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Real Energy Corporation, Cheap Option on Large Gas Resource, Massive Upside

Stuart Baker - Breakaway Research - 01-Dec-2017

KEY POINTS:

Real Energy has a very large has accumulation in the Cooper Basin, where appraisal in 2018 aims to establish commercial reserves. There are MoU's with Santos to process gas, and with Weston Energy to buy up to 18 PJ over 5 years. None of this is receiving attention in the equity market and RLE is a very cheap option on the upside from reserve bookings and future development. Drilling and testing in 2018 could drive a multi-fold re-rating.

  • RLE's flagship gas project in the northern Cooper Basin targets gas in tight sandstones in the Windorah trough. This is a "basin centered gas" concept (BCG) and presents challenges, but two wells drilled since 2014, Tamarama#1 and Queenscliff#1 encountered gas and flowed it to surface, confirming the geological model.
  • 2C and 3C contingent gas resources are 276 Bcf and 672 Bcf respectively, but the BCG play is laterally extensive and the prospective recoverable resource is assessed at 5483 Bcf.
  • Testing continues and Tamarama & RLE reports increases in gas flow rates building up as water production eases, as expected.
  • Planning is underway for two appraisal wells starting in early 2018. The costs are not onerous and RLE is funded through this campaign.
  • The acreage is 100% owned giving RLE operational control.
  • In the 2017 June quarter, RLE signed a MoU with Santos a toll-process the gas through nearby facilities, thus opening up a route to markets. Subsequently, a non-binding MoU was signed with gas consumer Weston Energy for up to 15 PJ of gas over 5 years, including provision for a $6m pre-payment.
  • We think news during the next drilling phase will drive investor interest. Booking of reserves would justify a multi-fold re-rating.
  • The share price discounts any success, we think due to the failure of "shale gas" campaigns conducted by others in the Cooper Basin and the BCG is erroneously labeled as a shale play. It isn't.
  • Based on peer relativities for EV/2C and EV/3C we generate a valuation range of 32-40c and set our price target at 32c.
RLE has an interesting project in a great location, with encouraging exploration results and a funded appraisal program commencing early 2018. A short gas market, gas processing MoU with Santos, and a gas sale MoU with a foundation customer support a development if RLE can establish commercial flow rates and book reserves. The 2018 work program is designed to achieve this and if so, a multi-fold re-rating would follow. Breakaway Research has a buy recommendation on Real Energy and price target of 32c.