Hi,
Amongst many other pearls from John Bishop including upside valuation of $3.50 this is the first time Woodford has been referenced...
Red Fork Energy Ltd
(RFE $0.78) Buy
Analyst: Jon Bishop
Date: 10 July 2012
Operations Update – Noble County Dev. Area 2
Price Target : $1.45/sh
Investment Case
The early Blair 1-24H results continue to support our positive view of asset quality. Early signs at McMurtry 1-21H are consistent with Blair. At least 5 new well flow rates are expected over the next couple of months. The RFE story very much remains a proof-of-quality story in the short to medium term. Third party transactions value undeveloped acreage at up to US$12k (vs RFE’s EV:acre of $3,200/acre), therefore providing substantial value headroom within which to grow for RFE's 75k net operated, oil prone acres: Buy.
Key Points
Blair 1-24H has been on test for nearly 3 weeks and has been producing consistently at rates of 350-400boepd (~80% oil and high BTU gas) to sales over this period.
Post the initial 30-day testing period, the Company intends to provide further update to the market regarding 30-day average and peak rates recorded.
McMurtry 1-21H has commenced flow back and is building casing pressure and giving up loadwater with cuts of oil and gas. These results are consistent with the early behaviour of Blair 1-24H.
McMurtry 1-22H awaits completions which are expected to occur within the next 10 days.
Bunch 1-19H and Tasman 1-15H should TD this week; extensive oil and gas shows have been witnessed across the lateral.
The State 1-13H and 1-16H will be spudded shortly.
Our RFE valuation is $1.45/sh.
The current share price implies an EV:acre of $3,200/acre; this compares favourably with recent 3rd party divestment and listing metrics (see Repsol, Devon and Sand Ridge Miss. Trust II) of between $4,500-$12,000/acre.
Maiden independent reserves for RFE’s Mississippi Lime interests are due this Q.
Analysis
The early results for the Blair well are very encouraging and production rates consistently between 350-400boepd over the past couple of weeks is well ahead of the Sand Ridge Trend average.
Additionally, the relative implied oil to gas ratio and strength of early production rates auger well early production volumes and associated well economics.
These results are particularly positive noting that very little load-water has been recovered and the fluid level remains high.
We understand the that the well logs from the wells off-set to Blair, exhibited similar reservoir characteristics and McMurty 1-21H appears to be behaving similarly to Blair in its early stages of clean-up.
We retain very positive expectation on the early production results from these wells as they are brought on-stream.
The forward programme should bring 1-2 additional wells on production per month.
We stress, particularly in light of Abunda, wells in the Mississippian can take a substantial amount of time to reach stabilised flow and as such, the Mississippi Lime is very much a statistical play.
A spread of results (be it ‘peak’, ‘total estimated’, ‘average’, ‘initial’ etc) can be expected and no single result (as witnessed in SEA and AUT to date) proves or more importantly disproves a play.
Ultimately, acreage quality will be reflected by consistency in terms of statistical variance observed over time from RFE’s wells.
We maintain that well results will drive continued re-rating of RFE’ s acreage position over the medium term in our view.
Sand Ridge Energy Mississippi Trust II listed in April at an implied $12k/undeveloped acre.
This compares favourably with RFE’s current EV:acre of <$3,200/acre (mkt cap $215m, 75k net operated contiguous acres in the oil rich Mississippi Lime).
We view maiden independent reserves for RFE’s Mississippi Lime interests later this Q will provide further validation of acreage (value) potential.
Particularly where Schlumberger assess each 640 acre pooling until has recoverable potential of 1mmbboe from 3 wells under full-field development.
RFE will need to drill at least 110 wells to hold its acreage by production over the next 5yrs and likely at least 300 to fully develop its interests.
On a full scale development scenario considering full development scenario of 3 wells per 640acre spacing unit (@ 30 wells/yr from 2013), results in a valuation of +$2.50/sh (vs current $1.45/sh).
This is without factoring in the underlying potential of its oil prone Woodford Shale interests; a play of increasing focus by Devon et al.
Devon recently achieved an IP of ~400boepd (88% oil) from a Woodford Shale test, approximately 6 miles west of RFE’s Noble and Payne County acreage (see ‘Drilling Wire’, June 26, 2012, pg 3).
Incorporation of an additional horizon of development through the Woodford Shale requires assumptions of timing and pace of development.
However, it would seem plausible that RFE could internally manage a pace of 50 well/yr (ie 4 rigs drilling 1 well/rig/mnth) for 720 wells at average of US$3.5m/well (to incorporate slightly higher drilling costs due to relative depth of the Woodford).
This would underpin valuations of +$3.50/sh.
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