Highlights"RFE doubled its producing well inventory in the Mar Q...

Highlights

"RFE doubled its producing well inventory in the Mar Q and is now completing behind drilling which should deliver a further 25-30 operated wells this CY.  Currently averaging 2,000boepd, the operational improvement is clearly being borne out in terms of production (31% inc. Q on Q) and cashflow growth. Growing reserves and production will in-turn increase RFE’s funding capacity. Beyond which, upside to the RFE story lies with improved resource recovery through development spacing and Woodford oil shale development. Buy.

Key Points

Current av. gross rate of 1,950boepd (up from 1,690boepd in Mar).

April av. gross production of 1,806boepd.

RFE doubled its operated producing well inventory in Mar Q and has interests in 35 gross wells in various stages of completion, across 8 dev. areas.

A smaller fourth rig has been employed to drill SWD wells ahead of development hubs.

Spud to first sales target of 45 days achieved at the Flinders 1-25H well, with Santana 1-30H and Bull 1-16H recording 60 days or better.

The Company expects to increase availability and size of current US$65m RBL facility in the Jun Q.

Analysis

RFE continues to demonstrate an improvement to operating efficiency with the Company now completing behind drilling for its operated programme which should deliver a further 25-30 operated wells this CY; an impressive improvement in operational execution since the end of 2012.

As a consequence, the Company is beginning to realise the benefits of improving spud-to-first-sales cycle times:  Recent wells are already converging on the Company’s aspirational target of 45 days. 

This is translating to material Q-on-Q increases to production (31% inc. Dec to Mar) and a steady underlying monthly improvement: April averaged +1,800boepd, and with current rates averaging 2,000boepd, comfortably tracking the guided 3,400boepd CY exit rate.

Noting the lag between first production and sales receipts (up to 50 days in our experience: M1 production = M2 receipts) and the concerted operational effort from mid-Februrary, we anticipate stronger Q-on-Q increases when the Company reports its Jun Q numbers.

Growing operational cashflows should be pronounced over the next 18mnths: We forecast US$20m EBITDA for CY’13 increasing to +US$70m in CY’14.

The Mar Q’ly implied well capex costs are consistent with the US$3.2m previously guided by RFE.

Improving spud to rig-release times av. 26 days (vs +40 prev.) will have a positive downward impact on gross well capex going fwd.

Pleasingly - and a reflection of increasing industry focus on the oil prone, Mississippi Lime acreage east of the Nemaha Ridge in our view – RFE participation in non-operated drilling is showing a significant up-tick.

We understanding RFE will participate in at least 12 non-op wells with DVN alone this CY, including tests of the underlying Woodford Oil Shale.

As per the recent DVN Mar Q’ly conference call, the Company has been consistently delivering IPs of 600-1000bbls of oil (plus NGL rich gas) from its recent Mississippi programme, focused in acreage coincident with RFE.

RFE – where pooled with DVN – has the opportunity to review DVN’s operational techniques (for it is in DVN’s interests ie where RFE operate on their behalf) and we expect some of these key learnings to applied immediately to the current programme.  We watch the results from June with interest on this basis.

The Company has guided that it will likely increase the size and the available borrowing base (currently US$20m) of its US$65m (@ 3.25%) RBL facility this Q. 

We expect that with at least 20 new wells completed this H, this should provide increased access of up to US$50m by Jun 30 and likely more (circa US$70m) early in the new FY from an increased facility size (say +US$150m).

This would allude to a material increase in the Company’s 1 and 2P reserve position come next statement as a function of the reserve engineers (and thus lenders) acknowledging the de-risking effect of spreading development throughout 7 (of 10) development areas. 

It would also be reasonable to anticipate recognition of a significant proportion of RFE’s 50mmbboe Mississippi Lime 1C resource as 3P reserves on this basis.

Our valuation does not factor-in full-field dev’t of 3 gross wells per 640-acre spacing unit, further down-spacing nor the underlying Woodford Oil Shale potential.

We believe that with on-going production data and highlighting the development infrastructure in-place, RFE will be of inc. corporate appeal."