aok v rfe

I hope my maths is correct!!! Reader beware!! DYOR


RFE has gone down alot recently. The question on my mind is whether this is a good company at bargain price. As an AOK holder in particular, I've wondered whether to transfer some funds over to RFE because it is "cheap".

I've tried to do an apples and apples comparison between the two companies to get an idea whether the the story matches reality, and how strongly I can expect them to perform in the future.

Type Curve.
Type Curves are projections into the future. In a young play like the ML it is a best guess rather than basing expectations on historical production. None the less ...

AOK:
Drill Cost: $650 K
NPV $1.2 M
IRR 90
Payback in 1 yr approx according to previous reports.

RFE:
Drill Cost: $3.2 K
NPV $4 M
IRR >50
Payback in 2 yrs approx according to previous reports.

Standardizing this to a per Million Dollars invested by the company, the proposition is:

AOK - Money back in 1 year and a further $1.9 Million paid back over 10 yrs total.

RFE- Money back in 2 yrs and a further $1.3 Million dollars paid back over 10 yrs total.


Reality
AOK increased production by 405BOE over a 12 month period (June Production 2012 to 2013). In the same period they had total operating costs of $18.4 Million. (This is gross costs not net of revenue). This works out at $46K per flowing BOE.

RFE increased production by 1302BOE over a 12 month period (June Production 2012 to 2013). In the same period they had total operating costs of $101.2 Million. (This is gross costs not net of revenue). This works out at $78K per flowing BOE.

Its notable that many people use $100k per following BOE as fair value (with some variation for price of oil, oil cut etc). On this basis, AOK creates 2.18 times the value of dollars invested. RFE creates 1.28 times the value of dollars invested.

The Maths

For every dollar (D) invested by AOK, they create 2.18 times the value of dollars invested. The income they get allows them to reinvest the dollar every year (Y). Very simplistically expressed as an equation this is:

AOK Value Generation = D x 2.18 X Y = 2.18DY
D= Dollars invested
Y= Years of investment

For every dollar (D) invested by RFE, they create 1.28 times the value of dollars invested. The income they get allows them to reinvest the dollar every 2nd year (Y/2). Very simplistically expressed as an equation this is:

RFE Value generation = D x 1.28 X Y/2 = 0.64DY
D= Dollars invested
Y= Years of investment

RFE can increase value by (a very respectable) 6 times in a 10 year period. However, AOK is creating value at over 3 times the speed of RFE. This does not include the further acceleration from ongoing income (from existing wells) and debt facilities.


Conclusion
Based on the above I'm less negative about RFE than I once was. They are creating value (but at a slower pace than I would like). The elephant in the room is serial dilution until income is closer to expenses. I'll pass on if for now. I can't see any value for holders while that issue still hangs.

Based on the above, I'm more positive about AOK. I think the slow rise in the share price has been a combination of (a) the market previously pricing future potential and (b) dilution. I think much of this is behind AOK now with better cash flow and impending debt facilities.