euroz update post july report

Main points:

"Price Target: $1.44/sh

Investment Case

A 10% month-on-month av. production rate increase to 2,440boepd gross (1,500boepd net after royalty) and (particularly) a sharp jump towards the month end to 2,775boepd gross (1,700boepd) continues to underscore positive themes of improving operational execution and corresponding production and cash flow growth.  At an EV of A$176m vs PV10 of US$144m for its 1P Reserves and with the emerging upside of the Woodford, RFE looks compelling cheap and obvious corporate target: Buy.

Key Points

June av. production improved by 10% to 2,440boepd gross (1,500net post royalty) from 2,229boepd gross (1,370boepd post royalty).

Peak rate of 3,014boepd gross (1,850boepd net post royalties) and average of 2,775boepd (1,700boepd net) over the last 7 days of July.

3 new wells were completed in the month; total 52 gross (op and non-op) hzntl wells in 8 (of 10) dev. areas in various stages of development.

Clear efficiencies being realised with 5 wells TD’d and 5 wells spudded in the month.

Recent 24hr IPs include 500boepd at McMurtry 1-27H; 249boepd at Oxley 1-35H; and 231boepd at Reef 1-29H.

Operational enhancements bearing out in terms of 30, 60 and 90-day average rates of recent wells outperforming type curve by 50-60%.

Up to 90% of RFE’s 77,000 net acre ‘Big River’ Mississippian play is underlain by oil prone Woodford Shale.

Analysis

The underlying operational performance and asset quality continue to be highlighted by the most recent operational update. 

Production growth outlook remains strong; there has been steady acceleration to prod’n growth, particularly since the turn of the new CY:

·         Dec Q av - 1,108boepd gross (net post roy. rev. US$3.5m)

·         Mar Q av - 1,456boepd gross (net post roy. rev. US$4.1m)

·         Jun Q av - 1,945boepd gross (EZL est. net post roy. rev US$7m)

Moreover, we are seeing substantial improvement to average 30, 60 and 90 day rates on the wells that have employed jet pumps in the initial phase of clean-up.

[chart]

It can be seen above that recent well performance witnessed at Jardine, Mawson, McMurtry 1-27H and Flinders, has significantly outperformed the Company’s average rates achieved in the wells completed in CY’12.

And we are seeing consistent improvements to peak and 30-day IPs.

Importantly, the average rates presented are 50-60% improvements on the Lee Keeling and Assoc. type curve applied to determine RFE’s reserves and thus borrowing base.

And in kind, substantially above the Euroz type curve used to determine our A$1.44/sh DCF valuation.

Cash flow growth is steadily following: We determine US$6m EBITDA for the Jun H’13 will grow to US$25m for the Dec H on the current pace of development.

Operating Cashflow will be enhanced by improving spud to rig-release times (av. 16-17 days (vs 26 prev.)) translating to a positive downward impact on gross well capex (EZL est US$3.2m).

We understand, more recent total costs are below US$3m vs. the typical US$3.2-3.5m/well AFE (Authorization For Expenditure).

RFE will participate in at least 12 non-op wells with DVN alone this CY, including up to 6 tests (av. WI - 12%) of the Woodford Oil Shale.

This non-op programme will provide RFE access to DVN’s intellectual property, which should serve to further improve RFE’s production performance over time.

The continued emergence of the oil-prone Woodford Shale play, provides significant additional potential value for RFE, with up to 90% of RFE’s 77,000 net acre ‘Big River’ Mississippian asset prospective for the underlying Woodford.

Whilst RFE’s current operated programme continues to focus on HBP drilling of the Mississippi Lime,  RFE’s lease terms and pooling process ensure all existing and planned drilling will secure the mineral rights pertaining to the Woodford Shale.

DVN have recently reported (see Q2 earnings call) early results encouraging economic potential at least similar to the Mississippi Lime in this area:

·         well capex of US$3-3.5m well;

·         30 day-IPs of 400-700boepd (70% liquids);

·         Low opex on account of relatively lower produced formation water;

·         Economics enhanced by utilising existing Mississippian infrastructure.

Under a development scenario of 4 wells per 640 acre pooling unit, RFE’s acreage package supports at least 650 gross well locations. 

There is clearly enormous potential valuation upside to the RFE asset portfolio on this basis."