Operations Update – Noble County Dev. Area 2Price Target :...

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 $2,500/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 a week and has been producing oil and high BTU gas to sales over this period.
During the last 24hr period, production totalled 331boe, comprising 253bbls of oil (or 76% of total production) and high, 1,350BTU gas.
Rates have not yet stabilised, casing pressure continues to build, pumping rates have not yet been increased nor choke size relaxed and only a small percentage of load-water has been recovered.
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 drilling out isolation plugs; the well has already been giving up loadwater at 2,000bbls/d.
McMurtry 1-22H awaits completions, Bunch 1-19H and Tasman 1-15H are drilling ahead. It is anticipated that these wells will be completed over the next few weeks.
Our RFE valuation is $1.45/sh.
The current share price implies an EV:acre of $2,500/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.
Analysis
The early results for the Blair well are very encouraging.
The relative implied oil to gas ratio and strength of early production rates auger well for peak rates and early production volumes.
These results are particularly positive noting that very little load-water has been recovered and the fluid level remains high, the Blair well may yet take several weeks to clean-up thus possibly outperform the 331boepd rate recorded.
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.
McMurtry 1-21H will be put on pump in the this week subsequent to which, the Tasman, second McMurtry and the Bunch wells will be completed.
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.
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.
This is without factoring in the underlying potential of its oil prone Woodford Shale interests; a play of increasing focus by Devon et al.
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 <$2,500/acre (mkt cap $215m, 75k net operated contiguous acres in the oil rich Mississippi Lime).
We flag potential valuation of +$2.50/sh (vs current $1.45/sh) after considering full development scenario of 3 wells per 640acre spacing unit (@ 30 wells/yr from 2013).