ROK Resources (ROK.V) Q4 Results - Apr 14

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dan_s
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ROK Resources (ROK.V) Q4 Results - Apr 14

Post by dan_s »

ROK's CEO is speaking at our Houston Luncheon on Tuesday, April 18

ROK Resources Inc.
Thu, April 13, 2023 at 7:30 PM CDT

REGINA, SK / ACCESSWIRE / April 13, 2023 / ROK Resources Inc. ("ROK" or the "Company") (TSXV:ROK) has filed its Annual Financial Results, Reserve Report, and Management Discussion & Analysis for the year ended December 31, 2022.

Financial and Operating Highlights

In Q4 2022, the Company realized production volume of 326,469 total boe (3,549 boe/d), resulting in crude and natural gas sales of $23.9 million and funds from operations of $14.9 million. < Beat my forecast of $10.1 million operating cash flow.
This equates to an operating netback, after hedging, per boe of $43.87 and an operating income profit margin, after hedging, of 59.9%.
Fourth Quarter Highlights:

Record production of 3,549 boe/d (75% liquids) for Q4 2022; < Lower than my forecast of 3,700 Boepd.

Net Debt of $35.3 million as of December 31, 2022. An increase of only $4.6 million from Q3 2022 end after Q4 2022 capital expenditures of $12.0 million;

Achieved 2022 capital efficiencies of just under $18,000 per boe/d on 22 gross (12.9 net) drill, complete, equip and tie‐in and 7 gross (4.2 net) reactivation and workover capital projects, which averaged gross IP30 production of 112 boe/d (53 boe/d, net); and

Realized an annual hedge gain on commodity contracts of $4.1 million.

Complete reports and statements are available on SEDAR at www.sedar.com

About ROK

ROK is primarily engaged in exploring for petroleum and natural gas development activities in Alberta and Saskatchewan. Its head office is located in Regina, Saskatchewan, Canada and ROK's common shares are traded on the Exchange under the trading symbol "ROK".
Last edited by dan_s on Sun Apr 16, 2023 12:23 pm, edited 1 time in total.
Dan Steffens
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Re: ROK Resources (ROK.V) Q4 Results - Apr 14

Post by dan_s »

This is more important than ROK's Q4 results and why I urge all of you in the Houston area to attend Tuesday's luncheon. You pay me the BIG BUCKS to find Hidden Gems like this.

REGINA, SK / ACCESSWIRE / April 3, 2023 / ROK Resources Inc. (TSXV:ROK)(TSXV:ROK.WT) (the "Company" or "ROK") has completed its previously announced dispositions of certain non-core assets (the "Assets") for total combined proceeds of approximately $47.25 million, before normal closing adjustments (the "Transactions"). The Assets are comprised of ROK's non-operated interest in the Weyburn Unit and two smaller non-core assets located in Saskatchewan.

The Transactions are consistent with ROK's strategic plan, focusing on debt reduction and high-grading of the Company's asset portfolio and drilling inventory. The Company's outstanding senior term debt will be reduced by 85% from proceeds of the Transactions, resulting in cumulative interest savings of approximately $5.8 million that would have been otherwise paid over the remaining term of the senior term debt.

Notably, since the FCL acquisition in March 2022, the Company has disposed of approximately $74 million in non-core assets representing ~31% of production and ~127% of the purchase price, after closing adjustments.

2023 Guidance

Current corporate production is approximately 3,750 boepd (65% Liquids), net of the above-noted disposition.

In the second half of 2023, ROK intends to focus on increasing shareholder value through; (i) the optimization and integration of asset acquisitions, (ii) debt reduction, and (iii) executing a drilling and recompletion program. For H2 2023E, the Company expects to average 4,120 boepd, generating $19 million in cash flow from operating activities. For Q4 2023E, the Company estimates exit production of 4,500 boepd, generating a total of $38.9 million in annualized cash flow from operating activities, and $5.9 million in annualized free cash flow.

The Company's senior term debt is expected to be paid off entirely by mid-2023. Net debt at December 31, 2023 is expected to be $7.5 million, implying a net debt to cash flow from operating activities ratio of 0.2.

In support of the 2023 drilling program, the Company currently has hedged an average of 1,766 bbls/d of corporate production for the remainder of 2023 at an average price of approximately US$82.17/bbl. The Company is actively monitoring the current commodity price volatility and evaluating all options with regards to its hedging program.

Drilling & Recompletion Program

The second half of 2023 drilling program is expected to investment approximately $11.6 million and will aim to drill 10 gross (9.52 net) new wells within core operating areas in Southeast Saskatchewan, resulting in a 2023 exit target of 4,500 boepd (20% increase from current levels). The Company expects to balance drilling between conventional Frobisher and unconventional Midale, two of the most economic plays in the basin.

At Kaybob, the Company will focus on capital efficient recompletions and reactivations, while continuing to prepare for future Cardium oil and Montney gas development on its 100% working interest lands.
Dan Steffens
Energy Prospectus Group
dan_s
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Re: ROK Resources (ROK.V) Q4 Results - Apr 14

Post by dan_s »

There is some concern about the number of warrants that ROK has outstanding.

Go to slide 6 of ROK Resources Spring 2023 presentation slides, which they will be speaking from at Tuesday's luncheon in Houston.
https://rokresources.ca/assets/rok-resources-inc-investor-presentation-spring-2023-04-03.pdf

Warrants and Options can be dilutive BUT THEY ALSO CAN BRING A LOT OF EQUITY CAPITAL INTO THE COMPANY.

If the warrants and options listed on slide 6 are all exercised it will bring $34.6Cdn million of cash into the Company, which can be used to accelerate their production growth. That equity infusion will also shore up the balance sheet, making it easier for ROK to get more capital if needed.

My point is that warrants are not a "Bad Thing". They are commonly used in this business to get start-up capital. The company and the shareholders want the warrants to be exercised because it means the company is being successful and growing.

ROK's current production is ~3,750 Boepd (~60% crude oil) and they have a clear path to a 2023 exit rate of 4,500 Boepd. Based on my forecast model, they should generate $45 to $50Cdn million of operating cash flow this year, more than enough to cover this year's drilling program AND END THE YEAR DEBT FREE.
Dan Steffens
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dan_s
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Re: ROK Resources (ROK.V) Q4 Results - Apr 14

Post by dan_s »

The comments below from Eight Capital on November 29, 2022 are what got me interested in ROK. Primarily, because they compare ROK's upside potential to that of InPlay Oil (IPO.TO) that has generated more than a 500% capital gain for us.
----------------------------------------
Eight Capital: We are initiating coverage of ROK Resources with a BUY rating and a C$0.80 target price.

We think ROK offers investors an attractive opportunity to invest in an early-stage junior E&P with a high production growth profile that is generating free cash flow and has a strong balance sheet that can provide optionality for organic growth, tuck-in acquisitions or acceleration of debt repayment. Furthermore, ROK differentiates itself as a junior with a hedge book that offers immense downside protection by protecting its development program and debt repayment capacity. We view the current stock price of $0.45 as a compelling entry point with the company trading at 83% of its PDP NAV10 and 1.7x EV/23'DACFs which is the third cheapest amongst Domestic SMID-cap E&Ps. < ROK.V closed at $0.385Cdn on April 14.

This is the KEY for me: Management team has a track record of success in the private E&P space:
The executive team, spearheaded by Cam Taylor, has worked together for 15 years, having built four iterations of private Southeast Saskatchewan light oil E&Ps, raising a cumulative $154 million in equity then selling these companies for a total of $458 million of equity proceeds. We think ROK provides an opportunity for investors to obtain exposure to a growing company with a top-tier management team that has a track record of building companies and generating value.

ROK's asset base is primed for growth with free cash flow: ROK's primary focus of development is the Frobisher play in Southeast Saskatchewan, which can grow production by 30% while generating $60 million in field level free cash flow in 2023 on STRIP. This is driven by the Frobisher's exceptional well economics, where we estimate that Tier-2 inventory can generate IRRs in excess of 500% at STRIP. In Alberta, we think that ROK can deliver high production growth from Montney gas development that is supported by low decline oil weighted Cardium production. Next year, we believe ROK can grow this area by 40% to 1.7 MBOE/d in Q4/23 with an $11 million investment. We see further upside in the multi-zonal prospects of the Deep Basin and through redevelopment/workover opportunities. < During Surge's presentation at our luncheon last week, they discussed how strong the well-level economics are in the Frobisher play.

ROK's forward year metrics and long-term free cash flow generation versus peers suggest the stock is undervalued in our opinion: On STRIP, ROK trades at 1.7x EV/23'DACFs which is the third cheapest in our coverage, while having the second best cash netback, generating the second best FCF Yield of 25% and having a positive net cash position. Additionally, the company has the third highest growth rate on a debt adjusted per diluted share basis. We see ROK still being able to deliver a significant FCF yield of 25%-30% over a 5-year outlook assuming a flat capital program that delivers on 8%-53% production growth. We think that ROK's shares should re-rate in order to reflect the value it creates.

Previous transactions also suggest the stock is too cheap: The key transaction we highlight is Surge's (SGY) acquisition of Astra Oil Corp, a private company in southeast Saskatchewan with similar attributes to ROK. The transaction valued Astra at $39,000 per BOE/d. Applying this to ROK's 2023E production and capital stack we see an implied share price of $0.67 which is a 50% premium to ROKs current share price.

Prospects for reserve growth can also help drive a re-rate: ROK's current RLI weighs on the stock's valuation in our view, but we believe that the reserves purchased by ROK from FCL were at the tail-end of a period of underinvestment. We think that as ROK develops its acreage and demonstrates strong well performance, we should see strong reserves growth that could help re-rate the stock.

We see InPlay Oil's (IPO; BUY; TP: C$11.00– Covered by Phil Skolnick) demonstrated reserves growth and multiple expansion as a good proxy for this.
------------------------------
Follow-up from Eight Capital on January 25, 2023

Yesterday (1/24/2023) after market close, ROK announced its H1/23 guidance with the closing of the S.E. Saskatchewan asset
acquisition and debt financing:
> First-half 2023 guidance outlined post S.E. Saskatchewan acquisition: ROK expects to produce between 4.2 and 4.3
MBOE/d and generate $25 - $27 million of funds from operations based on a US$80 WTI and C$3.50 AECO price
assumption.
> The company plans on spending $10 million of capital by drilling three gross (2.63 net) wells focused on
both of its core areas, S.E. Saskatchewan and Kaybob.
> ROK plans on allocating $10 million directly to the principal
reduction of the Term Facility and expects to reach net debt of $53 - $55 million by the end of Q2/23. < ROK now is on a path to pay off all senior debt by end of Q2/2023.

Debt financing is highlighted by interest cost reductions: the company outlined the terms of its Senior Loan Facility,
comprised of a $52.5 million term facility which carries a 2-year term with an interest rate of BA + 6.25%. The term loan
will carry a monthly principal payment requirement of $2 million. In addition to the Term Loan, the company has access
to a $22.5 million syndicated facility with a sliding scale interest rate of BA + 3.75%. ROK highlights that the interest cost
reduction is expected to be in excess of 30%.

ROK states that it will be evaluating the option to sell certain non-core, non-operated assets: we view this as a
positive since it will accelerate the repayment of debt and increase its working interest towards operated assets which
aligns with ROK's overall growth strategy. We highlight that the term loan carries no prepayment penalty.

We reiterate our BUY rating and $0.80 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.
Last edited by dan_s on Mon Apr 17, 2023 8:30 am, edited 1 time in total.
Dan Steffens
Energy Prospectus Group
dan_s
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Re: ROK Resources (ROK.V) Q4 Results - Apr 14

Post by dan_s »

I spent four hours on Sunday updating my forecast/valuation model for ROK Resources. The model has been posted to the EPG website.

Key Stat: Q4 2022 Operating Cash Flow of $14.4Cdn million ($0.07/outstanding share) beat my forecast by a wide margin. Full year 2022 Operating Cash Flow of $45.6Cdn million ($0.22/outstanding share) is incredible for a stock that closed at $0.385Cdn on Friday, April 14.

ROK's current production is ~3,750 Boepd.
This year's drilling program will not kick off until July (after ROK has paid off 100% of senior debt), but it is expected to push production up to 4,500 Boepd by year-end. < The drilling program will be fully funded by operating cash flow.

This company has a very strong management team and they have the asset base to be the next InPlay Oil for us. If you live in the Houston area, I urge you to attend our luncheon on Tuesday to meet the CEO, Cam Taylor
Dan Steffens
Energy Prospectus Group
tlengoc
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Re: ROK Resources (ROK.V) Q4 Results - Apr 14

Post by tlengoc »

dan_s wrote: Sun Apr 16, 2023 3:13 pm There is some concern about the number of warrants that ROK has outstanding.

Go to slide 6 of ROK Resources Spring 2023 presentation slides, which they will be speaking from at Tuesday's luncheon in Houston.
https://rokresources.ca/assets/rok-resources-inc-investor-presentation-spring-2023-04-03.pdf

Warrants and Options can be dilutive BUT THEY ALSO CAN BRING A LOT OF EQUITY CAPITAL INTO THE COMPANY.

If the warrants and options listed on slide 6 are all exercised it will bring $34.6Cdn million of cash into the Company, which can be used to accelerate their production growth. That equity infusion will also shore up the balance sheet, making it easier for ROK to get more capital if needed.

My point is that warrants are not a "Bad Thing". They are commonly used in this business to get start-up capital. The company and the shareholders want the warrants to be exercised because it means the company is being successful and growing.

ROK's current production is ~3,750 Boepd (~60% crude oil) and they have a clear path to a 2023 exit rate of 4,500 Boepd. Based on my forecast model, they should generate $45 to $50Cdn million of operating cash flow this year, more than enough to cover this year's drilling program AND END THE YEAR DEBT FREE.
On slide 6 how many of the 113.1 M warrants have yet to be exercised? How many were issued?

TIA,

Thomas
dan_s
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Re: ROK Resources (ROK.V) Q4 Results - Apr 14

Post by dan_s »

They are all issued and none of them have been exercised. Most warrant holders wait until they are about to expire to exercise them.

See Slide 6.
Dan Steffens
Energy Prospectus Group
dan_s
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Re: ROK Resources (ROK.V) Q4 Results - Apr 14

Post by dan_s »

Most recent analyst's report that I can find. From Beacon Securities March 24, 2023
They rate ROK a BUY with a price target of $0.90Cdn



ROK announced that it has agreed to sell some non-core assets that are
producing a combined 490 boe/d for $47.25 million as the company looks
to significantly reduce debt and effectively take more control of its destiny
by removing some non-operated assets.

The main component of the sale is ROK’s 2.1% interest in the Weyburn Unit,
which accounts for the vast majority of the transactions. Weyburn is a high-
quality asset that accounted for approximately 11% or ROK’s production
and 21% of its 2022 NOI. As such, it is easy to understand why Rife Resources
(the purchaser of ROK’s Weyburn interest) paid such high valuation metrics
of nearly $100,000 per flowing boe and 4.6x EV/NOI. < NOI = Net Operating Income.

A key result of the disposition is the 90% reduction in ROK’s senior term debt
and the expectation that the senior term debt will be eliminated by the end
of Q2/23. As such, ROK estimates that it will save $5.8 million in interest
payments and increase monthly cash flow by $2.5 million.

ROK plans to provide 2023 guidance when the sale closes on March 31,
2023. For now, we have lowered our production forecasts from Q2/23
forward by the volumes sold and have maintained our $35 million E&D
capex program for this year. Our revised forecasts are summarized in.

Conclusion & Recommendation: ROK has transitioned from a company
with 3,000 boe/d and $46 million of net debt about a year ago to one with
3,750 boe/d and $15 million of net debt once this sale closes next week.
ROK has at least 172 drilling locations identified, so we expect an increase
in H2/23 drilling. We maintain our price target of $0.90, which tracks to a
2.4x EV/DACF multiple of our 2024 forecasts. We maintain our Buy rating.
------------------------------
ROK's first goal is to be debt-free by mid-Q2 and build up enough cash to fully fund a ten well drilling program and several recompletions that should puch production up to 4,500 Boepd by year-end. Estimated Capex to drill and complete the ten wells is $11.6 million. At current oil prices, Frobisher wells payout within six to eight months.
KEYS TO MY VALUATON:
> Solid management team with track record of success.
> Strong balance sheet. Plenty of operating cash flow to fully fund production growth.
> Lots of running room in one of the best oil plays in Canada.
Dan Steffens
Energy Prospectus Group
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