"Price Target: $1.51/shInvestment CaseMaiden independent...

"


Price Target: $1.51/sh

Investment Case

Maiden independent reserves and contingent resources at RFE’s Mississippi Lime development provide an early measure of the potential for the asset: The net NPV10 of the 3P reserves and 1C resources imply valuations at least 2x the current share price.  The maiden reserves validate our view that there remains significant upside to valuation once factoring-in full field development. We retain our Buy with a valuation and price target of $1.51/sh that reflects development drilling purely to hold acres by production.

Key Points

Lee Keeling and Associates (LKA) has compiled gross maiden reserves and contingent resources for RFE’s Mississippi Lime interests:

·         1P – 2.1mmbboe;

·         2P – 4.7mmbboe;

·         3P – 29.0mmbboe;

·         1C – 166.9mmbboe.

The net reserves vary across the categories due to the mix of controlled and non-controlled sections and their proximity to production.

NPV per well of US$4.45m based upon total EUR per well of 245mbboe (79%oil, 21% high-BTU gas).

Resulting net NPV10  (Flat SEC oil price US$95.89/bbl; high BTU gas price US$5.23/mcf ):

·         1P - US$24.8m;

·         2P - US$45.5m;

·         3P - US$158.0m;

·         1C - US$446.0m.

The US$604m net NPV10 of the 3P plus 1C inventories is in-line with our current A$587m ($1.51/sh) valuation.

There remains significant upside to valuation upon considering production out-performance and factoring-in full field development, the underlying Woodford oil shale potential, improved liquids’ yields, spacing and optimization of completions’ design.

We understand Tasman 1-21H is continuing to clean-up and build production.

Increasing development pace is anticipated with the Bunch, McMurtry 1-22H and State 1-16H wells due to be completed and the arrival of a 3rd drill rig this month.

Analysis

The maiden reserves and contingent resource statement represents a highly encouraging first pass evaluation of the economic potential of RFE’s Mississippi Lime interests.

Particularly as the reserves are based upon limited drilling and production data to Jun 30, 2012 and are concentrated about RFE’s 2 (of at least 10) development areas to date.

The net NPV10  of US$604m the 1C resources (US$446m) plus 3P reserves (US$158m) provides validation of our current A$587m ($1.51/sh) valuation.

Statement Analysis

We estimate that RFE’s current net reserves are as follows:

·         1P – 2.1mmbboe (1.4mmboe net from 6 net wells)

·         2P – 4.7mmbboe (2.5mmboe net from 10 net wells)

·         3P – 29.0mmbboe (8.8mmbboe net from 36 net wells)

·         1C – 166.9mmbboe (50.7mmbboe net from 207 net wells)

The relatively modest 1P and 2P reserves and the corresponding net wells (6 and 10 respectively) are simply a function that as at 30 June, RFE had only drilled 2 wells in Development Area 1 and 4 wells in Development Area 2.

The 3P reserves only incorporate 36 net wells or a third of the total possible HBP locations net to RFE.

Similarly, the Contingent resources are heavily discounted to reflect both the geological uncertainty as one moves away from the production ‘control points’ as well as the time taken to ultimately develop these resources.

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.

Implications for Valuation

We note that RFE’s 75k net acres generate 117net well locations based upon Oklahoma State legislation deeming 640acres are Held-By-Production (HBP) per producing well.

Thus the reserves only consider a third of RFE’s Mississippi assets, highlighting that only 36 wells have been incorporated by LKA to derive the 3P reserves and associated US$158m NPV10.

At the very least, should 3P reserves be ascribed across the entire acreage package, simplistic application of the existing assumptions would provide for a US$480m ($1.25/sh) valuation.

Valuation Upside

We share the industry view that full-field development will comprise at least 3 wells per 640-acre section.

Thus, RFE’s net participating wells will be circa 350 (ie 75,000 net acres divided by 640acres/section) versus the 243 (implying 2 wells/section) assumed by LKA.

This would have a positive effect on the asset DCF.

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.

We look forward to the impending results of the Tasman well and remain confident that it can mirror the strong results achieved at McMurtry 1-21H, Blair and Tahara.

Dynamic Working Interests (WI)

We note that the implied WI decrease moving from 1P to 1C categories:

·         1P – Implied WI = 66%;

·         2P – Implied WI = 53%;

·         3P – Implied WI = 30%;

·         1C – Implied WI = 30%;

This is a function of proximity to development areas and the working interests per individual 640acre section.

This will constantly change and increase with on-going development ie RFE will consolidate controlling interests through drilling and lease rationalisation with neighbouring lease holders, there-by increasing average working interests in areas of concentrated development.

Operational Execution

The key for RFE now is operational execution. 

As we have seen with other resource plays, growth and maturation of reserves is a function of development.

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.

Over the course of CY’12, the Company has successfully facilitated increased development pace by:

·         debottlenecking drill-ready locations (through shooting 3D seismic over nearly all of their acreage);

·         building an inventory of cased holes (by employing better and more drill rigs);

·         securing completions services (Halliburton and Consolidated on evergreen agreements for fracking), and;

·         securing sufficient bridging (to positive operating cashflow) funding (current cash of circa A$70m).

The Company is guiding development pace of 36 gross new wells/yr from CY’13.

With Bunch, McMurtry 1-22H and State 1-16H due to be completed through October.

Completion of 3 wells this month should provide a level of comfort that RFE has the operational capacity to execute on its stated development plans.

Additionally, we understand that the use of Unit rigs are translating to shorter spud to rig-release times already; Warburton and Mawson appear to be progressing ahead of earlier well profiles.

A third rig is due to commence this month and a 4th early in the new year"