euroz research post site visit tp u/g to $1.64

This apparently came out last Friday arvo. Analyst has been to site and upgraded data including target price.

Red Fork Energy Ltd
(RFE $0.74) Buy

Analyst: Jon Bishop
Date: 27 July 2012

Jun Q’ly & Site Visit Summary

Price Target : $1.64/sh
Investment Case
Our recent site visit and recent production results confirm RFE’s strategic planning in terms of acreage selection and infrastructure development has substantially de-risked the story. In addition, acreage is shaping to be economically superior to the broader Mississippi Lime trend. Continued strong results from the forward programme will continue to add weight to the argument for a premium to applied: Recent Blair and McMurtry-1 21H results support this view.Buy.
Key Points
Our recent site visit has reinforced our view that RFE’s methodical approach to acreage selection and well location and design is bearing fruit in terms of well results:
- McMurtry-1 21H has achieved a peak rate of 712boepd (80% oil) in 15 days on production and averaged 520boepd over that period
- Blair-1 24H achieved a peak of 400boepd (80% oil) and averaged 273boepd over 21 days on production
- We understand logs over Tasman and McMurtry-1 22H are consistent if not better than Blair and McMurtry-1 21H in terms ‘net-pay’ – Tasman is likely the next well to be fracked (early Aug).
The Company has also taken a long-dated approach to field development with disposal, gathering and take-away infrastructure in place at 2 development nodes servicing at least 30-50 wells each.
RFE’s midstream company is generating revenue from 3rd party disposal and gas handling.
Maiden independent reserves for RFE’s Mississippi Lime interests are due this Q.
The Company will have the option then to borrow against 1&2P reserves and midstream company revenues.
Rolling forward to FY’13 our RFE valuation increases to $1.64/sh ($1.47/sh previously).
Analysis
The site visit provided a company overview of the Mississippian Lime assets. Specific attention was given to the geological controls that have dictated acreage selection and how the geology influences well drilling and completions design.
Site inspections of the McMurtry-1 21H and Blair-1 21H production and newly spudded State-1 13H and State-1 16H wells plus the Noble County Development Area 2 gathering and disposal infrastructure were also undertaken.
We view that RFE’s strategic planning – in terms of infrastructure development as well as thorough geotechnical evaluation for the purpose of acreage selection and ultimately well location and completion design – has substantially derisked the story.
The latest production and drilling results are vindication of this view; we feel that these results will continue as the recently drilled wells (Tasman, McMurtry-1 22H, Bunch and the State wells) are brought on.
Thus far RFE wells at or substantially above average peak rate of 300boepd across the Miss Lime trend and oil yields of 80% vs play average of <50% oil to gas ratio.
We view that should these results continue – in terms of both absolute production and high oil yields – RFE will rightfully command a relative premium for its acreage.
The current share price implies an EV:acre of $3,200/acre; this compares favourably with recent 3rd party divestment and listing metrics (see Repsol, Devon and Sand Ridge Miss. Trust II) of between $4,500-$12,000/acre.
We view maiden independent reserves for RFE’s Mississippi Lime interests later this Q will provide further validation of acreage (value) potential.
Particularly where Schlumberger assess each 640 acre pooling until has recoverable potential of 1-3mmbboe from 3 wells under full-field development.
And the long-dated approach to implementing field development (ie water disposal, gas gathering, take-away infrastructure and long-term sales contracts attracting +$6/bbl to WTI currently) will add to RFE’s corporate appeal for new entrants into the play willing to pay a premium for de-risked and established, large, operated acreage positions.
Our $1.64/sh valuation assumes RFE drill at least 110 wells to hold its acreage by production over the next 5yrs.
On a full scale development scenario considering full development scenario of 3 wells per 640acre spacing unit (@ 30 wells/yr from 2013), results in a valuation of +$2.50/sh (vs current $1.45/sh).
This is without factoring in the underlying potential of its oil prone Woodford Shale interests; a play of increasing focus by Devon et al.
Devon recently achieved an IP of ~400boepd (88% oil) from a Woodford Shale test, approximately 6 miles west of RFE’s Noble and Payne County acreage (see ‘Drilling Wire’, June 26, 2012, pg 3).
Incorporation of an additional horizon of development through the Woodford Shale requires assumptions of timing and pace of development: Our conservative assumptions underpin valuations of +$3.50/sh.