Red Fork Energy Limited (RFE.ASX, $0.53/sh, Mkt Cap $205m) –...

Red Fork Energy Limited (RFE.ASX, $0.53/sh, Mkt Cap $205m) – Overhang cleared, attractive entry point – TRADING BUY

- On 16 May we placed a HOLD recommendation on RFE when it was trading at $0.68/sh on the basis of seeking clarity regarding the prospect of a near-term funding shortfall. Since then stock has fallen sharply which we believe has been attributed to the following factors:

i. clarity on short term funding;

ii. exiting of a large holder selling in the market;

iii. tornado’s affecting the mid-west region; and

iv. general market weakness.

- Apart from market weakness, we are now of view that a number of these factors are being resolved. Consequently, view the current share price as an attractive entry point. In particular, yesterday we witnessed 7m go through the market which we believe to be a large holder exiting their position – hence the stock rising sharply in afternoon trade to finish up 15%.

- With respect to project funding, we recently met with management and are now confident an additional $20-30m of funding can be accessed through the extension of the existing Reserve Based Lending Facility (‘RBLF’), which should address the near term funding requirements. Though we do still believe an equity issue may be required at some point to top up development funding and ensure an appropriate gearing level is maintained.

- We remain buoyed by improvements and progress RFE are making operationally. Yesterday’s operational report highlights steady progress is being made with gross production increasing to 2,357 (1,800 net) boe/d a 30% increase on the previous month. Based on our conceptual modelling we believe RFE remains on track to achieve 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 and ~90% upside to yesterday’s close.

- Our risked DCF valuation for RFE is $1.24/sh based on a NPV of 110 wells drilled over 5 years to hold its acreage by production. Upside risks include, out performance 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 upgrade our valuation from a HOLD to a TRADING BUY