I first heard about Roan Resources through my research of Riviera Resources (OTCQX:RVRA), a high conviction idea. A significant portion of Riviera's midstream value is dependent on Roan Resources, its main customer or anchor producer. Thus, I've been following Roan Resources closely. Both RVRA and ROAN are successor companies to Linn Energy (which went bankrupt).
Overview of Roan
Roan is an independent oil and natural gas company focused on the development of oil and gas assets throughout the eastern and southern Anadarko Basin. The Anadarko Basin, which spans from south-central Oklahoma to the northeast corner of the Texas panhandle, is one of the largest and most prolific onshore oil and natural gas basins in the United States.
As of year-end, Roan had 54.1 MBoe/d of net production (27% oil, 31% NGLs, 42% natural gas). It has 170,000 total net acres. Over the past year, Roan has invested heavily to grow production, as shown below.
More recently, due to the declining oil prices in Q4 2018 and a realization that investors preferred positive free cash flow rather than exponential production growth and negative free cash flow, Roan announced that it would moderate its drilling plans in 2019 and focus on generating positive free cash flow.
While production is still expected to grow 30% in 2019, Roan expects to generate positive free cash flow in Q4 2019. Roan further noted that it expects production to grow in 2020 but that it will remain free cash flow positive in the year.
Despite this positive announcement, ROAN continued to perform poorly as shown below.
ROAN experienced another leg down when its CEO announced on 4/15/2019 that he was resigning for personal reasons. I confirmed with Roan that the CEO was not fired. Rather, the job was significantly more stressful than he originally anticipated it would be, and as a result, he decided it would be best for him personally if he left ROAN. Obviously this is the company's message so there could be other factors at play.
ROAN shareholders finally received some positive news when the company announced on 4/29/2019 that it had received multiple unsolicited indications of interest to buy the company. Roan announced that it is considering all consolidation opportunities including the outright sale of the company.
What is the Company Worth if Acquired
In the upstream oil and gas world, the two most common ways to value a company are on an EV / EBITDA basis and on an EV / PV-10 basis. As shown below, ROAN is trading at a significant discount to its peers using consensus numbers.
Source: Ycharts, May 12, 2019
Assuming ROAN deserves to trade in-line with peers at 5.9x 2019 EBITDA, the stock would be worth $12.19, or 132% more than its current price of $5.25.
On a EV / PV-10 basis, ROAN also looks undervalued. If ROAN were to trade in-line with peers at an EV / PV-10 multiple of 1.4x, it would be worth $15.86 or 202% higher than its current price.
Currently, Elliot Management, Fir Tree Capital, and York Capital own ~36% of the company. They bought the Linn Energy debt when it was trading at a significant discount and were converted into equity post bankruptcy. They have such larger positions in the stock that the most effective way to monetize their respective stakes would be to sell the company. Open market sales or secondary market sales would further depress ROAN's stock price.
While ROAN is evaluating all strategic options, I think a sale of the company has a reasonable chance (~50%) of occurring. If a sale does occur, I think it would occur at a significantly higher price.
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Disclosure: I am/we are long RVRA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.