comments from patersons

Rialto Energy Limited (RIA) - SPEC BUY

Impending Resource Report and Improved Political Stability in Cote d'Ivoire

* We are re-initiating coverage on Rialto Energy Ltd (RIA) with a SPECULATIVE BUY recommendation and a price target of $1.00/sh, given the investment opportunity presented by the sell-down in share price through 2011, resolution of political uncertainty in Cote d'Ivoire and impending completion of an updated Competent Persons Report (CPR) and Field Development Plan (FDP). Since our previous initiation note, the RIA story has strengthened with political stability restored in Corte D'Ivoire, an increase in working interest in CI-202 to 85%, progression of subsurface and development studies for CI-202 and is leveraged to the resultant impending CPR plus the operator's (TAP) ongoing farmout of the Ghana Accra block.
* High Value 85% stake in CI-202. RIA's primary asset is an 85% WI in block CI-202 which is located in the proven Ivorian Basin and contains 5 x discovered and tested oil and gas discoveries in the Gazelle and Hippo clusters. In February, RIA released the results of RPS Energy's CPR which estimated gross mean contingent resources of 56mmbbls of oil/condensate and 391bcf of gas; prospective resources of 140mmbbls and 669bcf; and an unrisked valuation based on development of 76mmboe of 2C resource of US$472m. RIA is targeting appraisal drilling of 2-3 wells in the Mar Q 2012 followed by further drilling in the Dec Q 2012, with first oil for phase 1 development at Gazelle targeted for 1H 2013.
* Completion of development plan and resource report targeted for Sep Q. Based on the integrated subsurface and facilities studies for development of CI-202, RIA plans for completion of an updated CPR and FDP in the Sep Q. While RIA will not book any reserves until after completion of the FDP and submission in the Dec Q, we are anticipating an upgrade to resource estimates. The completion of the FDP should significantly de-risk the stock by providing details of the planned development.
* Resolution of political turmoil in Cote d'Ivoire. Political stability has returned to the country since early 2011 with the house arrest of the incumbent President Laurent Gbagbo, who had refused to handover power to the internationally recognised Alassane Ouattara, who was democratically elected in 2010. This has allowed for the establishment of an office in the capital Abidjan and the completion of several successful meetings in country with its JV partner Petroci, the government and the Minister of Energy.
* Award of rig contract for drilling early 2012 drilling program. In July RIA entered into an agreement with Transocean for provision of the GSF Monitor to drill 2-3 wells in early 2012.
* Ghana Accra provides "blue-sky" upside. RIA holds the rights to acquire an 18% interest in the highly prospective "Accra" block, subject to GNPC and ministerial approval, which covers an area of 2,000km2 across depths of 50-2,500m. Several shallow to moderate depth prospects have been identified and is prospective for deep-water Jubilee Style prospects - however this deepwater play is unproven in the Keta-Benin basis. Operator TAP is currently targeting a farmout of its interest in the block which, together with work-up of deepwater prospects for 2012 drilling should provide key catalysts