I started in the oil business”, says Andrew Bell breezily, when Minesite phones him up for a chat about the latest moves at the company he chairs, Red Rock Resources.
Andrew Bell Red Rock has traditionally had exposure to a wide range of commodities over the years, but hitherto they’ve all been in the mining space.
No longer. Via the a 39 per cent stake in Australian-listed Resource Star, Red Rock has now branched out into oil.
“Resource Star was always a uranium company, which placed it in the energy space”, says Andrew.
“But in uranium, life had become really, really tough. There was Fukushima and equity weakness and Resource Star was in danger of becoming one of the walking dead.”
Among his many interests, Andrew is also on the board of Resource Star as chairman, so this is not the carping of a disgruntled outsider. Rather, it was clear to him that action had to be taken.
But what? In Australia the end of the mining boom is dragging the whole economy down. On the other hand, the oil price is proving remarkably resilient. A move to oil seemed to make a lot of sense.
So, early in August Resource Star signed a binding term sheet to acquire a 50 per cent interest in 96 old wells in Alibene, Texas. Due diligence is still underway, but at this stage Andrew says he’s relatively confident the deal will go through.
After all, it’s a straightforward enough proposition. The plan is to rework the old wells at a cost of between US$25,000 and US$60,000 per well, depending on the depth, and including the fracking that will be required.
“It’s good, sweet crude that you can sell”, enthuses Andrew. “It has an API of between 38 and 40 or 41 degrees.”
The official literature accompanying the deal spoke of an initial target of around 500 barrels of oil per day by the end of this year, rising to 1,500 barrels by the end of next year. At this stage, the life of the field is put at between 15 and 25 years.
Andrew is confident it can deliver more, though. He talks of adding more acreage, and of an area already in the leases that looks as though it has “a lot of potential”.
“We could maybe get it up to 4,500 barrels per day”, he says. “Certainly we think it’s easy to get it up to between 800 and 1,000 barrels per day, and that it will then plateau for five years before depletion.”
On that basis the fields could produce profits of between US$60 and US$70 million over three or four years.
But it’s not a slam dunk.
For one thing, the IRR numbers look too good to be true. “We’ve been really careful with the due diligence”, says Andrew. “It looks like the IRR is between 100 per cent and 200 per cent.”
But he’s fairly sanguine about that. “With numbers like those, after you’ve thrown everything at it and got back to reality, it’s often still between 20 per cent and 40 per cent. My expectation is that we may well find it actually is a good rate of return. We have a petroleum consultancy in Houston looking over the figures and deconstructing the business plan. But I’m relatively confident. My expectation is that we’re going to pass the due diligence.”
All the ground in the Resource Star area has long since been pegged, so Andrew’s in no doubt as to its prospectivity. “In this area it’s too late to get in”, he says. Unless, that is, you know someone.
Resource Star’s late entry ticket to a party that’s already well underway comes via Searex Petroleum and at a cost: US$1 million in cash plus 65 million Resource Star shares, plus a requirement to raise US$5 million by way of high yield debenture notes.
“We would be highly confident that there would be sources in America that would provide funding for this”, says Andrew.
“In this case there are some pretty good assets you can get security on, and we have family offices and funds here and in Singapore, so we think this is going to be a doable deal.”
SRT Price at posting:
3.5¢ Sentiment: ST Buy Disclosure: Not Held
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