Energy Prospectus

I was working on my August newsletter when I got this flash alert from Bill Newman, a CFA at Research Capital.

"This morning, ROK Resources Inc. (“ROK”) announced its Q2/24 financial and operational results, which were in line with our forecasts. The Company also reaffirmed its 2024 guidance. Current operations are focused on a multi-well drilling program that began in late Q2/24, with results meeting expectations. We maintain our BUY recommendation and our $0.60Cdn target price, based on an EV/DACF multiple of 3.5x applied to our 2025 DACF estimate." < Bill's price target compares to my current valuation of $0.59Cdn per share ($0.44US per share).

ROKRF is in our Small-Cap Growth Portfolio. At the time of this post, it was trading at $0.157US, which is just a bit higher than my operating cash flow per share forecast for 2024. This Canadian Junior is free cash flow positive, has steady production growth locked in and good quality "Running Room".

I did not expect ROK to announce Q2 results until after the markets closed today.
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Q2 2024 HIGHLIGHTS

Production In-line with Forecast: Production averaged 3,937 boepd (63% liquids), a YoY increase of 19.4%; < Beat my forecast of 3,800 Boepd

Operating Netback Increase: Operated Netback of $17.87 per boe compared to $16.06 per boe in Q1 2024;

Successful Frobisher Drill Program: Drilled 4 gross (3.44 net) wells with an average IP30 of 148 boepd;

Successful Optimization Program: Continued success with casing gas compressor installations on Midale producers, resulting in average capital efficiencies of $3,850/boepd and 4-to-6 month payouts;

Adjusted Net Debt Reduction: Adjusted Net Debt reduced from $18.7 million at the end of Q4 2023 to $15.1 million at the end Q2 2024; and Credit Facility Renewed: The Company maintains a $22.5 million credit facility through June 30th, 2025. < ROK is free cash flow positive, and they have NO NEAR-TERM DEBT ISSUES.

2024 OPERATIONS UPDATE AND OUTLOOK

Year to date, the Company has successfully drilled 5 gross (4.33 net) wells in 2024, currently producing a total of 735 boepd (640 boepd net to ROK). In addition, since beginning casing gas compressor installations on existing Midale wells in Southeast Saskatchewan, the Company has added 280 boepd (IP90) to the base production levels of 15 wells. Management has identified an additional 22 locations for compressor installations over the next 18 months.

Key initiatives for 2024 remain unchanged with the Company focusing on using its current balance sheet to target strategic opportunities in core areas, improving operational efficiencies through targeted well optimizations and undertaking operational cost reduction measures. The remaining drill program aims to add Frobisher drilling inventory while proving up Midale prospects with multi-lateral drilling. The Company anticipates completing its 2024 drilling program by drilling a total of 7 to 9 gross wells in 2H 2024. < My forecast is that ROK's production should ramp up to over 4,400 Boepd in Q4. Their production mix is also improving and should be approximately 60% crude oil, 10% high value NGLs and 30% natural gas by year-end. That's a 10% YOY increase in crude oil.

KAYBOB, ALBERTA, UPDATE

As previously mentioned, with the current softening of the North American natural gas markets, the Company has continued to shut-in 300 boepd (80% natural gas) in its Kaybob, Alberta area. The strategic shut-ins are expected for the balance of Q3 2024 with reactivation expected by year-end.

Re valuation:

The problem with valuations on operating cash flows is it ignores cap ex

ROK is spending most the of cash flow on cap ex

The 2nd issue is oil prices are collapsing with next year in the 60’s

The 3rd issue is it’s so tiny it relies on retail buying to move it.

4th issue is the Canadian government attacking evil oil companies

But agreed it looks good with oil in the 80’a

My mission is to give EPG members some profitable companies to choose from. If you like large-caps, just by large-caps. Size does matter in this business. I have personally made my largest gains on finding promising small-caps and buying them before the Wall Street Gang figures them out.

ROK needs to grow. They should be spending their operating cash flow on building a quality production base. BTW they have a clean balance sheet.

I met the ROK management team last year. They have a history of success in Western Canada and the Company is growing without increasing debt since their early acquisitions.

Do I understand correctly that the H2 results reflect no new drilling in 2024? I assume the Frosbisher wells have negligible if any production in the reported results.

As I understand it all of their drilling has just recently commenced so it is unlikely to show up meaningfully until late 2024/early 2025. Is my understanding correct?

ROK's production should be approximately 4,100 Boepd in Q3 and 4,500 Boepd in Q4. See my detailed forecast that was just posted to the EPG website.

ROK's balance sheet is in very good shape and this year's drilling program is being fully funded by operating cash flow.