Rose Petroleum #ROSE – Less Manure more Miracle Grow.

Rose Petroleum #ROSE – Less Manure more Miracle Grow.

Reading through the internet, it’s easy to find lots of good articles written on ROSE, before any asks these are not necessarily articles that predict 10p in a weeks time, but they are articles that give a reasoned and thoughtful view point. There are however some which are rather manure in like. For this reason I’ve been thinking hard about whether to write anything on ROSE as most of it has been said. Now I just to need to confirm that I am a holder of ROSE.

The history of  ROSE has been written about elsewhere, so I’ll  mostly skip that for now, as most know ROSE came out of the ashes of a previous company with a bit of baggage, a few exploration sites, a working  and profitable mining unit in Mexico and unfortunately a Convertible loan note for 80m shares priced at 1.25p.

The mining unit in Mexico has been doing very well, with higher than predicted grades and better throughput, which has counted rising gold prices to give a 1m+ profit. This is expected to increase further and nicely covers the administration costs of the company leaving money raised to be used for exploration purposes.

ROSE has large exploration licenses in Utah with independently assessed reserves of of 1bn barrels are a great deal of gas. ROSE has committed to drilling and completing in the upcoming quarter into an already proven and producing resource target. Over 100 drills have taken place, over $1bn is being spent by other companies exploring these plays in 2014.

Rose has also committed to producing (using recently raised funds in the next 9 months.

So what does ROSE have going for it..?

Lets start large scale external…The US has a desired aim to be self sufficient in production of oil and gas, It also wants to be a major exporter and finally wants to be self supporting in the event of a 50% increase in consumption in case of a major war scenario. US states, particularly those without a highly educated workforce or high population areas are in need on revenue. Washington although not a firm believer of fracking turns a blind eye due to the national benefits.

UTAH is very much at the forefront of this drive.  Its low population density. Has a need for revenue and has a number of world class oil/gas plays vastly under developed (of which ROSE is very well placed). Utah is currently rapidly activating licenses for auction.

The licenses that ROSE have in UTAH have very good oil and gas connectivity with major pipelines within easy distance to get production up and running quickly.

http://www.bloomberg.com/news/2014-06-27/magnum-hunter-turns-891-million-in-debt-into-138-gains.html

An interesting article above on the state of Shale mining at magnum hunter, it owes, vast amounts of money, has a 1.6bn market cap, has only drilled 5 wells. But importantly its potential is seen as so massive that it can raise money at will…..The boom in US Shale should not be underestimated imho.

So moving down Rose has probably the most impressive OIL BOD and Team of any Oil company with a valuation of less than 50m MCAP imho. Through the end of May the share price rose rather dramatically and importantly for the Note holders shot past the note issue price of 1.25p+ a healthy profit margin. On the 5^th of June the SP was over 3.50p a share, however the companies was forced the on the 6^th of June it was given notice that the note would be converted. As the CEO has mentioned in recent interviews, the only reason the conversion would occur would be in they intended to sell the shares. The Share price started falling on expectation that 80m shares would hit the market and the BOD knew they would need to get a placing in quickly before the SP fell to far. They opened a book, didn’t have to underwrite the placing and received 6 times more interest than they needed. A few comments have been made about the quickness and timing, but in my opinion this was forced on them to do it before the 80m share hit the market. They negotiated a respectable 1.5p. Importantly the information obtained, indicates that the most of the placing went to industry specific funds, with smaller percentages to private individual’s, directors and brokerage companies like Jarvis. The extra money raised above 5m in the placing was solely to industry specific funds.

On the 19^th of June the equity for the note conversion was released, on the 20^th of June the placing was announced. The Share price fell to 1.6p within an hour…… At the same time the 80m shares from the note conversion started to be sold on the open market, by the 24^th of June over 30m of the shares had been sold…

Seems to have been a perfect storm to collapse the share price. However the share price responded. Despite this we now currently sit at 2.275, after having reached over 2.5p.

An examination of the large trades indicates that over 120m has been sold in large quantities, an assumed 60-80m of the notes (although it’s possible that the note holder, sold enough shares to cover the 1m note and the remainder is staying unsold as a free carry). An assumption can also be made that some of the shares from the placing were pre-sold into the market before being released on Monday.

So where does that leave us moving forward…

The laws of gravity normally dictate that the share price will fall whilst a big seller offloads, that hasn’t really happened, although the share has come down from its spike. It’s been very clear that the share has actually risen from the date the 80m shares came on the market. I firmly believe that most of the placing shares from traders that were only looking for a short term profit have most likely sold up. Volumes have been from 30m to 110m over the past 10 trading days on AIM an ISDX combined and its fairly clear investors (both large and small) have been buying all of the available stock on the market.

The questions that most are asking are, is this a spike ?, what will happen when all the placing shares are sold ?

These are totally the wrong questions, investors should be asking, what will happen when the large sells have gone ? (which looks to be  the case very very soon) and why was the placing 6 times over subscribed ?

We are in my opinion on the verge of a liquidity crunch for ROSE this will happen in 3 places to differing degrees.

First crunch before spud, during July, August and September the company will conclude its virgin hole. Prior to this interest will peak allowing a rise to 5-6p, as shares drift to more medium term holders will to wait until after the results are known for the 1^st drill.

Second crunch post spud, pre results. This is likely to be sentiment push, again with minimal selling. Drift to 8p.

Third crunch post results. If Rose hits any kind of decent flow rate, then the money rich mid tier US companies will be knocking, many with a 1-2bn Mcap, spending 400-500m a year on exploration able to raise upto 1bn in short order. If Rose gets a decent first drill, then the chances of rose staying independent for more than 6 months will be tiny. A rise to a 300-400m MCAP is not to be discounted, again who would sell with the knowledge that the US are Shale exploration crazy and ROSE is successful ?

We have to remember that ROSE has the profitable Mexican mining unit. This could, should and hopefully will be sold once a successful production ready drill has occurred for a reasonable price of 10-15m. This would be enough for 10 further drill, expected to cost $1.5m per a drill. So ROSE could well be fully funded to  3000-4000bopd.

As with all investments, ask the right questions, buy at the right price and the opportunity that the offloading of the notes and the funding shares has presented should not be ignored by investors, a very real chance of being the share of the year and at this price a genuine steal.