Roan reported solid Q3 2019 production results (with oil up +7% compared to Q2 2019).
Production expenses are also trending well, bringing its YTD average below guidance.
Realized prices for NGLs and natural gas are hampering Roan's financial results though, as those commodities are 74% of Roan's production.
The merge appears to have a decent future after Roan's improved results, although realized prices for NGLs and natural gas will need to get closer to 2018 levels.
The December vote on the Citizen Energy proposal is quite likely to pass.
Roan Resources (ROAN) reported solid Q3 2019 production results, indicating that its merge acreage looks capable of generating decent returns for Citizen Energy in the future. Due to the relatively low oil percentage of most of the merge wells though, realized prices for natural gas and NGLs will need to improve for Roan to sustain heavy development activity though.
Q3 2019 Results
Roan reported solid production results in Q3 2019, with its average daily production reaching 53,700 BOEPD (26% oil) during the quarter. This was a 6% increase in total production and a 7% increase in oil production compared to Q2 2019. The increase in production was helped by higher capex spend during the quarter due to increases in working interests.
Roan also performed well in terms of production costs, with its production expenses improving to $2.61 per BOE in Q3 2019.
The solid results in Q3 2019 would have kept Roan on track to meet its prior full-year production guidance of 50,500 to 53,500 BOEPD (averaging 51,200 BOEPD after three quarters) and perhaps do better than its production expense guidance of $2.80 to $3.10 per BOE (averaging $2.79 per BOE after three quarters). However, due to the planned merger with Citizen Energy and the hiring of a new CEO, Roan has temporarily curtailed its drilling and development activity and suspended all completion activity while its new CEO assesses Roan's overall operation plan.
The curtailed activity is also likely due to very weak realized prices for natural gas and NGLs.
Natural Gas And NGLs
In Q3 2019, Roan only realized $0.81 per Mcf for its natural gas and $8.05 per barrel for its NGLs before the effect of its hedges. This is a significant issue given that around 47% of Roan's production is natural gas and 27% of its production is NGLs.
Source: Roan Resources
This has around the same effect on Roan's well level results (compared with realized prices of $1.81 per Mcf for natural gas and $20 per barrel for NGLs) as with a 70% oil producer seeing WTI go from around $55 to the low-$40s.
Thus Roan's well-level economics are likely marginal with Q3 2019 realized prices for natural gas and NGLs despite significant decreases in D&C costs and decent production results.
Roan is holding a special meeting on December 4 for shareholders to vote on the merger proposal. It is very likely that the proposal will be approved and Roan's share price (which has been around the offer price of $1.52 per share) reflects this high likelihood.
In general, there isn't much choice other than to accept the offer since Roan's liquidity is limited. At the end of Q3 2019, it had $779 million in net debt and around $71 million in liquidity from its cash on hand and term loan and credit facility availability.
Roan may have had a path to continue as a standalone company with a combination of slightly higher oil prices and much higher prices for NGLs and natural gas. However, the weak prices for the latter two commodities prevent Roan from being viable with limited liquidity.
Roan reported decent production and production expense results in what could be its last quarter as a standalone company. It has made significant progress in costs and capital efficiency, and the merge looks to have a solid future assuming that realized prices for natural gas and NGLs rebound. Roan can generate solid well-level economics at mid-$50s WTI oil but probably needs NGL prices to be 30% to 40% of WTI rather than 15% of WTI. As well, it would need realized natural gas prices to be more like $1.50 to $2.00 per Mcf rather than sub-$1.00.
With its limited liquidity and 2020 term loan maturity, Roan didn't have much time to wait for improved prices, and thus the Citizen Energy offer appears to be the best option given the circumstances.
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