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Range Resources Part 2 – Further Thoughts, conclusion sell!

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Following on from my comments about Range Resources (LSE:RRL) on Friday I have become far more convinced that the shares are, at 4.86p, a sell.  You can read the original analysis HERE. There are two reasons for my strengthening view that this is not a stock to own in fact I would wait until the Puntland news is out and then whatever it says go short.

The first is a very odd investor Q&A released by the company on its website. Odd timing, just before the bank holiday and a few days ahead of the Puntland well results which it says will be within days. But the whole statement which you can read HERE just begs more questions than it answers.

The most curious thing is the company’s insistence that it will by September have in place a large debt facility. That is, of course needed, since if one extrapolates the June 30th quarterly balance sheet and cashflow analysis, Range will be almost out of cash by the end of September. So it needs the facility in place urgently otherwise it has a real problem. Oddly this does not appear to be much commented on by its BB devotees.

But it then says that it will use that facility to develop its assets in Trinidad, Georgia, Colombia and, perhaps, Puntland. Given its extremely chubby corporate overheads there is another mouth to feed. But it goes on to say that if it sells its US assets it will then use some of that cash for share buybacks. That may re-assure some private investors but it concerns me. It is financial engineering which for a company that is not generating cash seems imprudent to say the least.

We then move on to what it says about Puntland. It seems pretty clear here that going forward Range is going to have to stump up $4m per well drilled. There is a lot of blather about spinning Puntland off into a separate self-funded entity but at that point what would Range’s 20% interest be diluted down to. If well 2 is dry who exactly is going to back such an entity.

I think this all comes down to cash. The fact is that Range will (based on the 3 months to end June statement) be out of it within weeks. I rather think that many of its BBB devotees seem to be ignoring this little point.

My second concern is just a bit of digging I have been doing on Puntland itself. I accept that Range does have other interests. So this may be of more concern to Red Emperor (RMP) and TSXV listed Horn Petroleum, its partners in this enterprise which are both far more highly Puntland geared. It just strikes me that this is an extremely unstable Islamofascist place.

I cite as one piece of evidence the curious case of the Lesbian couple who discovered how Puntland works a few months ago. One of them appears to have picked up an STD and infected her partner. The partner complained to the Puntland old bill. A few months later (in February of this year) both of the lasses were in court charged with engaging in unnatural acts and were sentenced to death and executed. A journalist who reported on this was arrested and his paper shut down.  Not even Vladimir Putin would go that far.

As for corruption and political stability? Just do a google search on “Puntland corruption.”   It is a hoot.  You could not make it up. It strikes me that the risk weighting on any oil asset here must be incredibly high. As far as I can see title is more or less worthless in Puntland.

Needless to say those who have fallen in love with Range have flamed my original piece with comments about how I fail to value Trinidad, Georgia etc fairly. They cite the company’s claim that output in Trinidad is set to increase massively during the next few years. That may be the case. But perhaps my new non admirers might just help me a little by clarifying a)how will Range fund the drilling of new (increasingly deep) wells to massively increase output and b) how do you know these wells will produce the oil quantities that you appear to think are guaranteed?

As ever, caveat vendor there may be Puntland hype imminent. For what it is worth I do not believe that a Puntland asset is worth a lot even if it dies come with commercial oil shows. But notwithstanding that, I am now convinced that one should sell these shares down to 1.5p.

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Comments

  1. Nathan Peters says:

    Tom

    I am not invested in Range but do believe you are targeting the wrong company, you see both Horn Petroleum and Red Emperor have nigh on 100% exposure to Puntland, their downside will be considerably greater than that of Range should the 2nd well be inconclusive. I am rather surprised you have not mentioned this as a matter of balance.

    I also believe you have understated the possible value placed on Range’s US and Trinidad assets by some margin.

    There is a line of thought, not without some credibility, which suggests that the timing of an announcement of a large scale hydrocarbon discovery is being delayed due to upcoming elections.

    If you care to look at the announcement timetable from the operator re well 1 and compare it to well 2 it does seem that the reporting of well 2 seem unusually delayed. Political intervention?

    Getting back to Puntland there is no doubt that a considerable hydrocarbon structure exists in the region, it is a matter of finding it. It appears that the various companies involved are all under-capitalised to achieve this objective.

    It should be noted that Genial have recently expressed a wish to spend their £1b cash pile. I would not be surprised to see them, or indeed other companies of scale, farm into this project, possibly via Range or one of the other listed entities.

    Such an announcement would not surprise me and it could benefit the recipient company significantly. That could just be Range, Horn or Red Emporer.

  2. SavvyUnlikeYou says:

    Ah another further unbalanced article.
    But to answer your question – “how do you know these wells will produce the oil quantities that you appear to think are guaranteed?”: A waterflood programme isn’t a risky business with a low chance of success, it IS pretty much guaranteed to mean that a far higher number of BOPD will be being pumped out of Trinidad when complete. As for the shallows they’ve also struck with a 100% success rate so far, so even accepting a few misses at some point it’s got a very high chance of adding more of these cheap fast paying back wells. If you take the 2500bopd target for the end of the year that’s still a significant amount of cash it’s now generating which will keep rising. The fund options like debt, drawdown, Texas sale etc are just things needed to cover the interim period as Trinidad keeps scaling up.

    You resort to articles about lesbians now in your increasingly irrational attack on Range. Very very strange. Everyone knows there’s heavy discounting for risk in Puntland but it’s far from written off by others. Slightly more reputable news sources have a somewhat different view to you:
    http://www.guardian.co.uk/world/2012/feb/25/britain-oil-dash-somalia

  3. Savvy is Wrong says:

    Woops Savvy have you seen the share price. Nevermind.

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