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AIM listed oil producer and explorer Range Resources (LSE:RRL) is a stock beloved of penny share bulletin board punters. That, I suppose, should be a good reason not to buy. I must admit that in my heart I would rate this as a slam dunk sell but there is just a chance that the shares are cheap. Let me explain.
We start with the strange goings on in Puntland. For those of you not familiar with Range this is not a parallel universe inhabited by a race of people entirely cloned from Evil Knievil, but a place which is now, after years of strife, autonomous from Somalia. I should say that it is not the sort of place you would really choose to do business, let alone go for a break in the sun, but there just may be a lot of oil there.
Range is in a consortium which has vast acreage. Range has a 20% share, Red Emperor (20%) and the operator of the well, TSX Venture market (a scary place) listed Horn Petroleum 60%. The first well drilled showed oil shows but not a commercial find. A second well is now being drilled and shares in Red Emperor have been suspended ahead of the news. Horn shares continue to trade which is bizarre as do those in Range. Both are at near 52 week lows. We expect news imminently although a spokesman for Range claimed to have no knowledge of a BB rumour that a statement was planned for later today. My gut instinct is that if there were positive signs we would have been told about it and that as such this well may also prove non commercial. But it might just be a winner. We do not know.
Now Horn is valued at £31 million and is a pure Puntland play. That effectively values the Range stake at £10 million. Yet at 4.89p it is capitalised at £112 million. Hmmm.
To be fair it has other assets. I shall ignore small Colombian assets as they are undeveloped and need cash to firm them up. Range itself has a bit of cash. It also has some Texas gas assets which it has said that it will offload. But gas is not sexy right now and speculation (well an Edison Research note) that they could be worth $40 million might be a tad rich. I suspect that it would – right now – be lucky to get $20 million ( £12 million) for those assets and that cash will be needed to drill up Colombia, drill any further wells in Puntland ( cost to Range £2-3 million per well) and to cover PLC costs ( which were a whacking £2.6 million in the three months to June 30th 2012. But I stress that no sale has been agreed. There are also Georgian assets which may have some value and in Trinidad a series of shallow short life oil plays are will chuck off $1m pcm free cashflow this year and there is potential to build that significantly ( at a cost of drilling more expensive deeper wells).
I note that cash was £6.5 million at 30th June but also that the net operating cash outflow during that quarter was £9 million. I am told that Range is looking to secure a $15-40 million debt facility. If it cannot achieve a quick sale of its US assets (and given gas prices I reckon it will not) it will clearly need it. At least Trinidadian cashflows should mean that it can secure such a facility.
And so what is this company worth? Well if Puntland 2 is another duster the shares will slump as folks who craved the excitement of elephant hunting move elsewhere. If one effectively values Puntland at nil then on a break up basis ( where one can afford to ignore the c£1 million a month being spunked away on PLC costs) there is still support from the US ( call it £12 million) + Trinidad ( two times cashflow – call it £16 million) plus bits and bobs elsewhere call it £33 million – the shares would (plausibly) be a worth another look if they fell to just under 1.4p. If Puntland comes in big (and the share price movement of Horn and Range in recent days plus my instinct tells me that this will not happen), the shares will clearly move higher. However given a) the cost of developing a project in the middle of an unstable hell hole with zero infrastructure and b) the fact that Puntland is not exactly East Surrey I wonder how much higher? As things stand if you really believe in Puntland it strikes me that Horn’s 60% stake is being valued at £31 million while Range’s 20% stake is being valued at £44 million. Ceteris paribus Range is not cheap. And if the news is not good – when it arrives – it could be very expensive indeed.
There must be a caveat that the shares could go sharply higher if Puntland comes good. But the share price already discounts some good news here. On balance while not a ludicrous proposition, Range does look a very, very high risk play indeed. I certainly would not bet the ranch on it.
your forgetting puntland offshore, the fact that t&t will in the next few years be producing multi thousand barrels a day on very good fiscal terms (and it has its own rigs) plus each short drilled well which costs 100k yields 40k barrels at $28 net to range, its very cash generative. Throw in the water flood project and potential for early production at low cost from Columbia and you see range is not as risky as you seem. It’s a balance between dull cash flow from t&t and Columbia and Georgia going forward to pay for the likes of puntland. i’m not nieve and know range has its risks but discounting puntland completely the t&t plus Columbia make it a winner on a longer term basis.
Your valuation of Trinidad is absolutely laughable. What a joke.
yes Trinidad is the core asset. 2500 barrels by yr end = £30m cashflow to Range.
4000 within 18 months and 10000 within 2/3 years. Break-even at $ 30 per barrel.
Trinidad worth 10p & Texas 4.p. Columbia 1.2p Georgia 1.4p.
News of sale and finance deal will be positive short term news. Puntland?
Adsy- I think you may get your chance to buy at 3p sooner than you think.
John – how will Range (no cash) fund all these developments?
SavvyUnlikeYou – a joke, go ahead FYB tomorrow and laugh all the way to the bank
LeoRoy – Offshore Puntland? Surely a dream now. How will range fund all these developments?
Thanks to all of you for your comments and as such mega bulls you should have an ample opportunity to average down tomorrow. I wouldn’t
Best wishes
Tom Winnifrith