Reserve upgrades to support growth – TRADING BUY RFE and SEA
•Both SEA and RFE yesterday released reserves upgrades.
•There was a marked increase in RFE’s reserves with net 1P reserves increasing by 73% to 14 mmboe , driving a 60% increase in 2P reserves to 18.6mmboe and a 57% increase in 3P reserves to 28.3 mmboe. The sharp increase in reserves reflects the aggressive development program, which has been successfully implemented over the past 6 months.
•Importantly, the increase in the reserve base should underpin a significant increase in RFE’s borrowing base. Funding had been our key concern regarding RFE however with recent equity issue coupled with an increasing RBLF borrowing base the company is sufficiently funded to pursue an aggressive drill program continuing to build its reserve and production base.
•SEA also had a material increase in reserves with 1P reserves increasing 49% to 14.3 mmboe, 2P reserves increasing 40% and 3P reserves increasing 29% to 74.7 mmboe. SEA increase in reserves has been primarily a result of its development program in the Eagleford where production has steadily increased since taking operatorship from TXN.
•The table below highlights how RFE and SEA compare to one another based on an EV/Production and EV/Reserve basis. While RFE had previously looked relatively over priced, the marked operational progress by RFE over the past 6 months has bridged that gap. The valuation metrics for both companies now appear broadly in line relative to each other. Both companies have good growth prospects yet a different strategy to drive production growth, each with its own merits.
•In SEA’s case we are attracted to the exceptional well results which are being achieved in the Eagleford which should translate to quicker production growth., we forecast ~5,500 boe by CY13. The results from the 6 wells completed to date have been outstanding with the average 60 day and 90 day production rates of 549 and 554 boepd respectively. Based on our conceptual modeling we estimate pre-tax IRR in of ~100% when factoring the high oil price, the fact SEA is selling oil in the Louisianan Light Sweet Crude market at ~$10/bbl premium to WTI, Oil cuts >80%, and total cost of the well at~$8.5m.
•RFE are embarking on an aggressive drill program aimed at holding its ~85,000 net acres in the Mississippi Lime by production by 2015. While such a strategy may have its drawbacks in not being able to focus development on a ‘sweet spot’ in the near-term, once the acreage is held by HBP it provides multiple options to monetize it (at its own pace) including focused development, potential farm down or an asset sale.
•We rate SEA and RFE as TRADING BUY http://www.fostock.com.au/announcements/reserve-upgrades-to-support-growth
SEA Price at posting:
$1.08 Sentiment: None Disclosure: Not Held
