hartleys new valuation

RED FORK ENERGY LTD
Transformational Acquisition to Double Company
Red Fork Energy Limited (“Red Fork”, “RFE”, “Company”) has announced that it
has entered into an agreement to acquire a large natural gas producing project
in Oklahoma. The agreement is subject to final due diligence and is scheduled
to settle on the 2nd November. Consequently, the Company has not announced
who the vendor is or the consideration proposed; however, in light of Red Fork’s
strategy to become the dominant player in the biogenic Woodford Shale, we
can speculate with a reasonable level of certainty.
We understand that Red Fork will acquire 60,000 acres, 80 completed wells
(approx. 40 producing), compression and sales infrastructure, including 25
miles of gas transportation pipeline. Given that the Company had $29m in cash
and estimates it will have $16m cash (no debt) post transaction, the implied
value of the transaction is ~US$11.5m.
Re-Cap – The Woodford Shale
The biogenic Woodford Shale is a play type that has been internally generated
by Red Fork management over many years of analysis based on in depth
knowledge of the East Oklahoma (“EOK”) area. The more conventional
Woodford Shale play exists to the east of Red Fork’s acreage and has been a
prolific producer from deeper, horizontally drilled wells. RFE’s play is shallower
and can be developed using vertical wells with light conventional fracture
stimulation. Wells drilled and tested to date indicate that initial flow rates of
300,000 cubic feet of gas per day per well can be expected, with ultimate
recovery of 0.3 billion cubic feet of gas.
Red Fork’s existing 50,000 acre position at EOK may support the drilling of over
600 wells, resulting in potentially recoverable reserves of ~200 billion cubic feet
of gas. Well costs are low, at around US$150k, so payback usually occurs
within 6-9 months of tie-in to sales. At current spot prices, we estimate value
per thousand cubic feet of A$1, and if US gas prices were to return to the
historic mean, this would increase to A$2, resulting in potential value for EOK
between A$200-A$400m, or 120-140cps (we only include $108m in our
valuation due to a high discount rate). Red Fork recently committed to an
expansion of this project (“North EOK”), which could double its landholdings to
100,000 net acres, with a consequent doubling of the potential value.
What’s it Worth and Likely Outcomes
We believe that the transaction is likely to be for the East Oklahoma assets of a
private equity funded group located to the south (“South EOK”) and adjacent to
Red Fork’s existing EOK project. If this is the case, then RFE is potentially
acquiring the acreage, which has had over US$70m spent on it, for a very
competitive price of US$11.5m. We would consider this a bottom of the cycle
opportunistic acquisition, the value of which could be transformational.
Based on our conservative modelling of the value of the EOK acreage, we
assign $108m to the original EOK project, $54m to North EOK and value the
potential from this transaction, on the same basis, at ~$100m. This would raise
our total valuation for RFE’s Woodford Shale acreage to ~160cps, on a heavily
discounted basis. If the estimated 600 billion cubic feet of gas reserve potential
of the acreage of is achieved, the upside valuation would be greater than A$1b
to RFE, or 600cps. Many wells must be drilled over a number of years for this to
occur; however, we consider an investment at these levels to be attractive on a
risk / reward basis. Our short-term price target has increased from 150cps to
206cps and we recommend Red Fork as a BUY.