ROK Resources (ROKRF) Valuation Update - Mar 21

[dan_s]

I got some new information during today's webinar.

Cam, Bryden and Jarod are a solid team with the right kind of experience to grow ROK Resources into a valuable company. Today it is free cash flow positive and it has a lot of high-quality Running Room in one of North America's top oil basins in Saskatchewan (SK).

Most important is that if WTI does average $80US/bbl in 2024, ROK will have enough cash to drill and complete 16 Frobisher duel lateral wells ($1.3Cdn million each) AND pay off all of their debt this year.
During the presentation Bryden said this year's drilling program would be 12 to 16 Frobisher wells. 12 if WTI averages $70US and 16 if WTI averages $80US. If WTI does go to $90US in Q4 (as many large banks are now using in their price decks), ROK will probably add two more Frobisher wells late in Q4 before releasing the rig.

16 new Frobisher duel lateral wells should push ROK's 2024 exit rate over 6,000 Boepd. Thanks in part to the low royalty rate in SK (2% on first 37,000 bbls of oil per well), if ROK just holds production at 6,000 Boepd (60% oil) they should generate over $100Cdn million of operating cash flow in 2025, compared to $30Cdn million actual in 2023 and my forecast of $46Cdn million in 2024.

Since they are going to focus the drilling on the most oil-prone SE Sach areas and the KayBob ngas production will decline, the Company's production mix should go from a production mix of 50/10/40 (oil/NGL/ngas) to 60/10/30 by Q4 2024.

The 113.1 million publicly traded warrants expire mid-2025, which means that ROK will get a big capital infusion if the stock price is over the warrants' strike price. Yes, it will be dilutive, but the $28+ million of cash would be used to significantly accelerate development of their assets.

We learned today that their Lithium project does have significant value and several near-term catalysts should draw more attention to it. ROK will be coming to Houston this summer to host a luncheon for us. I learned today that Koch Industries is now involved in their Hub City lithium project. I have high respect for Koch. Their involvement is a BIG DEAL.

My updated forecast/valuation model has been posted to the EPG website.

[dan_s]

I was not able to post the updated forecast/valuation model for ROK to the EPG website until 3:20PM CT.

ROK.V close today at $0.275Cdn today. < Just 1.3 X my 2024 operating cash flow per share forecast of $0.21Cdn

PV10 Net Asset Value based only on the Proved Reserves as of December 31, 2023 is $0.51Cdn per share.

My current stock valuation is $0.86Cdn, which translates to $0.64US per share. My valuation multiple for ROK is 4X annualized operating cash flow for 2023 to 2025. There is nothing in my valuation for the Hub City Lithium Project.

[Fraser921]

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This was from Dans 1st zoom call last September 21st

here is an excerpt from that call

Listen to ceo says he missed an opportunity discussion on warrants in july 2023. In July 2023 they were 10 cents. If they missed an opportunity at 10 cents, whats this opportunity now at 6.5 cents?

They subsequently climbed to 60 cents when crude was 90+

If crude hit 100 , these warrants can be a 10 x, downside is 6.5 cents

They also said bank doesnt want them to piss precious cash on buybacks. Ok then , dont use cash, use the intrinsic value of the warrant. Or sell stock to redeem them all

EPG Webinar Hosted by ROK Resources - September 21, 2023

https://youtu.be/cJJcNzby5KY?si=SJErLlkX7JOJuD57&t=2620

[dan_s]

Hindsight is 20/20.
I think Bryden said that their debt covenants don't allow them to buy back the warrants.

Look at column S of my forecast model, the forecast for 2025. It assumes that 100% of the warrants are excersized in mid-2025. Even on a fully diluted basis the numbers still look very good ($0.16 EPS and $0.30 operating cash flow per share). Plus the money from the warrants would make the Company debt free, allowing them to accelerate their drilling program.

[dan_s]

This morning, I asked Bryden and Jared if the BOD has considered doing something to get rid of the dilution overhang created by the warrants. Below is Jarod's response: Note that currently the covenants of their revolver do not allow them to buyback shares or warrants for cash.
--------------------------------------
The warrants don’t have any formal accelerators however we could consider the following:

1. Offer a discount to warrant holders to exercise early. Counsel has identified some challenges given a certain percentage of warrant holders have already exercised;

2. If the bank ever permitted an ability to buyback common shares and/or warrants we could consider buying them back using FCF to buy when appropriate; or

3. If we ever dividend out lithium shares to any ROK shareholder on record, the warrant holders may have incentive to exercise early to acquire said lithium shares.

For clarity, ROK is not advancing any of the above at this time but I wanted to convey some of the options available and highlight managements insight into the matter which we consider as a potential set of “tools” to maximize ROK shareholder value.

Any further questions, please do not hesitate to contact.

Best regards,

Jared Lukomski
Senior Vice President
(P) 306.536.2600 (E) jared@rokresources.ca

ROK Resources Inc. (TSX.V:ROK I ROK.WT I OTCQB:ROKRF)

[dan_s]

PS: Since I started covering ROK they have been very responsive to all of my questions. With all companies, especially the small-caps, the quality of the management team is a BIG part of my valuation. Cam Tayor, Bryden and Jared are a high-quality team with a strong track record of building value for their investors. Prior to going public with ROK, the team built and sold four private companies that sold for ~3X the capital invested.

[Fraser921]

Regarding warrants, I've seen other companies do the following:

1. Offer a discount to warrant holders to exercise early and/or

2. Redeem options ie. trade in current options which have an intrinsic value to buy the shares at .25. >> This doesn't require them to spend cash. The warrants currently trade at 7 cents. Offer a cashless exercise ie., trade them in for shares at .25 cents, viola , overhang is gone, no cash spent actually cash comes in on the stock purchased 3 1/2 option = 1 share of common at .25 cents. So 10 warrants gets you 3 shares.
(Like stock options at work, a cashless exercise)

They really need to address this. I bet the name would jump 25 % if they did this

Now, lets assume they do nothing an oil soars , so does the stock price. lets says its at .50 cents, then the options get exercised at 25 cents and they get that cash in but the missed the boat not redeeming them when they were cheap at 7 cents and then they could sell shares at .50 cents later instead of .25 cents. That's not hindsight, that's foresight.

But, I also see the point , it really doesn't matter. The investors that funded the company received warrants. And on a proforma ownership % , it doesn't change with the exercise to the original investors.

I bet the company would love to receive that slug of cash and I'm hoping that they get it which means the business is doing well.

interesting pick