22/08/2023

Introduction:

Given the current state of the small cap market in London, it would be easy to find dozens of companies who have every reason to suggest that they are sitting on an unfair valuation. Various explanations are in place at the moment for stocks to be trading sub par. Rising interest rates, a liquidity crunch and the aftermath of a pandemic bubble have all taken their toll. However, in the case of Reabold Resources, the current £11m market cap is totally at odds with the £46.5m NAV. We have become used to investment companies trading at a discount to NAV, say half. But to trade at quarter seems totally exaggerated, and at odd with the recent history of the company, and future prospects. This is especially the case given ongoing issues regarding energy security, and the current elevated crude oil price.

The Sale Of Corallian

At the heart of the bull argument for RBD has to be its sale of Corallian and its Victory licence to Shell (RDSB). The net proceeds of this are expected to be £12.7m. This compares to an acquisition price of £250,000. What is interesting here is that the market is treating RBD as if it is a company with no successful track record of investment. It is also pretending that selling at asset to Shell, is not a big deal. The fact that a total of £4m is set to be returned to shareholders this year, has also apparently been ignored. If Location, Location, Location is the rule in real estate, Execution, Execution, Execution is the mantra in the small cap space. RBD not only sold a key investment, the buyer is as good as it gets. One would not be wrong to assume that down the line RBD will be perfectly capable of dealmaking successfully, with what is clearly a decent Rolodex of contacts.

West Newton

Of course, Corallian is done and dusted, and we may have to accept that the traditionally forward looking stock market is looking forward to events, rather than allowing RBD to sit on its laurels. Enter the West Newton asset. It has a 56% interest in WN, potentially one of the UK’s largest onshore oil and gas projects. The implied NPV10 is $222m for RBD’s stake, with broker Finncap suggesting that the company’s stake risked value is $94m. This amounts to 0.82p a share versus 0.11p currently. We should be treated to the drilling of a horizontal well at WN by Q4 2023. This is now only a few months away, something which should start to improve sentiment towards the company, if not the stock, soon. However, it does appear to be at least partially baked into the valuation of RBD’s fellow stakeholder in WN, Union Jack Oil (UJO). This company only has a 16.6% share in the project, yet its market cap is £25m on a NAV of £23m. Of course, both RBD and UJO both have other assets in the portfolios other than WN, and therefore it is not a like for like. Nevertheless, this state of affairs underlines the way that RBD should be trading near to its NAV, rather than just a quarter or so.

Conclusion:

The summer to date has seen stocks which have been perhaps oversold both fundamentally, and in terms of sentiment, bounce back sharply. This is mostly likely the result of over two years of small cap retracement after the pandemic induced liquidity bubble. Broker Finncap has noted that there has been a “seller” in shares of RBD, and suggested that this alone is the reason for the relative under-value in the company. Indeed, it is notable that neither the prospect of drilling WN, a share buyback, or a decent cash return to shareholders has materially altered the weakness in the stock.

What can be said is that, as we have seen from equivalent bear trend situations, Canadian Overseas Petroleum (COPL) comes to mind, when the turn comes it can be just as much of an over reaction to the upside, as the downside. Indeed, the past couple of weeks have seen the shares rise over 100% on what looks to be a vicious squeeze. While it may take cash from Shell, and / or the start of drilling at WN, RBD looks to be a similar sharp recovery candidate.