Red Emperor Resources sees a post-deal bull-run hold for the time being – but can it last?
Shares in Red Emperor Resources have risen from 1.83p to 3p since our coverage it in June as investors have continued to pump money into the company following its part acquisition of four leases in Alaska. Here, we take a look at the updates the business has released since announcing the deal and ask whether its current bull run, which has seen share leap 114pc since January, can continue.
To recap, Red Emperor, a dual-listed Australian natural resources firm, shot up by more than 100pc in less than a week in June after acquiring a 31.5pc stake in four Alaskan leases collective known as the ‘Western Blocks’. Alongside 88 Energy (36pc owner) and Otto Energy (22.5pc owner), Red Emperor plans to develop a prospect with a gross best estimate prospective resource volume of 400MMbbl and a 25-30pc chance of success.
A testing well at the prospect managed by 88 Energy will be drilled by no later than 31 May 2019 at an estimated cost of $15m, with the firm already commencing a rig market survey. Red Emperor will fund its $5.25m share of the costs – and any additional work commitments – from its current cash balance.
Since the deal, Red Emperor’s shares have barely paused for breath, enjoying a sharp move upwards despite some day-to-day volatility, as can be seen in the chart below. In particular, it received a fresh 7pc boost at the end of July, after revealing that- alongside its partners- it had executed formal agreements to acquire and drill the Alaska prospect.
Alongside this formality, the update also saw the partners report they had paid their share of a $3m performance bond to the State of Alaska and paid $500k cash to Great Bear, previous lease owner and 10pc stakeholder. On top of this, the partners will have to pay a further $500k to Great Bear upon receipt of final permits necessary to drill the initial test well alongside providing it an option to acquire a further 10pc working interest in the leases.
The latest update on the project came at the end of August when Red Emperor – now trading in both Australia and the UK – reported that 88 Energy had executive a rig contract with local business Nordic-Calista Services. The rig, which can drill to up to 14.500ft, will be used to drill the Western Block prospect, which has now been named ‘Winx’, in Q1 next year.
Red Emperor’s managing director, Greg Bandy, said at the time: ‘Once again the consortium has shown its ability to move swiftly and efficiently with another important milestone achieved. 2019 is fast approaching and everything remains on track for drilling to commence on the large and exciting Winx prospect in early 2019.’
Up or down?
The speed at which the partners have signed the agreement and secured a rig is impressive, and it is encouraging to know they have targeted drilling in Q1 2019. However, it may be difficult for Red Emperor’s shares to continue accelerating at the rate they have been moving since announcing the deal.
The main risk is that, for want of a better term, Red Emperor’s eggs are in one basket. Indeed, the firm has said Alaska will now be its primary focus, and its only other asset of note appears to be a 37.5pc stake in a block in the Philippines. Its approach will be too risky for some, but for those who remain tempted, it is worth once again going over some of the bull points attached to the Alaskan assets.
Perhaps most excitingly, the so-called Western Blocks are located right next to a well called Horseshoe-1. The well is part of Nanushuk, a billion-barrel plus oil fairway that represents one of the most significant conventional oil fields found in the US in more than 30 years.
Another potentially exciting element of the deal, depending on who you talk to, is the involvement of 88 Energy. 88 has endured some major operational hiccups this year across its broader portfolio, collapsing from 2.8p to 1p between June and July following a series of disastrous update from its Icewine#2 well. However, its £63.9m market cap still dwarves Red Emperor’s £13.4m. Having this sort of firepower on its side could end up benefitting Red Emperor as operations move forward, especially if 88 is willing to throw some of the A$17m (£9.5m) it raised in an April placing at the project.
Finally, the deal was Red Emperor’s first under new CEO Gracian Lambert, who joined this month after a decade at ExxonMobil in a variety of senior roles focused on both field operations and negotiations. It was a bold first move, and hopefully a positive sign of things to come. Who knows?
The bottom line is that Red Emperor will not appeal to everyone due to a lack of diversification and perhaps even the involvement of 88 Energy. However, there is clearly a lot of good will aimed towards the firm that has held for several months now. If the partners in Alaska can release a stream of decent news flow from Winx, which – at least in theory – has a lot of potential, then it will be very interesting to see if the current trajectory of Red Emperor’s shares continues.
The author does not own shares but was remunerated