Rose Petroleum plc (LON:ROSE) Broker Research Notes

Rose has signed a binding Letter of Intent with Captiva Energy Holdings II LLC to acquire an initial 10% of Captiva’s 89.5% net working interest in the 317 acre McCoy lease located in the Denver-Julesburg (DJ) Basin in Colorado.

This acquisition represents the initial stage of ownership in what may ultimately become a considerably larger Drilling Space Unit (DSU) to accommodate a multi-well drilling programme of two-mile horizontal wells targeting up to four reservoir formations. This deal is being expedited with a view to establishing early production and cash flow within the next 12 months.

Over the last six months, Rose has restructured the company’s board and management team and initiated a revised strategic focus on oil and gas opportunities in the Rocky Mountain region of the US. While maintaining the restructured Paradox project as an important part of the longer-term strategic vision of the company, Rose also intends to take advantage of the
highly fragmented smaller end of the US E&P sector and grow a more balanced portfolio through the acquisition of more ‘bite-sized’ interests which represent a lower risk, near term cash flow generative projects with longer-term development upside.

For a modest consideration of only US$0.27m payable to Captiva in Rose shares at a premium to the current share price, the company has agreed to acquire an initial 10% of Captiva’s 89.5% working interest in the McCoy lease with an option to acquire up to a further 80% of Captiva’s interest at a later stage.

Among several factors, the acquisition is conditional on regulatory approval for a wider DSU to accommodate the drilling of two-mile horizontal wells. When the deal completes, Rose will gain the right to participate in the proposed drilling of an initial tranche of 12 wells which will target the productive Niobrara and Codell reservoirs.

Rose estimates that there is the capacity to drill a maximum of 23 wells including boundary zone wells which will require
a further agreement with offset pad owners. As the eventual DSU will be considerably larger than the initial McCoy lease, Rose expects that its initial net interest across the eventual DSU will be approximately 2.217%, with the potential to increase to 19.954% in the event that Rose exercises its option to acquire the additional 80% interest in Captiva.

Gross capex for an initial 12-well programme is estimated to be US$72m (average well cost of US$6m) with Estimated Ultimate Recovery (EUR) from each well of c.0.85 mmboe. We anticipate that Rose’s share of initial capex will US$1.59m with an additional US$175,000 payable as a function of Rose’s paying 11.1% for a 10% networking interest under the terms
of the agreement with Captiva. Should the option to increase Rose’s interest in Captiva be exercised fully, the company could incur a further US$12.6m of capex as its share of the initial 12-well programme.

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In order to fund part of the work programme as outlined in the deal with Captiva, Rose has conditionally raised £1.25m through the issue of 113.6 million new shares at 1.1p per share.

This will be conducted in two tranches, the second of which is subject to shareholder approval at a General Meeting to be held on 21 November 2019. With the restructured Paradox project representing an attractive medium-term appraisal play for the company, Rose is now expediting its new strategic focus on the near term, lower risk plays in the Rocky Mountain region of the US with the potential to generate production within a 12-month timeframe. We anticipate that a successful conclusion of the acquisition of an interest in the McCoy project could represent the first of several such deals as Rose develops a pipeline of potentially attractive projects to grow the company’s asset portfolio.

A restructured business

In recent months, Rose has undergone a major restructuring which includes:
• Bolstered operational and governance framework through the restructuring of Board and management
team (See Appendix 2 for full management biographies)
• Revised focus on upstream oil and natural gas opportunities in the U.S. Rocky Mountain region
• New strategy to grow asset portfolio through value-accretive production and development
acquisitions
• McCoy deal meets all internal acquisition criteria and will give the company low-risk near term
production alongside a strong industry partner
• Paradox project restructured into a more focused and fundable project
• Pipeline of further projects to grow portfolio
• Significant news flow over the coming months

Rose’s strategy is to build a balanced portfolio of assets, exhibiting both free cash flow and long-term development opportunities. The restructured Paradox project and the McCoy acquisition sit firmly within this strategic vision and the Board looks forward to adding additional projects to the portfolio in the short-term.

Building a portfolio
In Rose’s 2018 annual report, released in June 2019, the management outlined its belief that strong financial returns could be generated from the highly fragmented smaller end of the US oil exploration and production sector and the board is now in the process of restructuring Rose so that it can be a stable public growth vehicle targeting this part of the market. Rose believes that the construction of a balanced portfolio, exhibiting both free cash flow and long-term development opportunities, is core to successful growth. The company’s vision for a balanced portfolio includes:

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1) Production assets acquired at compelling valuations
2) Near-term, lower-risk yet highly economic development opportunities located in core acreage
positions in established basins. In particular, the company will target infill horizontal development
drilling opportunities in basins long established through vertical production
3) Longer-term, high-potential appraisal and exploration projects designed to add significant scale, such
as the current opportunity in the Paradox.

Investment criteria
Rose already has significant long-term appraisal and exploration exposure through its restructured Paradox asset and as such, is focusing acquisition efforts on near-term development and production opportunities. As part of this process, the company has adopted the following high-level methodology for screening potential acquisitions based on the following factors, and all acquisitions will need to be consistent with the criteria listed below:

Geographic criteria: Utah, Colorado or Wyoming (the Rocky Mountain Region)
• Portfolio criteria: Near term development (PUD) or accretive producing (PDP) opportunities
• Expertise criteria: Prior management experience operating asset or similar assets

• Cash flow criteria: Cash flow generative within 12 months of acquisition
• Entry criteria: Proprietary acquisition angle (such as via land strategy, relationship, or unique view
on upside opportunity) or uncommonly good value
• Partner validation: Strategic financial or industry partner validation

Rose believes that these specific criteria give the company a clear focus and the McCoy opportunity fits very
neatly within this strategic profile and complements the Paradox asset.

 

Research Notes

 


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