n the Roman calendar, the Ides of March fell on 15 March. Legend has it that a soothsayer warned Julius Caesar he would be assassinated on this day, but Caesar dismissed him out of hand. Unfortunately for Caesar, the soothsayer’s grim prophecy came to pass and Rome’s first Emperor fell to the Senate’s blades.
Fast forward 2,000 years, and shareholders in Red Emperor Resources (LSE:RMP) have just received their own portent of possible trouble to come. They have to wait ten days for wireline logging to be conducted at Winx-1…
On Wednesday morning, Red Emperor announced that the Winx-1 exploration well, targeting 400m barrels of oil in Alaska, reached target depth at 6,800ft. All pre-drill targets were successfully intersected and multiple “potential” pay zones have apparently been identified.
Judging by the market’s rapturous response you would be forgiven for thinking this RNS wasn’t laced with all manner of pretty significant health warnings, not least the use of that pesky word “potential”.
But don’t let reality get in the way of mega share price run.
As of writing, Red Emperor’s shares were up 110% at 6.96p on volume of 85,000,000 shares (c.17% of shares in issue). This is not at all bad when you consider they closed last Friday at 1.4p, following disappointing interim drilling results.
In that RNS, Red Emperor reported that the preliminary review of the Nanushuk interval suggested oil shows were at “the lower end of the range required for commerciality”, although “further petrophysical analysis would be necessary”.
This triggered a mad rush for the exit and opened up a decent speculative trading opportunity. Anyone who has researched the backgrounds of the companies involved in Winx-1, Red Emperor, 88 Energy (LSE:88E) and Pantheon Resources (LSE:PANR), would know that these firms are well versed in the art of stock promotion.
Although Friday’s price action was brutal, the directors of these companies are not known for giving up easily on a narrative and just walking away. However, despite this, I doubt many people would have predicted what has happened so far this week.
The rally is bonkers.
Here’s why.
Red Emperor’s market cap is now £37m. According to the half year report the company had A$5.9m (c.£3.1m) net current assets. It then raised £2.8million at 2.8p on January 22nd and issued its brokers and corporate advisors 6,000,000 options, exercisable at 2.8p.
You can be pretty certain those options are currently being converted faster than you can say “Winx One” and the shares are flying (or, more likely, have flown) out of the door. While this will help Red Emperor’s cash position, it won’t do much to bolster the current fundamental argument for holding stock.
Red Emperor has not made a commercial oil discovery.
This is not to say that Winx-1 will be a failure, but the current rally looks highly irrational. This is especially the case when you read the significant caveats in this morning’s news.
It is worth bearing in mind that Strand Hanson, Red Emperor’s Nomad, is one of the better nominated advisors out there. Strand has a background in oil and gas and tends not to let its clients overegg things too much. Today’s cautionary statement is a good example of this. It reads:
‘Cautionary Statement: The estimated quantities of petroleum that may potentially be recovered by the application of a future development project(s) relate to undiscovered accumulations. These estimates have both an associated risk of discovery and a risk of development. Further exploration, appraisal and evaluation is required to determine the existence of a significant quantity of potentially moveable hydrocarbons.’
In other words, if the wireline logging results disappoint in 10 days time you have no one but yourself to blame if you’ve bought this stock at this price.
Then there is the likelihood of another placing to consider. If there is one thing Red Emperor’s directors have been successful at over the years it is raising money. They really have excelled in their timing of this.
In April 2012, Messrs Bandy and Co raised £6.24m at 32p at the height of the Puntland frenzy. That project ultimately ended in dust, with a controversial oil to water episode thrown in to boot, but Red Emperor’s board ensured the company took maximum advantage of the wild rallies by raising as much money as it could.
It would not be at all surprising to see that happen again now, not least because January’s placing participants have made a killing, there’s a shedload of in the money options no doubt being converted like billy-o and however you cut it Red Emperor is just not worth anything like £37m based on what it has announced so far.
Let’s see what happens over the next 10 days, but with the Ides of March approaching, you have been warned.
Julius Caesar, Act I, Scene 2, A public place
Soothsayer. Caesar!
Caesar. Ha! who calls?
Casca. Bid every noise be still: peace yet again!
Caesar. Who is it in the press that calls on me?
I hear a tongue, shriller than all the music,
Cry ‘Caesar!’ Speak; Caesar is turn’d to hear.
Soothsayer. Beware the ides of March.
Caesar. What man is that?
Brutus. A soothsayer bids you beware the ides of March.
Caesar. Set him before me; let me see his face.
Cassius. Fellow, come from the throng; look upon Caesar.
Caesar. What say’st thou to me now? speak once again.
Soothsayer. Beware the ides of March.
Caesar. He is a dreamer; let us leave him:
