Rose Petroleum (2.45p) – Cantor Fitzgerald risked NAV 125p per share (unrisked £11.62 per share)

Rose Petroleum plc (Symbol: ROSE) is an AIM listed oil and gas company focused on the exploration and development of approximately 80,000 acres in the Paradox Basin, Utah, U.S.A., where it is earning into a 75% working interest.  The Paradox acreage constitutes a project of considerable scale and prospectivity. According to the resource report prepared by Ryder Scott Company in 2014, there are potential resources of 1.1 billion barrels of oil and 2.2 trillion cubic feet of gas on the acreage. A Competent Person’s Report by Gaffney Cline & Associates in 2018 on the acreage covered by the recently completed 3D seismic acquisition (approximately 17,250 acres of the total circa. 80,000 acres held) and focused solely on the single Cane Creek reservoir (Clastic 21) of the multiple prospective reservoirs within the Paradox Formation determined gross contingent resources (2C) of 15.61 million barrels of oil and 31.23 billion cubic feet of gas with a NPV net to Rose of $122.4 million.

Rose has identified more than 60 well locations on both its existing and new acreage within the area covered by the 3D seismic survey that was completed in 2017.  As stated above, this area contains contingent resources (2C) of 20.8 million barrels of oil equivalent in the Clastic 21 reservoir alone. The Paradox Basin formation is made up of approximately 24 clastic zones, of which Clastic 21 is the primary producing zone of the basin to date. Additional potential clastic reservoir zones also exist, both above and below the Clastic 21. These were also assessed as prospective in the Competent Persons Report and add further potential both within the 3D seismic covered area (which represents only 15,000 acres – or 17,250 “held at surface” – of the 80,000 acres over which Rose has a working interest) and the area outside, providing the opportunity to significantly increase resource numbers on the Paradox project in the future.

On 1 November 2018, Rose announced that the U.S. Bureau of Land Management (“BLM”) had approved the Application for Permit to Drill for the GV 22-1 well. The APD is valid for an initial two years.  The GV 22-1 well is within the new leases acquired in March 2018 and is covered by the Company’s 3D seismic acquisition completed in December 2017, adjoining existing leases within the Gunnison Valley Unit.  The GVU 22-1 well is considered a top ranked well location, based on the 3D seismic interpretation and its proximity to the producing 28-11 well.  At the current time, it appears that a suitable rig will now be available in Q1 2019, in line with the now agreed operational plan. The Company is targeting securing the necessary drill programme funding ahead of then.

A fracture characterisation study undertaken by Schlumberger has now been completed. In the detailed analysis of the proposed well GVU22-1, the models of the combined fracture sets developed in the study show that the well is situated optimally to capture the fold and fault related fractures.  The planned well location is also consistent with stronger amplitudes from the attribute mapping, which may correlate to fracture corridors.  Schlumberger and Rose will utilise the completed work to refine the well path design to optimise the fracture networks to maximise the performance of the well. The fracture systems encountered will be a major factor in the commercial success of the well.

The GV 22-1 will be a horizontal well which Rose’s management consider has a potential Estimated Ultimate Recovery (“EUR”) of 894,000 barrels of oil equivalent (“BOE”), consistent with the Gaffney Cline Competent Person’s report. The potential of the GV 22-1 well is supported by its close analogy to highly productive structures (>1mmboe EUR) within the nearby Cane Creek Field (12 miles south) and locally by its close proximity to the producing 28-11 well (approx. 1 mile). This well produces from the porous and permeable fracture network within Clastic 21 and can be tied to the proposed 22-1 location within the 3D seismic data set. The 28-11 is a vertical well that was drilled by Delta Petroleum in 2006 without the benefit of 3D seismic. It has produced 141,000 barrels of oil equivalent (“BOE”), and represents a key piece of evidence for the presence of hydrocarbons and of a greater fracture network across the area covered by the 3D seismic. These factors give the Board a high degree of confidence in the potential of the GV 22-1 well, and it was for these reasons that the Company decided to prioritise the GV 22-1 location as Rose’s first well.

Presently capitalised at £3.51 million at the current share price of 2.45p, total investment in intangible exploration and evaluation assets was US$12.5 million at 30 June 2018.  Cash and cash equivalents at 30 June 2018 were US$2.0 million. Cantor Fitzgerald Europe have been appointed as financial adviser / joint broker to the Company and, with the updated Competent Persons Report now providing independent verification of the geological and economic strength of the Paradox project, their primary task is to assist the Company in assessing the funding options for the drilling of Rose’s first wells. Cantor Fitzgerald has initiated equity research coverage of Rose with the release of a research report on the Company. The report includes a Buy recommendation, with a target share price of 9.0p based on the assumptions set out in the report.  Cantor Fitzgerald’s risked net asset valuation for Rose is 125p per share.

Subsequent to the above, Rose successfully participated in the December 2018 Bureau of Land Management Utah lease sale, which resulted in the Company acquiring a 75% working interest in an additional 1,920 gross acres (1,260 net acres) immediately adjoining its GVU acreage.  The majority of the new acreage, 1,600 of the total 1,920 gross acres, is covered by the existing 3D seismic data that the Company acquired in late 2017.  Utilising a similar methodology to that of the Gaffney Cline & Associates Competent Person’s Report (dated 30 April 2018), Rose estimates that the new acreage has potential 2C Contingent Resources (net to Rose) of 1.2mmboe (million barrels of oil equivalent), within Clastic 21. This is in addition to the existing Clastic 21, GVU net 2C Contingent Resources estimate of 12.33 mmboe which was valued at a pre-tax NPV10 of US$122.4m, by GCA in 2018.