euroz update buy @ 73c target $1.44

Highlights

"RFE is showing steady inc. to development pace and efficiency at
its Big River Mississippi Lime asset. RFE is in a strong financial
position which will improve with growing associated production/cash
flow and capital efficiencies through lower capex and spud to first cash
receipts. Beyond which, upside to the RFE story lies with improved
resource recovery through development spacing and Woodford oil
shale development. Buy.
Key Points
Gross production of 1,108boepd average for the Dec Q (up 89% Q-on-
Q) and Dec 31 exit rate of 1,234boepd (gross pre-royalty).
100kbboe (gross) for the Q from all assets delivering US$3.5m in net
after royalty sales receipts (inc. 57% Q-on-Q).
Oil production 63% of the production stream for the Q versus 54% for
the Sep Q by comparison.
10 wells to be completed in the Mar Q (vs. 11 wells on prod’n/testing
currently) and an inc. no. of non-op wells over the medium term.
Improving spud to rig-release times (now sub-30 days vs +40 prev.) will
have a positive downward impact on gross well capex going fwd.
Cash of US$36.7m plus EZL est. operating cashflow of +US$14m for
the Jun H.
Factoring-in current cash position, our valuation is $1.44/sh (prev.
$1.50/sh).
Analysis
The Dec Q showed a marked improvement in development pace and
efficiency at its Big River Mississippi Lime asset; well inventory is
building as is the oil mix by production stream.
Improving capital efficiency is being borne out with improved spud to
rig-release times (reducing from 45 to sub-30 days currently).
We expect that drilling and operational efficiencies can continue to
place downward pressure on well capex.
The key in the short-term will be improving the cycle time from spud to
first cash receipts; the Mar Q is poised to demonstrate this shift in
focus.
The Company is guiding 10 wells will be completed in the Mar Q (vs.
11 wells on prod’n/testing currently) and 9 gross wells to be drilled.

This will be increasingly complemented by an inc. no. of non-op wells
over the medium term.
We believe that the market will price in production and implied reserves
growth as a Company continues to demonstrate that it can consistently
‘make’ good wells in a timely manner.
On our assumptions, current development pace should deliver at least
circa US$14m in operating cash flow for the Jun H.
With 36 new wells planned for the year, clearly the operating cash flow
should improve considerably this year.
We do however, foresee that the current cash and project cashflows
will be supplemented by a reserves’ based facility sometime this CY.
With the necessary funding, infrastructure, access to drilling, service
and ullage, and permitting in place, we view that RFE is
advantageously placed to realise the potential of its asset.
The net NPV10 of US$604m the 1C resources (US$446m) plus 3P
reserves (US$158m) provides validation of our current A$560m
($1.44/sh) valuation.
We believe – as witnessed in other resources plays and highlighting
that new wells are consistently being drilled around RFE’s acreage –
that this discount will reduce over time, particularly as RFE embarks on
development of their additional slated areas.
Beyond which, there remains significant upside to valuation upon
considering:
1. production out-performance and improved liquids’ yields;
2. optimization of completions’ design;
3. tighter development spacing (beyond 3wells/section);
4. the underlying Woodford oil shale potential.
"