ROK Resources (ROK) Update - Sept 13

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dan_s
Posts: 34962
Joined: Fri Apr 23, 2010 8:22 am

ROK Resources (ROK) Update - Sept 13

Post by dan_s »

My updated profile on ROK Resources has been posted to the EPG website. My forecast model and the profile were sent to the Company yesterday for their comments. My forecast is based on their recent production guidance.

It is a Canadian Junior that was added to our Small-Cap Growth Portfolio early this year.

Timing is good on this one. The Company closed two strategic acquisitions since March 2022, and they recently closed a significant non-core asset sale. Cash proceeds from the sale have paid off 90% of their debt and the balance sheet is in GREAT SHAPE heading into 2H 2023.

Lots of Running Room: ROK kicked off this summer's drilling program in June and their guidance is for strong production growth month after month through Q1 2024. The drilling program is fully funded by operating cash flow.

I believe the combination of increasing oil production and rising oil prices sets up ROK to be potential triple for us. The Company also has an interesting Lithium Project that is discussed on pages 7 & 8 of the profile.

ROK is hosting a webinar for us on September 21st. Read the profile carefully and register to attend the live event. You have a chance to ask questions directly to the CEO, Cam Taylor.

You must register on the EPG website to attend the live webinar.
Dan Steffens
Energy Prospectus Group
dan_s
Posts: 34962
Joined: Fri Apr 23, 2010 8:22 am

Re: ROK Resources (ROK) Update - Sept 13

Post by dan_s »

Notes from Beason Research dated 3-24-2023

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.

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 Exhibit 1.

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 $0.90Cdn, which tracks to a 2.4x EV/DACF multiple of our 2024 forecasts.
We maintain our Buy rating.
Last edited by dan_s on Wed Sep 13, 2023 11:00 am, edited 1 time in total.
Dan Steffens
Energy Prospectus Group
dan_s
Posts: 34962
Joined: Fri Apr 23, 2010 8:22 am

Re: ROK Resources (ROK) Update - Sept 13

Post by dan_s »

Note from Research Capital dated 8-18-2023:
Their price target is $0.75Cdn

Q2 Results - Organic Growth Takes Centre Stage

ACTION - Maintain BUY and Target Price
During the first half of 2023, the Company focused on debt reduction, asset divestitures
and acquisitions, and asset integration. In the second half of the year, ROK will pivot
towards growth through the drill bit. 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.

During the first half of 2023 the Company focused on debt reduction, asset divestitures and
acquisitions, and asset integration. In the second half of the year, ROK will pivot towards
growth through the drill bit. 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.

Quarter Highlights: Production in Q2/23 averaged 3,297 boe/d, which was in line with
our forecast of 3,200 boe/d. Approximately 250 boe/d (80% natural gas) was shut-in
during the quarter as a result of the wildfires in Alberta. Production was recently restored;
however, additional shut-ins are expected in Q3/23 due to ongoing constraints of 3rd
party facilities. ROK maintained its exit 2023 production forecast of 4,500 boe/d. Adjusted
funds flow of $5.4 million ($0.02/fd share) was below our forecast of $9.1 million ($0.03/
fd share) due to higher operating cost, G&A cost and royalties. Unit operating costs
of $32.56/boe are expected to decrease to ~$27 to $28/boe, with the return of shut-in
production and with the integration of the recently acquired assets. Capital expenditures
in Q2/23 were $4.1 million and the Company exited the quarter with net debt of $3.8mm.
Note that net debt includes $7.7mm for the future value of hedge contracts that the
company plans to monetize in the next 12 months.

Drilling Program Underway: ROK maintained its 2023 capital budget of $30mm, which
implies ~$20mm to be invested H2/23. The Company expects to drill a total of 10 (9.52
net) wells in H2/23.

Lithium Update: ROK holds a 25% interest in Hub City Lithium Corp. (“Hub City”).,
a private company that holds 192,000 net acres of mineral titles in Saskatchewan. EMP
Metals Corp. (“EMP”) holds the remaining 75% interest. To date two wells have been
drilled and tested at Mansur and two wells at Viewfield. At Viewfield, the discovery well
returned high lithium concentrations from multiple zones from the Duperow formation,
including one zone that tested up to 259 mg/l, which is the highest lithium concentrations
ever recorded in a brine in Canada (see our research report dated February 21, 2023). On
August 17, 2023, EMP announced that a follow up step-out well at Viewfield was drilled
~800 metres to the east of the discovery well and return lithium concentrations of up to
237 mg/l. A Preliminary Economic Assessment on the Viewfield project area is underway,
and the results of the second successful Viewfield well will be incorporated into the report
which is expected to be completed in Q3/23.

Lithium Resource Report: On May 2, 2023, ROK announced the results of a NI 43-101
Technical Report on the lithium brine potential and preliminary resource assessment
("PA") for its Mansur and Viewfield project areas, which showed an inferred lithium
resource of 1.15 million tonnes of lithium carbonate equivalent, at an average grade of
143 mg/l. We view the lithium play as a free option for investors (see our research report
dated May 2, 2023)

IMPACT: Neutral
The lithium drilling and testing results to date have been encouraging, and we look
forward to the Viewfield PEA report expected later this quarter. Also, ROK has an active
drilling program which should boost production before year-end and could provide
momentum heading into 2024. We maintain our BUY recommendation and our $0.75
target price
Dan Steffens
Energy Prospectus Group
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