From report on Range Resource Guatemalan acquisition by OLD PARK LANE CAPITAL – 8th February 2013 (see RRS ASX report around this period)…
From the report…
Indicative Valuation (directly from the report);
“Given the impact of cost recovery within the fiscal regime in Guatemala, we can confirm from the collation of our assumptions outlined above that net backs are at least $45 per barrel to the operator on an $80 oil price. On an NPV 10 basis, we have therefore valued the Guatemalan projects at $62.1m (gross) at this stage which equates to a highly attractive $28 per barrel of 2P reserves across the assets.
Range’s indirect interest of between 21.1% and 23.9%, dependent on the participating interest taken up by partners on future wells, is consequently valued at $13.1m - $14.9m. We believe that this base case valuation represents very attractive upside to Range’s initial investment of A$4m (assuming that the A$2.0m debt conversion to CTR equity is neutral to Range). Bear in mind Range’s 10% interest in LAR will be finance carried and repaid out of Range’s share of future production.
Range also issued 40m options at A$0.05 to CTR as part of the transaction. However, given that their exercise would accrue A$2.0m to Range and our valuation assumptions are based on Range’s fully diluted equity, we have not included their market value in the transaction cost.”
[emphasis from me]
If RRS have been selling and trashing the CTR price in the process (according to some), I guess it is nice to know if RRS price ever rises and CTR’s options in RRS are worth something…we can always return the trashing favour?
Target price implications (directly from the report);
“As outlined previously, the current uncertainties relating to the Guatemalan project are CTR exercising not its farm-in option or failing to secure the necessary funding. As such, we feel it appropriate to ascribe a very cautious 50% commercial risk factor to our valuation in relation to its impact on our share price target for Range.
Based on our calculation of Range’s fully diluted equity of 2,663.4 million shares, we are ascribing a preliminary valuation of 0.15p per share assuming the lower indirect interest of 21.1% net to Range. This increases to 0.17p per share on the basis of a 23.9% interest.
Upon the confirmation of the early project milestones outlined above, we would look to remove the commercial risk factor as our NPV calculation already accounts for inherent operational risk within the projects.
Although our early pass does little to impact our overall target price for the company at this stage, it is appropriate to note that the project valuation is currently based on a very modest reserve base of only 2.3 mmbbls gross and further successful drilling over the next two years is likely to increase the 2P reserve markedly given the Atzam field’s indicated similarities to the considerably larger Rubelsanto field in the adjacent acreage. Upon these upgrades, we would adjust our target price accordingly.”
[again emphasis from me]
So…
After applying 50% commercial risk factor subject to “CTR not exercising its farm-in option or failing to secure the necessary funding.”
CTR CTR 60% interest = AUD$20.5million CTR shares on issue = 1.2 billion CTR per share = 1.7c
It would appear the market is pricing CTR at 50% commercial risk levels of ~1.7cps. Of course this does not take into account production, nor de-risking from 2 wells.
What happens if we reduce commercial risk to 25%, assuming funding is less of an issue and the acquisition is completed as per agreement (the revised terms of the arrangement suggest this is all but done)?
Current field (assume 25% commercial risk given success and funding confidence);
CTR CTR 60% interest = AUD$267.4million CTR shares on issue = 1.2 billion CTR per share = 22.2c
As can be seen, a field upgrade should have a material impact on valuations, which poses the question, why hasn't this been done yet?
We have now had two successful wells confirmed since this valuation was prepared, and a we also a have well flowing at 170bbls/d on highly restricted choke, so one might suggest risk has significantly reduced…
What does happen if we drop the commercial risk from 50% to say 25%?
CTR CTR 60% interest = AUD$535.2million CTR shares on issue = 1.2 billion CTR per share = 44.7c
It is a reasonable assumption these initial valuations made the CTR/LAR acquisition look fair and reasonable for the purpose of the transaction for RRS side of the equation…I respectfully suggest they got a very good deal at the prices they paid.
A different report may have suggested higher values, meaning higher acquisition prices may have been necessary.
One last thing…
This report assumed oil prices of just $80 per barrel…currently they are closer to $110.
As can be seen above, any field upgrades, especially if accompanied with reduced commercial risk factors (not to mention the measurability of confirmed oil flows), will have a “material impact” on the value of the Guatemalan assets and by extension the CTR share price.
This clearly underlines the upside inherent in this stock, that is there to be released if CTR management choose to, but they will have to ease up on the confetti trail of cheap placement after cheap placement to their preferred "financiers".
Now you know what attracted me to this somewhat risky, yet potential investment some 2 years ago, and why I have hung around so long in spite of all the rubbish going on and the share price falling to third of its value.
I respectfully suggest the time has come to finally let this thing go?
Cheers!
CTR Price at posting:
1.4¢ Sentiment: Buy Disclosure: Held
(20min delay)