Roc Oil has never been a big one for flashy, public relations soirees and bullish investor roadshows. Their shareholder base is essentially the same as when they floated, on a spread of assets that represent interesting, mainly overseas, oil plays from an industry perspective but not well understood by the wider investment market. Perhaps this is why their activities have not sparked the trading support like some others in their peer group.
It is a fine line creating an exploration and production portfolio so that it contains the right balance of regular cashflow and exploration upside to attract the attention of the stockmarket. In these times of uncertainty, cash flow is king. Looking at ROC’s cash flow, entirely derived from its UK positions, it shows impressive and profitable earnings of over A$50 million for the 1st half of 2001. This yielded a $10 million dollar net profit for the first six months of 2001.
Roc Oil’s Managing Director, John Doran, said the profit was an improvement of over 100% from the same period last year, excluding asset sales. If earnings per share are looked at, there was an increase of over 200%, said Doran, with a final figure of 9.4 cents per share.
The bulk of that income is from ROC’s Kyle and Saltfleetby fields. While production levels decreased (down 25%) high oil prices meant that ROC still gained a 30% increase in sales over the same period last year.
ROC’s balance sheet seems to be solid. “We have more cash than debt and that debt has been unchanged for a while now at US$30.5 million. It is more than covered by our production and reserves in the UK, and we don’t expect to be required to repay any of that debt until 2002.”
Often with small companies, one concern with funding exploration and development is the dilution of equity through capital raisings. However, ROC has “about A$65 million cash, more than enough to cover any upcoming expenditure,” said Doran. “In fact our problem is finding where to spend the money wisely.”
When Doran explains the shareholder base of the company you can understand why he’s reluctant to put any more scrip out in the market. While “being open to the vagaries of opportunity,” Doran said ROC “was jealous about its equity.”
“One of the distinguishing features of the company,” which Doran believes is unique in the Australian oil patch, “is that 17% of the company is owned by management and board, and I’m not talking options, I’m talking fully paid shares. In total, 30% is owned by ROC’s original private investors, including the 17% management stake. We’re all aware of the value of the equity.”
Roc has started to appear more frequently on the brokers’ radar screens. A recent report by Perth broker, DJ Carmichael, said ROC looked to be undervalued with its $75 million per annum cashflow from gas and oil sales.
“With a market capitalisation of $153m, the company is trading on a prospective price per earnings ratio of around 7.5 times financial year 2002 prospective earnings.” The broker put a buy on the stock. Looking at the ROC share price chart, the broker said if Roc was to rise above the $1.31 mark, it would signal a rise to $1.90.
It also said the company looked to be in a very strong position with high gas and oil prices generating healthy revenues.
One of the characteristics of the mid sized explorer is the tendency to overplay their upcoming exploration activities. “We’d prefer to let the exploration wells talk for themselves on the basis that the dry holes will have very little to say” said Doran. “There’s plenty of time to be a hero after a well has come in. A discovery also had to be commercial, he added. “There’s no such thing as a ‘technical success’ -it’s either a commercial success or it’s a commercial failure - you can’t pussy foot around.”
“Sometimes our co-venturers help us with our PR,” he said, referring to the publicity that was generated by Mauritania and the farm in partners to the Cliff Head well, due to be drilled around December this year in the offshore Perth Basin.
Lower keyed, but perhaps more important due to the lower risk, is the appraisal and development activity occurring in ROC’s North Sea acreage. An extended well test on the Chestnut Field is yielding around 11,000 barrels of oil per day (bopd) gross, and in less than three months it has produced almost 600,000 barrels. While Mauritania is sexy in terms of the size of the prize on offer, the prudent Doran sees the UK as being the steady contributor to the portfolio, and field development costs are much lower due to the shallower waters and existing infrastructure in the UK.
Doran’s views on the undervaluation of ROC are well known - never complain, just try to fix the problem by performing. With a swag of UK assets in the kitty, was he looking at an overseas listing such as London’s Alternative Investment Market to attract more investor interest?
“We’re conscious that when we came to float the Australian market provided the support needed, for a variety of reasons,” said Doran. “Generally the market in Britain - although perhaps it has changed –has been very negative on the small oil companies. There are some exceptions which suggests you could be forgiven for thinking that the climate is improving but at the moment there’s little Roc Oil stock in overseas hands.
“It may well be a direction that we want to review but we’re very wary about, for example, listing in London because, though we have UK assets, the onshore UK assets are still not widely understood by the market in the UK. There’s still a basic belief that if it’s onshore it can’t be much good.
“The Saltfleetby Gas Field puts the lie to that view but it takes time for people to change their minds. That’s OK because we’re producing 30 million (cubic feet) a day, every day, while people are waiting to change their minds, and we have 100% of the acreage all around it,” said Doran.
Doran said, if anything, a full UK listing would be preferable to a second board approach such as the AIM. “I could be wrong but if we have a full public listing in Australia, I can’t see why we’d go on the AIM market in London,” he said. “A full listing in London maybe, but what we don’t want to do is list in London, throw a cocktail party that night to celebrate, and then climb on the Qantas jet back to Sydney so that the next day the people at the party wake up and say ‘Who were those guys, where did they go?’
“Quite apart from anything else, don’t forget our office in the UK isn’t in London, it’s in Lincoln and quite bluntly, the cost of basing anyone in London is almost too terrible to contemplate.”