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Re: RIA – Rialto Energy

Thought that some might like to read some extracts from a broker report. I have allowed time for it to be acted upon by followers before posting. I found this on another site. It really just summarises some of what I have been saying for a while:

Rialto Energy Ltd

(RIA $0.34) Buy

Analyst: Jon Bishop

Date: 27 January 2012

Capital Raising

Price Target: $0.86/sh

Investment Case

We remain highly enamoured by the potential of RIA’s Cote d’Ivoire asset. The recent conditional investment of US$20m by the World Bank (IFC) reinforces our positive view. Furthermore, alignment in the interests of the IFC and the Cote d’Ivoire Government provides further surety for development once FID is met later this year. As well as converting 59mmbboe into reserves, significant value can be added with the forthcoming drill campaign which is also targeting material exploration upside. We value RIA at $620m or $0.86/sh on the assumed dilution.

Key Points

Raising

RIA intends to raise up to $68m by way of a two tranche placement ($60m) and SPP (up to $8m). Post completion of the raising, RIA will have up to $119m in cash (inclusive of the IFC $20m placement). Anticipated allocation of the cash reserves will be:

– Forthcoming CI-202 Block drilling campaign comprising 2x appraisal/exploration wells and 1x exploration well ($73m)

– Allocation for the Accra Block, offshore Ghana ($15m)

– 3D seismic acquisition costs over the CI-202 Block ($11m)

– Long-lead items towards FEED for CI-202 Block ($4m)

– General working capital

Forthcoming Drilling Campaign

The upcoming drilling campaign is expected to commence mid-February. The programme will comprise:

Appraisal

– the Gazelle P-3 and P-4 appraisal wells targeting 59mmboe 2C Resources

– Success in the appraisal campaign will ensure momentum towards FID; slated for mid-2012 on this basis.

– We value the proposed Gazelle Hub Phase I development comprising 8kbopd (with capacity of 15kbopd) and 100mmscf/d at $412m (or $0.57/sh post issue).

Exploration

– Deepening the P-3 well to test the 15mmbbls + 750Bcf Condor prospect

– At $5/bbl and $0.10/mcf in-ground, a discovery would be worth $128m (~$0.18/sh fully diluted) net to RIA (at 85% interest).

– The Chouette exploration well targeting 84mmbbls and 42Bcf of recoverable resource

– A success case would warrant a valuation of around $361m at $5/bbl in-ground or $0.50/sh) net to RIA.

Our valuation for RIA stands at $0.86/sh (vs $0.96/sh as a function of the dilution).

Valuation breakdown: $0.57/sh for the proposed Gazelle Hub development; $0.14/sh cash (net of IFC); $0.03/sh unpaid capital (to reflect IFC placement) and $0.14/sh for exploration.

Our total $620m valuation compares favourably with an EV of $99m post issue (assuming a cash and unpaid capital position of $119m inclusive of IFC placement) at $0.30/sh.

Analysis

The raising ensures that RIA has sufficient capital to fund its upcoming 3 well drilling campaign as well as the recently acquired 3D seismic over the CI-202 Block.

We remain attracted to the potential of the CI-202 Block to yield a number of meaningful oil and gas discoveries and new developments in time.

Govt ratification of the FDP and attaching Gas Sales Agreement MOU provides development momentum for RIA’s asset. The recent conditional placement to the IFC (World Bank) further endorses the CI-202 Block potential.

IFC – Cornestone Placement

IFC, the private sector lending arm of the World Bank Group, is looking to invest US$20m via a private placement, subject to IFC Board approval post a 60 days public disclosure period and RIA shareholder approval. An IFC investment is of great significance as it:

– confirms the attractive technical and commercial attributes of RIA’s asset following comprehensive technical due diligence

– introduces a high quality cornerstone investor that is aligned with the interests of both the Cote d’Ivoire Government and RIA, thus ensuring smooth future development of RIA’s gas-oil dev. hub

– flags the IFC’s involvement in key strategic energy projects in the region – specifically in Cote d’Ivoire

– allows the IFC to underpin its own ambitions pertaining to energy supply within country and the region

– potentially provides substantial funding in the short term towards the imminent appraisal/exploration campaign

– potentially provides an obvious and reliable source for future development debt capital

As part of the investment, the IFC is to receive 16.7m warrants at $0.50 exercisable within 4yrs.

Forthcoming Drilling Campaign

The 3-well drilling campaign, due to commence in Feb, comprises appraisal of two completed and suspended oil development wells at the Gazelle Hub by the P-3 and P-4 wells.

The Gazelle P-3 and P-4 appraisal wells seek to covert 59mmboe (circa 14mmbbls oil, 266Bcf gas) 2C Resources into reserves.

The main focus of the appraisal drilling is to better delineate the Gazelle Field.

The wells have been designed to intercept key contacts (ie oil:water, gas:eek:il/gas water contacts) to define field volumes.

Drill Stem Tests (DSTs) will be undertaken to recover hydrocarbon samples. The constrained flow tests will assist in substantiating whether commercial flow rates (as seen in the discovery wells) can be replicated. However, the pressure data that will be gathered from the DSTs is of greater importance.

The DST information is critical in terms of finalizing production designs for the development.

A likely extension leg to the P-3 well will test the deeper Condor exploration gas-condensate target (P50 – 15mmbbls and 758Bcf potential).

Identification of commercial quantities of moveable hydrocarbons at the Condor exploration leg of the P-3 well. A success case will have a very positive bearing upon the overall development economics.

A third well will target the high impact, oil prone, Chouette (84mmbbls P50 potential) exploration prospect at the Hippo Cluster.

Chouette lies between the Bubale (Gas-oil), Hippo (gas) and Impala (oil) accumulations discovered by the Hippo, IVCO-22 and IVCO-18 wells.

Phase II – Drilling Campaign

Conceptually, a second drilling phase (from the Dec H’12) would likely involve tying-in the Gazelle wells and appraising/developing the Hippo hub (>4 wells) which comprises a series of feeder canyons analogous to the 1Bnbbl Jubilee field.

Acquisition of 3D seismic in CI-202 is complete and should provide more detail on the Gazelle hub as well as exploration features outboard.

Exploration drilling would likely focus on the Faucon (154mmbbls and 77Bcf – P50 potential) outboard area.

Broader Potential of the CI-202 Block

The key attraction of RIA’s Cote d’Ivoire remains its prospectivity. The CI-202 Block lies within a proven petroleum system with a number of play types.

RIA has five undeveloped oil & gas fields on its CI-202 block providing portfolio depth and development flexibility.

Of the wells drilled, 11 produced commercial flow rates as high as 3.7kbopd and 40mmscf/d.

The mean gross contingent oil & gas volumes for CI-202 are currently 50mmbbls and 396Bcf respectively based on the 13 wells drilled on the block so far.

Comprehensive seismic over the block has identified a high impact inventory of large, game changing, oil and gas prospects that can easily be development via tie-back or on a standalone basis where size permits.

Current exploration portfolio of 14 identified prospects with total mean Prospective Resources of 511 mmbbls & ~1.8 Tcf.

Interpretation of new 3D over the entire block will define drill ready candidates for the Phase II campaign and test the outboard exploration potential.

Gazelle Hub – Phase I Development

The Government of Cote d’Ivoire has recently approved the Field Development Plan (“FDP”) for the Gazelle Field located in CI-202.

Consequent to the approval of the FDP, RIA will be formally granted a 25yr Exclusive Exploitation Area (58.5 km²) over the Gazelle Field.

An attaching Memorandum of Understanding (“MOU”) provides the framework for a binding take or pay Gas Sales Agreement (“GSA”) to be executed prior to Final Investment Decision (“FID”) expected mid-2012.

Targetted commencement of production at the Gazelle Hub is mid-FY’14 @ initial oil rates of 8000bopd and gas rates up to 100mmscfd for at least 7yrs.

Our forecasts assume one fixed platform (with compression and gas and liquids handling facilities) with oil & gas being piped onshore. Spare Oil production capacity of at least 15kbopd and gas of 100 mmcf/day is assumed.

We assume 20 mmbbl of oil and 300Bcf gas to be produced in the initial 7yr development phase.

We will revise our valuation and forecasts to include gas once more details on the potential gas development emerge with finalization of FID.

We assume US$400m of capex for the initial development phase would be likely funded largely via debt. The potential incorporation of IFC into the development provides an obvious and reliable source for project finance.

Geological Risks:

As the two appraisal wells are designed to test existing discoveries, barring mechanical failure, we are confident that these wells will intersect hydrocarbon bearing reservoir.

The risks therefore relate to whether the reservoir thicknesses are supportive for development and consistent with existing volumetric analysis.

Additionally whether the reservoir quality is of sufficient quality (in terms of porosity and permeability) and of a relatively uniform nature.

And finally, whether the pressure regime is consistent across the net to gross or whether the field is compartmentalized (thus requiring a potentially more complicated development design).

Exploration drilling is subject to the normal geological risks.