RVRA - Riviera Resources

[stockspinoffinvesting]

I’m clearly talking my own book (it’s my largest position), but I think RVRA is compelling at current levels.

 

As background, Linn Energy went bankrupt and then emerged from bankruptcy with the debt holders owning the company. It then split up into two companies: Roan Resources (upstream company focused on STAKK SCOOP MERGE plays in Oklahoma) and Riviera Resources (legacy, slow decline upstream assets and some midstream infrastructure).

 

It trades at a market cap of $828MM and an enterprise value of $690MM.

 

RVRA is comprised of upstream assets (low decline, natural gas-focused producing wells) and midstream assets (biggest of which is a natural gas processing plant) which operators as a separate subsidiary called Blue Mountain.

 

Here’s what I think it’s worth:

 

Upstream Assets

 

I think it’s fair to value these assets at PDP PV-10. Why? Because RVRA has consistently sold upstream assets at a premium to PDP PV-10. In the last 7 months, RVRA has announced 4 asset sales for $226MM (Sale price / PDP PV-10 of 1.1x). Each of these asset sales was at or above PDP PV-10.

 

Adjusted for the most recent sale and the recent reduction in oil/gas prices (I’m assuming $52 for oil and $2.39 for gas), PDP PV-10 currently stands at $543MM.

 

Midstream Assets (Blue Mountain)

 

Management guidance is for the midstream business to generate $58MM of run rate EBIDTA by Q4 2019. Conversations with management suggest that this guidance is conservative. Small midstream operators are trading at 6.5x 2020 EBITDA currently. This implies a fair value of $377MM for the Midstream Assets.

 

Cash

Pro forma for the recent asset sales and share repurchases, RVRA has $138MM of net cash on its balance sheet.

 

 

Total Value

Upstream: $543MM

Midstream: $377MM

Net cash: $138MM

Total: $1,058MM

Total per share: $16.17

Shares outstanding: 65.4MM

 

$16.17 represents ~28% upside from RVRA’s current share price of $12.65.

 

This may not seem that compelling given that we are talking about a smaller cap energy company. However, there are several upside drivers.

 

1. RVRA is aggressively buying back stock. The company has bought back ~15% of shares outstanding in less than a year and will continue to do so as long as the stock is trading well below fair value. As such, fair value per share will increase over time.

 

2. Blue Mountain should be worth significantly more than $377MM. Management is reviewing strategic options which include an asset sale, IPO, spin-off or minority investment. I expect a minority investment to be announced by year end.  Blue Mountain’s cryogenic natural gas processing plant is expected to generate $115MM of EBITDA at full capacity. Add in $19MM of EBITDA that will be generated from water management services, and the business has earnings power of $134MM. A $1BN valuation for this is potential is not unreasonable.

 

I will leave it there in the interest in keeping the pitch relatively brief, but I’m happy to address any questions.

 

 

[Spekulatius]

I looked at this and bought a few shares. I agree that the midstream operation should be worth more than $377M, the gas cryogenic plant  alone should be worth more. It is also favorable that management aggressively manages capital with asset sales and buybacks. I think most E&P give a hoot about Pv10 valued  unless management validated them by either generating FCF or monetize them when the discrepancy is too large. We will see how his goes, but I like the setup.

[kab60]

Looks interesting at first glance but ultra quick (and lazy) questions; Seems a lot of the value is concentrated in Blue Mountain, so what is the risk to those assets? Is there a risk that they won't be needed in the future (perhaps because the plays they're located in won't be profitable at lower oil/gas prices)? Does management have skin in the game and what's their track record?

 

[awindenberger]

Interesting news:

 

https://seekingalpha.com/pr/17544549-riviera-resources-announces-intention-commence-tender-offer-premium?ifp=0

 

I wonder how much of a premium that would be willing to pay here with a tender.

[Spekulatius]

Looks interesting at first glance but ultra quick (and lazy) questions; Seems a lot of the value is concentrated in Blue Mountain, so what is the risk to those assets? Is there a risk that they won't be needed in the future (perhaps because the plays they're located in won't be profitable at lower oil/gas prices)? Does management have skin in the game and what's their track record?

 

The basin ( SCOOP/ STACK) where the assets are located is decent, but it’s no Permian , as the geography seems more difficult. A bigger concern is that they work with Roan resources ( their Twin from before the Linn separation ) which appears to be on its way to become a penny stock.

 

Disclaimer: no expert on E&P’s, but I have been following and investing in midstream for a long time. I think this will eventually become a midstream play.

[stockspinoffinvesting]

Yes exactly right Spekulatius. The issue is that all players in the SCOOP/STACK/MERGE play have had disappointing results.

 

Here's a good article that summarizes the issues facing producers in the regions:

https://www.reuters.com/article/us-oklahoma-energy/interest-dims-in-oklahoma-shale-play-as-drilling-results-disappoint-idUSKCN1TE1CE

 

Roan is Blue Mountain's anchor producer and currently represents ~85% of Blue Mountain's acreage dedication. So as Roan goes, so goes Blue Mountain. I've spent a good amount of time analyzing ROAN and I don't think its going bankrupt given:

 

1. Roan's enterprise value looks very cheap versus it's proved reserves and vs. ebitda when compared to another pure play competitor in the region, Chaparral Energy (similarly challenged). By my math, CHAP is trading at an EV / PV-10 multiple of 0.91x (I reduced 2018 PV-10 by 25% as oil and gas prices are roughly 25% lower). On an EV / '20 EBITDA basis, CHAP trades at 2.1x '20 EBITDA.

 

If Roan were to trade at a 0.91x its PV-10 (I reduced 2018 PV-10 by 25% as oil and gas prices are roughly 25% lower), it would have an enterprise value of $1.43BN and a market cap and share price of $830MM / $5.43.

 

If Roan were to trade at a 2.1x '20 EBITDA multiple, it would have an enterprise value of $855MM and a market cap and share price of $255MM and $1.67.

 

Given the above analysis, it appears that Roan should be able to raise additional debt or at worst case, dilutive equity.

 

2.  JVL Advisors, Elliott Management, Fir Tree, and York capital own 63% of the company. If need be, I bet they would rather pony up more money than see their equity go to zero.

 

But even if Roan did go bankrupt, Blue Mountain's acreage dedication would likely survive the bankruptcy process. Anything can happen in bankruptcy, but Blue Mountain's contracts are currently written to maintain the acreage dedication even if Roan goes bankrupt.

 

With regards to management having skin in the game, its hard to find how many shares management owns as it trades OTC. But the bigger story here is that Elliott Management, Fir Tree, York Capital, and PSAM own over 60% of shares outstanding so they are really driving the bus here in terms of trying to increase value. One risk is that Elliott does something that is good for Elliott, but not necessarily common shareholders (for example take the company private at a premium to its current price but discount to NAV). However, the involvement of Fir Tree, York, and PSAM partially mitigates that risk.

 

[stockspinoffinvesting]

Interesting news:

 

https://seekingalpha.com/pr/17544549-riviera-resources-announces-intention-commence-tender-offer-premium?ifp=0

 

I wonder how much of a premium that would be willing to pay here with a tender.

 

They previously announced a tender off on September 25, 2018 at $22. The share price closed at $21.30 the day before the announcement so a 3.3% premium.

 

Its weird that RVRA didn't announce the tender price in this press release....

[kab60]

Seems like Roan will be BK. So say debt holders get new equity but these guys keep burning 1 dollar for each invested - how do these midstream assets not get stranded?

[stockspinoffinvesting]

I guess that's what the market is thinking. I, for one, don't think Roan will end up in BK based on their PDP reserves.

 

The issue with all the players in the region is they were drilling too fast and not taking the time to incorporate new intelligence into future wells. All players are slowing down and resetting expectations and there are signs that results are improving:

https://seekingalpha.com/news/3467626-chaparral-energy-plus-12-percent-lifting-q2-production-outlook

 

To me, this opportunity is fairly low risk because RVRA has net cash and is not getting any value for Blue Mountain. If Blue Mountain ends up being worth what I think it's worth, there is a lot of upside. If it's not, there is minimal downside.

 

RVRA recently announced that it will be buying back 2,666,666 (4.2% of shares outstanding) at $15 per share in a tender offer. The stock trades at $12.61. Why the discount?

 

Because it's expected that hedge funds that own 63.7% of the stock (Elliott, York, Fir Tree, and P. Schoenfeld Asset Management(PSAM)) will participate in the tender, thus, it's likely to be extremely prorated.

 

Here's the SEC statement announcing the tender:

http://ir.rivieraresourcesinc.com/node/6601/html

 

It is disclosed in the SEC filing that PSAM has been selling aggressively in the open market. York has sold a small position. Interestingly Fir Tree has not been selling (it's been reported that Fir Tree has been getting redemption requests).

 

It will be interesting to see who participates in the tender.

[gfp]

it's likely to be extremely prorated.

 

Extremely prorated it sure was!  4.4%

 

http://ir.rivieraresourcesinc.com/news-releases/news-release-details/riviera-resources-announces-final-results-its-tender-offer-0

[gfp]

http://ir.rivieraresourcesinc.com/news-releases/news-release-details/riviera-resources-announces-sale-remaining-hugoton-properties

[stockspinoffinvesting]

Big positive in my mind.

 

The press release implies that the company is leaning towards issuing a special tax free dividend with the the proceeds. Should come out to ~$4.90 per share on a $13.25 stock.

 

Current market price (Even with the move up) implies a $176MM valuation for its midstream assets (Blue Mountain). Assuming a 6x multiple, the midstream asset is worth $377MM. I think longer term, the midstream asset (Blue Mountain) will be valued substantially higher.

 

I think the stock is worth ~$17 today with the added catalyst that you will likely receive a tax free dividend of $4.90 in Q4. Longer term, I think the stock is worth more, but it depends on Blue Mountain.

 

[Maple Fun]

The cos is worth another look now. Sold and distributed most of E&P assets. $0.75 dividend coming. Gas gathering & processing assets left.

[Maple Fun]

Finally they sold their mid-stream and most of upstream assets. Closing in Q3 and Q4

Surprised the share price did not move much higher...from the press release they clearly committed to return cash ASAP.