special dividends. The company also intends to beef up its exposure to gas, as this is considered a more environmentally-friendly energy source than oil.
MIDAS VERDICT: RockRose has come a long way in a short time and should continue to make progress. Austin is a 27 per cent shareholder too so he is committed to success and keen to triple the size of the business over the next few years. At £17.35, the stock is a buy.
Traded on: Main market Ticker: RRE Contact: rockroseenergy.com or 020 3826 4800