Justin Reynolds
Rockrose Features In The Morning Review
RockRose Energy, is an independent oil and gas company listed on the main board of the London Stock Exchange, takes its name from a stubborn flower that thrives in the harshest conditions.
Since launching in January 2016 during the last crisis to beset the industry, RockRose has prospered in the tough environment of the North Sea energy sector, demonstrated by the rise in its share price from an initial 50p to levels touching 2230p as recently as January. Now, the company faces the sternest test of its resilience.
A broad portfolio of assets
RockRose has acquired a reputation as an astute and prolific deal-maker, building a broad portfolio of assets in the UK and Dutch sectors of the North Sea.
Early acquisitions included asset interests from Egerton Energy Ventures, Sojitz Energy, and Idemitsu. These were followed by the purchase of assets from the Dyas group of companies, and the taking of a 30.4pc position in the Shell-operated Arran field offshore Aberdeen.
Last year Rockrose became an operator, and doubled its reserves and resources, by acquiring the UK assets of Marathon Oil. The deal secured 37-40pc operated interests in fields in the Greater Brae Area, with 5,000 boepd net production expected to last at least until 2030, and interests in the BP-operated Foinaven Field and Foinaven East areas that brought a further 3,000 boepd.
RockRose’s momentum stalled
With producing assets of more than 20,000 boepd, net 2P reserves of 63 MMboe, a healthy cash balance, and dividend payouts totalling 210p, it’s clear why RockRose has become an LSE favourite. But the current crisis, to which mature North Sea assets of the kind the company has so carefully accumulated seem particularly vulnerable, is a sudden, sharp shock to the momentum it has been gathering.
Evocative images of idle rigs piling up in the Cromarty Firth, which came to symbolise the 2014-15 downturn, have returned to reports weighing the gloomy prospects for the North Sea. OGUK, the sector’s trade body, predicts a grim set of outcomes: operators to cut capital investment by up to 30pc this year; drilling to fall by more than a third to record lows; mature fields to be decommissioned early; and cash flows to turn negative for only the third time in the basin’s history.
Braced for the storm
RockRose has not been immune to the fallout, its share price tumbling since March to levels below 800p. The company has responded with a series of robust announcements.
A March operations update announced progress on two West Brae infill wells, one on production, the other being drilled, which are expected to increase the company’s net production by 2,500 bopd. The two wells are surviving elements of a seven-well programme that, before the downturn, had been designed to increase net production by more than 8,500 boepd this year and into 2021.
The update was followed by the publication earlier this month (April) of a positive set of annual results for 2019. The Marathon acquisition has taken the company’s production to 20,000 boepd, with Covid-19 not having had a material impact on the day-to-day execution of drilling operations. The company has entered 2020 with a strong cash balance of $375.5m (of which $59.7m is restricted), a reserve well able to cover its progressive dividend policy. An interim payment of 60p per share was made in October 2019, with a final dividend of 25p per share to proceed as previously announced, bringing the total for 2019 to 85p per share.
These positives were leavened with some significant adjustments to the company’s operations programme forced by new market conditions.
The expected capex for 2020 of $200m has been cut by 40% to $120m, a reduction in part due to Shell’s postponement of infrastructure development for the Arran field which was to have accounted for four of the seven wells that were to be drilled this year. Hedging is in place to support the outstanding capex commitment: 455,000 barrels of oil are locked in at $65.70 per barrel for Q1 2020, and 63 million therms of gas at €0.53 per therm for 2020. The company also announced cuts in unit opex to below $30 per barrel, and in abandonment costs, from $30m to $25m.
In a series of interviews, including one here on TMS earlier this month (April), RockRose CEO Andrew Austin has maintained the cut in production will not have a material impact on the company’s reserves, and has been upbeat about the long-term value of North Sea assets, arguing that the basin’s strongest operators should be able to follow the pattern of the 2014-15 downturn, when investment was delayed rather than abandoned, in expectation of a recovery in future demand.
Harsh winds
It’s too early to say whether those hopes will be borne out. But it is reasonable to expect that if any of the North Sea independents can ride out this emergency, it is RockRose. The company has a blend of producing and prospective assets, a healthy balance sheet, and a management team respected by investors, attributes which – so far – have given weight to its rhetoric of resilience.
The company floated four years ago, when Brent crude traded below $30 per barrel. RockRose seems well placed to withstand the harsh winds that have returned, and that seem set to blow for some time. For now, this is an investment to hold on to.
In March Malcolm Graham-Wood spoke to Andrew Austin, Executive Chairman of RockRose Energy
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