"RFE is showing steady inc. to development pace and efficiency at its Big River Mississippi Lime asset. RFE is in a strong financial position which will improve with growing associated production/cash flow and capital efficiencies through lower capex and spud to first cash receipts. Beyond which, upside to the RFE story lies with improved resource recovery through development spacing and Woodford oil shale development. Buy. Key Points Gross production of 1,108boepd average for the Dec Q (up 89% Q-on- Q) and Dec 31 exit rate of 1,234boepd (gross pre-royalty). 100kbboe (gross) for the Q from all assets delivering US$3.5m in net after royalty sales receipts (inc. 57% Q-on-Q). Oil production 63% of the production stream for the Q versus 54% for the Sep Q by comparison. 10 wells to be completed in the Mar Q (vs. 11 wells on prod’n/testing currently) and an inc. no. of non-op wells over the medium term. Improving spud to rig-release times (now sub-30 days vs +40 prev.) will have a positive downward impact on gross well capex going fwd. Cash of US$36.7m plus EZL est. operating cashflow of +US$14m for the Jun H. Factoring-in current cash position, our valuation is $1.44/sh (prev. $1.50/sh). Analysis The Dec Q showed a marked improvement in development pace and efficiency at its Big River Mississippi Lime asset; well inventory is building as is the oil mix by production stream. Improving capital efficiency is being borne out with improved spud to rig-release times (reducing from 45 to sub-30 days currently). We expect that drilling and operational efficiencies can continue to place downward pressure on well capex. The key in the short-term will be improving the cycle time from spud to first cash receipts; the Mar Q is poised to demonstrate this shift in focus. The Company is guiding 10 wells will be completed in the Mar Q (vs. 11 wells on prod’n/testing currently) and 9 gross wells to be drilled.
This will be increasingly complemented by an inc. no. of non-op wells over the medium term. We believe that the market will price in production and implied reserves growth as a Company continues to demonstrate that it can consistently ‘make’ good wells in a timely manner. On our assumptions, current development pace should deliver at least circa US$14m in operating cash flow for the Jun H. With 36 new wells planned for the year, clearly the operating cash flow should improve considerably this year. We do however, foresee that the current cash and project cashflows will be supplemented by a reserves’ based facility sometime this CY. With the necessary funding, infrastructure, access to drilling, service and ullage, and permitting in place, we view that RFE is advantageously placed to realise the potential of its asset. The net NPV10 of US$604m the 1C resources (US$446m) plus 3P reserves (US$158m) provides validation of our current A$560m ($1.44/sh) valuation. We believe – as witnessed in other resources plays and highlighting that new wells are consistently being drilled around RFE’s acreage – that this discount will reduce over time, particularly as RFE embarks on development of their additional slated areas. Beyond which, there remains significant upside to valuation upon considering: 1. production out-performance and improved liquids’ yields; 2. optimization of completions’ design; 3. tighter development spacing (beyond 3wells/section); 4. the underlying Woodford oil shale potential. "
RFE Price at posting:
73.0¢ Sentiment: Buy Disclosure: Held