Rubellite Energy - for the brave

Rapid profitable growth in the Clearwater play

Rubellite (RBY.TO) has some of the best economics in the WCSB, ranking ahead of its peers in the prolific Clearwater play in terms of return on investment and fast payout for new wells.

This new company is in the early stages of exploitation of its substantial acreage in Marten Hills and Nipisi but plans to grow rapidly primarily with equity capital and internally generated cash flows. Management says it expects to produce 1,600 to 1,800 Boe/day in the third quarter of 2022 with costs of CAD$17 to $20 a barrel and a royalty rate of 11% to 12%. Realized prices after “hedging” losses should be about CAD$80 a barrel so Q3 economics can be roughly estimated:

Revenue net of hedging 1,600 x $80 x 91 days = ~$12 million
Operating costs 1,600 x $20 x 91 days = ~$3 million
Royalties of 12% = $1.5 million
G&A costs (at run rate) = <$1 million
Cash flow for Q3 somewhere around CAD$6.5 million or an annual rate of ~CAD$26 million.

Total capital expenditures for 2022 are projected at CAD$56 million, pretty well exhausting cash on hand and operating cash flow but building output for a strong 2023. Capital efficiencies in Rubellite’s Clearwater acreage range from CAD$12,000 per boe/day at Ukalta to CAD$17,100 per boe/day at Marten Hills according to the company’s latest presentation, so the capital program for this year should see end-of-year production rate for 2022 approaching 4,000 boe/day. If that holds for 2023, cash generation of CAD$55 to $60 million is a reasonable guess for 2023 which should more than fund a CAD$50 million 2023 capital program (my guess for the size of the capital program) which using the same capital efficiences adjusted for 10% inflation should see Rubellite end 2023 with output somewhere around 7,000 Boe/day setting the table for 2024 cash flow north of CAD$100 million (more if the company stops “hedging” and commodity prices remain firm).

I can see market capitalization at 5x EBITDA of CAD$500 million in the 2024 timeframe and with about 60 million shares outstanding (fully-diluted) the share price has the potential to trade in the CAD$8 range. I assign a 5 x multiple owing to the potential for sustained rapid growth tempered by the risks of lower commodity prices if the expected recession is of longer than a few months duration.

I like the company, admire its management (Susan Ridell-Rose and Ryan Shay), and think it is a businessman’s risk at the current price of CAD$3 per share more or less.

I own 25,000 shares.