rbc initiates coverage

On the 14th RBC initiated coverage with a very detailed 27 page report.

Highlights

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We are initiating coverage on Red Fork Energy as a leveraged play on a simple, reproducible exploitation target, the Mississippian Lime, chasing crude oil growth.

The company is targeting a 10-fold increase in production over the next four years which should underpin earnings growth and a rise in EPS to an estimated >20cps (PER <5x).
Key Points:

Red Fork Energy represents a simple investment model like many of the US-exposed ASX-listed companies. Our investment premise is based on a proven, predictable, low-risk oil play in the Mississippian Lime in Oklahoma.
Fast tracking production and reserves

The company has commenced an aggressive drilling programme targeting 38 gross wells in FY13 and a sustaining 56 gross wells thereafter. Company guidance has production rates growing from 1,100 boepd to 11,000 boepd (net). Drilling will also drive reserves growth and we expect a material upgrade in booked volumes through the forecast period.
Intrinsic Upside

The initial programme is based on a conservative assumption of three wells per 640 acre section, with industry participants suggesting a higher density drill spacing as a natural evolution of the play. We suggest the potential drilling targets could be understated by up to 66%.
Funding?

An aggressive programme requires funding, and the company has secured some first-phase, reserves-based facilities, which secures the financing through early 2014, by our estimates. We assume successful drilling supports further reserves-based facilities and suggest that the risk of an equity raising is low, but it will come down to delivering at or above the type-curve average.
What to look for throughout 2013.

With activity already underway, the market will know quickly whether drilling schedules and production targets can be met.

upcoming quarterly and financial updates will be a direct indicator of production and earnings growth, and
a continuous field campaign with up to another 31 gross wells to be added in the Big River asset.


Valuation and Price Target

We set a Price Target of $0.90, and with implied 12-month returns of 35%, initiate with an Outperform, Speculative Risk Rating for Red Fork. Our NAV ($0.93/share) is set using a sum of the parts (SOTP) valuation. Our current unrisked upside is $1.48/share.

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