Rubellite Energy – Never seen, never heard off

[Petroleum economist]

Introduction
If you have never heard off Rubellite Energy, then there are three good reasons for that: (1) Rubellite is Canadian, (2) it is very young (formed only in mid-2021) and (3) it is very small (market value is US$ 122 M).

Rubellite Energy came into being after it acquired the Perpetual’s Clearwater Assets in July 2021. Since 2021 Rubellite has seen rapid growth which is continuing till the day of today with the acquisition of Buffalo Mission in August 2024.

Summary
Rubellite Energy produces heavy oil from the Clearwater and the Mannville formations in eastern Alberta. The reserves and the production are growing at a high rate. The balance sheet is in a reasonable state, but needs until mid-2025 to recover from the Buffalo acquisition in mid-2024. The company is profitable with profits growing with increasing production. Shareholder returns before mid-2025 are unlikely, but then can start, provided that no more acquisitions are made. Returns in 2027/2028 can be very substantial. Rubellite Energy ranks in my oil and gas ranking at a high 10th position (out of 82). Rubellite potentially is a very interesting investment. Daily trade at times is very limited to nil.

Reserves
• Reserves are fast growing, up threefold since 2023. Proven reserves in late 2023 were 9.3 M BoE, up from 6.1 M BoE (2022) and 3.2 M BoE/d (2021). The reserves growth since 2021 was completely autonomous.
• The acquisition of Buffalo Mission in august 2024 brought total proven + probable reserves to 23 M BoE. No split was between the two was provided.
• Assuming the Buffalo reserves are 60% proven, total reserves are equivalent to a low 6.0-7.0 years of 2025 production (industry average 9.5-10.0 years).
• The reserves replacement Ratio (RRR) is very high. 4.24 over the period 2021-2023 (industry average 1.02-1.05).
• The RRR in 2023 was a high 3.68.
• The proven reserves combined with the high RRR suggest that substantial production growth is feasible if the RRR can be maintained.

Production
• Production is growing fast.
• Production grew from 75 bbl/d (2021), 1,671 bbl/d (2022) to 3.305 bbl/d (2023).
• Q2 production (4.5 K bbl/d) was flat versus Q1 (4.5 K bbl/d), but 7.5% above Q4 2023 (4.2 K BoE/d). The flat production was a consequence of only drilling 6 production wells in Q1 and 8 wells in Q2.
• With the contracting of a second rig in June 2024 the well development rate will pick up and thereb the production.
• For Q3 I expect a production of 6.4 K bl/d, based on 4.7 K bbl/d of the original assets and two months pf 2.5 K bbl/d from the Buffalo acquisition.
• Q4 production in Q4 can go up 7.6 K bbl/d (outlook 7.4=7.8 K bbl/d) This will lead to an overall 2024 production of 5.8 K bbl/d (outlook 5.6-5.9 K bbl/d).
• 2025 production, with Buffalo included for the whole year and further development, can go up to 7.8-8.0 K bbl/d. Rubellite expects continued 2025 growth without being specific.
• Over time production can grow to 8.6 K bbl/d in 2028. This can be higher with more reserve bookings

Balance sheet
• Rubellite is well financed and has a solid balance sheet.
• The equity ratio (=equity/balance sheet total) decreased from 78.2% (late 2023) to a still high 73.5% (Q2).
• After the Buffalo acquisition the equity ratio will fall to 57.9% and will need some reinforcement.
• Long term debt after the Buffalo acquisition will be approx. C$ 117 M, leading to a 2024 debt/EBTDA ratio of 1.10.
• In 2025 with Bufalo included for the whole year and the FCF utilze1d for debt reduction, the debt/EBITDA can fall to a very good 0.6 or less.
• The balance sheet over the next 12 months needs some reinforcement.
• Thereafter shareholder returns can start after mid-2025, provided no additional acquisitions are made.

Profitability
• Rubellite is a very profitable company.
• Royalties are 10.5-12.0% of revenues.
• Unit costs (inclusive interest, depreciation, and overheads) are a medium low US$ 35.30/bbl.
• Profits (excluding non cash hedging results) were C$ 7.0 M (eps C$ 0.07) in Q1 and C$ 9.1 M (eps=C$ 0.11) in Q2.
• With the start up of the Trans Mountain pipeline, realized oil prices in H2 should increase.
• For 2024, with WT-$ 70-75/bbl, I expect a profit of C$ 29-32 M (eps=0.45-0.49, PE=5.0-5.5). The PE is low.
• From 2025 onwards, with increasing production the eps in 2025 can increase to C$ 0.42-0.58 (PE=4.2-5.9) and to C$ 0.548-0.68 (PE=3.6-5.0).

Shareholder returns
• Till mid-2024, Rubellite has never paid shareholder returns. I do expect this to continue to at least mid-2025.
• Starting mid 2025 shareholder returns are possible, provided that no more acquisitions are made.
• Returns in 2024 will be nil.
• Returns in 2025 can start at C$ 0.10 (yield=4.8%), climbing over time to C$ 0.32=0.36 in 2027/2028 (yield = 13-15%).

Conclusions
Rubellite Energy produces heavy oil from the Clearwater and the Mannville formations in eastern Alberta. The reserves and the production have been quickly growing. The balance sheet is in a reasonable state but needs until mid-2025 to recover from the Buffalo acquisition in mid-2024. The company is profitable with profits growing with increasing production. Shareholder returns before mid-2025 are unlikely, but then can start provided that no more acquisitions are made. Returns in 2027/2028 can be very substantial.

Rubellite Energy ranks in my oil and gas ranking at a high 10th position (out of 82). Rubellite potentially is a very interesting investment. Daily trade at times is very limited to nil.