Update out from EurozHighlights "Price Target:...

Update out from Euroz

Highlights

"Price Target: $1.89/sh

Investment Case

RFE is continuing to demonstrate improved spud-first sales cycle time:  it remains on course to double producing well inventory in 3 months.  This is translating to material increases to production (30% inc. Jan to Feb) and cashflow. Growing reserves and production will in-turn increase RFE’s funding capacity. Beyond which, upside to the RFE story lies with improved resource recovery through development spacing and Woodford oil shale development. Buy.

Key Points

Current gross rate of ~1,590boepd has shown a healthy uptick from the 1,300boepd as at last report date.

February average gross rate of 1,303boepd inc. 30% on the 1,000boepd average achieved in Jan.

A record peak gross rate of 1,800boepd was achieved in early Mar.

Production growth to continue with 8 new producing/testing wells added to the 10 well inventory (as at Dec 31) so far this CY.

A further 2 are currently being stimulated and a another 7 await stimulation (of which 4 are operated).

We anticipated announcement of an RBL facility in place shortly (we est. US$20m initially inc. to US$50m by Jun 30).

Improving spud to first sales cycle times has resulted in Company guidance of 38 gross wells drilled in CY’13, increasing to 56/yr from CY’14.

We have adjusted our model accordingly: Our valuation (debt adjusted) increases to $1.89/sh (prev. $1.44/sh).

Analysis

RFE continues to demonstrate an improvement to spud-to-first-sales cycle time with 8 new producing or testing wells added to the 10 wells the Company had on production at Dec 31.

Pleasingly RFE is tracking to deliver 10 new operated, completed wells by the end of the Q as guided.

In addition, at least 3 non-op wells will have be added to RFE’s producing inventory.   

As a consequence, noting the peak of 1,800boepd achieved in early Mar, we expect continued strong growth in av. production come the next ops update.

Improving spud to rig-release times av. 26 days (vs +40 prev.) will have a positive downward impact on gross  well capex going fwd.

Additionally, it points to an increasingly ability for RFE to develop its asset more quickly – the Company recently flagged a run-rate of 56 gross wells to be drilled per year from CY’14.

Assoc. increases to production will drive material reserve increases in the short term, improving RFE’s access to debt funding.

We expect a new RBL facility in place within the month. This will be sized appropriately with increasing availability with on-going development and likely be very low cost funding.

We est. initial availability of US$20m based upon the 10 wells at Dec 31.  With at least 20 new wells expected this H, this should provide increased access of around US$50m by Jun 30.

In order to maintain a US$25m cash buffer, we estimate a total draw of US$60m by end FY’14 incorporating the increased development pace into our model.

Factoring-in US$60m (-A$0.15/sh) in debt funding to meet the accelerated development timeline, the accelerated cashflow has driven an increase to our valuation.

Our new A$1.89/sh valuation does not factor-in full-field development of 3 gross wells per 640-acre spacing unit.

Critically, the overall picture remains one of growth and individual results continue to support an average (at least on 30 av. basis) that is ahead of our type curve assumptions (EZL est 190boepd av).

Combined with on-going optimisation of completion design and improving capital efficiency via improved spud to rig-release times (reducing from 45 to 26 days currently), we remain compelled by RFE’s Mississippian economics.

Beyond which, there remains significant upside to valuation upon considering:

1.     Factoring-in full field development;

2.     production out-performance and improved liquids’ yields;

3.     optimization of completions’ design;

4.     tighter development spacing (beyond 3wells/section);

5.     the underlying Woodford oil shale potential.  "