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Rose Petroleum: We’ve only just begun

An independent reserves and resource report which sparked a 150% rally suggests that this is just he beginning for a stock, which has essentially come back from the dead under new management.


The 150% rise in the share price of Rose Petroleum (LON:ROSE) in the last three trading days suggests investors may have missed out on the re-rating of this US focused oil junior.

However closer inspection of an independent reserves and resource report that sparked the latest rally suggests that this may just be the beginning for a stock, which has essentially come back from the dead under new management.

Respected consultant Ryder Scott estimates the group’s interests in the Mancos and Paradox shale plays in Utah could contain 1.45bn barrels of oil and 4.79 trillion cubic feet (tcf) of gas.

The numbers have yet to be proven up by drilling, but reflect a great deal of potential.

They also backed-up Rose’s initial enthusiasm for its newly acquired projects.

It agreed in March to pay US$2mln upfront and committed to spend US$17mln on drilling, to acquire a 75% interest in 230,000 acres split across the Cane Creek property.

Breaking the Ryder Scott numbers down, Paradox is estimated to have 966mln barrels of prospective oil resources and 1.88 tcf of gas. While the figures for Mancos are 486mln barrels and 2.9 tcf of gas.

Separately, another consultant, Christie Ward Schultz, assigned a US$1.47bn valuation to the Paradox shale (via the Cane Creek project) for a 30 year life-of-field, whilst for Mancos this is estimated at US$941mln.

Over a 10-year period, the valuations for Paradox and Mancos come in at US$660mln and US$503mln respectively.

The consultant estimates Cane Creek’s ‘finding and development’ costs at US$19.50 per oil equivalent barrel, whilst for Mancos this is estimated at US$16.91. Cane Creek is estimated to have a rate of return of around 125%, and for Mancos it is 96.31%.

Both basins are being actively developed already, and the infrastructure available is excellent with road, rail, pipeline and power all readily available.

The leases, meanwhile, are also in an ideal location being only about an hour's drive to Grand Junction, which is the region's oil and gas services hub offering drill rigs, fracking equipment.

Underlining the potential of this highly attractive shale play is regional player Fidelity Exploration & Production, which is owned by New York-quoted MDU Resources. 

Since 1963, it has produced 5.2mln barrels of 44 API oil and 4.2bln cubic feet of gas from 20 wells in Cane Creek. 

Currently, 18 wells produce at a total average rate of 4,563 barrels a day and 2.4mln cubic feet of gas. 

“Given its long-term presence as well as its technical and operational expertise in the region, Fidelity is frequently used as the benchmark by which other operators are judged,” said Dougie Youngson, the oil analyst at finnCap.

The real kicker to the valuation will occur when the company actually starts drilling.

Rose is on record as saying it wants to be producing by the end of the year and it is expected the first well will target the Mancos using existing 2D seismic data and information culled from historic wells.

Based on current market prices and rig availability, experts estimate the cost of drilling a 3,000-feet Mancos well with lateral to be around US$3mln.

The remainder of the programme will be informed by 3D seismic, which is likely to be shot over 150 square miles of ground over six months at a cost of perhaps US$5mln.

That would then pave the way for a 9,000-feet Paradox well and lateral, which might cost a further US$8mln.

Given the high level of understanding within the US shale industry, the chance of success tends to be higher than usually found in the oil and gas sector. 

The range in the company’s competent persons report for Paradox is around 20% to as high as 56%. 

For the Mancos acreage, the chance of success is 30%, or about the industry average for conventional projects.  Of course the work must be funded and even a cursory glance at the balance sheet reveals the group will have to raise some additional capital.

However it is worth pointing out there is an appetite among investors to fund decent projects with high potential returns – Rose very definitely fits into this category.

Of course there are other non-equity related options for funding the next stage of development. The group could bring on board a partner at the project level, who might fund all or part of the work.

And in fact, it is understood there is potential interest from a number of parties, one of which might farm in.

This then brings us back to the question of the potential value of Rose and the recent upsurge in the share price.

A market capitalisation just north of US$20mln and net present values of the assets of around US$2.4bn suggests we’ve only just begun to tap into the value of this AIM pocket rocket.

Of course you have to weigh the potential rewards against the significant risks associated with a project at this formative stage of its development.

And in fact finnCap’s Youngson does a very good job of this as he pares back some eye-popping unrisked valuations back to a more realistic 5p a share (current price just over 2p).

Analysts says the value triggers will include: 

- Securing funding for initial work programme 

- Positive results from initial work programme 

- Identification and funding of future work programmes 

And he concludes: “The updated CPR is an important first step for Rose post acquisition of the assets. 

“The next crucial step is funding and we understand the company is currently examining the various options available.  We therefore set a notional pre-funding target price of five pence a share.”

Quick facts: Zephyr Energy PLC

Price: 0.725 GBX

Market: LSE
Market Cap: £2.08 m


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