By Ian Lyall
Investors who missed out on the Range Resources (LON:RRL, ASX:RRL) story as the stock went stratospheric might want to take a look at its Australian compatriot Red Emperor Resources (LON:RMP, ASX:RMP).
Each owns a 20 per cent stake in a high impact oil exploration project in Puntland, Somalia, that has been a major contributor to the runaway Range share price and they are partners in the former Soviet state of Georgia.
The one glaring difference between the two is their respective valuations. Where Range is worth A$340 million, Red Emperor has a market cap of just A$51 million.
Okay, Range owns producing assets in Trinidad and Texas – and has 40 per cent of the Georgia asset compared with Red Emperor’s 20 per cent.
But this still doesn’t fully explain the chasm between the two.
Hoping to narrow the gap, Red Emperor listed on the AIM last week noting the success Range has enjoyed since it made a similar leap of faith by taking a London quote.
“Over the last 18 months Range has really been the darling of the market over here in the UK,” says managing director of Red Emperor Greg Bandy.
“They have gained a great deal of traction and success, and a lot of the interest has been around the assets (Puntland and Georgia) that we have also got.
“We are on AIM because Range has shown there is a large appetite for these assets over here.”
What Bandy and executive consultant Tony King have done has been nothing short of miraculous in snagging both assets on earn-in deals with no upfront costs.
It sealed the Puntland deal last year and will foot 30 per cent of the drilling costs there – around US$7.5 million – for a 20 per cent stake in the Dharoor and Nugaal onshore basins.
Bandy admits that Red Emperor was in the right place at the right time as the seller, TSX-listed Africa Oil (CVE:AOI), was struggling with only US$5 million in the bank and needed to “take some risk off the balance sheet”.
“Subsequent to them doing the deal they have had a major discovery, farmed out a lot of their ground to Tullow Oil, the share price has trebled and they have had US$100 million of capital come in,” says Bandy.
“If we were trying to negotiate that today it wouldn’t happen. We have had a bit of luck there. But we were prepared to put the US$7.5 million on the table when others weren’t and we’ve ended up with a really good deal.”
The scale of that success is underlined by report from the independent consultants Gaffney, Cline Associates, which estimates gross oil in place of 19.9 billion barrels.
Meanwhile, Range and African oil have shelled out US$70-80 million in acquisition and seismic costs, and all three are leveraging on the US$150 million spent in the 1980s and early 90s by the oil majors which eventually quit the war torn region.
Bandy reveals operator Africa Oil is still on schedule to drill the first well in Puntland in the third quarter.
“If we get some definitive news on the drilling timetable and a rig being mobilised then probably hit the market to cover this cost,” says Bandy.
That said the company has around A$14 million in the bank, which will fund imminent two-well programme in Georgia with probably enough left over to meet the costs of the first Puntland well.
“We don’t want to drill three wells with no cash in the bank afterwards,” King says.
“We want to be fully buffered with some cash underpinning the business. We’ve got that at the moment.”
We won’t know until nearer the Puntland spudding date just exactly how much Red Emperor will raise. Even so the pair are confident of investor support here in the UK.
The news flow in recent days has been from Georgia, where the drilling rig is now on site with work set to get underway in the first two weeks July.
Here Red Emperor’s costs are capped at US$5.6 million under a deal with Range and Strait Oil & Gas.
Here the seismic survey compiled on blocks Via and VIb have identified 68 individual structures, each potentially containing stacked reservoirs, and six drill-ready targets.
An independent estimate by RPS Group puts the unrisked oil-in-place across these prospects at just a tad over 2 billion barrels. “Until that seismic work was done nobody knew how to value Georgia,” says Bandy.
Of course there are varying degrees political risk operating in each jurisdiction, though in Strait it has a partner in Georgia which is “well liked because it has been a good corporate citizen”, says Bandy.
Puntland is more of worry, although King believes the risks have been overblown here too. “The government (of Puntland) needs a well drilled here,” he explains.
“It is one of the poorest countries in the world. The elections are in 18 months so there is a big vested interest here to get a well going in that time.
“Just getting a rig in and drilling is a big windfall for the local economy. It is very important for the government and the people for these wells to be drilled.”
The float has been a success for the company as the shares began their first day of trading in London at a significant cent premium to their value on the Sydney exchange.
Let’s Red Emperor can now go on to emulate Range to become one of the most popular (and financially rewarding) stocks on the junior market.
Source: proactiveinvestors.co.uk
