Riviera Resources (RVRA) – Liquidation – 27% Upside

Current Price: $1.73

Liquidation Value: $2.20

Upside: 27%

Expiration Date: TBD

Press Release

This idea was shared by Maple Fun

 

Executive summary

This is a risky liquidation play with high uncertainty as some important parts of the eventual liquidation value cannot be estimated with accuracy.

Riviera Resources (OTC: RVRA) has been in a slow liquidation mode for the last 2 years. They recently made three announcements (herehere, and here) that they are selling the majority of the current assets (transactions to be closed in 2020 Q3 and Q4), while the remaining smallish assets are expected to be sold in Q4 (although no details are available on that so far). The company is majority-owned (64% combined) by a couple of PE/hedge fund shops - Eliott and Fir Tree and York Capital, which control the board and are pushing for the liquidation. The management has been paying big tax-advantaged distributions in the last 2 years and is fully committed to distributing the proceeds from recent asset sales in the quickest and most efficient way. My estimated liquidation value is approximately $2.2 per share, with the most part of it to be received in late 2020 and early 2021. The company has clearly stated that they will return the majority of proceeds to shareholders as soon as possible (PR):

The Company intends to evaluate the process of winding-up and of returning the majority of its remaining capital to its shareholders as efficiently as reasonably possible, at which point the Company would completely exit the upstream and midstream business, in the event this sale and other contemplated asset divestitures are completed.

The company has not made a formal call for liquidation of the company yet, however, given the involvement of the PE/hedge fund shops and the trajectory the company's been taking over the last 2 years, it seems that RVRA should be liquidated shortly after the remaining assets get sold (expected in Q4).

Risks/uncertainties:

  • Lack of clarity of what portion of Net Working Capital will remain with the company after asset sales are completed.
  • Higher than expected cash burn/fees and liquidation expenses;
  • Uncertainty regarding the remaining Mid-Continent asset sale;
  • Timing of cash distribution (especially for the final liquidation);
  • OTC stock and limited liquidity.

 

RVRA Asset Sale

Firstly the assets, which are currently on sale (the three agreements):

  • North Louisiana upstream - definitive agreement for $26.5m is signed with an undisclosed buyer. Closing estimated in Q3'20.
  • Anadarko Basin upstream - definitive agreement for $16m is signed with an undisclosed buyer. Closing expected in Q4'20.
  • Blue Mountain midstream - definitive agreement for $111m is signed with Citizen Energy. Expected to close in early Q4'20.

So all three sales already have the definitive agreements signed and the most important (largest) of them is Blue Mountain. Blue Mountain is getting acquired by Citizen Energy - a privately owned and newly created (2019) PE fund that in Q3'19 has acquired Roan Energy for $1bn. Given that Blue Mountain is a 10x smaller transaction, it is fair to assume that there should be no problems with financing, while the strategic reasoning (combining upstream and midstream assets in STACK/SCOOP areas) also seems legitimate. Overall, I assume that the probability of asset sales closing is very high.

After these 3 sales are completed, RVRA will retain only smallish mid-continent upstream properties, which the company is expecting to sell in Q4 (although no price or further details were given so far):

The Company has also previously announced plans to sell its remaining upstream assets, primarily located in the Mid-Continent region, with plans to close in the fourth quarter of 2020.

These Mid-Continent assets include "various other oil and natural gas producing properties and mineral acreage throughout Oklahoma", however, due to consolidation, their value is not clearly defined in RVRA statements. Thus, to remain conservative, I have assumed zero value for these, however, any additional income from the sale will increase the potential liquidation value.

 

Liquidation value

Estimated proceeds from the RVRA liquidation:

RVRA

The most important wild card here is the Net Working Capital (NWC) as it is not clear how much of the indicated $76M (based Q2 numbers) will remain with the company following asset sales. If $20m of this figure gets transferred together with the asset sales, then the whole upside is eliminated. In the liquidation scenario above I have assumed the full amount stays of NWC with the company. Larger components of NWC:

  • Cash was listed at $56M, among which only $1M is at subsidiary Blue Mountain. So the full amount is likely to stay with the parent.
  • Restricted cash stood at $24M, among which ~$10M was reserved for management incentive pay with the corresponding liability. The remaining amount was reserved for asset retirement obligation which might be released or paid as fees upon asset sales (high uncertainty at the moment).
  • Other current assets and current liabilities - various receivables, payables and 'other': I have treated these at face value and assumed full amounts stay with the parent.

Regarding the cash burn and other fees, I've modeled $6m for commissions/fees related to asset sales. That’s ~4% of the gross stated amount and is consistent with historical asset sales numbers. RVRA sold Hugoton Properties last year: $295M news release number, $283M net proceeds as shown on financials. That was 4% fees. They sold their office building this year for $21.4M, $21M shown on financials: 2% fees.

Furthermore, I have modeled an additional $20m of cash burn for running the business/cash leakage, liquidation expenses and etc. The number is arbitrary and speculative (another point of high uncertainty). Please note that during H1'20, with historically low energy prices, the company actually generated a positive $10M operating cash flow prior to changes in the net working capital. Moreover, RVRA shut its productions and cut personnel expenses in Q2 (a lot of severance pay already occurred), sold assets (so minimal capital expenditures in H2 and hereafter), and cut other expenses heavily.

 

RVRA Background

Riviera Resources originated from Linn Energy, a failed shale play. After emerging from bankruptcy in mid-2018, Linn Energy was split into two entities: Roan Resources (upstream assets in SCOOP) and Rivera Resources (other legacy upstream assets and midstream infrastructure).

The share price of Riviera has been very disappointing since its birth in 2018. Two reasons to explain: first, the overall U.S. shale industry has suffered a lot from low energy prices and bad economics of shale oil/gas. Second, Riviera’s midstream assets are in SCOOP and provide services to Roan Resources (acquired by Citizen Energy in Nov 2019). SCOOP has been hit extremely badly by low output and high decline.

Riviera Resources started selling assets and returning cash to shareholders from Day 1. However, worth noting that the share buybacks so far have been value destructive as shares were repurchased significantly above the liquidation value. Maybe at the time of buybacks management envision far higher liquidation value - hard to tell with limited communication.

Track records are as follows:

In H2 of 2018, they spent $153 M on share repurchase.

In 2019, they spent $149 M on share repurchase and $249 M on dividends.

In the first half of 2020, they spent $3 M on share repurchase and $101 M on dividends.

In total, from Aug 2018 to June 2020, they returned $655 M cash to shareholders. Currently RVRA has a market capitalization of around $100 M.

Current shareholders:

RVRA share

17 COMMENTS

  1. ijw

    Why do you assume receivables, Accounts payable and asset retirement liabilities stay with company? Isn’t that transferred with sold assets?

    I got the following, just taking $55m they already got, add $147m to that from recent sales (fees included here), subtract $75m for debt and subtract another $10-15m for wind up costs ($25m seems aggressive given that SG&A was $11m last quarter and will probably shrink fast in coming quarters?). And exclude 100% of restricted cash or other current assets.

    Since this line gave me the impression that close to 100% of restricted cash will be used for compensation awards:

    ” At June 30, 2020, “restricted cash” on the condensed consolidated balance sheet consisted of approximately $10 million that will be used to settle certain claims in accordance with the Plan (which is the remainder of approximately $80 million transferred to restricted cash in February 2017 to fund such items), approximately $1 million related to deposits and approximately $13 million related to potential future distributions for nonvested share-based compensation awards”

    Or am I reading it wrong, I am not good with legalese. Where do you get the relation between restricted cash and asset retirement liabilities? And how much of wind up costs is already included in restricted cash figure?

    I get to $1.95-$2 in liquidation value per share here.

  2. Maple Fun

    I am waiting for the guidance provided by the management. Hopefully we will have a better picture when they announce Q3 financials regarding net working capital adjustment.

  3. W51W52

    I’ll just add a few of thoughts:

    1) Not everything in the Anadarko Basin has been sold. Per the 2Q’20 Earnings Press Release: “The Company announced today that it has signed a definitive agreement to sell its interest in certain properties located in the Anadarko Basin in Oklahoma. The transaction is expected to close in the fourth quarter of 2020 for a contract price of $15.8 million. The properties are located in 14 counties throughout central and northwest Oklahoma, and consist of approximately 2,100 wells with average second quarter net production of approximately 28 Mmcfe/d.” The key word is “certain” as opposed to “all.” If you look in the 2Q’20 10-Q, average daily production for Mid-Continent is 36 Mmcfe/d, so 8 Mmcfe/d has not been sold yet. Just doing some rough math of price per Mmcfe/d from the existing transaction, it is possible that the remaining Anadarko Basin producing property is worth $4 to $5 million.

    2) If you look through the 1Q’20 Supplemental Presentation, you’ll note that most of the non-producing property is located in Oklahoma (~6,100 net mineral acres, with ~2,150 net mineral acres in Grady County). That is also worth something, but it is hard to determine the exact value. The way I looked at it is based on comps (it is probably not accurate, but it gives you a starting point). The North Louisiana transaction was for $26.5 million, and it was for 100 wells with an average second quarter net production of 16 Mmcfe/d. If you check the 10-Q, that’s the entire North Louisiana production. I can’t see a logical reason why the purchase price per Mmcfe/d is so much higher in North Louisiana as compared to that of the Anadarko Basin, UNLESS the transaction also included the North Louisiana non-producing upstream inventory (see page 9 and page 10 of the 1Q’20 Supplemental Presentation). So, hypothetically, if the per Mmcfe/d value for North Louisiana is the the same as that of the Anadarko Basin transaction, it would imply that ~$17 million of the $26.5 million is attributable to the North Louisiana non-producing upstream inventory. From the face of it, it appears that the royalties area in the Anadarko Basin (Dewey, Custer, Washita, and Caddo Counties, basically everything that is not in the NW STACK Core Area) is quite a bit larger than the assets in North Louisiana (see page 10 of the 1Q’20 Supplemental Presentation; one map is much more zoomed in than the other one). So, I think assuming $10 to $20 million of upside (maybe even more) for the sale of these net mineral acres wouldn’t be unreasonable.

    3) I found the 2018 Omnibus Incentive Plan and the corresponding Performance Shares Agreement:
    https://www.sec.gov/Archives/edgar/data/1737204/000119312518240571/d593263dex101.htm
    https://www.sec.gov/Archives/edgar/data/1737204/000119312518240571/d593263dex102.htm

    Based on my reading of the documents, I find it highly, highly, highly unlikely that the 1,847,950 Performance Shares will be issued, and as such, the $6.00 per share associated with the Performance Shares will be available for distribution to all shareholders.

    4) The other $10 million of restricted cash is related to the settlement of claims related to the original Linn Energy bankruptcy. It is unclear if this cash will be used to pay claims, or be released into unrestricted cash & cash equivalents. Originally, $80 million was transferred to RVRA back in February 2017 to fund the payment of bankruptcy claims.

    1. Writser

      I don’t know if it is too conservative. Insiders probably have a better view on that than we do. It is worth noting though that this is the distribution range of remaining assets AFTER making provisions. They also have to hold back some money for:

      – Any claim which is the subject of a pending action, suit or proceeding to which it is a party
      – Claims that have not been known to it but are likely to arise within ten (10) years after the date of dissolution

      So unless things really go south I think there’s a large chance that these provisions will be (partially) paid out at some point. Of course that could take a few years.

      Still, by my estimates the company should have ~$125m in unrestricted cash pro forma and even if you adjust for costs and provisions the guidance seems quite disappointing to me. Either I am missing something big or the company is going to hold back a massive amount of cash for potential future claims.

    2. ijw

      $40 million is $2.04 per share, which was actually slightly higher than my estimate. I think it is very likely to fall somewhere in the top half of that estimate?

  4. W51W52

    Even if you take company’s range at face value. Mid case is $20 million, or $0.34 per share. Right now the implied price is $0.15 per share.

    I don’t think they are taking into account the release of the cash reserved for the 11.3 million of performance shares on their balance sheet. If you read through the Performance Shares Agreement, I seriously doubt that these shares will be issued.

    $146.4 million of cash proceeds from the announced asset sales + $55.6 million of unrestricted cash on the balance sheet (2Q’20), less $80 million for Bluemountain = $122 million of cash. Upside is $11.3 million of restricted cash related to Performance Shares, possible release of claims related to Linn Energy Bankruptcy ($0 to $10 million), sale of remaining Anadarko Basin ($0 to $5 million), and sale of the remaining upstream assets (no idea here, total guesstimate of $0 to $20 million). Downside is cash burn in liquidation, and any reserves for known and contingent claims (plug in a number here).

    I’m making this a 1.5% position on a post-$1.35 dividend basis. About the same as my BMY RT. Similar upside/downside, but better odds (I think).

    1. Maple Fun

      Agree. I added to my position…in the worst case, it may take a couple of years to collect follow-on distributions if any..

  5. W51W52

    The next trading window is if we see updated 13Gs from Elliott, York, and Fir Tree blowing out of their positions. Their funds are not doing well this year (down YTD), so they are inclined to realize losses this year (it would really anger their LPs to have a negative year in terms of performance, and be presented with a K-1 for positive capital gains). So, I think it’ll be a good opportunity to add there. As always, DYODD.

    1. Platitudes

      @Maple Fun
      How did you arrive at the conclusion Adage was a “decent arb house”?

      1. Maple Fun

        It’s subjective of course. Look at their holdings. Do they make sense to you? Then you can make your judgement.

  6. ERB

    Anybody know if the derivatives on their balance sheet can be counted as cash at this point? They didn’t get go out the door with the divestitures, so wonder if it’s a safe bet if they were commodity hedges that they’ve been closed/realized at this point…around $6m net.

  7. nostradamus

    Riviera sold remaining royalty properties for 7M, and now expects to distribute 0-30M (0-52 cents per share I believe). I haven’t been looking into this as closely as I should have perhaps; shares are down 10% today and share price is now mid of the weirdly wide distribution range. Anybody here with better insight, for example: what’s up with the large distribution spread? These guys basically sold all of their assets, why can’t they be more specific?

    1. ERB

      They have to go through the claims process, so there is a chance someone will pop up and claim they are owed something (also a possibility they might find some small assets). Additionally, per their Q3 report, their restricted cash includes $14m of “deposits”, which are essentially transaction escrows. Highly unlikely that they don’t recover almost all of this, but I feel like the bottom of the range is more of a CYA thing. Another possibility is some kind of lawsuit that’s low probability enough to exclude from their disclosures, but still exists as a risk. Hopefully we get some more clarity before shares stop trading in Dec.

  8. bigdaddy85

    Any idea the timing of the last distribution? I thought they said they were going to delist in the middle of December, so is that the payment time as well?

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