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Questor: buy now before others spot this enormous discount

·4-min read
nodding donkey
nodding donkey

We are always on the lookout for big discounts but Questor has never come across one of 90pc before. The trust in question is Riverstone Energy, which invests in shale oil and alternative energy assets, most of them unlisted.

If you look up Riverstone’s discount on a website such as Hargreaves Lansdown you will see a figure of around 43pc. This is big enough to attract our attention but analysts at Numis, the broker, say it is based on outdated information and the true figure is more than 50pc. If we go further and strip out its cash and other easily valued assets, we arrive at that figure of 90pc for the unquoted assets in the portfolio.

Let’s go through the analysis in more detail. First, that “official” discount quoted by data providers, of 43pc or so, is obtained by dividing the current share price by the most recent net asset value reported by the trust. The shares closed last night at 468p and Riverstone’s most recent NAV is 813p, which makes the official discount 42.4pc. But that 813p NAV figure is from Sept 30 last year, and quite a lot has happened since then.

“Riverstone has holdings in two listed oil companies, Centennial Resources and Pipestone Energy, and shares in both have risen since the September NAV figure was calculated – by 24pc for Centennial and by 77pc for Pipestone,” Numis tells Questor. It says the trust has also carried out significant buybacks of its own shares, which has the effect of increasing the NAV if the shares are bought back at a discount.

The broker’s current estimate of Riverstone’s NAV, once the rises in the share prices of the two listed holdings and the buybacks have been taken into account, is about 975p. At the current share price this would make the discount 52pc. But it also modelled what would happen if the assets whose value is easily realisable were taken out of the calculation – as would happen if the trust were wound up, for example.

In that hypothetical event the trust’s considerable cash balance could be returned to investors, as could the proceeds of the quoted holdings – and in the case of these assets shareholders would receive full value; they would not suffer from the discount that would halve the proceeds, relative to NAV, if they sold their shares in the open market.

The “rump” trust – the assets that would remain once the cash and quoted holdings were disposed of – would have an NAV of 542p per share, Numis calculates. If we also deducted the value of the cash and quoted assets from the current share price, we would be left with 35p. Relative to the NAV of the “rump” this represents a discount of more than 90pc.

Riverstone’s next update, for the quarter to the end of December, is due next week. It will include an NAV figure that reflects the rise in value of the quoted oil holdings. The shares have been flat since the end of September, suggesting the market has not cottoned on to the likely improvement in the NAV.

We would not therefore be surprised to see a bounce in the share price on the update and suggest that readers exploit the opportunity by buying before then.

Such a tactical move would be backed up by Riverstone’s more fundamental appeal, which is based on the continued recovery potential for its oil assets as crude prices remain elevated and the prospects of the fund’s newer investments in renewable energy assets, towards which it is gradually switching.

And it’s not as if the trust’s move into green energy is a leap into the unknown driven by investment fashion: its management company said it had been involved in more than $5bn (£3.7bn) of decarbonisation and renewable investments since 2009 and had achieved 34pc annual growth in the capital invested.

Those who followed our earlier advice to buy the trust should hold on; others should exploit the immediate opportunity with new cash.

Questor says: buy

Ticker: RSE

Share price at close: 468p

Read the latest Questor column on every Sunday, Tuesday, Wednesday, Thursday and Friday from 5am.

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