fosters update - 16 may

Red Fork energy Limited (RFE.ASX, $0.68/sh, Mkt Cap $260m) – Fourth rig deployed, production on the up, clarity on funding required – HOLD

- Yesterday RFE provided an operation update at its Big River Project in Oklahoma. Gross production for the month of April increased to 1,806 boe/d, with current production ~1,950 boe/d, based on 16 wells tied in to production. We expect the production number to consistently rise over the coming months with 11 wells currently on test and 7 already producing to sales. All are expected to transition to production wells in the June quarter.

- RFE continues to demonstrate improved efficiency in its drilling operations with the company target of 45-days spud to first sales being achieved on the Flinders ~1-25H well. RFE now has 35 (gross) horizontal wells across eight development areas at various stages from drilling to producing. A 4th rig has recently been deployed which should which should result in a run rate of 56 new well a year (4.6 per month). In addition we expect to also see RFE participate in an increased number of non-operated lower working interest wells.

- While we remain buoyed by improvements and progress RFE are making operationally we continue to remain cautious of its funding position. $31.8m available as of 31 March comprising cash on hand of $11.8m and $20m revolver facility. Cash burn for the quarter was $23.7m, while we expect receipts from sales to increase ($4.0m in March quarter) we believe in the near term this will be offset by the additional costs of a 4th rig and improved spud to cycle times, resulting in more wells being drilled.

- Based on our assumptions of 14 gross wells drilled next quarter, $3.6m per well and an average WI of 67% we forecast capital costs in the order of ~$33m. While the revolver facility could be extended, given the $10m was based on 10 wells completed vs. ~30 which should be completed by mid year, and subsequently cash flow from operations increasing we are of the view RFE may require further funding in order to maintain guidance for the drill program and retain a healthy cash position.

- We forecast CY13 exit production rate net for RFE of 3,400 boepd. Applying the average EV/production multiple of $105,000 per flowing barrel of oil equivalent for ASX listed US unconventional O&G companies to RFE’s exit production rate we estimate the stock can justify a market valuation of ~$1.00/sh by year end, representing a 53% premium to the current share price.

- Our risked DCF valuation for RFE is $1.24/sh and is based on a NPV of 110 wells drilled over 5 years to hold its acreage by production. Upside risks include, outperformance of average well type, full field development (350 wells based on 3 wells per 640 acre spacing) and development of the underlying Woodford shale.

- We maintain a HOLD recommendation until clarity on the potential near term funding shortfall is resolved.