Range Resources - Back In View

http://www.rangeresources.com.au/

Range Resources Logo
Two drills and two misses, Range Resources (LSE:RRL) has had a particularly turbulent 2012 so far with failures in its 'historic exploration program' in the Puntland region of Somalia, but with ramped up production at its Trinidad operations. Range is an oil and gas exploration and production firm with assets in multiple locations. It is one of the most followed AIM stocks on the London Stock Exchange, but long-term investors have failed to see any return on their investments. Range is listed both on the London stock exchange and the Australian stock exchange where it has the ticker/EPIC code of RRS. This is a bonus as it means its able to be put into an ISA. Range has ~2.35 billion shares in issue and a market capitalisation of circa £122m.

Over the past year Range has traded between the low four pence and mid-sixteen pence area. Since rising an incredible 427% in late 2010 it has been a long downward trend with a midway four month upward trend with the remainder being interspersed with sharp drops down and spikes up. With most shares the enthusiasm would have wavered by this point, but investors have held strong only to see their holdings be eroded away. A similar picture is displayed by partner Red Emperor (LSE:RMP) who listed in June 2011 at around 30p, only for the share price now to stand at a lowly 4p.

 Range itself listed on the LSE just prior to the crisis in late 2007 closing its first day of trading at just over 27.5p. It made a low below 2p in early 2009, but had since enjoyed a bullish run lasting through the first months of 2011. Following the notes made in the above chart investors now find themselves at just 5.20p. Chart-wise the stock looks favourable having just emerged from a downward wedge on the news of finding no hydrocarbons at their latest Somalian well - not the typical reaction to bad news, but to an extent this rise happened due to the news already having been priced in. Another reason is the strong interest of Range to retail and institutional investors.

Financially, Range looks set to benefit strongly from its operations in the Caribbean and the US although i'll address this later. With the exception of 2009, revenues at Range have risen year-on-year from $0.22m in 2007 to $3.07m in 2011 with a substantial increase expected for FY 2012. Pre-tax losses have fluctuated with a net loss before tax of $15.5m last year, but this reflects increased exploration work for the company.

Range Resources has operations in four locations; Texas, Puntland, Georgia and Trinidad.

Range's Texas operations began when it acquired a stake in 2009. The stake was in the 'North Chapman Ranch (NCR)' project where it had an initial 25% interest in drilling the first well that would be reduced to 20% for subsequent wells. The project area itself encompasses 1680 acres 'in one of the most profilic oil and gas producing trends in the state of Texas'. At the time the NCR field had flowed 250bcf and 10mmbo since 1965 when it was first discovered. Clearly the value here lay with exploiting the existing resources to use Texas as a producing asset in Range's portfolio. Texas would also soon be seen as a risk-free asset compared to Somalia where a lack of proper governance has led to a famine crisis and an Islamic group reigning many areas. Due to the vast prior exploration in Texas the development costs are also relatively low due to existing infrastructure.

The Smith#1 well was drilled in late 2009 reaching target depth before year-end uncovering 37m net pay with no water intrusion. Bottom-hole pressure was also encouragingly high at over 11,000 psi. In December 2009 the discovery was announced as commercial and was placed into production in early 2010. As with the North American trend over the last 18 months or so, recovery rates can be further improved at this well through fracking - effectively shattering the rock allowing for increased rates of oil/gas to be achieved.

Range also drilled the Russell-Bevly #1 appraisal well in May 2010. The drill found 40m of net pay in four zones without water contact also. Casing was set, perforated and this well also went into production in September 2010. Following the successful NCR program Range planned two further wells; Albrecht#1 and Smith#2 that would be completed in 2012.

Range also has the East Cotton Valley Prospect (ECVP) in Red River county. The ECVP spans 1570 acres and Range has a 21.75% interest in this prospect. As per the company's website,

'The East Texas Cotton Valley oil accumulation was discovered in March of 2008 with the drilling of a vertical well to approximately 5,500 ft. The initial well encountered more than 100 ft. of gross oil pay at approximately 5,300 ft and was immediately placed into production. A horizontal appraisal well spudded in December of 2008 encountered good quality reservoir in a lateral section approximately 1,500 ft. long, but was badly damaged during completion.

In October 2011, the operator has resumed testing of the Ross 3H horizontal wells with additional perforations being added between 7,245 and 7,675 feet in the horizontal section. Swabbing operations have commenced looking to confirm oil saturation before the commencement of fraccing operations to the reservoir.'


It's worth noting that Range is planning to monetise these Texan assets which currently bring in about $1-1.5m per well per year.

Range's Puntland assets are what have drawn the most interest recently. Somalia is known as the 'Horn of Africa' due to its shape and it's located in the North East of the continent. A clear risk with this asset is not its poor stability, but also its underdeveloped nature thus the chances of drilling success immediately is very very low - data must first be gathered.

Range has a 20% stake in Puntland, Red Emperor has 20% and Horn Petroleum (a subsidiary of Africa Oil) has 60%. This stake is held in two basins Dharoor and Nugaal, the former being onshore and the latter having an offshore extension. The company says there is a 'Potential replica of the 5 Bbbl – 10 Bbbl hydrocarbon basins in nearby Yemen'. This could very well be likely due to the short proximity and the fact that they share analogous geology as they were once joined as a single land mass - only now does the Gulf of Aden separate them. The potential here is huge but will take time to be realised in any situation due to the lack of prior drilling, but Africa Oil (owner of Horn petroleum) have attributed OIP of 3.65 billion barrels of oil net to Range.

Whilst most of the important Puntland work has happened in 2012 thus I shall cover it later on, the company notes,
Puntland is believed to have all the geological requirements to become a commercial oil-producing region. Somalia, and in particular Puntland, remains one of the last under-explored countries that has a high potential for considerable reserves of hydrocarbons which can be subsequently developed for the benefit of both the people of Puntland and Range Shareholders.

Range also holds 40% interest in two Georgian exploration licenses spanning circa 7000km2. According to RPS Energy, 68 fold structures that are potential leads exist within their Georgian outfit with gross estimated OIP (oil in place) of 2045mmbbls. In July 2011 the Mukhiani#1 well was drilled targeting a prospect entitled Vani 3 which had a total depth of 1500m. However, a lack of previous data and 'previously unrecognised faults' led to the basement being encountered earlier than expected thus the aim of the well was not found. The well was plugged and suspended despite the Vani 3 prospect having 145million barrels gross OIP. In total, the main six prospects in Georgia have in excess of 700million barrels gross OIP - a company making figure in any respect. The company announced that further seismic and work would determine whether a sidetrack could be used to further operations at this well.

However, it is Range's Trinidad operations that really make the company look cheap. Trinidad is already established as a well-regarded hydrocarbon province so this does not come as a surprise. Range entered Trinidad in mid-2011 when it acquired 100% interests in three onshore blocks covering ~16000 gross acres. These are known as Morne Diablo, Beach Marcelle and South Quarry. Range's production from Trinidad is expected to rise significantly with a target production of 4000bopd within three years. This would provide excellent cash flow to Range's other operations. To an extent, this Trinidad acreage balances out the risky Puntland acreage and makes Range an attractive prospect license wise. Trinidad will play a significant part of Range's future going forward with a 50 plus well program along with a waterflood (process by which oil flow is improved) ready to be enacted. The company through this is targeting 8000bopd by 2014 double the preliminary estimates. In May production was at 750bopd so there is significant upside here that could spark the share price at any time. The QUN 16 well drilled back in the 1940's is located over 3000ft from QUN 127 and the geology experienced at both is similar. This gives hope to the geology being shares between the distance, in which case there is huge potential for continued success at Trinidad.

Range is also well placed for drilling services in Trinidad owning a multitude of rigs with varying capabilities; six drilling, three production and one swab. A swab rig is used to extract a fluid from the well using a metal rope and swab cup mechanism - it helps to improve flow from a reservoir.

Range has had a busy 2012 so far on all fronts - i'll briefly summarise these. The first update came in early January through a 'Texas and Corporate Update'. The update featured an updated drilling depth for the Texan well Albrecht 1 along with the injection of $15.5m into the company by an exercise of options. The Albrecht 1 well was spudded in December 2011.

The next milestone marked the spudding of the Shabeel-1 well in the Dharoor Valley. The company mentioned, '[This is] the first oil exploration well to be drilled in over 20 years in Puntland targeting Prospective Resources of over 300 million barrels of oil (mean 100% basis)' of which 60million are attributable to Range. A pilot hole had also been drilled at the site of the Shabeel North-1 well, but this had not yet been spudded. The drilling of the two wells would meet the requirements arranged in the production sharing agreements. A week later the company announced the site preparations for the Kursebi-6 well in Trinidad which was targeting ~40mmbls net to Range. A target spudding date was set to mid-February.

An interesting development in Trinidad followed this with Range and Leni Oil and Gas (LSE:LGO) arranging an agreement whereby both firms will develop Leni's Goudron field and Range's Beach Marcelle field. Range will acquire half the Goudron field for a $8m payment and Leni can acquire 15% in the Beach Marcelle field for $7m. This comes across as a particularly good deal for Range as the potential loss of interest in the Marcelle Field is worth less than half the probable reserves estimated by Leni in the Goudron field. A further Trinidad update was then released announcing the flow of up to 102bopd from a new well (QUN 117). Another rig was also drilling the QUN 119 well and was progressing well. In Texas the Albrecht 1 well was still drilling deeper and fracking would take place at the ECVP on the Ross 3H horizontal well.

The Quarterly report was released at the end of January highlighting a series of points. In late 2011 a 490% increase in P1 (proven) resources in Texas and Trinidad was re-touched upon , but little new information was released. In late February updates on the Puntland drilling and Georgia preparations were given with only minor things to note, one being delays in Georgia due to poor weather. However, a 100ft+ gross interval was found at Alrecht 1 and testing at the Smith#2 well was ready following fracture stimulation. Together, these two wells are expected to move significant reserves into the proved category, paving the way for future development. A £3m draw down from an equity line facility (ELF) was also used.

In March a further Puntland drilling update with a revised depth was released, but no hydrocarbon shows had been seen through to the current depth. The main reservoir had not been penetrated yet either. In Texas the Smith#2 well had its first of four zones testing which flowed 3mmscfd gas and 125bopd. These would contribute towards cash generation. Half year accounts were also released. Revenues were up massively to circa $12.8 million from circa $1.1 million FY 2010. Year on year losses were flat, but the worth of development assets had rocketed to $175m from $6m.

Another interesting news release came out a week later. Firstly, the company had secured an offshore extension to the Nugaal block with Range having a 100% working interest. Through this it will be interesting to see whether Somalia can continue East Africa's hydrocarbon success which has primarily been offshore. However, these finds have been mostly very large gas finds as opposed to oil. An update on Shabeel-1 was issued with another depth measure. The most interesting though was the possible sale of the Texan assets. The company had been approached by a few parties and the company is considering selling these following a future reserves report to pursue a return of cash to the company and a share buy-back. A buy-back could be particularly significant as the vast number of shares and amount of interest in Range means it has erratic trading patterns. A new venture was also being explored, 'The Company is also pleased to announce that it is has secured a 65% farm-in opportunity (350 km2 of 3D seismic and 2 new wells) on two highly prospective licenses in the on shore Putumayo basin in Southern Colombia. The finalisation of the farm-in agreement is subject to regulatory approvals with full details to be provided upon regulatory sign offs being obtained. A placement at 12.5p was completed to raise circa £18.75m. This price is now well over double the current price.

On the 12th April two further asset reports were released. Trinidad was making good progress. The QUN 119 well was placed into production and producing circa 130bopd, QUN 120 had encountered 39 feet oil pay plus other additional and would be targeting 120bopd when online. QUN 122 was expected to be able to produce up to 50bopd and multiple other wells were being prepared for drilling. Further seismic was being undertaken and more personnel were being hired to ramp up operations. This increased production should see Range turn into an established oil producer that can use these funds to pay for exploration. In Puntland, sands exhibiting oil and gas shows were found in the Shabeel 1 well over an estimated potential pay zone of 12-20 metres. In the 2nd Quarterly report of the year QUN 118 had stabilised at producing 65-70bopd. Importantly, the results of some of these drills extended the field thus P1, P2 and P3 reserves could continue to increase in the future adding to the value of Trinidad.

In May, the company announced it was switching objectives in Georgia towards drilling contingent resources of 400bcf in a low-cost development. Whilst this comes as a surprise, it reduces the current risk with Range's profile as well as building a solid resource base in Georgia. It will also help to meet PSA agreements prior to its expiration. Exciting Puntland news was released a week later, the company saying that a gross section of 150m with possible oil pay between 12-20m had been encountered in the Jessomma Upper cretaceous sands. These sands had a porosity of 18-20%. 'A successful flow test could result in 70 to 130mm barrels of recoverable oil from the well of which 14 to 26mm bbls would be attributable to Range.' Further details of this were to be released at a later date. Yet more Texan and Trinidad news was released soon after; 'Albrecht 1 well has already produced at approximately 1 mmcf of gas and 150bopd'. Fracking at the ECVP had also commenced whilst in Trinidad more wells were being prepped. Later in the month the Shabeel-1 well had reached total depth and also found an extra 3m of net pay but in thin sands that did not warrant testing, the first zone (12-20m) would be prepared for testing.

On the sixth of June the Shabeel North-1 well was spudded. The total depth was far higher at just 2400m deep thus the estimated time to drill was 45-60 days. To confirm the prospectivity of the Texan assets was the reserves report that was released. P1 resources were up by 54-57% and P2 were up by 16-20%. A short while later the farming into the Colombian block was finalised. Range will have a 65% interest in blocks PUT-6 and PUT-7 (in the Putamayo basin) with an option to increase this by ten percent at a later date. According to Range, 21 leads have been identified. The block PUT-7 already has one suspended well that can be re-entered. Estimated resources there are 7.9million barrels recoverable - further work will determine whether it will be re-entered. If it is it will occur in late 2012/early 2013. For further information read Range's relevant RNS which talks about the geology.

In mid-July a 50m gross zone in the Shabeel North-1 well had been penetrated - it would be tested over the next few days to determine whether it was oil or water bearing. The wording of the RNS suggests that they had thought it may be water bearing else whhy would they have said it. Additionally, it says regardless of the result it would continue drilling to total depth - the wording strongly suggests they were not confident of the result of the testing, but it was worth testing anyway. The test did retrieve 'fresh water'.




Production at Trinidad up 120%
 since the asset was bought
However, to negate this, an update was then released on Trinidad again - the milestone of 1000bopd had been breached for the first time, over double what was initially produced since acquiring the assets. On 27th July, the total depth for Shabeel North-1 was deepened due to a lack of movable hydrocarbons. Whilst another set of sands had been found it is likely these had a low porosity of were likely to be water bearing. The new total depth would be 3400m. This was likely more in understanding the geology rather than obtaining a find as otherwise the initial total depth would have been here and so far, the water bearing sands had not provided encouragement at this location. Just last week Range announced the results of the Shabeel North-1 well which had a final total depth of ~3950m - more sands were experienced but no hydrocarbon shows. Most disappointingly the sands in Shabeel North-1 were announced to have been at a similar level to those at Shabeel-1 thus the company effectively said the 12-20m zone at Shabeel-1 may contain water hence did not require testing. Sparks memories of Desire Petroleum's oil to water fiasco. Unfortunately, this does mean that the only benefit of having drilled these two wells is to better understand the geology and know where not to drill again. A good seal has been noted though and decent sands which provides encouragement that there could be oil/gas elsewhere in the basin, but not at the explored locations. The only other released news was that of a Trinidad spudding.

Based on the encouragement provided by the Shabeel wells, the Operator (Horn Petroleum Corporation) and their partners, Range Resources and Red Emperor, plan to enter the next exploration period in both the Nugaal and Dharoor Valley Production Sharing Contracts ("PSC’s) which carry a commitment to drill one well in each block within an additional 3 year term. The current operational plan would be to contract a seismic crew to acquire additional data in the Dharoor Valley block and to hold discussions with the Puntland Government to gain access regarding drill ready prospects in the Nugaal Valley block.

This does mean that there is unlikely to be any drilling in Puntland for a considerable length of time - at least a year, but most likely 15 months so Range can better understand the geology. It will be worth watching the state of the government in Somalia though as its a very fragile area to do business. Whilst the disappointment of the drilling campaign is clear, the end of it is actually a good sign for Range. They can continue to work on Trinidad which is only likely to get better, monetise Texas, commence work in Colombia and further the low-risk work in Georgia. These should allow the share price to increase as further updates are released especially since the share price is low historically. Ultimately, the potential at Trinidad will be the key driver particularly due to the number of wells that will be drilled there. As I said earlier, Range actually has a very well balanced portfolio between exploration, production, high and low risk so the downturn in the share price over Puntland is slightly overdone. Even following the news Panmure Gordon revised its target price down, but still to 10 pence - 92% higher than the current price.

It's easy to get swept away with sentiment and arguably there is rightful distress over the Somalia
drilling, but the potential is clear and at present does not lie with Somalia. At 5.20p it looks a bargain - I have put a buy tag on it.

Some photos courtesy of 'freedigitalphotos.net'

Update July 2013: Range Resources has been moved from buy to neutral at 2.85p representing a 45% loss. Since the review I have not been particularly impressed by the corporate news and the shares are now technically weak

11 comments:

  1. I don't know about anyone else, but this is excellent. Very good review.

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  2. A great article.
    Huge potential in RRL in coming days....

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  3. Well researched piece of work. Thanks.

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  4. Top quality. - will pass it on

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  5. I have been invested in RRL for some time and this is a very comprehensive summary. I think the immediate future for RRL lies in production in Trinidad.

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  6. great blog thanks

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  7. It is a great blog. Right on Commander.

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  8. Thank God for some educated comments, great blog...

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  9. Thanks for this.

    Certainly plenty of bangs for the bucks. After hovering since you flagged it up I'm in after todays further drop to 4.3p.

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    Replies
    1. Price may be volatile next week(hopefully up) as there should be
      an update due. Good opportunity to buy IF you firmly believe
      that the update will ease doubts that the company has/will have
      cash flow issues. Range has recently announced loan agreement $15m.
      Range is a punt on whether Herera Formation flows oil or not(rig 8).
      The odds should be better than puntland drills.

      HH

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    2. Above post should read 'ease concerns over company cash flow'

      Refreshing to see a blog with 'integrity'... state the facts
      and calculate the figures. (try reading TW's blog on advfn ...
      I think (Pl) he's lying about $10m cash in the bank. If your
      taking that attitude I could say the same for every company
      in the world ... I think (enter name here) is lying (no evidence).
      Talk about biased. ...oops(sorry frustrated can't post on TW's
      with critism... another one sided story)

      Meant to ask what's your view on Trinidad oil flow?
      PL projections : currently 1050 bpd
      01/13 1500bpd
      07/13 4000bpd
      current shallow well average 50-100bpd per well. 4 drilling rigs
      active, one well per two months hence 4x75=+300 average increase
      hence should reach 1350bpd in this coming update. So by end of
      year ~1650bpd a little optimistic(averaging error) hence E1500bpd.
      Here I get stuck. PL says from current reserves therefore does not
      include Herera. same calculations +600 mid 2013 2250bpd.
      Only if Herera x4 wells by 07/13 E500bpd per Herera well. +2000
      you get 4250bpd. Has PL already included Herera figures, not a sure
      bet... or is it?

      (there should be more readers here, waste of good stuff)
      Elliot update target price ~8p, ~13p with Herera

      Ignore if this post is unreasonable

      HH

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