euroz update

Mississippian June Operations Report

Price Target: $1.47/sh

Investment Case

The underlying operational performance and asset quality continue to be highlighted by the most recent operational update.  Additionally, operational enhancements are delivering stabilised 30, 60, 90 day production rates well above the independent type curve.  Production growth outlook remains strong, with upside via continued improvement to resource recovery through completions optimisation, development spacing and Woodford oil shale development. Buy.

Key Points

June av. production improved by 24% to 2,229boepd gross (1,690boepd pre-royalty) from 1,800boepd gross (1,365boepd pre-royalty).

4 new wells were completed in the month; total 47 gross (op and non-op) hzntl wells in 8 (of 10) dev. areas in various stages of development.

Operational enhancements bearing out in terms of 30, 60 and 90-day average rates of recent wells outperforming type curve by 50-60%.

Successful placement for A$47m; our valuation A$1.47/sh post dilution.

The Company recently increased its RBL facility to US$100m and current availability to US$45m (US$25m drawn).

Total liquidity of circa +US$125m capex of ~US$90m in FY’14 on this basis, provides a substantial funding buffer.

Analysis

The continued growth in production from RFE’s Mississippian operations provides further endorsement of both the asset quality and the dramatic improvement to operational execution RFE’s operations team has achieved in the past 6mnths.

The Company is completing behind drilling and this, combined with improvements to completions design and reservoir management, is seeing sizeable increases in production rate, Q-on-Q which is in-turn building cashflow:

·         Dec Q av - 1,108boepd gross (net post roy. rev. US$3.5m)

·         Mar Q av - 1,456boepd gross (net post roy. rev. US$4.1m)

·         Jun Q av - 1,945boepd gross (EZL est. net post roy. rev US$7m)

Moreover, we are seeing substantial improvement to average 30, 60 and 90 day rates on the wells that have employed jet pumps in the initial phase of clean-up.

These results are encouraging versus our type curve.

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It can be seen above that recent well performance witnessed at Jardine, Mawson and Flinders, has significantly outperformed the Company’s average rates achieved in the wells completed in CY’12.

Importantly, the average rates presented are 50-60% improvements on the Lee Keeling and Assoc. type curve applied to determine RFE’s reserves and thus borrowing base.

And in kind, substantially above the Euroz type curve used to determine our A$1.47/sh DCF valuation.

And we are seeing consistent improvements to peak and 30-day IPs.

Improving spud to rig-release times av. 17 days (vs 26 prev.) will have a positive downward impact on gross well capex (EZL est US$3.2m).

We understand, more recent total costs are below US$3m vs. the typical US$3.2-3.5m/well AFE (Authorization For Expenditure).

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 (Jekyll and Hyde – 1H et al) with interest on this basis.

The recent A$47.7m capital raising complements the Company’s low cost, US$100m facility, enabling RFE to effectively leverage its strong debt-cash funding position and sound capital management to deliver excellent shareholder returns.

Total liquidity of circa +US$125m ($20m debt + $57m cash + vs EZL est. EBITDA of US$47m) capex of ~US$90m in FY’14 on this basis, provides a substantial funding buffer.