Anthony Eastman, executive director of oil and gas group Range Resources, speaks to Stockopedia News
hands between investors in his company. For the executive director of AIM and ASX listed oil and gas group Range Resources (LON:RRL), trading in London since the start of 2010 has been “phenomenal”. The dramatic rise in investor interest was sparked by a remarkable six months last year when Range – once exposed to just a single, albeit exciting, exploration play in the Puntland region of Somalia – got its hands on acreage in the safer haven of Texas, US. By the turn of the year, that interest had turned into a 25% stake in a production well – and there was more to follow.
For Eastman, and Range’s chief executive Peter Landau, spreading risk and diversifying operations have been top priorities alongside efforts to get drilling underway in Puntland. In Texas, the company now holds stakes in the Smith #1 and Russell Bevly wells on the North Chapman Ranch and in June acquired a 13.56% stake in the East Texas Cotton Valley prospect. A recent independent valuation of North Chapman by Lonquist & Co estimated that total gross commercially recoverable reserves stood at 215 billion cubic feet (bcf) of natural gas (with 45bcf attributable to Range); 15.9m barrels of oil (3.3m barrels attributable to Range) and 15.5m barrels of natural gas liquids (3.2m barrels attributable to Range). A similar valuation of the East Texas Cotton Valley prospect estimates that total gross commercially recoverable reserves stand at 5.4m barrels of oil, with 0.7m barrels attributable to Range. Multi-well development programmes are currently being planned for both projects. Elsewhere, the company also holds interests in the Caucasus state of Georgia, where seismic surveying was recently completed and possible well locations are currently being identified.
This week, Range made its latest acquisition, with a deal to take a 10% stake in companies that hold licences over production fields onshore Trinidad. The company described the move as the last of its ‘pre Puntland drilling’ strategic plays and reckons it can take daily production there from 700 barrels of oil to 3,500 barrels over the next three years.
Anthony Eastman spoke to Stockopedia News about Range’s plans in Puntland, Texas, Georgia and Trinidad and why he thinks the company’s strategy has won over investors.
Before we talk about Range Resources, can you tell us about yourself and your background?
Well I’m a chartered accountant by background; I joined Ernst & Young Australia in May 2002 and later transferred to Aberdeen in Scotland for two years. From there I moved down to an oil and gas company in London, CalEnergy Gas, which was a subsidiary of the Berkshire Hathaway conglomerate and they relocated me back to Perth back in 2006. Just over two years ago, I started working with Peter Landau and his consulting company OKAP Ventures, which provides corporate compliance, capital raising and non-operational advice to a number of listed companies, with Range being one of them
Puntland has always been the main focus for Range. How did that come about?
Range has been around for quite some time, it did have some nickel tenements in Western Australia some years ago. Back in 2004, the Tsunami that hit Indonesia also caused some damage over on the eastern coast of Somalia. There were some charity groups in Western Australia who went over and did some aid work on the coast over there and they got chatting to the government, which said ‘we really want foreign investment to try and realise some value in our natural resources’. They came back to Australia and said ‘we’re looking for a vehicle to put something into’ and Range Resources was there, which was when Peter Landau got involved. He secured the onshore/offshore mineral and hydrocarbon rights to Puntland back in 2005. Subsequent to that he looked to attract a joint venture partner to come in on the onshore, which is where Africa Oil (TSX:AOI) stepped in and they took 80% of the two onshore licences. We had all the mineral rights onshore but the bigger picture was the hydrocarbons, so we relinquished them back to the government. Africa Oil, the operator, has been trying to get the first well drilled onshore Puntland in 16 years. Back in January 2009 there was a change in the government in Puntland and whereas in a Western country all the agreements you have with the government survive changes, in Puntland we had to go and renegotiate the PSA (production sharing agreement). Those negotiations concluded successfully in December but it put all operations back about a year. Since then, Africa Oil have gone full steam ahead to try and get the drill rig on site by the end of the year.
Are those drilling plans still on track?
Yes, at this stage, but it is never 100% certain given where we’re operating. If it was that easy I think it would have been done quite a while ago by other people. But Africa Oil and the management they’ve got onboard there have been very successful in other areas. They took Tanganyika Oil Company, which was in Egypt and Syria, from a size similar to what Africa Oil is now and sold it to Sinopec for $1.5bn. They hope to replicate that model with Africa Oil and we’d like to piggyback on their expertise.
They farmed out some of their interest to Lion Energy (TSX:LIO) last year, and also another bit to an Australian listed entity, Red Emperor Resources (ASX:RMP), which only occurred about a month ago. So that has given the green light for Africa Oil to get all the tender documents to drilling companies and get them signed up and look to mobilise in the coming months. We’ll target to spud around November.
If that all goes ahead how do you see the work programme progressing?
Well they’re looking to do one well on the Dharoor block and they have already identified a potential target of over 300m barrels. At the moment the plan is to get one well drilled and see how it goes and go from there. They’re hoping to do another well either in Dharoor soon thereafter or in the Nugaal Valley, but the priority at the moment is just to get that first well drilled.
What is your feeling on political and social stability in Puntland and how that might influence things?
We have got a very good relationship with the government, which we had to build following the change in government. It did take some time but we’ve got a very good and constructive relationship with the current government. They have played their part in renegotiating the PSA and, as Africa Oil are more on the ground in the country at the moment as they prepare the logistics, so far things have been going okay, albeit a little bit slower than expected but no major problems at all.
Overall, how do you rate the importance of these licences to Range? There is a feeling that this could be the real company maker.
Absolutely, if you put Yemen and the Horn of Africa together there are three valleys that I think host 6bn barrels of recoverable reserves there, and these valleys extend across the gulf into Somalia, two onshore and one offshore. So no-one has questioned the geology and the geo-physic potential onshore, it’s always been the execution risk of being able to successfully negotiate with the government and get in there and drill. The actual land is very flat and easily accessible, you’re not over in the Nigeria delta or Angolan jungles – logistically, geographically and geologically it is quite easy. But you are looking at tens and hundreds of millions of barrel targets.
Late last year, Africa Oil had an independent report and risk profile on the potential of both Dharoor and Nugaal and if you extrapolate those numbers to Range’s interest, it is between 80m and 90m barrels, and that is on a risked basis. Whilst that is potential oil in place and is heavily caveated, it shows the potential significance of what the joint venture is targeting there.
Has there been any development in negotiations over the offshore rights in Puntland?
We presented some seismic results to government this time last year and showed them the potential of the offshore there. At the moment the priority is to get the drilling on the onshore done. Once that is underway then you go to the government and say ‘look, this is all up and running, let’s look at doing something with the offshore’. What we would like to do, and if the government are willing, would be to hold their hands so to speak in setting up an offshore licensing round so it would attract other foreign companies. At the moment the priority is to ensure Africa Oil get in there and drill onshore, after which we would then look to try and realise some of the potential on the offshore
Turning to Texas, you have had a flow of good news down there in recent months.
Fantastic news. Our first acquisition over there was an interest in the North Chapman Ranch project and that was purely an opportunistic deal. Our consultant, Mark Patterson at Texas Energy Advisors, had a particular interest in a well that was drilling in North Texas which had got close to target depth and suffered a bottom hole blow out. Subsequently one of the partners said ‘hey look, we’ve run out of money, we can’t go any further’. So Mark Patterson called Pete and said ‘look, I’ve got this fantastic opportunity, you need to act on it within a week, they’ve already started drilling the second hole, would Range be interested in taking a 25% interest?’ Mark said ‘as far as the de-risked can go it is as de-risked as I can get you, you’ve only however many hundreds of metres away from that first hole, you’ve had a bottom hole blow out, the operators have learnt lessons from that hole’. So in September last year we announced a 25% interest in that first well which came up with a commercial discovery in December and we produced first sales there in February.
Up to June the sales had not been huge because the well has only been flowing at a natural pressure but during the last couple of weeks they shut the well in and fracture stimulated it and are slowly building the pressure to hopefully increase the flow rate. We’re planning on getting results of those out reasonably soon which will see some more meaningful sales out of there. Subsequent to the Smith well, the operator there said ‘look, depending on the results of Smith, if that’s a success, it could trigger the beginning of a multi well programme’. So we started the Russell Bevly well earlier this year, which was 570m away from the Smith well. Range has got a 20% interest in that well – there were certain claw back provisions on our farm-in. Again, that showed a 130ft hydrocarbon pay zone just recently and they’re doing some production testing on it as we speak. So, again, based on the success of the production testing we’ll be looking at getting sales out of that in the coming months and then hopefully spud another appraisal well, which is confirmed at the North West flank of the reservoir. We had Lonquist put out a reserves and valuation report, which was very impressive and the results from the Russell Bevly well will be able to shore up some of those reserves – move P3 to P2 and P2 to P1. Most analysts will value just P1 and P2 reserves and they won’t assign a value to P3. So obviously, once the results come out we will get Lonquist to revise their numbers and hopefully P1 reserves will increase.
So where is the US project going for you? You’re in there now and presumably you can keep drilling with money from cashflow?
Yes absolutely. The Smith cashflow has been a slow start because the pressure was quite good and we let it flow naturally. We had to stump up our share of the initial Russell Bevly well costs but by the time we spud the third well we are hoping to have enough internally generated funds from the Smith and the Russell Bevly revenue so it is going to be a self funding development programme on North Chapman. So yes, we had to pay around $400,000 for our share of the Russell Bevly and we may have to pay a little bit more if it is successful, for tying it in, but moving forward from there it will all be internally funded. It is the same with East Texas Cotton Valley, which we recently announced. Again another opportunistic deal there where one of the participants was a fund which was mandated to get out and we came in for 13.5%.
You must be pleased that some of this good fortune in the US is offsetting some of the uncertainty in Puntland?
Yes. Mark Patterson is also involved in that project (East Texas Cotton Valley), so he saw the opportunity and presented it to the board when we were in London in April. That was before the reserves report was put out so we were on risk that the report valuation wouldn’t come up trumps but fortunately it did and it has been a reasonably low cost entry for us into that well. Again, it’s only 13.5% but it is ticking over, paying the bills and represents some certainty. The valuation report that has come out underpins Range’s current market cap. So if, for whatever reason, Puntland is not successful at all and they can’t drill, yes there will be a hit to the share price but the actual value of Range is underpinned by this Texas interest. This time last year Range only had a future Somali interest, so if that didn’t go ahead Range and the shareholders would be left with absolutely nothing. So we feel we have diversified the risk reasonably well. It was a case of being in the right place at the right time.
Aside from Puntland and Texas, you have also got assets down in Georgia. Are you still on course to drill a well there?
The seismic survey was completed at the end of March. Back in July last year, at a time when we were still negotiating with the government of Puntland, we thought we had better diversify a little bit. We were looking at certain opportunities and the Georgia project came up. Straits Oil and Gas, the private company that had the licences, were ready to go with financing from some Swiss backers two or three years ago but then Russia invaded South Ossetia, so that financing obviously fell over. Then the global downturn hit and they were left having obligations under a PSA but with no financial backing. We came in last year through one of our contacts in London and Range had to fund the Phase 2 obligations under the PSA and issue shares to Straits in return for 50% of an entity that owns the licences. Phase 2 of the PSA involved 350km of seismic surveying and by the end of March the seismic contractors had ended up acquiring 410km of seismic. That data is being processed and interpreted as we speak and hopefully we are getting some ready to drill targets identified in the coming weeks.
With project work ongoing in Puntland, Texas and Georgia and £10m from last week’s share placing, what are the company’s priorities?
Range is in a good position in that we are not the operator on any of these projects so we can make the investment and we do our work on who the operators are and, thus far, that has been very successful and we can piggyback on their expertise and success. From a market point of view, the big picture is Somalia and that is what Range is known for. Whilst we have diversified, the main focus is hopefully getting results from Somalia. But we are always looking to see if opportunities exist that we believe would be a good fit for Range.
That brings us to your latest deal in Trinidad.
Yes, again another opportunistic deal where we are taking on a 10% interest in an onshore oil play in an established area. Again, that’s an exciting opportunity. It is already producing at the moment, albeit a small amount, but with a bit of a workover and some additional drilling we’re hoping to increase barrels per day from the known reserves, which only account for approximately 5-10% of the licence areas. Again, significant exploration upside exists there and Range will take 10% on a carried basis and the other party believe that, other than initial working capital requirements from their raising, ramping up the production of the known reserves will be internally funded within 12 to 18 months.
Finally, the volumes of Range’s shares being traded in London have been very high in recent months. What do you make of that?
Phenomenal. Put it this way, at the beginning of December I think between 2% and 3% of Range’s share registry was on the AIM market. As of last week it was about 57%. It’s phenomenal. Pete and I were over in the UK in January and did a bit of a roadshow which sparked a bit of interest and then again in April. We appointed some new brokers back in January that did a small placement and helped out there, and we did do a bit of a PR offensive. There’s been quite a bit of press coverage for us and the UK market likes the attractiveness of Somalia but the underpin of Texas. I put it down to the PR and word of mouth, we’ve had some very good feedback from the UK investors that are happy with what we’re doing.
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