Strolling around the boardroom in the Mayfair headquarters of stockbroking firm Old Park Lane Capital, Barney Gray contemplates a question about US debt and macro-economic misery. “If I thought about it too much I think it would make me stressed,” he says. With that, the conversation switches to natural resources – a subject close Gray’s heart and one which is helping to define Old Park Lane Capital as a broker that can make a very big impact on the fortunes of smaller quoted companies.
For the firm’s Inverness-born Director of Research, the traditional City summer lull is proving rather less relaxed this year. Since joining from Westhouse Securities last summer Gray has played a key role in building a corporate broking arm next to the already established stockbroking operation run by the firm’s founder, CEO and well-connected City broker, Michael Parnes. Among the growing corporate client list, which is entirely focused on natural resources stocks, is Range Resources (LON:RRL) – an AIM and ASX listed oil and gas exploration and production company whose popularity among investors is reflected in astonishing trading volumes. With Range’s recent announcement that exploration drilling is now underway on its licences in the former Soviet state of Georgia, plus indications that drilling could soon start in Puntland, the news flow and Gray’s broker notes are flowing fast.
Barney, tell me about Old Park Lane Capital and the companies and individuals the firm works with?
Old Park Lane Capital has a very simple structure; there are two parts. You have got the ultra high net worth individuals, including a lot of friends and family, and we have got a team of brokers on that side. Michael has got incredible connections and he’s built the business up through reputation and performance. It is very much a gentleman’s stockbrokers with very high service and very much about dealing with individuals. On the other side of the Chinese wall, we have corporate broking where we are purely focused on natural resources. Obviously there is mining and oil and gas but we do have a couple of clients that are involved in alternative energy – we have just signed Altona (LON:ANR), which is a classic company that gets overlooked because it doesn’t fall neatly into one of two camps.
Phil Swinfen, who is former RBC Capital Markets, came to join us and together we have been building the client base with lots of mining and oil and gas companies, AIM listed companies and Australian listed companies that are looking to list on AIM. We are growing the business through oil and gas and mining at the exclusion of anything else because that’s what we do. We are very busy, we have picked up a lot of clients and it is really ramping up at the moment.
There is no shortage of companies looking for capital but I also know that there are a lot of brokers out there, probably too many in that very competitive mid-market space. We intend to stay niche and stay nimble. You get to know these companies intimately; I am involved in deals from start to finish and you don’t always get that with a larger firm. Taking companies that need some real handholding is something that we can do.
Oil prices have been strong and fairly stable in recent months. What has that meant for junior oil and gas companies and what are your views about where the price may go in the future?
Those companies have been underpinned by a relatively strong oil price. This hovering around the $100 mark makes life a little bit easier when it comes to valuations. A lot of production prospects and plays are valid and a lot of areas around the world are brought in to play because of the $100 oil price. I think that if oil were to drop down to $40/50 it could create a lot of anguish in the sector. Clearly there are certain economic factors that are keeping the oil price where it is but nevertheless there is still sluggish economic growth everywhere. In the West we have almost been holding back on our oil demand but it is very interesting to think that once global growth gets back to where it was, and with demand from all these Asian economies in particular, I think you could see a real strengthening of oil prices over this next decade. It will be a really good environment for the juniors because at the end of the day you have got to find this stuff and you have to find it in new and increasingly risky areas.
For our own internal modelling we assume about $85 per barrel at the moment because we have to build in some head room to give investors comfort on the kind of valuations that are coming out. So we won’t be feeling any pain, even at $85, but oil just doesn’t show any signs of going down to that level. I think the trend, long term, is upwards and pretty strong but I’m hoping not enough to create a bubble. I think that if you went to $200 now it would be deemed to be a bit crazy because of all the economic implications – we simply can’t afford for oil to be $200.
Range Resources, a client of yours, has become a hugely popular stock over the last 18 months. What has that company got right and how does that fit in with your view of what investors are looking for in junior resources companies?
There is almost a magic formula which involves an element of production that throws off some cash flow, which enables you to pay your bills and gives you the leverage to raise more money and go and drill some nice low risk, high impact exploration targets. Not many companies fit into that particular mould but you can get there with some very astute deal making. A small company with production enabling it to spend on exploration is very rare. Range Resources have done this but you can’t do it overnight. You go back to the beginning of 2010 and their share price was less than 4p. The market got excited about some exploration assets they had in Puntland, and obviously Puntland still hasn’t drilled yet, but in the meantime they were able to use the cash they had to get into some production assets in Texas. That was all about timing, skill and judgment.
A distressed partner drops out, wells can’t be drilled, so you come in with a couple of million dollars and you say: ‘I’m your man’ and then the drilling commences. You have to be opportunist, you have to know where the opportunities are because simply buying production is a very expensive game, you have to have something extra on top of that. With that they bought into Texas and then they started shaping up the Georgia prospect and then Puntland is getting closer, although it is a slow process. In all that time they didn’t drill an exploration well but now they are, the time is right and they haven’t put a foot wrong really. Trinidad was a great deal, we are really impressed with Trinidad. Straightaway, they have got the cash from a share placing, they have got a 21 well development programme – and this is still an oil junior. They have got exploration wells going down and they are still producing in Trinidad and Texas, what a cracking, diversified portfolio. It is a great example of what you can do to get your market cap up by a factor of 10, which is what they did. You need a little bit of serendipity, sometimes you need the cards to fall in the right way for you, but that was astute deal making and now they are drilling bang on the right time and scouring the world for good assets.
Good assets will always be out there and attract the right investment, and obviously us being able to tell what is a good asset from an average asset is obviously paramount, we have to be able to do that. If you have oil juniors come along with mediocre assets they are probably going to find it hard – a $100 oil price isn’t quite enough incentive. Sometimes it is all in the presentation, you have to present well, you have to build a very, very convincing, straightforward exploration case. Keep it simple because complicated small companies are not something I think investors like.
What are your priorities when it comes to raising money for a company; what is the ideal funding mix and how straightforward is it to bring in institutional investors?
We love to get institutions involved; the Holy Grail is when you get a good, cornerstone investor. Say you are doing a fundraising or a placing, ideally what you want is a cornerstone institution in there with a disclosable interest because it makes everything a lot easier and it brings other institutions in. These guys really do their due diligence so for them to come in and say: ‘Yes, we like this, we’ll take a decent slug’ is just fantastic. They do have criteria though and I suppose, in the case of Range Resources, Puntland is a high risk area and obviously if you are operating by certain criteria maybe Puntland is something that you can’t visit at the moment. So Range always have that very, very spicy upside that means perhaps that institutions would like to wait and see what happens. All investors are valuable because if you are raising money, and you want to do something with it immediately, everyone’s money is as valuable as everybody else’s. Typically we will get a mix of the market, a lot of the brokers in the market will participate, the high net worth individuals will participate, we have got extensive friends and family links and at this stage we are very pleased if we can get an institution to participate because it is an excellent benchmark.
With that in mind, how important are retail investors and the after-market in maintaining liquidity and how do you work to maintain the communications flow?
I think very important. The retail market covers quite a broad spectrum but its value in terms of liquidity can’t be understated. It is fantastic having an institution as a long term holder, that is what we want, but we also want the liquidity and the after-market and for stocks that capture the imagination. The guys who trade day in and day out are the ones that create the liquidity and create the momentum and if we can get the volumes going there we are very pleased. I think too many stocks on AIM suffer from very poor liquidity and I think the retail market is good for that. That was one of the reasons why Old Park Lane Capital was set up – to create an answer to the liquidity problem that you are seeing. For example, let’s say there are 5,000 shares on offer for a small stock at a few hundred pounds. Unless there is someone there ready and waiting to mop them up it may mean 10% off the market cap in the event that they are just ditched in the market. Let’s say one of the high net worth individuals has a sizeable chunk of the company; for the sake of 5,000 shares that come on the market he is just happy to pick them up.
That was what Michael identified as the imperfection in the market that wasn’t being addressed. Companies were losing 10-15% of their market cap for the sake of a few thousand pounds worth of shares being dumped. These are seriously wealthy individuals and, for them, it is in their interests to maintain the value of their share holding by having the ability to move quickly and mop up these shares. An institution isn’t going to be interested in 5,000 shares and crucially we are dealing with guys who can invest in institutional sizes but have that retail investor ability to be able to trade in whatever sizes they like. So we try to offer a solution to poor liquidity for smaller companies.
Does that mean you have to be very careful about the companies that you take on as clients?
Yes, we do a lot of due diligence because we have to be sure that we can execute our part of their business plan for them. Phil and I visit companies on-site in the country that they are in, we will see the assets, talk to the management and assess the business plan because from a reputation point of view, every client we take on matters a great deal – for our reputation and theirs. We do a lot of work with each client and we treat them all the same. All we ask in return is that they keep the market updated if they are doing interesting things. You have got to breed familiarity with your story and with what you are doing and that is how companies get a following.
Presumably you see a link between regular communications flow and the success that Range Resources has had in building an investor following?
They are excellent at keeping the market updated – it is a very simple formula that they have adhered to. It sounds simple but they have always kept a constant commentary so people know exactly what is happening. Range is becoming relatively diversified, they have got four business units now and they have to keep the market updated. The same goes for Red Emperor Resources (LON:RMP), which is in some of the same assets. They are your pure exploration player and obviously have had a great performance recently. When you are drilling and when you are involved in exploration where better to be than in the leveraged play? If you are going to try and double your money in Georgia or quadruple it when Puntland drills I can see why people are going into Red Emperor.
Among your other clients, who else would you point to as particularly interesting at the moment?
We have got Frontera Resources (LON:FRR), which has been a fantastic story. You’ll obviously notice that we’re big backers of Georgia – we are the entire market for Georgia, I believe! Frontera came to us because they saw what we had written about Range Resources in Georgia but the two companies are completely different. Frontera is a development and production company at the other end of the country in a different basin. We have been working with Frontera since last November, at a time when they had this huge overhanging convertible loan. Since then, together with their other advisors, we have been helping to get them into a position where we could remove most of this convertible through what was effectively a huge dilution of the share capital as well as raise some additional capital. We changed the domicile of the company so that the shares can now be traded electronically in London. Previously they had to be traded in certificated form, which had been a big impediment to their liquidity. Frontera have been fantastic, they had a great deal to do but they have done it. Now what we want to do is get the share price up. The placement was at 4p and it is now up to them to start increasing production in Georgia and really get it going.
Finally, markets everywhere are under pressure at the moment. What is your reading of it – and is it all bad news?
Macro-economic factors are weighing on the market. In the FTSE 100 there is complete resistance at 6,000 points but what is there to push it on? I think that businesses on an individual level in the UK are performing well but from what I understand about the weighting of the FTSE 100 a lot of it is mining, a lot of it is resources and those companies have had a good run. I think we have a lot to be thankful for with the resource companies; it is nice that one area of the global economy is still going strong. Hence why Australia has been insulated from a lot of the worst of the global recession; it highlights the fact that one of the few places in the world that didn’t go into recession was Western Australia. We can’t underplay the importance of the commodities sector and that is why Old Park Lane Capital is here.
Barney, thank you for your time.