Rubellite Energy Seems Deeply Undervalued By The Market (RUBLF)

Rubellite Energy (TSX:RBY:CA) (OTCPK:RUBLF) was created as a spin-off of assets by Perpetual Energy (OTCPK:PMGYF, PMT:CA) and shares management with Perpetual. It is a pure-play on the Clearwater oil reservoir in the Western Canadian Sedimentary Basin. In two short years, it has increased production from a few hundred barrels of oil a day to about 3,200 Barrels a day this year and in my opinion a likely run rate of almost 5,000 barrels a day by year end 2024.

I wrote about Rubellite in early 2022 projecting the company would reach a run rate of 4,000 boe/day by 2023. That has happened with the company recently releasing preliminary Q4 production in excess of 4,000 boe/day.

In October 2023, the company added 800 Barrels a day of production and significantly increased its Clearwater acreage with a CAD$34 million acquisition. The acquisition adds to fast production growth at the drill bit where the company keeps one rig fully occupied throughout the 2024 drilling season spudding its first 2024 well in January.

Clearwater is considered by many to be the most prolific and most profitable heavy oil play in Canada, with key operators in the area including Tamarack Valley (OTCPK:TNEYF, TVE:CA), Baytex Energy (BTE), Cardinal Energy (OTCPK:CRLFF, CJ:CA), Canadian Natural Resources (CNQ) and a handful of private companies. Investment in junior exploration and development companies is fraught with risk and this investment is appropriate only for those willing to take the risk and expose themselves to the potential loss of their investment.

I have built a financial model of Rubellite based on the company’s publicly disclosed economics and arrived at a value based on a multiple of 5 times EBITDA adjusted for debt. The key inputs are capital efficiency, capital budget, decline rates, royalty rates, transportation costs, operating costs, and the company’s disclosed hedges, selling general & administrative expenses, all from Rubellite’s public filings. Rubellite’s capital efficiency adds one flowing barrel for about $30,000 and its $60 million capital budget should add about 2,000 boe/day in each of 2024 and 2025, with that output declining in line with the 38% to 40% decline rate I have estimated based on the results disclosed so far by the company. Rubellite shares trade at about CAD$2.25 per share currently but in my opinion have a value of more than CAD$7.00 based on projected 2024 results with that value more likely to grow than not. The market price of this thinly traded stock tends to follow rather than lead results, owing to wise investor caution over a new company with little history. Here is my model.

Rubellite is managed by Susan Riddell-Rose, daughter of legendary oilman the late Clayton Riddell and wife of Mike Rose, CEO of Tourmaline Oil (OTCPK:TRMLF, TOU:CA). Her brother Jim is CEO of Paramount Resources (OTCPK:PRMRF, POU:CA). I believe she is not only competent but also has access to family resources in terms of advice and counsel from established leaders of highly successful oil & gas firms.

The key risks to my model and to the company are in common – a collapse in heavy oil prices, declining success in drilling, higher royalty rates, inflation in operating costs (which should decline presently with increasing economies of scale in drilling equipment, tie-in and transportation costs and investments in infrastructure included in the capital budget. I see no reasons to change my model from the current version which incorporates all of the public data the company has released and the environment has not changed materially since the model was updated. With WTI at about US$72 a barrel, Western Canadian Select (WCS) prices (which is the benchmark for heavy oil) should come in about CDN$80 a barrel this year net to Rubellite as the Trans Mountain Pipeline comes onstream narrowing the WCS discount to WTI and the Canadian dollar continues to slip against the U.S. currency owing to weaker GDP growth in Canada than South of the border. That is a key assumption, since a $10 per barrel decline in the price realized by the company in 2024 translates into about $16 million less revenue. Since the company has hedged about half of 2024 output at a price higher than $80 a barrel, the risks seem manageable with an additional $8 million added to the treasury from the sale of 1.5% Gross Overriding Royalty on certain of its lands. I am projecting year end debt at $37 million compared to the company’s disclosure that debt was $32 million at month end November.

I like the risk-reward profile and own 90,000 shares of the company.

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