This article was published in the Telegraph earlier today.

If shareholders have learned anything about Riverstone Energy (RSE) during its volatile 10 years, it is perhaps to take profits where you can in a fund investing on both sides of the energy transition.

But what do you do when the investment company offers to buy back your shares for 31% more than they were trading at, but for 16% less than their actual value?

That’s the dilemma urgently facing investors in the Telegraph’s Questor recommendation that floated at £10 a share in 2013 and peaked at £13.51 four years later before crashing to 160p in the 2020 pandemic.

The shares have recovered impressively since then, prompting investors to ask for a view on the £158m ($200m) tender offer the dollar-based, North America-focused fund launched last month.

Riverstone is proposing to buy back 35.7% of its shares at £10.50, which is 31% more than the 800p share price on 7 February before the company said it would return to shareholders the profit made on the $1.8bn sale of Canadian shale oil group Hammerhead last November.

Riverstone shares jumped 14% to 914p on the day of the announcement and have risen since to 953p.

That represents a 52% gain since Questor last tipped the shares at 628p in November 2022 and a doubling, or 104% gain, for those who followed its previous advice in January of that year to buy at 468p. Even better, they have trebled since its earlier update at 314.5p in May 2020 when the shares rebounded from the Covid shock and, under pressure from shareholders, the company adopted a more investor-friendly approach having lost two thirds of its value in the previous seven years.

Sadly, however, Questor is still 24% down on its original tip in October 2017 at £12.50 but is hopeful the company can recover this loss as it continues to return excess capital to shareholders.

Crunch time

So what do investors do now given they only have until 6pm on Monday to decide whether to sell in the tender?

On the face of it, the £10.50 offer is good at a 12% premium over the current price. However, it is 16% less than Riverstone’s net asset value (NAV) per share of £12.53 at 31 December. This means investors who sell are giving up a huge potential gain if the shares ever close their 24% gap to NAV.

It also means a ‘material’ transfer of value from exiting investors to those who remain, according to James Carthew, head of research at QuotedData, an investment companies specialist.

Carthew said if the tender offer is taken up in full, Riverstone’s NAV will rise by 113p to £13.66 a share because of the boost from buying its shares cheaply. ‘Shareholders need to weigh up their need for liquidity against this loss of potential long-term value – and this is very much an individual decision,’ he said.

An argument for selling is that Riverstone’s managers are moving the £529m ($674m) fund towards renewable energy where they have a less successful record than in conventional oil and gas companies. The 2023 annual results showed the £182m invested in 11 decarbonisation companies was worth half that amount.

Investors’ decisions are complicated by the likelihood that, having had a strong run, the shares will fall back after the tender. The company has more cash to resume buybacks, but Carthew said there was no guarantee it would stop the wide discount worsening, noting the last time the company purchased shares in October, they traded 50% below asset value.

This is Riverstone’s second tender offer since August when it bought 7% of its shares at 578p on a 43% discount that Carthew thought poor value. The latest tender is better, but marks another contraction of Riverstone that raises the possibility of a bid for the company.

‘It is interesting that the announcement sets out the rules around the Takeover Code in some detail – the share register is quite concentrated,’ said Carthew. Riverstone has noted that Moore Capital Management, a US fund manager, owns a 20% stake and could be required to bid if its position rose to over 30% if it did not tender any shares.

While investors can apply to sell all their shares, Questor thinks investors should keep things simple and sell 35% in line with the offer. That way they pocket some immediate gain and are around if more comes gushing up the pipe.

KEY FACTS

Market value: £402m
Year of listing: 2013
Discount: 23.9%
Average one-year discount: 45%
Yield: Nil
Most recent year’s dividend: Nil
Gearing: Nil
Annual charge: 2.5%