When two small companies get together, investors should ask themselves the following question: is this a case of two drunken men leaning on each other for support?
This is certainly apposite in the case of Range Resources (LSE:RRL) which, while gathering an army of private investors, has had a thoroughly undistinguished career on AIM. Back in October 2007, the broker Fox-Davies raised £4m for the company through a placing of shares at 22p each. After that exercise Range had 190 million issued shares.
Since then it has issued over 2.65 billion more shares in pursuit of oil riches in Puntland, Texas, Guatemala, Trinidad, Georgia and elsewhere, and much good this has done shareholders. Today the share price is just 3p, and Range is embarking upon a fresh corporate manoeuvre. It is merging with International Petroleum, exposing Range’s long-suffering shareholders to another of the world’s dodgy oil regions – Russia.
That well-known phrase: ‘strong strategic fit’
I have seen more than enough corporate presentations to be immune to the PR guff that decorates them. But for your delectation I am sure you wish to know that the group’s new chief executive, Chris Hopkinson, who comes from the International Petroleum side, has “a strong track record in the oil and gas sector and an extremely strong technical team”. Naturally, the two make a “strong strategic fit”, have “world class assets” and the whole construction is “a stronger, more robust company with greater financial and technical resources”.
To which I add the following: having courted private investors, Range has now decided that it does not like their nasty habit of selling shares in response to bad news. By merging with International Petroleum it acquires what it hopes will be the more passive institutional shareholder base of the latter.
For its part, International Petroleum swaps its quote on the illiquid National Stock Exchange of Australia for one on AIM. More important, so far as I can see, it has run out of money, and smuggled into the merger is a cash-raising exercise of AU$20m and a working capital advance to International Petroleum of $15m (£10m).
A focus on two very risky plays
I doubt that there has been a merger document in the history of AIM that does not contain the phrase “strong strategic fit”. What does this really mean? If I am seven feet tall, have black hair, and like football and marry a girl who is four feet high, has blonde tresses and would rather stay at home knitting cardigans, we could be said to have a “strong strategic fit”. In other words we have nothing in common, and much the same could be said of Range and International Petroleum.
Spinning the story to me were Chris Hopkinson and Range’s executive director, Anthony Eastman. They have only known each other for two months, and whether they and their respective colleagues will hit it off is just one risk to the future of this outfit.
As to the business, International Petroleum is interested in Russia and the landlocked African country of Niger. Range is to focus on Trinidad, but its interests in Kazakhstan, Georgia, Texas, Colombia and Guatemala – all the subject of plenty of hype in the past – will be expeditiously chucked over the side of the new corporate vessel.
Why I’m so sceptical of Range
We are now to believe the following: the combined production of the group, now running at about 1,000 barrels a day (bopd) will soar to 12,000 bopd by the end of next year and a cool 17,000 bopd by the end of 2017. To be fair, this is not entirely pie in the sky, because Range has proven oil in Trinidad, as does International Petroleum in Siberia. Here only the absence of a pipeline – soon to be resolved, I am assured – is holding it back. In theory as this oil comes gushing through the pipes, and revenue trickles into the corporate coffers the new group will then be funded for its exploration efforts in Niger and Puntland.
Do I sound a little sceptical? Frankly anybody who has followed Range can hardly be otherwise. When it comes to political risk, Russia is in a class of its own, while the CIA’s description of Niger features a predictable litany of military coups, drought, attacks on military targets by ethnic groups, and “various external threats including insecurity in Libya and spill over from the rebellion in Mali”.
None of which, of course means, that it does not have oil. But frankly, if this all sounds just a little too risky, and if the deal looks like just another mechanism whereby Range can stumble on as a public company, I would hardly blame you for giving it a wide berth.