Article from Investment Trust Newsletter September 2024.  For full access to all articles and back copies, please SUBSCRIBE HERE.

RIVERSTONE ENERGY

(RSE, 803p)

Riverstone Energy is not an easy trust to understand.  It has a colourful record from its listing in late 2013 to the present time, with plenty of highs and lows along the way.  Depending on timing, investors may have made or lost a great deal on Riverstone Energy over the years.  The trust raised £760m from its launch but then took a long time to get invested and had put less than 40% of its money to work after 18 months on the market.  Its shares sank to a wide discount as a result but then rallied sharply again as its holdings in North American oil and gas companies started to deliver against a backdrop of stronger oil prices, peaking at 1385p in 2017.  

By the middle of 2019 some disappointing valuations and weaker crude prices had dragged the share price back below its starting level of 1000p and the trust was attracting some criticism for its high fees.  It ended 2019 as the worst share price performer in the whole sector with a drop of more than 60% and fell further as the pandemic hit in early 2020.  The shares hit a low of 108p, then bounced quickly. A discontinuation vote in November 2020 was looming though, with a chunky exit fee in prospect for the managers, but they could also block it together with cornerstone investors, raising governance issues.  That was indeed the outcome, and the trust decided to transition towards clean energy investments to capture the zeitgeist of the day.  RSE shares rallied by more than 60% in 2021 and carried on rising in 2022 in spite of a continuing wide discount.  The shares briefly regained the 1000p mark earlier this year but remain volatile and the trust is clearly a tricky proposition for investors.

Following the acquisition of the RSE portfolio company Hammerhead Energy last November the trust found itself with excess cash that it decided to return to shareholders through a US$200m tender offer at 1050p per share in March.  This leaves RSE as a smaller trust now with around £350m of net assets, and a considerably smaller market capitalisation that reflects the wide NAV discount of 35.5%.  The portfolio is around 63% invested in conventional oil and gas assets, with 16% in decarbonisation investments that have proved poor performers to date, and the remainder in cash.  There is a mix of listed and unlisted investments, but like Castelnau Group (CGL, 100.5p), Crystal Amber Fund (CRS, 108p), 3i Group (III, 3090p), Baker Steel Resources Trust (BSRT, 49.5p), Manchester & London (MNL, 623p), Hansa Investment Company (HAN, 228p; HANA, 226p), Chrysalis Investments (CHRY, 78.7p), Geiger Counter (GCL, 39p), Aurora Investment Trust (ARR, 257.5p), Schroders Capital Global Innovation (INOV, 10.625p) and others, RSE is a highly concentrated trust with a large holding in a single company.  At the end of June the US oil producer Permian Resources accounted for 34% of the net asset value; an unlisted European company called Onyx that operates coal and biomass fired power plants made up another 15%; and another US oil producer, Veren, 14%.  That degree of concentration makes RSE a high-risk proposition, as does the influence of the oil price, so we can expect more volatility ahead.  And whilst that discount of 35.5% looks wide in absolute terms it has been much wider over the last twelve months.  The stockbroker JPMorgan Cazenove removed RSE from its model portfolio in June after its strong run higher, and we consider the shares to be SPECULATIVE.

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