ROK: Comments from Canadian base analysts - Nov 22

[dan_s]

Comments from other analysts: Their Price Targets are in Canadian dollars.

"This morning, ROK announced its Q3/23 financial and operational results that were more or less in line with our forecasts. The company demonstrated significant activity on the drilling front, completing a total of six wells in Q3 and an additional three wells in Q4/23. Two additional wells are anticipated to be drilled in December. The success of this drilling program has led to a boost in current production, reaching approximately 4,000 boe/d, and additional volumes are expected to come online in Q1/24. We maintain our BUY recommendation and our $0.75 target price equal to an EV/DACF multiple of 3.5x applied to our 2024 DACF estimate."

Bill Newman, CFA
bnewman@researchcapital.com
---------------------------------------
Company Updates / Research:

• ROK Resources (ROK-V, $0.345) – Buy, $0.95 Target, Garett Ursu: This morning ROK Resources reported Q3/23 results with production of 3,858 BOE/d well ahead of our 3,475 BOE/d forecast as well as guidance at 3,475 BOE/d as the Company drilled and completed six gross (5.9 net) SE Saskatchewan wells including three gross (2.9 net) Frobisher and three gross (2.98 net) Midale horizontal wells in the quarter. Of note, ROK posted the “8th best performing Mississippian oil well in Saskatchewan” for Q3/23 with that well producing ~7.0 MB of (monthly) oil with an impressive initial rate (IP-30) of 232 B/d. The Company has now drilled three (100% WI) SE Sask Frobisher wells and one (30% WI) Kaybob Gething gas well in Q4/23 with two gross (1.45 net) unbooked Frobisher wells still to drill next month. With new wells onstream (including two 100% WI Midale wells still in cleanup), current volumes are ~4,000 BOE/d with exit production of 4,300-4,500 BOE/d forecast. ROK now expects to complete its 2023 drilling program in late Q4/23 (slightly behind schedule) with some wells to begin producing in early Q1/24, hence the lower exit guidance (compared to previous exit guidance of 4,500 BOE/d). Six gross (4.75 net) wells remain to be brought onstream by Q1/24. Cash flow in Q3/23 of $5.3 MM or nil per share was behind our $6.6 MM ($0.02/share) forecast despite the higher volumes as materially higher operating costs (due to proactive facility turnarounds) and lower than expected realized pricing offset the higher volumes and lower royalties, though we expect opex to normalize in Q4/23 and beyond. E&D spending of $7.5 MM ($8.5 MM including ARO and land) was below our $12.8 MM forecast on operational delays (though 2023 spending guidance remains $30 MM), putting net debt at ~$15.0 MM at the end of September. Finally, a Preliminary Economic Assessment (PEA) for the 25% owned Hub City Lithium SE Sask project remains on track for release this quarter (Q4/23). While operational issues have pushed some wells into 2024, the Q3/23 volume beat offsets slightly lower exit guidance with our bullish thesis on the name unchanged. Trading below 2.0x 2024E EV/EBITDA while aggressively growing production, we reiterate our BUY rating and $0.95 target on ROK. – GU
-----------------------------
From VIII Eight Capital: Christopher True
"ROK reported Q3/23 results this morning. We believe the update will have a slight negative impact on the stock as ROK missed on CFPS, which was largely a result of higher-than-expected operating costs. This is the third quarter in a row with opex/BOE being higher than expected post-acquisitions completed in early 2023. The company also reported delays in drilling activity, which resulted in the company softening its exit production rate from 4.5 MBOE/d to a range of 4.3 - 4.5 MBOE/d. However, we are expecting to see the incremental volumes come in during Q1/24.

Cash flow below expectations: The company generated cash flow (including cash interest expense) of $5 million which is below our $8.6 million estimate and Bloomberg consensus of $5.6 million. The miss on cash flow was largely due to higher than estimated operating costs as a result of facility turnarounds that were overdue after the recent acquisitions and annual costs such as property taxes, government fees and increased water and emulsion trucking costs, which impacted the quarter. ROK notes that it expects operating costs to normalize to previous levels in Q4/23.

Capex lower than expected: The company spent $9 million on capex during the quarter, which is below our $14 million estimate and in line with Bloomberg consensus of $8 million. During the quarter, ROK experienced some delays on its drilling program which has resulted in the company shifting more wells into Q4/23 from Q3/23 and still expecting to reach its $30 million capital expenditure guidance.

Production was higher than expected: The company reported production of 3.9 MBOE/d which is a touch higher than our 3.7 MBOE/d estimate and above consensus of 3.5 MBOE/d. Production was ahead of our estimates due to greater than expected gas volumes in the quarter. Due to delays in the drilling schedule, ROK is expecting some wells to begin producing in early Q1/24 and has updated its 2023 exit guidance to a range of 4.3 - 4.5 MBOE/d from 4.5 MBOE/d.

Operations update: In Q4/23, ROK drilled 3 gross (3 net) Frobisher horizontal wells in Southeast Saskatchewan and 1 gross (0.30 net) Gething gas well in Kaybob Alberta. In December, the company will drill 2 gross (1.45 net) wells, both unbooked horizontal Frobisher locations in core operating areas. Current production is approximately 4 MBOE/d with 2 gross (2 net) Midale horizontal wells in "clean-up" period post-frac, plus an additional 6 gross (4.75 net) wells forecasted to be on-stream no later than Q1/24.

We reiterate our BUY rating and $0.65 target price. Our target is based on a 50/50 weighting of 4.0x 2023E EV/DACF target multiple and 1x our risked estimated NAVPS. Risks to our price target include commodity prices, cost inflation, equipment, rig & crew availability, and production performance.