oilbarrel

March 19, 2013
Rialto Energy Still Weighed Down By Funding Concerns As November Deadline Looms In Cote d'Ivoire

Australian E&P Rialto Energy's debut on AIM has been something of an ordeal for shareholders, with the shares losing 80 per cent of their value after a string of indifferent well results from its flagship project in Cote d'Ivoire. With a new CEO, the ex-FD of Dominion Petroleum Rob Shepherd, and non-executive chairman, ex Shell and Standard Chartered executive Andy Bartlett, the hope is the company will begin its recovery and yield some returns for shareholders from what remains a promising portfolio in West Africa.

Funding worries continue to weigh on the stock, however, with the company on the hook for US$91 million of commitments, including around US$60 million on two exploration wells on Block C1-202 in Cote d'Ivoire, which must be drilled before November 10, and US$9.3 million for its share of drilling costs on a recently acquired block in Ghana. At the end of 2012 Rialto, which is also listed on the ASX, had US$30 million in cash, with a US$10 million receivable still outstanding from Cote d'Ivoire state oil company Petroci after it elected to up its stake in the Gazelle field to 26 per cent. This leaves Rialto with a 74 per cent working interest and 84 per cent paying interest in the Gazelle development, which is now carved out of the block as an exclusive exploitation area (EEA).

Rialto, which retains an 84 per cent interest in the rest of the block, now reduced to 506 sq km following a Q4 2012 relinquishment, has plenty of headroom to farm-down and this will be the key catalyst for any recovery. Analysts at Investec, which rate the stock a BUY with a target price of 13 pence per share, say if the company can find a near-term funding solution, they see “considerable scope for the shares to re-rate” as this would ready the company to “deliver a catalyst-heavy 2013”. Without a strong deal, the stock will face further headwinds as investors anticipate dilution to raise the needed funds.
Worryingly, there was no mention of the funding issue in the recent interims, which saw the dual-listed company report a US$4.4 million loss for the six months to December 31. MD Rob Shepherd, who helped Dominion execute a creditable exit strategy when it was acquired by Ophir Energy for around US$220 million in February 2012, said that the company “remains focussed on securing funding”. Some positive news on this front would go a long way to providing reassurance to spooked investors.
Analysts at Fox Davies Capital agree that a forward plan is now imperative. “With a funding shortfall needing to be covered, the key question is now about how and when this can be accomplished. Given the fact that November 10 is the deadline, the Company needs to get a move on and find the cash quickly, or face the ignominy of losing the acreage outside of the Gazelle EEA,” said the analysts, although they did give credit to the experience and ability now accumulating at Board level following the recent appointments.

The portfolio certainly has much to recommend it. While last year's post-IPO drilling on the Gazelle field in the C1-202 block disappointed, with a shallower than expected oil water contact reducing resources estimates on the Gazelle field by 26 per cent to 85 million boe, the block is still home to some material targets, with a 21 prospect inventory and total mean prospective liquids and gas resources of 897 million barrels and 2.9 TCF of gas. What's more the company is well placed to chase down this prospectivity, having contracted the Vantage Sapphire jack-up to drill between two and five exploration wells from Q2 2013 – funding dependent.
The company is rethinking development options for Gazelle to squeeze out costs as well as working up development plans for the existing Hippo and Bubale discoveries. This is, of course, a long way from the company's IPO plans to greenlight Gazelle on the back of the 2012 campaign and bring the field into production in Q4 2013 at an initial production rate of 8,000 bpd and 10 million cf/d.

The company recently received Government approval of its entry into the Accra Block offshore Ghana, a move that provides some much-needed portfolio diversity plus exposure to the heart of the West Africa Transform Margin Play that has the industry so excited. Here it will participate with a 12.5 per cent interest in the Ophir-operated Starfish wildcat, which is targeting a prospect, reckoned to be analogous to Tullow's game-changing Jubilee field in Ghana, that carries a P50 estimate of 431 million barrels and must spud before the end of September. Success here would de-risk a number of look-alike prospects on the 2,000 sq km block.

The stock was trading at 5.28 pence on Friday, far short of the 27 pence at the time of its April 2012 IPO. With a market cap of just £36 million (US$54 million) and US$30 million in cash plus US$10 million in receivables, those 85 million boe in Gazelle, not to mention the upside across the block, are looking very cheap...with the Ghana block thrown in for free.

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