Rialto Energy - Rial Potential


Rialto Energy Logo

From 27p to 10.00p. Rialto Energy (LSE:RIA) has seen its share price suffer since listing on the London Stock Exchange in April despite already being listed on the Australian Stock Exchange (ASX:RIA) since 2006. Rialto is an oil and gas exploration firm with interests in offshore Australia, Ghana and offshore the Ivory Coast. Rialto certainly looks an overlooked prospect - but for what reasons and is the stock still overpriced or is upside imminent. Rialto currently has a £78.54m market capitalisation along with ~682m shares in issue.

Technicals wise, the LSE:RIA stock looks favourable for a move upwards. A new channel has been formed with higher highs and lower lows. It will be news that will determine the next big stock movement. Rialto issues weekly drilling reports - a big plus for investors who are keen to not be left in the dark. These will and have been the share price catalysts on notable news releases. However, the trendlines are not as reliable as perhaps liked because of the short term in which the share has been listed. Therefore there are only 2-4 touches of each trendline which reduces their reliability. Despite this, a good news release could really push the stock a lot higher due to it being overlooked because of its recent listing. You may say its 'not on the radar yet'.

To properly analyse the chart movements I also took the share chart for the Australian Listed Rialto shares. It may or may not please investors its dual listed as it may keep some up at night trying to read purposefully into share price movements to ascertain the nature of the possible news - of course the reality is that it just provides another way of measuring the stock performance and how investors the other side for the globe interpret information. It is fair to say that Rialto is more actively traded on the ASX than on the LSE for the time being. The ASX:RIA chart currently looks a little more bearish due to the short upward trend just formed and the current price within it. The current price is nearing the lows following a spike up possibly suggesting that a downward break could be fairly significant (10% plus). However, equally a movement up towards the top of the channel could be 10%+. Rialto ASX is also in a long downward trend and would need to reach around 0.26 AUD to break out of the downward channel and potentially start a new long term upward trend.

Now to fundamentals. Rialto has three assets; two in the African continents and one in Australia.. The Ivory Coast license entitled CI-202 is where Rialto is operator with an 85% working interest. The fields within the block are known as Gazelle and Hippo. The block covers 675km2. The potential of the block has already been uncovered - 14 wells have been drilled there with multiple sets of 3D seismic. Gas has been produced at up to mmcfd/day and oil over 2200bopd. The company has described the Ivorian assets as a 'high value, low cost production opportunity'. Impressively the block is just 80km west of the massive Jubilee field in Ghana. The map to the right better highlights this. The seas around Rialto's block are largely unexplored, but prior to estimates you would expect multi-hundred BCF's of gas or a small portion of oil. In September 2011 it was confirmed through a CPR with contingent resources of 50 MMBBLS & 396 BCF and prospective resources totalling 551 MMBBLS & 1,785 BCF. This supports a valuation of $165m at a 35% COS level which is successfully validated would exceed the current market cap by well over 50%. It would not be a surprise to see these increased further through appraisal with the drill bit. Importantly, the block is located close to the shore thus it is more commercial compared to fields further out to see - particularly the Gazelle field. At Gazelle, '7 wells have intersected and tested oil and gas over a 370m gross section'. At Hippo three discoveries have been made, two oil and one gas and condensate which sells at a very similar price to oil. Production is expected to commence in late 2013 or early 2014. A pipeline will run through the block close to the Gazelle prospect. The prospect nicknamed Chouette alone could be worth 31p/share. Notably, Tullow's well offshore the Ivory Coast earlier this year further proved that the petroleum system experienced in Ghana is also translated offshore the Ivory Coast as the finds were in the same Upper Cretaceous fan system. However, it is expected that Rialto will farm down this stake to better manage costs as development is likely to cost $400mm (of which most is attributable to Rialto's stake) with companies such as Dragon Oil being likely and a farm down being fairly soon coming (likely before Q1 2014). Such a farm down is likely to significantly boost investor confidence.

Investec Bank noted, The sole components of our 41p NAV are the contingent and prospective resources in block CI-202. We would argue our valuation is conservative as our 41p only includes the value of the oil element of future exploration and appraisal in 2012/13 plus the gas resources at Gazelle, which is supported by a 100mmscf/d gas sales agreement. We apply a 70% risk factor to the contingent resources and 20% risk factor to the prospective resources.

Rialto included the following work schedule for the Ivorian block in June:
•1st Well: Gazelle-P3 encountered expected reservoirs plus a new exploration objective
-200 metre column extension to one of the primary Gazelle Field gas reservoirs
-Gazelle-P3 ST2 (Sidetrack) currently being drilled to further optimise production well location for UC-1 reservoir
•2nd Well: Gazelle-P4 well to appraise 6 proven reservoirs for optimising development well locations
•3rd Well: Chouette exploration well will target significant liquids upside of 84 mmbbls gross mean prospective resources

Rialto's Australian prospect is also entitled Gazelle and is located very close to major discoveries made by major BHP Billiton. It is found within the WA-399-P license in the Exmouth Sub -Basin which is within kilometres of other large finds such as Macedon and is approximately 60-80km from the shore (where the pipeline route joins). Even more promising is that the petroleum system is known to have the same
era of rock existing in both the Gazelle and Macedon prospects. A 39-90 MMBOE was also attributed to the Gazelle prospect in September 2011. At Rialto's 12% working interest this equates to 4.68MMBOE at the lowest estimate and up to 10.8MMBOE at the top of the range. As shown by the diagram on the left, BHP Billiton are also planning to construct a pipeline from the field to the mainland - although not confirmed, any discoveries made could be tapped into the pipeline. This is made more likely by the partner of both BHP and Rialto being Apache Energy. The company said, 'On 1 March 2010, BHP Billiton and its co-venturer Apache Energy Ltd announced the commencement of First Oil production from the Pyrenees project in Retention Lease WA-12-R, directly adjacent to WA-399-P. The proximity of WA-399-P to this producing development, and the entry of Apache Energy to the WA-399-P Joint Venture, increases the confidence that any discoveries in WA-399-P can be commercialised quickly.'

Rialto's potential final asset lies offshore Ghana in the Accra block where Rialto may have a 18% stake with the operator being Tap Oil. The block prospects are within the Keta-Benin basin where the large fields offshore Ghana were also found. The contract was signed committing towards one exploration well before October 2012. The Keta-Benin basin is similar to the Ivorian basin where Rialto's other assets are located due to the plays both being within the Cretaceous age rocks that are oil prone. Whilst current exploration in the Accra block has been slow, many MMbo can attributed to a variety of Albian and Late Cretaceous plays over a number of both structural and stratigraphic traps through analysing what geologically analogous zones have been found elsewhere in the region. The reason why the English i've used here is conditional is because the Ghanaian government still needs to confirm the arrangement which is taking a rather a Long time but this is to be expected in West Africa where governments are not as tidily managed as we would like to think. Nevertheless, the deal is likely to go ahead. The sooner the better is the motto for Rialto as they have a hugely prospective lead named 'Starfish' lined up which could be worth up to 66p/share alone on an unrisked basis. A clear risk is if the government does not grant approval - if this were the case the Starfish prospect will not be of interest to Rialto and Rialto would relinquish any potential interest in the block.

However, there are some risks to the process. Obviously gas and oil prices pose a risk to commerciality, but this is unlikely to change unless there is a very significant change in these prices. Another possible problem may be a gas commercialisation contract as this still needs to be sorted. Additionally the final risk may be the inability to secure funding for the project through debt or farm outs. The low share price may also lead to a higher number of shares being issued if this is the path that is taken.

Rialto was admitted to the AIM on 12/04/12. Its first RNS was released after five days and came in the form of the weekly drilling report. It was certainly not the most positive of starts as they released that the drill bit had got stuck during drilling at circa 1000m (On their Gazelle-P3 well in the ivory Coast) so were now working to free it. They also announced that 'The Gazelle-P3 well was spudded on 12 March 2012 using the Transocean GSF Monitor jack-up drilling rig. The well is the first of an overall three well drilling programme on CI-202 that is anticipated to take six months to complete, together with testing.'

The next RNS was to announce the completion of the second tranche of shares given to the International Finance Corporation consortium issuing ~32m shares and ~8m options raising a further $9m which would be used to further work in key licenses. A further weekly drilling report was then released announcing the freeing of the stuck drill pipe and noting at which depths the casing would be set. The Quarterly activities report further addressed the financial situation and wrapped up the funding situation that had taken place prior to Rialto listing on the AIM. A shown below the placements and purchase plan were oversubscribed which bodes well should further funds need to be raised int he future and hints that the share price is currently rather low.
The Company raised AUS$86.4 million to fully fund a three well drilling programme in Block CI-202. This funding was achieved through:
- An oversubscribed Private Share Placement
- Funding agreement reached with the International Finance Corporation
- An oversubscribed Shareholder Share Purchase Plan

The next two RNS' consisted of the drilling reports which included the further drilling but also the logging of the Upper Cenomanian rock sections prior to drilling further ahead. The next milestone achieved was that of securing production agreements (in mid-May) as noted below.

Rialto is pleased to announce that the Company has received formal confirmation from the government of Côte d'Ivoire that Rialto has been granted an Exclusive Exploitation Area ("EEA") over the Gazelle Field on Block CI-202. The EEA grants Rialto with the right to produce hydrocarbons from Gazelle over a tenure period of 25 years.

The Gazelle Field is the current focus of an initial 3 well drilling campaign by Rialto, which commenced with the drilling of the Gazelle-P3 development well in March 2012 and which will be followed by further development and exploration drilling in and around Gazelle during the coming months.

A day later the company announced that encouraging oil and gas shows had been encountered near a depth of 3000m in the Upper Cenomanian and they would seek to wire line log this after drilling further to gauge any potential. A week later Rialto had finished drilling further finding encouraging hydrocarbon zones in the Lower Cenomanian as well. These sections were now being logged and fluid and pressure samples would be taken.
Ultimately, the results of these were mixed. The Upper Cenomanian was poorly developed and a sidetrack was being considered to better target the section. However, the Lower Cenomanian section of rock encountered gas 200m lower than the current known gas as the other wells thus deepening potential and expanding the play. This will be added into a future CPR report.

A 75m TVD gross reservoir package of high quality sand was encountered at the base of the Gazelle-P3 ST Well. Drill cuttings exhibited shows and the logs indicated the sands to be water bearing with possible residual oil saturations. This sand represents an exciting new exploration target and the recently acquired 3D data will be used to identify new drillable impact prospects in the Gazelle/Condor Area with a view to future exploration activity. 

It was decided that the Gazelle P3 ST well would be sidetracked to try to find better quality reservoir rocks. The well was less risky than a normal exploration well as the petroleum system had already been confirmed and the well itself was only meant to be used to optimise production. However the sidetrack would cost an additional $9mm bringing up the year to date total to $85mm. Another positive of the well is that it greatly de-risked the Condor discovery as its features the same type of geological traps. The Condor appraisal well is set to be drilled in 2013The well was sidetracked and successfully drilled objectives - it was then logged and hydrocarbon shows were again observed. On the 25th June Rialto announced the following;

As previously announced, the Gazelle-P3 ST2 well encountered the expected oil and gas bearing Upper Cenomanian reservoirs and will now be drill stem tested. Testing operations are expected to be completed in around 2 weeks.
Following successful testing operations, the well will be suspended for future completion as the first production well of the Gazelle field. The drilling rig will then move directly to the Gazelle-P4 location to commence drilling of this second development well of the current fully funded three well programme.
Another huge milestone was achieved a day later when Rialto was awarded a FEED (Front end engineering design) contract with Petrofac which enables them to expedite the production from their Gazelle field in the Ivory Coast. The development plan that was already initialled by Ivorian authorities will not be set into motion. The production facilities will be comprised of an offshore production platform with oil and gas pipelines linking it to facilities onshore. Any future finds can also be linked via the production platform at a much lower cost.
On the 18th July, Rialto released the testing results from the Gazelle sidetrack which were wholly positive. A maximum rate of 19.6mmscfd was achieved with 133bcpd along with an unstable rate of 760bopd at a 40 degree API standard. However, at a smaller choke size gas flow rates up to 33mmscfd are expected.
On the 26th July the Gazelle P4 development well was spudded. The initial estimated time of completion was 45 days and it was budgeted to cost $28m which it was fully funded for. Post Gazelle P4 Rialto estimated a remaining budget of around $25m so clearly funds will need to be raised for next years prospects. The Gazelle P4 well reached final depth on the 23rd August - well within the time allocation (28 days taken vs 45) and thus less money from the budget will be withdrawn.
The well has encountered encouraging oil and gas shows through the Upper Cenomanian and gas shows through the Lower Cenomanian reservoir intervals. These will now be evaluated by wire line logging, fluid and pressure sampling to properly evaluate the shows, and identify potential test intervals.
An update on the logging is expected imminently with the next weekly update being released tomorrow 30th August. The results of this could further confirm the prospectivity of the Gazelle prospect and could further build towards increased reserves in the CPR. Considering these finds are all being located within the same era of rock, the likelihood that there will be usable hydrocarbons is high.

The slide above shows the planned work program for 2013 in a succinct manner. There is clear upside based on the prospects they are wanting to drill. The biggest hurdle will of course be financing it. I would expect Rialto to farm out thus allowing Rialto to reduce their share of the costs. Maybe a 20-25% farm out is reasonable. If this were the case their new share would be 60-65%. However, I also think that if they did farm out the Ivorian national oil and gas company (PETROCI) would use their back-in rights to reclaim 11% thus leaving Rialto around 50% which is a far healthier stake. Rialto also has the Vantage Sapphire rig secured for 2013 thus this is not a problem which is reassuring. In 2012, the Chouette prospect is the next big exploration target as mentioned earlier in the article. Success here will significantly boost the share price as well as de-risk another section of the license.

Rialto also has a lot of highly positive broker estimates reflecting its huge potential. First Energy has a 45p target, Investec Bank has a 41p target and all others have targets far higher than the current price. Despite this, I have no rating on the stock with no price target for now.

Rialto is a medium term,high risk, high reward prospect.  However, whilst its exploration is high risk its production and development wells are lower risk thus providing a well balanced portfolio for Rialto. An introduction of a partner to help fund the progress would be a major achievement and with an aggressive drilling schedule, an agreement from the Ghanaian authorities for the Accra block would be a buy in point in itself. Tomorrow could further increase the prospectivity of the Gazelle prospect so should be watched. If results tomorrow are negative then Rialto would offer a share price opportunity at probably less than 10p/share - whether this is good value depends upon the well result. The wheels of Rialto are rolling here - it will just take time for the majority of investors to take note. No rating


  1. Great. And Petroci used their rights this morning.

  2. Great report. Keep up the good work.

  3. You should probably make an update about the reduction of interest in the C-102 block the state-owned Cote'd'Ivorian O&G company took an additional 11% interest so Rialtos interest in the field is now 74% (84% paying). Happened yesterday.