Disappointment for Range and Red Emperor in Somalia Interactive Investor

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Disappointment rained down on Range Resources (RRL) and Red Emperor Resources (RMP) investors on Monday as the companies found water, rather than oil, in their Shabeel North well in Somalia.

Shares in both companies dropped as the news sank in.

In a brief statement, the partners said: “An open hole Drill Stem Test was conducted over a 50 metre gross interval (1,910 metres – 1,960 metres) which contained several sands in the upper portion of the primary Jesomma Formation which had oil shows. The test recovered fresh water (1,200 parts per million Cl-) without any traces of oil.”

The news was particularly disconcerting as last week’s update on the work said it had “penetrated a 50 metre gross section of upper Jesomma sands with oil shows”.

It went on: “An open-hole drill stem test is currently underway to determine if this zone is oil or water bearing and should be concluded within the next 24 to 48 hours.”

When asked about this, a spokesman for the company told Interactive Investor the drilling had moved through several rock layers where traces of oil may have been found. “Until you test, you don’t know what you have found,” he said.

Next steps

The firms now plan to drill ahead to the originally planned depth of approximately 2,400 metres which will penetrate the remaining section of Jesomma sands. At that point the entire section will be evaluated by electrical logging to determine if further testing is warranted.

The drilling is targeting Upper-Cretaceous Jesomma sands, which had good oil and gas shows in the Shabeel-1 well, 3.5 kilometres to the south.

The well, which was spudded in June, is the second in the drilling campaign and is also operated by Horn Petroleum, which owns a 60% interest. Range and Red Emperor both hold a 20% stake.

Investor reaction

On the Interactive Investor discussion board for Range, feelings were running high.

“There is no oil at the intermediate depth- we never expected any until Horn told us last week that there might be so nothing has changed except a ridiculous red herring which has succeeded in bringing share prices of RMP and RRL right down,” commented user ‘5iron’.

He added: “If there had been no RNS saying there might be oil, share price would still be higher- it’s a ridiculous situation – maybe contrived – maybe not. So if you disregard the whole episode then this is one heck of a good buying opportunity!”

‘Newtothisgame2’ said “Tough luck guys, bad, bad result but for those looking to hold longer term today will offer opportunities for very cheap shares if you still believe in RRL.”

Analyst view

Despite the negative development, analysts were keeping the faith.

“Exploration in Puntland has proven to be challenging and we expect the shares to come under pressure on these results. That said, we believe that there is more to Range than Puntland’s exploration risk/reward. We believe that the Trinidad operation, where production volumes are nearing 1,000 [barrels per day], is core to the group and provides an underpin of 10p/share,” said Panmure Gordon’s Leila Reddy. She retained her ‘buy’ recommendation.

Also holding firm was Fox-Davies which said: “The news that the mini well test has flowed water opposed to oil is certainly a disappointment, but not yet the killer that it sounds like it is; it must be remembered that the target horizons are significantly deeper and drilling will now continue to these deeper target horizons. So, while this news is disappointing, it is not yet a ‘kill’ for the exploration well.”

The broker added it was maintaining its ‘buy’ stance, “especially given the prospective ‘appraisal’ CBM acreage in Georgia, and in respect of Range Resources its Trinidadian operations – and retain target prices of 27p for Range Resources and 65p for Red Emperor.”

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