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  • Range Resources Receives Buy From UK Broker 0 comments
    Jul 4, 2014 1:53 AM

    Range Resources (ASX:RRS, AIM:RRL) has received a Buy recommendation with a target price of 3.7p (A$0.0676) from financial services firm Cantor Fitzgerald Europe.

    It noted that with a strengthened core management team, reshaped portfolio, a new strategic alliance and refinanced debt, Range has a revitalised and sensible strategy for shareholder value creation.

    Cantor also estimated the value of Range's Proved Reserves in Trinidad at US$162.62 million using a DCF field development model.

    The following is an extract from the report:

    New CEO Rory Scott Russell, and two NEDs were appointed in Feb-14, VPs of Production and Exploration were hired in Mar-14 and a new CFO was appointed in May-14.

    The revitalised team brings experience from firms including Shell, Chevron, Tullow, Suncor Energy, Petro-Canada and BNP Paribas.

    The portfolio focuses on enhancing production in Trinidad by targeting an increase in volumes to c.1000bopd by the end of 2014.

    Range is the largest private onshore acreage holder in Trinidad. It AIMs to deploy capital to maximise current production and pursue growth to enhance cash generation.

    The recent farm-in with Niko Resources and progression of drilling at Morne Diablo provide exploration upside and add reserves.

    Range is also 100% owner of Range Resources Drilling Services, with six drilling rigs and six swab/work-over rigs, which provides an advantage in a tight supply market.

    Range has an integrated master services agreement with LandOcean Energy Services (one of the largest listed oil & gas service companies in China), and an optional financing package of up to US$50 million.

    In May 2014 LandOcean introduced Range to a new private, strategic institutional shareholder Abraham Ltd, who subscribed US$12 million.

    These funds were used to repay outstanding debt including convertible instruments, with the remainder to be used for general working capital.

    Investment Case

    We are initiating coverage with a BUY recommendation and TP of 3.7p.

    We believe that the hard work of the new management team is starting to be reflected in the share price of the company, following a series of high-impact announcements on revised company strategy, debt refinancing, and securing new strategic alliances, partners and advisors.

    After years of expanding its portfolio to include assets in Colombia, Guatemala, Texas and the Republic of Georgia, the renewed management team has a revised strategy, focusing on maximising production and revenues from their onshore Trinidad production base.

    The process of divestment of its non-core assets is ongoing.

    We believe that the market does not fully appreciate the value of Range's core production base in Trinidad.

    Range AIMs to deploy capital to maximise current production, and pursue growth by a combination of in-fill and step-out development drilling, implementation of modern oil field practices, secondary recovery (waterflood) projects and low-risk appraisal of deeper production horizons, using its captive drilling and well services business.

    Use of existing infrastructure reduces capital expenditure and operating costs, whilst the addition of new acreage will allow Range to benefit from exploiting technical, operational and financial synergies.

    In our view, in Trinidad the reservoirs are shallow and well understood with geological risk being virtually zero, given the volume of historical drilling in the region.

    Recommendation and Price Target

    We see the key value driver in the short-term arising from the increase in production at Range's Trinidad base.

    Our valuation illustrates that at present, the market does not appreciate the full value of this asset. We initiate coverage with a BUY recommendation and TP of 3.7p.

    We base our 12-month target valuation on a risked net asset analysis of the company's Trinidad production base, adjusted for financial items including net cash position, options and a 10% DCF of G&A expenditure.

    We have valued Range's Trinidadian asset base using 10% DCF field development models for the production of the 1P reserves (net 1P 19.0MMbbl) in the Morne Diablo, South Quarry and Beach Marcelle fields.

    We value the 1P production and development at US$162.62m. With the largest 1P reserves (net 13.9MMbbl), the most valuable of the three fields is Beach Marcelle, which we value at US$112.4m.

    This provides a value of US$8.1/bbl for each proven barrel in the Beach Marcelle field.

    We have also valued the further development of the probable and possible reserves (3P less 1P) as potential risked upside, based on the per barrel value numbers generated by the field development models.

    These reserves add a further US$66.34m to our valuation. The Trinidad assets currently have no 2C contingent resources attributed.

    We have not valued Range Resources Drilling Services Co independently, as it currently exists solely for the use ofRange Resources.

    However its existence reduces the cost of drilling and working over wells in Trinidad, providing cost efficiencies, operational flexibility and eliminating dependence on external service contractors.

    Assets for sale

    We have included several of the 'held for sale' assets in our valuation, at the book values that Range ascribes them.

    Of these, Georgia is the most valuable, with a value essentially equal to the cost pool available on the project to date of US$37m.

    Miscellaneous

    We value the 6.67% interest in ASX-listed Citation Resources at US$0.81m, based on an A$0.01 share price. The 20% Latin American Resources direct holding is valued at cost of US$2.9m.

    Peer group analysis

    Given the renewed focus on increasing production from Range's Trinidad production base, we have chosen a small peer group of onshore Trinidadian producers for comparison.

    Leni Gas & Oil, Touchstone Exploration and Trinity Exploration & Production.

    Range's EV/2P Resource number is US$5.26/boe. The average EV/2P Reserves for the group is US$9.55/boe.

    Relative to its peer group average (and in particular Leni Gas & Oil) Range's current share price represents compelling value, in our view.

    Proactive Investors Australia is the market leader in producing news, articles and research reports on ASX "Small and Mid-cap" stocks with distribution in Australia, UK, North America and Hong Kong / China.

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