Strange thing this exploration business; one day you have nothing but hope and the next day, well.....
Let’s say the next day you have a bit more than just hope, you have some real evidence of value within your prospects. Your operating environment has changed for the better. Your ability to achieve your corporate objectives finally, after much delay, start to look like they could become reality....
Your business has been growing wings but previously you were prohibited from flying. You had earned the right to succeed but not, so it seemed until this point, the permission. You were all dressed up, and until December 2009, had nowhere to go.
This rather confusing opening picture is the environment currently occupied by Peter Landau, Executive Director of Range Resources (ASX:RRS)(AIM:RRL).
But it seems Cinderella, or in this case Range Resources, shall at last go to the ball! What happened in December 2009 was transformational for the business; it’s just the market hasn’t realised the magnitude of transformation....well not yet anyway.
It’s a bit of a protracted story, but, in a nut shell, this is where we are at present:
1. has a 25% stake in a Texan prospect from which drilling has identified a commercial oil and gas find;
2. has, with their operating partner Crest Resources, recently increased the size of their Texan oil prospect licence area by some 50% (1120 acres to 1680 acres);
3. has just commenced a seismic review operation in Georgia targeting substantial oil prospects (project revenue share 50/50 with Georgian government pre cost recovery and 35% Range after costs recovered, no tax deducted thereafter);
4. has just received the go ahead for drilling of the Puntland (northern Somalia) onshore oil licences estimated to contain 2-10billion barrels in one basin and a similar amount in a second with drilling now due to commence in 2010. Range hold a 20% interest and are free carried for the first $50million of exploration costs by their partner Africa oil (see comments below re free carry status);
5. holds 100% of offshore oil/gas exploration licences and plan to secure a partner to fund exploration programme in 2010;
6. has a market cap of A$36.5million or £21.1million based on 563million shares currently in issue.
The stock market has a long memory and, like the proverbial elephant, it never forgets. Where a company has erred it takes a while before the market forgives, and even then failure remains in the back of an investor’s mind and management have to behave impeccably to maintain the confidence to move beyond any historic difficulties.
Now we could drone on about management changes, delays, information flow etc ..... ad infinitum. Or we could focus on what Range Resources has right now and the value delivered to shareholders in the final weeks of 2009.
I vote the latter, and to help keep us positive, a quote from the first page of the Range Resources 2009 website presentation:
“If you can find a path with no obstacles it probably doesn’t lead anywhere”
You can see why they chose that one for the front page cant you!!
So straight on we go with a brief overview of what they have created. Spot the value here. We believe there is lots of it and Mining Maven is quite excited about what could happen to Range Resources and its share price in 2010.
After reaching target depth with the Smith1 Well in the North Chapman ranch area of Texas in November the markets were made to wait until 21 December 2009 before an rns confirmed a commercial oil and gas discovery.
Initial test results showed flow rates of 2.4million cubic feet of gas and 191 barrels of oil per day. No estimates were given as to the side of the finds but Range is to conduct additional testing of the well into the sales line whilst finishing completion. The company has confirmed that reservoir size and reserve figures will be released once completion operations are finalised this month (January 2010). Also, first production and sales are expected to commence later this month. So Range will become, at some time in the next few weeks, a revenue earning producer. Quite a change given the difficulties of the past.
Drill costs are supplemented by costs to production and Range has incurred expenditure of just A$1.3million, a figure they expect to recover in around nine months from their share of production and sales revenues. Quite a feat!
Now here’s a few extra points to note. Firstly, the initial well test measurements were conducted using a small choke size, so the full potential flow rate could be materially higher. Secondly, only one of the three pay zones has been perforated and tested, so more upside there. Thirdly, they are planning additional wells thus speeding up the potential production and sales revenues (of course they have to fund their share of cost for all wells drilled).
And finally, Range and its partners have just increased their Texan acreage from 1,120 acres to 1,680 acres, a 50% increase. Evidently they like what they see!!
There is much speculation as to the extent of reserve and of course speculation can lead to desperation. That said it’s worth noting that the original target for the drill campaign was to find a minimum of 80 billion cubic feet of gas. Initial speculation is that the find could exceed this target substantially and of course, there is also the oil to consider, something of a bonus.
Many investors are optimistically hoping for 200 billion which sounds a stretch until you consider that the Mobil David field just north of North Chapman ranch produced 250 billion cubic feet and over 10 million barrels of oil. Food for thought, but without doubt, the Texas success could be a mini company maker in its own right!
Onshore
Speaking of company makers how about Puntland onshore licences? Here Range Resources have a 20% interest with Africa Oil (as operator)(TSX:AOI) holding 65% and Lion Energy 15%. The Joint Venture Agreement covers the Dharoor Valley block and the Nogal Valley block.
Puntland is an autonomous state within Somalia and no doubt straight away the geopolitical risk warning flags will be waving in front of your eyes!
In reality the large remaining oil reserves of the world seem to be sat in the middle of geopolitical storms and despite this, significant returns can be made by investing in such territories.
That said, for a high-risk environment Puntland has made some significant progressive steps in recent years. Elections have been held in Puntland since 2001 and the recent (Jan 09) elections passed peacefully. Range makes a firm point that it has a positive constructive relationship with the Puntland government.
Evidently Puntland is cogniscent of the importance of Foreign Direct Investment and the need to address security issues. The recent appointment of a Kuwaiti security firm to protect those operating in the country was regarded as significant evidence to that effect.
Range has been trying to move forward the Puntland programme for some years now. Therefore there was some relief when a news announcement, released on 14 December, confirmed that the company, Africa Oil and the Puntland State of Somalia had reached agreement over modification to the Production Sharing Agreements. The revised agreements were still subject to Parliamentary ratification but this was achieved and confirmed via a news announcement on 21 December 2009.
The modifications allow Africa oil to drill one hole in each of the Nogal and Dharoor Valley exploration areas or two in the Dharoor Valley. In consideration of the amended agreements the parties have agreed to relinquish 25% of the original agreement area in January 2010 and make a $1million payment to the Puntland government on each commercial discovery within each of the exploration blocks. Other terms include enhanced environmental safety measures and a one off payment by Africa Oil of $1,050,000 for development of infrastructure.
Africa Oil has stated an intention to commence operations immediately. Worthy of mention is that Africa oil has reviewed data prepared by the Puntland government and Range Resources. They have reinterpreted existing seismic data and have drill targets identified. Rig mobilisation for Dharoor is expected in Q1 2010 with a view to spudding the first well in mid 2010.
As part of the Joint Venture Agreement Africa Oil committed to paying the first $22.8mn of exploration expenditure within each block (Nogal and Dharoor). With respect to Dharoor in the fourth quarter of 2008 Africa Oil satisfied this requirement and going forward Range will be required to contribute against its 20% participation. With respect to Nogal, Africa Oil has spent $4.3 million of the $22.8mn sole funding commitment (to end September 2009).
Puntland is considered to be world class acreage and a continuation of the prolific Yemen Rift system. Reflecting this and the work undertaken to date the onshore campaign is targeting 2 - 10 billion barrels of oil, potentially within each basin.
Offshore
Range has completed an offshore seismic/well database and through this has identified reservoir and source rock targets.
Offshore licences are still 100% owned by Range Resources however the company is in discussion with joint venture seismic partners to move this forward. It is anticipated that, subject to Puntland Government approval, joint venture partners will be agreed and an offshore licensing round undertaken, possibly within Q1 2010.
Georgia benefits from a democratically elected government and a business environment that demonstrates significant cross border investment and multinational trading.
On 9th July 2009 Range announced an agreement with Strait Oil and Gas re the acquisition of a 50% interest in two Georgian Oil and Gas exploration blocks (Blocks VIA and VIB). To earn this 50% interest Range are committed to completion of Phase II of the PSA applicable to the specific blocks, consisting of 350km of 2D and 3D seismic and well selection.
The budgeted costs for Phase II are $4-5million and against this Range planned a $2.5mn placement (see comments re ‘Rights Issue’ below) to cover initial Georgian costs to December 2009 ($1mn) and also for Puntland related expenditures.
This is a substantial licence area with the two blocks representing a contiguous area of 7,000 square kilometres (or over 10% of the surface area of Georgia).
The blocks have been the subject of extensive exploration, particularly during the Soviet era and are considered to be highly prospective for both oil and gas discoveries. Fourteen prospects have been identified on Block VIA with a gross unrisked potential of more than 380 million barrels.
Range will now undertake 350kms of 2D seismic to identify drill ready targets in due course.
Georgia itself is an existing oil and gas producer with the Samgori field holding approximately 200 million barrels of recoverable reserves. In addition three major pipelines cross the country supporting the transportation of hydrocarbons.
Fundraising:
It’s worth mentioning that Range has just announced an entitlements (rights) issue along with a placement. The entitlements issue is to raise approximately $7mn with investors on the record date able to buy one share at 5c for every four held. The placement of $2mn is to fund ongoing Texan and Georgian commitments and has been placed with institutional and ‘sophisticated’ investors.
One can assume that the $7mn, which will hopefully be fully underwritten, is to cater for Puntland related costs (re general operations and contributory Dharoor costs).
This fundraising enable the company to move to a revenue generation model through Texas, which in itself thereafter should provide a material incoming cash flow which can be re-invested in Georgia and Puntland helping to build the value of the company asset base.
So the Portfolio again......
1. has a 25% stake in a Texan prospect from which drilling has identified a commercial oil and gas find;
2. has, with their operating partner Crest Resources, recently increased the size of their Texan oil prospect licence area by some 50% (1120 acres to 1680 acres);
3. has just commenced a seismic review operation in Georgia targeting substantial oil prospects (project revenue share 50/50 with Georgian government pre cost recovery and 35% Range after costs recovered, no tax deducted thereafter);
4. has just received the go ahead for drilling of the Puntland (northern Somalia) onshore oil licences estimated to contain 2-10billion barrels in one basin and a similar amount in a second with drilling now due to commence in 2010. Range hold a 20% interest and are free carried for the first $50million of exploration costs by their partner Africa oil (see comments below re free carry status);
5. holds 100% of offshore oil/gas exploration licences and plan to secure a partner to fund exploration programme in 2010;
6. has a market cap of A$36.5million or £21.1million based on 563million shares currently in issue.
Example Risks (not comprehensive):
- Exploration work fails to identify economic resources;
- Country/Regulatory risk;
- Financial risk (sufficiency and stewardship of working capital and investment capital in particular);
- Commodity price exposure;
- Key person exposure (risk of losing key members of the team).
Company information:
Range Resources is listed on the Australian Securities Exchange (ASX:RRS) and the Alternative Investment Market (AIM:RRL).
Shares in issue - 563,000,000 (fully diluted – 954,000,000 reflecting 391million options at 5c per share)
Current share price – ASX 6.5c and AIM 3.75p.
Market cap (4.1.10) – ASX A$36.5million and AIM £21.1million.
Company website is found at: http://www.rangeresources.com.au/
This summary represents the views and opinions of Miningmaven, has been prepared for information and educational purposes only and should not be considered as investment advice or a recommendation. Readers are advised to do their own extensive research before buying shares which, as with all small cap exploration stocks, should be viewed as high risk. Investors should also seek the advice of their investment adviser or stockbroker, as they deem appropriate.
All rights reserved. Users may print extracts of content from this blog for their own personal and non-commercial use only. Republication or redistribution of Miningmaven content, is expressly prohibited without the prior written consent of miningmaven. However, linking directly to the Miningmaven blog is permitted and encouraged.
The author owns shares in Range Resources plc.Copyright © miningmaven 2009
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