todays fosters stockbroking report

12 October 2012

Morning Report\


Red Fork Energy Ltd - (RFE.ASX, $0.67/sh, Mkt Cap $255m) – Reserve report highlights potential, all eyes on Tasman - TRADING BUY PT $1.50

Today’s Top Picks.

Red Fork Energy Ltd - (RFE.ASX, $0.67/sh, Mkt Cap $255m) – Reserve report highlights potential, all eyes on Tasman - TRADING BUY PT $1.50

· Red Fork recently released its maiden Mississippian Reserve report. The breakdown of the reserves were as follows:

­ 1P 2.07 mmboe;

­ 2P 4.7 mmboe;

­ 3P 2.9 mmboe and

­ 1C 166.9 mmboe

· As expected, the majority of the reserves are in the 3P and Contingent category, given the report was commissioned on 30 June, when there was limited drilling or production data. As of 30 June only 2 wells (Abunda and Blair) were completed and tied into production. Furthermore, only 36 net well locations were used in the calculations for contingent resources, which is a marked difference from the 117 well locations, which would have to be drilled to hold its 75,000 net acres by production based on 640 acre spacing.

· Nevertheless, the maiden reserve report provides a solid starting point for establishing the scale of the opportunity.

· The primary objective now for RFE is operational execution in order to de-risk and realise the value of its acreage, increase production, cash flow and progressively upgrade the reserves to a higher confidence (1P & 2P).

· We look forward to the results of Tasman #1-15H, which is currently flowing back frac water and is already delivering oil and gas to the company’s permanent production facilities. All signs are positive and indicative of Tasman outperforming the average well type in the play. Peak production should be reached over the coming week. Should Tasman come in line or better than the McMurty #1-21H production well with a peak IP of 712boe/pd and 30 day average of 470boe/pd, then we would expect a significant re-rating in the share price.

· While limited news flow has weighed on the stock price, we believe the increased development pace will start to be reflected during this quarter as Bunch, McMurty 1-22H and State 1-16H well come online. This should provide ample news flow and if flow rates continue to outperform we believe the stock will significantly re-rate.

· RFE’s pro-forma cash and development program is targeting a self-funding profile by 2014. There remains significant scope for growth when you consider full field development scenario of 160 acre spacing vs. the 640 acre spacing to hold by production. Further upside resides should they consider exploitation of the underlying Woodford shale, which has been the focus of US E&P giant Devon in the area.

· Our risked DCF valuation for RFE is $1.54/share and is based on a NPV of 110 wells drilled over 5 years to hold its acreage by production. Upside risks include, outperformance of average well type, full field development (350 wells based on 3 wells per 640 acre spacing) and development of the underlying Woodford shale.

· We rate RFE a TRADING BUY and PT of $1.50/sh.




·




·
·