this mornings fosters report

Just passed through to us....should see 80cents this week

15 April 2013

Morning Report\
Red Fork energy Limited (RFE.ASX, $0.72/sh, Mkt Cap $280m) – A marked uplift in production to trigger re rating – TRADING BUY PT $1.20/sh

Today’s Top Picks.

Red Fork energy Limited (RFE.ASX, $0.72/sh, Mkt Cap $280m) – A marked uplift in production to trigger re rating – TRADING BUY PT $1.20/sh



· RFE recently provided an update on its Mississippian operations. Gross production has increased to ~1,700 boe/d and 20 wells now have been completed for production and 33 wells at various stages from drilling to producing. Importantly, the backlog of 10 wells which were waiting completion is forecasted to be completed by the end of the month which should subsequently result in a marked increase in production as the wells are tied into production.

· As we alluded to in our previous note we believe the stock is at inflection point for a re-rating given the imminent and material uplift in production, which we expect to occur in the next month. Conceivably, with 7 wells expected to come online in the next month we could see gross production increase to ~3,000 boe/d, which will serve as the catalyst to re-rate the stock.

· RFE continues to demonstrated improving operational efficiency with average spud to rig-release improving to 25 days and average spud to first sales time also reducing, consequently RFE has provided revised guidance of 40 new wells (3.3 per month) being drilled in 2013. A fourth rig is forecasted to commence operations in 2H CY13 which would result in a run rate of 56 new well a year (4.6 per month). In addition we expect to also see RFE participate in an increased number of non-operated lower working interest wells.

· Near term funding has also been addressed given the establishment of a reserve based lending Facility. The initial revolver amount is $20m, which is based on 10 wells, which were in production as of 31st December, we would expect the lending facility to grow to $40m by mid- year given the ~20 additional wells which would have been completed. We forecast based on the current development pace of 3.3 wells per month at $3.5 per gross well and 67% WI interest, quarterly development costs would equate to ~$23m per quarter. With $36m as 31 December, growing cash flow and a $20m revolver facility RFE remains well funded in the near term, though should the company increase its development pace with the addition of a 4th rig and seek to retain a healthy cash buffer then additional funding may be required.

· We forecast CY13 exit production rate net for RFE of 3,400 boe/pd. 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 could be trading at $1.00/sh by year end, representing a 37% premium to the current trade.

· Our risked DCF valuation for RFE is $1.24/sh and is based on a NPV of 110 wells drilled over 5 years to hold its acreage by production. Upside risks include, outperformance of average well type, full field development (350 wells based on 3 wells per 640 acre spacing) and development of the underlying Woodford shale.

· TRADING BUY $1.20/