We initiate coverage of Red Fork energy Australia (RFE:ASX) with a Hold rating. While RFE has 77,000 net acres in the Mississippi Lime and is trading on very cheap EV to acre multiple, we view there is doubt around the capacity to fulfil its 2014 drilling program. We are currently modelling 14 wells to be drilled in 2014 which is less than the required 28 in 2014 to hold all acreage with production. We initiate coverage with a HOLD rating and 12-month price target of A$0.20.
On the forward program RFE initially expected to drill up to 45 operated wells in calendar 2014. The 2014 lease expiry schedule only requires 28 wells.
Current reality and what is required to hold onto all the acreage. This is so similar in how Texton (TXN) got unstuck before a very cashed up SEA gobbled it up.
If indeed RFE's acreage is that good, then expect RFE to be taken over on the cheap! A JV may be the most prudent course and this persistent sell down may be designed to set an appropriate entry price.
RFE Price at posting:
13.5¢ Sentiment: Hold Disclosure: Not Held
