euroz update post site visit

Highlights

"Our tour of RFE’s current Mississippi Lime development activities took in the recently completed Hartog and Mawson wells (on pump), the Carnegie well (at TD after 19days drilling) and McMurtry 1-27H (finished frack).

The following key points were noted during our time with the management and board:

·         30 wells have now been drilled in RFE’s Mississippi asset and at least 10 new wells will have been completed by the end of the Mar Q and will run at a rate of 1.5new completions/week over the next month or so;

·         Av spud to rig-release time currently 25days but continuing to reduce and a fourth rig is set to commence from the Dec H;

·         Av spud to first sales also reducing – the Whitney well (due to be completed the week of the 25th of March) will achieve a 60 day cycle time.  45 days av is targeted by 2014;

·         The Company anticipates participating (at between 1-30% WI) in 23 non-op wells during CY’13, including at least 2 Woodford Shale tests with Devon (the first of which is due to spud in the Jun Q);

·         RFE is currently on a run-rate to deliver 3,500boepd (net to RFE pre-royalty) exit rate by yr end CY’13; 5,600boepd by end CY’14; and +8,500boepd by end CY’15.

·         At a long term price assumption of US$95/bbl oil and US$5/mcf LPG-rich gas the Company models self-sustaining cash flow from mid CY’14.

The Company recently announced closing for a US$65m (at 3.25%) Reserve Based Lending (RBL) facility.  Initial availability of US$20m based upon 2.6mmbboe 1P reserves as at Dec 31, 2012 from 10 producing wells.

We expect RFE will re-determine the facility as at Jun 30 to account for the additional (at least 20 new) wells completed by this point.  The facility availability should increase to at least US$40m from the Dec H on this basis in our view.

We assume total maximum draw of US$60m by end FY’14 in our assumptions and account for this in our A$1.89/sh valuation (NB: we do not account for Woodford Shale nor full-field development in our numbers).

Investment Thesis

RFE is continuing to demonstrate improved spud-first sales cycle time:  it remains on course to double producing well inventory in 3 months.  This is translating to material increases to production (30% inc. Jan to Feb) and cashflow. Growing reserves and production will continue to 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.
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