Much attention has been given to buying businesses below net cash. This has been a viable strategy for investors since the Great Depression, with a focus on public companies. Even today, there remain a few hundred opportunities to buy companies below cash in the public markets.
But what about the private markets? What do net-nets look like there?
If you want to achieve high returns in private markets and through structured deals, you need to deeply understand what the seller needs. In public markets, you don't need to do any sort of value-add work to make the seller comfortable or happy. In most cases, you won't even know who is on the other side of the trade. But in private markets, it's as much of a people game as it is a financial game. Understanding what the other side needs is key to getting a great deal done.
As a case in point, here's the story of how Andrew Austin and the RockRose Energy team acquired Marathon Oil's UK business in 2019 for $95MM.
Did I say $95MM? I meant NEGATIVE $250MM.
Rockrose Energy was founded in 2015, as an oil and gas holding company. Their strategy was to purchase smaller producing assets which were being end-of-lifed by the oil majors. They would use their operational expertise to extend the life of these assets. Their founder, Andrew Austin, previously worked in banking, and later founded IGas Energy, the largest UK gas producer. He would bring part of his executive team to RockRose.
Marathon Oil can trace its roots back to 1887 as the Ohio Oil Company. They became an independent exploration and production company in 2011. By 2019, Marathon Oil had decided to divest its UK business so they could focus on their "high margin, high return US resource plays". This was in the wake of many of the oil majors focusing on North American shale instead of overseas resources. This presented RockRose with an opportunity, as majors such as Chevron and ConocoPhillips were divesting their North Sea portfolios in favor of their US shale fields.
Oil majors were running for the hills. Dumping these assets. There was nothing wrong with the North Sea. As a matter of fact, these are great oil and gas assets. However, the biggest companies in the world have no choice but to focus on the industry trends. If the oil and gas world was zigging towards shale, they couldn't afford to zag. RockRose and other independent companies had no such restrictions.
On February 25, 2019 RockRose Energy announced the agreement to purchase the UK assets of Marathon Oil. The reported price was $140MM. At the time, RockRose had a $120MM market cap, so this was considered a reverse takeover by the UK standards.
On July 1, 2019, the acquisition was completed. The final consideration payable was $95MM. This $50MM swing was due to cash build from operations in the past few months. So they were going to pay $95MM. What did RockRose ultimately get for this $95MM price tag?
Put another way, RockRose got paid $250MM to double their business and take over an excellent collection of assets.
For reference, in 2019 Marathon Oil reported 1,205 mmboe in total reserves. This was a tiny deal for them. It constituted a single paragraph in a footnote for their financial statements.
This is RockRose's strategy. Buying "unloved producing assets".
Marathon wanted out. They wanted to refocus on the US shale business, and also didn't want to deal with nearly $1B in liabilities that their UK business had. About $760MM for decommissioning liabilities and $111MM for pensions.
RockRose won this deal because they were the only bidder who could offer the whole package. They were able to offer Marathon Oil:
Marathon wanted to get out, and this was the price for it.
RockRose took care of these liabilities quite well. They extended the life of the oil field, and were able to significantly reduce the decommissioning liabilities they acquired. For the fields they weren't able to extend, they plugged them up and sold them for $1.
As for their pension liabilities, RockRose contributed an additional $62MM and sold off the obligations to an insurance company. This also created a deferred tax asset.
In one short year, they had reduced decommissioning liabilities by $500MM+, eliminated their pension liabilities, and acquired excellent assets. All while getting paid millions by the seller.
RockRose executed its strategy. It extended the half-life of the assets. They paid a fat dividend due to the new cash reserves. They made some other acquisitions. In 2020, they sold themselves for a total gain of 42x in 6 years. Not too shabby!