Rialto Energy - Is the tide turning?

http://www.rialtoenergy.com/

Rialto Energy Logo

Rialto Energy (LSE:RIA) is an clear case of an IPO stock that has had minimal success since listing and this, combined with there never being a significant amount of interest in the stock, has meant that the share price has crumbled from the original listing price. Rialto was one of the first shares I looked at on the site (in August 2012), when I noted that much relied upon the result of a well being drilled at the time. It will come as no surprise that subsequent drilling results have been disappointing, and this has led to a complete board overhaul with the Rob Shepherd having taken the helm. Since the last review, the market cap of dual-listed Rialto has toppled by almost 80% to ~£16.2m currently, whilst the number of shares in issue has risen to 1.15 billion. Whilst I was undecided upon the potential of Rialto a year ago, there seems to be a much clearer case for investing at the current share price compared to 12 months ago.

This article is a follow-on from the below post. For full context and information, read this article first:
http://www.theel1tetrader.com/2012/08/rialto-energy-rial-potential.html

RIA's AIM Stock
As always, I start with the technical picture. Due to Rialto being dual-listed I will briefly analyse the outlook for both sets of stock as there can be disparities. The ASX stock is more liquid than the AIM stock hence the spread is narrower which favours Australian investors, but nonetheless, the outlook for Rialto's AIM stock looks very rosy in my opinion. As shown above, the share price effectively bounced off 1p and has slowly drifted higher on relatively low volumes (taking into account the share price drop). The RSI is very bullish and the moving averages indicate, what is likely to be, the first real trend change for Rialto.

There have been occassions in the past when recoveries have occurred, but this one looks a lot more robust. Indeed I have seen this chart pattern multiple times and it is often the case that the share price accelerates upwards and fills the gap which currently lies at 1.83p. Furthermore, if this level is surpassed, the next targets are 2.5p and 4p respectively. Considering the current share price of 1.4p, that is not bad going. Of course, there is no certainty that it will motor upwards, but I'd say the odds are stacked in Rialto's favour now that most of the bad news seems to have been dispelled. Furthermore, the market tends to favour stocks that have previously been trading at a much higher share price, but have been drifting for a long period of time. These are the sort of stocks that break-out significantly. The most recent example of one of these stocks was Metminco (LSE:MNC), a dual-listed Mining Company. I would not be surprised if Rialto followed in similar, albeit not as large footsteps. Interest in Rialto is relatively low, so a spark of interest could drive Rialto forward. In the mean-time the wide spread remains an issue, and is something to be very aware of.

As if to solidify this outlook, Rialto recently undertook a placing to fund its forward work program. I'll discuss the terms of this later, but what is important is that the placing happened at 1.8p which is roughly 29% higher than the current share price. It was admittedly dilutive, but there was significant backing by Directors (in particular Rob Shepherd who ploughed in £120k) and by institutions such as International Finance Corporation (a member of the World Bank).

Note - The AUD featured in the chart should be Australian cents
Admittedly there is not too much different with Rialto's ASX stock. Volumes are higher because the stock is more liquid, and it will probably also be the ASX stock that drives any price movements in the AIM listed Rialto. There is not a huge amount of price difference between the two either, with the ASX share price equivalent at 1.45p, so a few percent short. The outlook for the ASX stock is decent, although a tad more precarious. However, as with the AIM stock, if the shares can rise around 10% more off the lows, it would confirm the potential for a lucrative recovery play. The signs so far are bullish and contrarian investing when the share price is bouncing around the lows looks decent technically.

On technicals alone there are reasons to be optimistic for Rialto shareholders. After the precipitous drop it may be little consolation, but there remains potential for a significant uplift from the lows. Moving to the company news, I'll quickly run over what has changed since the initial review. The first point to clear up is the result of the Gazelle-P4 well that was being drilled in the Ivory Coast. Oil and gas shows were encountered upon total depth. When tested, it was confirmed that one of the upper reservoirs could sustain a 40mmscfd production rate and that the second objective of appraising the Gazelle discovery was successful. However, what was interesting is that partner Petroci exercised it's right to gain an additional percentage stake in the project through reimbursing Rialto with 11% of the costs incurred in the field to date which was estimated at $10m. The percentage stake gained by Petroci was 10%. "As a result of the back-in by Petroci Holdings, Rialto Energy's interest in the Gazelle Field EEA will reduce to 74% (84% paying interest), whilst its interest in the remaining area of Block CI-202 outside of the Gazelle Field EEA will remain at 85% (95% paying interest)."

What does this mean? It means that Rialto are trading at a fraction of the worth of what Petroci were willing to pay for the 10% stake in Gazelle, plus a whole other series of assets and prospects are chucked in on top. Furthermore, Rialto confirmed that it had acquired a minority interest in the highly prospective Ghanaian Accra block with partners there including Ophir Energy and Vitol. Rialto's participating stake in Accra is currently 12.5% with a 11.25% effective interest. This strategically aligns Rialto to benefit from drilling upside without having to stump up too much cash.

Back to the Ivory Coast CI-202 block containing the Gazelle field, an updated resources and reserves report was released in January 2013 that accounted for the series of wells drilled during 2012. The result saw a 65% in prospective recoverable gases to ~2.9TCF and a 75% rise in recoverable liquids across the block to ~900mmbls. 2 of these prospects have been classed as 'drill-ready' These figures are impressive, but the problem for shareholders is that mixed success during 2012 meant that mean contingent resources actually dropped to 270bcf of gas and 40mmbbls. Across the 5 areas examined, the highest Chance of Success was 38% within the Hippo-Bubale field where, across 6 prospects, the mean estimate is for 127mmbbls and 684bcf. The problem that Rialto does have is that drilling costs are relatively high and the potential resources are spread out across multiple prospects.


In April 2013, Rialto released a comprehensive update across its Ivory Coast portfolio. Most notably, the company managed to secure a major partner for developing the West African portfolio - Vitol (a Dutch-owned energy trading company).

- Vitol to acquire, subject to regulatory and joint venture partner approval, a 20% interest in Rialto Energy (Ghana) Limited ("Rialto Ghana") in exchange for providing a facility to cover Rialto's US$ 7.7 million obligations for the drilling of the high-impact Starfish-1 exploration well in the Accra Block, Ghana, due to spud in June 2013;

- Vitol to acquire 65% of the shares in Rialto Energy (Côte d'Ivoire) Limited ("Rialto CdI") in exchange for providing US$ 50 million of capital to be invested in a to be agreed Block CI-202 work programme subject to the conditions outlined hereunder


There is little doubt that this part of the report was highly positive as it also meant that financial exposure to the Starfish-1 well was minimal. Furthermore, the sole presence of Vitol provides Rialto with firepower and some credibility that will aid any negotiations with governments.But once again a shadow was cast because it was noted that the drilling rig that had been hired (Vantage Sapphire) would need to be terminated, and this would come at a charge. Through negotiating, the board did manage to reduce the charge for the rig from $17.325m to $12.375m. $7.425m of this was left outstanding as at May 1st. $5.425m of this was also paid straight afterwards leaving a residual $2m charge. Through either persistence, or generosity on the contractor's behalf, it was admittedly pleasing to note that this $2m charge was further reduced to $1.25m in August, which will likely have now been paid.

Courtesy of topyti on flickr
Following this, in June, activity at the Accra block resumed. "The Starfish-1 well, which the Operator, Ophir Energy estimates to hold 292mmbbls of gross prospective un-risked mean resource (26.28 mmbbls net to Rialto), is scheduled to commence in June 2013." Skipping the technical details in between, the result of Starfish-1 was that no moveable hydrocarbons were encountered as the sands were water-wet. This represent a disappointing, but importantly inexpensive result due to the agreement with Vitol. The block remains highly prospective with a mean prospective resource of 405mmbls net to Rialto upon success across the prospect portfolio.

Managing Director Rob Shepherd commented: "As we have highlighted prior to and when the well spudded, it was designed as a play-opener with a 20% chance of success, and we also note Ophir Energy, the Operator, commented in their release on 10 July 2013 that their primary reason for farming-in to this acreage was the play potential outboard of the Starfish prospect."

To tie up news on the Accra block, a 6-month extension was granted in early August which takes the expiry date to late March 2014, by which point the partners must decide whether or not to enter the first extension period. Given the lack of exploration in the block, the likelihood is that the extension period will be entered.

Amidst all the disappointment and resignations of various board members, a new, streamlined board has been formed, but the most important point is that funding for the foreseeable future has been sorted. This was done through an equity raising I mentioned earlier, at 1.8p/share. The placing included issuing ~472m new shares to raise net proceeds of approximately £7.8m. For a 69% dilution, the fac that the discount was only 18% is surprising, but also encouraging as typically for a large dilution such as that, the discount would have been closer to 30% regardless of share price performance. Most of the proposed placing was taken up as well, which is a decent vote of confidence in the company and the new management team.

The funding will be used for general work commitments, but also to keep the active exploration program going by allowing Rialto to fund its share of the next well in the CI-202 block. Looking at the cash figures, as per the last report it indicated cash equal to £11.2m. Subtracting the ~£0.80m final repayment for the drilling rig termination retrieves an estimate for Rialto still having over £10m+ of cash at hand. Compared to a market cap of £16.2m, that is certainly a healthy amount and is a strong hand for the company to have. The fund-raising has been dilutive, but the company is in a better position having come out the other side, with regards to sorting out a forward-work programme focused upon the FID of Gazelle. It is important to remember that the company also has an interest in a basin in Australia - at the current point in time it may be worth the company looking to monetise and sell off that asset if there is any demand for it. It does not fit in with the whole West African theme and it may be a deterrent for some investors if there are too many projects on the go at once.

courtesy of freedigitalphotos.net
There is doubt currently hanging over Rialto stock though. And that doubt regards the Vitol agreement. The agreement is subject to various conditions, one of which is the Ivorian government agreeing to amend various parts of the the CI-202 PSC. Failure to do so could lead to the Vitol agreement becoming void. Personally, looking at various other instances of requesting PSC changes in Africa, the majority get passed with other terms amended to favour the government slightly. This may be through a larger acreage percentage relinquishment or through other means. I do not see there being a significant risk involved with this. PSCs do of course need to be amended from time to time, and in Africa, any changes that can help the country are often passed, albeit accompanied by a lengthy waiting period. I don't see a situation any different with Rialto. The government would lose a significant portion of investment plus delay any exploitation of Gazelle should it not be permitted, which is in the best interests of no-one. I cannot see this being an issue, especially with Vitol and the International Finance Corporation being aboard. Furthermore, the government is encouraging cross-block activity to identify a potential plan for getting the gas to market. Afren has indicated interest in this respect, so it would be crazy to revoke Rialto's licence.
 
Coming back to the question: Is the tide turning? The answer to that would be, it is starting to turn. Rialto is no doubt, like most junior oil explorers, a high risk investment, but at a £16m market cap, more than half of it is currently covered by cash. The doubts over the licence are in my opinion misplaced, and whilst negotiations could continue to be slow, there should be a result on this front. The technical position of the AIM shares is very bullish and consequently there could be decent upside here for investors who don't mind risk in their portfolio. Rob Shepherd has made a decent start in turning Rialto around. The job is not even close to being done, but some credibility in the company has been restored. I have put a Buy tag on Rialto at 1.40p.

UPDATE (11/11/13) - I have moved Rialto from Buy to No Rating at 2.45p. The reason comes down to uncertainty regarding the Vitol arrangement (it appears to be a loan arrangement which is repaid through production cash flows) in addition to the share price being around the second price target of 2.50p. I have therefore locked in 75% gains.

4 comments:

  1. As a solely technical trader, You could well be right. This looks like its on a one way track

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  2. Very interesting review,

    Terry (from hotcopper)

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  3. I have been a big fan or rialto, but I have also been watching from the sidelines

    Spread is rather wide, but may look to take a punt

    CraigJ

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  4. Spread fluctuates so much. May take a dip when it is smaller

    ReplyDelete