Key points:
- Riverstone Energy has been heavily tipped by Questor on the basis of a 90% discount to asset value
- This requires some fairly heroic assumptions, that 90% discount, but it could be true
- Even as Riverstone is up 7% this morning there could be more to go
- How to invest in the FTSE 100
Riverstone Energy Ltd (LON: RSE) shares are being tipped by Questor in the Telegraph as trading at a 90% discount to net asset value. That’s an enormous, almost unheard of, discount and if true might well trigger a significant revaluation.
The standard estimation of the discount is 43% (at this morning’s opening price, before the 7% rise) and it’s entirely fair that there is a discount too. Some to much of the value is in highly illiquid investments in the oil and gas field. There always is a discount for illiquidity. The reason being as Woodford found out – when people want their money back then illiquid investments have to be sold for near nothing to gain the cash.
So, a trust investing in illiquid assets, yes, there will be a discount against asset value. So far so unsurprising and 43% might be a bit rich as a discount but there we are. Given the volatility of the oil price (the gas assets are largely US, where the price isn’t as volatile as in Europe) even that might be fair.
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However, there are two large and reasonably liquid investments within the trust, Centennial and Pipestone. If we knock off the value of those – they could be theoretically sold – then that discount increases. Because those values are discounted by that 43% discount to asset value of the whole trust. Then if we strip out cash and near-cash equivalents we get down to a valuation of those illiquid assets of only 34 pence a share. But on the books, they’re worth vastly more than that. So, we might then say that Riverside is trading at a 90% discount to asset value.
One way of thinking through this is that yes, there’s that illiquidity discount. But logically it should only apply to the illiquid portion of the portfolio. The liquid portions of it – cash and quoted securities – might still attract a reasonable discount but not one of 43%. But that this discount is being applied across all the assets is too much.
Now, whether this is all true is another matter. True in the only sense that matters in a market, which is will everyone else, now that it has been pointed out, believe it? If so we can expect the Riverside Energy share price to continue soaring. This 7% is only the start of it – stonks time!
On the other hand this information has been available all along. So, why didn’t folk believe it before? We might find that the salience given to the discount closes it but that earlier opinions reassert themselves. At which point we’d get a fade of this bounce back to the previous situation.
There is also that third, gripping hand, argument. Which is that this is all newly true and that Riverstone will sell assets, return money to shareholders and so close the discount that way.
Trading this depends upon our estimations of what everyone else in the market believes about this. Do they buy the 90% discount story at Riverstone Energy or not?
