RVRA - Special Situation Trading At 47% Of Net Cash

Summary

• We estimate that RVRA has $0.53-$.58 in cash. The stock currently trades at $.25 (43-47% of cash less all liabilities).
• To lose money, wind-down costs have to exceed $16mm, which we think is unlikely given the business is almost entirely a pile of cash.
• We believe this opportunity exists because of the tiny market cap of ~$15mm.

Background

In April 2018, the RVRA's former parent, LINN Energy, announced its intention to separate Riviera through a taxable spin-off. Riviera was spun-off on August 7, 2018 with substantially all of the assets of LINN Energy, other than LINN Energy's 50% equity interest in Roan Resources LLC.

Prior to its recent divestiture of all of its assets, Riviera had two operating segments: 1) Blue Mountain and 2) Upstream. Blue Mountain was a midstream company located in the Merge play within Oklahoma's Anadarko Basin. Upstream E&P properties were located in the Hugoton Basin, East Texas, North Louisiana, Michigan/Illinois, the Uinta Basin and Mid-Continent regions.

Starting shortly after its spin-off, RVRA began selling off all of its assets piecemeal completing ~15 transactions over the course of 2019 and 2020. Proceeds totaled ~$424mm in 2019 and ~$228mm in 2020.

To-date, RVRA has made 4 distributions:

1. $4.25/share on 12/12/19
2. $1.00 /share on 4/24/20
3. $0.75 / share on 5/12/20
4. $1.35/share on 10/28/20

On October 12, 2020, the Board of Directors of the Company (the “Board”), approved the dissolution, winding up and liquidation of the Company and adopted the Plan of Liquidation. Also, on October 12, 2020, the required percentage of the Company’s shareholders approved, through written consent in accordance with the bylaws the Plan.

On 11/11/20, RVRA announced it sold its remaining royalty properties for net proceeds of ~$7.5mm. RVRA also updated its estimate of future liquidating distributions to a range of $0-$30mm or $0.00-$0.52 per share (down from $0-$40mm).

The Company’s common stock will cease trading on the OTCQX Market, on or about December 18, 2020.

Pro Forma Balance Sheet

Thesis

We estimate that RVRA likely has $0.53-$.58 per share in net cash (cash less all liabilities) as of 9/30/20 pro forma adjusted for the Mid-Continent asset sale completed 10/1, the Blue Mountain asset sale completed 10/8, and the “remaining royalty properties” sale completed 11/11. Note that there is a range as we don’t know the gain/loss from the $11/11 sale so the low end of the range assumes all non-cash assets and none of the liabilities are included as part of that sale.

The company’s remaining assets are $31-$34mm of cash after paying off all liabilities plus 20 wells (which may or may not have any value – we assume $0). While it is difficult to precisely frame how much further wind-down costs will be, we think the market implied ~$17mm of burn is too high. We think a much more reasonable range for the wind-down of a pile of cash is $2-10mm of additional cash burn post 9/30/20 till the end of the wind-down period.

Note that RVRA has 3 large shareholders: Elliott Management (~26%), Fir Tree (~24%), and York Capital (~15%) which we think is a positive for RVRA as it should reduce value leakage to management, and it should also provide substantial legal sophistication should any litigation issues arise as part of RVRA’s wind-down.

The stock is likely to stop trading on Friday, December 18, 2020. After which, the security will no longer trade and owners will then sit and wait for the remaining distributions. We estimate that the average duration of the liquidating cash flow is probably ~1 year which for what we believe is a near double from current levels offers a very, very attractive IRR (with little market-risk given the asset is almost all cash).