Questor: the shale oil properties that underpin this trust are significantly undervalued

A shale oil field
Riverstone backs shale oil start-ups

This column is always on the lookout for “catalysts” that could cause a trust’s share price to rise.

Sometimes investors start to take a more positive view of a company for some reason and narrow the discount even if there is no change in the value of the actual portfolio. In other cases, a sharp jump in the value of the assets will be enough to see the share price rise even if the discount doesn’t move.

A swift and significant rise in a portfolio’s net asset value or NAV is unlikely in the case of a well diversified basket of shares. However, it’s a very different matter when the trust has a small number of holdings, especially when those holdings are unlisted.

A quoted asset has its value revised by market forces daily, whereas the value of an unquoted one is more a matter of opinion and may be left unchanged in a trust’s accounts for many months, only to rise (or fall) significantly when a new valuation is carried out – or when the asset is sold.

If that all sounds a little theoretical, we will explain how just such a scenario could play out at this week’s trust, Riverstone Energy.

The company specialises in backing US shale oil start-ups. Its management company, Riverstone Holdings, has long-standing relationships with many entrepreneurs in the sector, as well as geological expertise of its own, and the trust provides finance when these entrepreneurs identify a promising area for exploitation in one of American’s shale basins.

Typically these new ventures are nurtured for several years, during which time further capital may be advanced so that additional wells can be acquired or built. Ultimately the aim is that each holding will be realised via either a sale or flotation, with the proceeds reinvested in new ventures of the same type.

When a holding is sold or floated, the likelihood is that the price will be much higher than the valuation on the trust’s books, which is used to calculate its NAV and hence its discount. As Riverstone’s portfolio is “concentrated”, with stakes in just 13 businesses, even one sale at an appreciably higher price will cause a spike in the overall NAV.

“Whenever one of its assets is sold or floated you tend to get an average uplift of 20pc-30pc relative to book value,” said Nick Wood of Quilter Cheviot, the wealth manager, who holds the trust in some of his clients’ portfolios. “The trust values its assets relatively conservatively so anything sold will be at a significant premium.”

The trust was fortunate in the timing of its investments in the shale sector: it listed (in London, despite its US focus) in 2013, shortly before the collapse in the crude oil price to about $30 a barrel, which forced owners of land in the shales basins to accept “fire sale” prices.

“There haven’t been many investment bargains since 2009 but energy assets a couple of years ago were one exception and Riverstone managed to buy a portfolio of them right at the bottom,” Wood told Questor. “Now oil is nearer $60 and the managers are looking forward to selling parts of the portfolio.”

While this means that there will be fewer bargains when it comes to reinvesting the sale proceeds, he said the managers had a “successful record of buying assets at much higher oil prices”. Many of the trust’s shale assets are highly profitable even at lower oil prices, Wood said, with break even at about $35 “and falling all the time”.

The company currently trades at an “official” discount of about 16pc but the true figure is likely to be far greater if, as expected, assets are sold at a significant premium to book value. Investors are likely to respond to such sales by pushing the shares higher.

Reassuringly, the managers have a record of investing their management fees into shares in the trust, giving them significant “skin in the game”.

Investors should bear in mind that while the shares are priced in sterling the assets are denominated in dollars, so exchange rate fluctuations could affect the value of their holding.

Questor says: buy

Ticker: RSE

Share price at close: £12.50

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