Rialto Energy Ltd(RIA $0.12) BuyBlock CI-202 CPR UpdatePrice...

Rialto Energy Ltd
(RIA $0.12) Buy

Block CI-202 CPR Update


Price Target: $0.48/sh

Investment Case

Successful farm-out in the coming weeks for RIA’s CI-202 Cote D’Ivoire asset is the key short term catalyst. RIA’s $50m EV clearly ascribes no value to a development at Gazelle and in our view, significantly discounts a 1.4Bn boe Prospective Resource inventory. More importantly, successful farm-out will provide funding for the forthcoming high impact +2well drilling campaign which can test up to 70% of the Block’s resource inventory. With a successful farm-out we see a short-term price target of $0.20cps and further inc. towards our revised $0.48/sh valuation with run-up into the drilling activity from May.

Key Points

· Rialto Energy (RIA) has released an updated independent resources estimate for Block CI-202 (Cote d’Ivoire).

· Total mean prospective recoverable liquids and gas resources of 897MMbbls and 2,936Bcf respectively.

· This represents an increase of 75% for liquids and 65% for gas from the 2011 CPR.

· This is a consequence of the new 3D defining the new Arius, stacked Hippo complex (Chouette area) and upgraded Condor prospects.

· Total mean contingent recoverable liquids and gas resources are estimated to be 40MMbbl and 270Bcf respectively (down from 50MMbbl and 396Bcf previously as a consequence of the outcomes of the Gazelle appraisal).

· At an EV of $46m, the mkt clearly ascribes no value to development of Gazelle and significantly discounts the prospectivity of the CI-202 Block in our view.

· We have modified our Gazelle Development DCF to reflect the lower volumes which has reduced our valuation to $0.48/sh as a consequence.

Analysis

Today’s releases reaffirm our view that the short term driver for RIA is successful farm-out on the CI-202 Block over the coming weeks.

Beyond which a high impact, relatively high Probability of Success, 2-5 well programme in Cote D’Ivoire from May followed by the +600mmbbls gross test in offshore Ghana from Dec Q, 2013, would otherwise drive a lot market interest in our view.

The new CPR reinforces the exploration potential of the block and encourages us that the current farm-out process will successfully secure an industry partner for the forthcoming (April/May) 3 to 5 well drilling programme.

The uplift to prospective resources to the tune of 380mmbbls and 1.2Tcf for 897mmbbls and 3Tcf of potential recoverable volumes highlights the prospectivity of the block.

RIA has 85% working interest to deal in a block with material exploration potential within several proven hydrocarbon systems and play types.

We stress that the 21 target portfolio represent mutually exclusive tests ie success or failure at one location does not lower chance of success of the other prospects.

We maintain the shallow water environment and low relative associated drilling costs for a near term 2-5well campaign, should be highly attractive to industry.

Indeed the newly defined Arius opportunity (both Upper and Lower) - 290mmbbls (plus gas) mean and high case of 835mmbbls (attributable to just the CI-202 Block) - is compelling on its own in our view.

The outcomes of the CPR, in terms of prospective resource potential and the current farm-out process, should be view positively as a consequence.

However, this will be tempered by the downgrade to Gazelle field contingent resources.

At circa 150Bcf and 5.7mmbls, development of Gazelle is clearly reliant upon a 3rd party to fund pipeline infrastructure (to lower initial capex) and likely aggregation of additional gas resources.

The underlying 1Tcf Condor opportunity – partly derisked by the recent Gazelle P3-ST1 well results – thus represents an obvious primary target in the new drilling campaign.

FID for infrastructure at Gazelle will thus follow pending outcomes of drilling of Condor, the commitment of a 3rd Party to fund pipeline to shore/reductions to upfront capex and/or aggregation of other surrounding gas discoveries.

We have reduced our assumed volumes and adjusted our Gazelle Development DCF with the numbers provided in today’s CPR.

Our valuation reduces to $0.48/sh.

























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