Reabold Resources : Exane BNP Research Note - 25th March 2022

REABOLD RESOURCES

PRICE 0.40p

VALUATION (UPSIDE) 0.71p (+78%)  0.86p (+115%)

VALUATION RANGE EPS 21e EPS 22e

 97%  83%

Monetising assets in an improved market

25 MARCH 2022 at 06:02*

Ukraine invasion has fundamentally changed the outlook for European energy

Thomas Martin

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The humanitarian impact of the Ukraine invasion is deeply saddening. These developments have also fundamentally changed the outlook for European energy supply and demand, with important implications for pricing and security of supply. Reabold's portfolio of undeveloped oil and gas assets has the potential to be positively impacted by these developments.

Improved market for asset monetisation; gas and oil prices likely to remain elevated Reabold's strategy is to gain access to oil & gas assets which have been starved of capital, adding value during the appraisal stage, prior to monetisation. Several assets in the portfolio are at, or near, the monetisation stage and the market for undeveloped oil and gas assets has improved dramatically. Plans to reduce Russian gas reliance are likely to see elevated price levels persist.

Domestic resources have increased strategic value

European sources of energy supply are likely to be increasingly important as reliance on Russia is reduced. Reabold's portfolio contains the undeveloped UK North Sea Victory field which is at the monetisation stage, and the UK onshore West Newton field where additional operational activity is required to demonstrate the potential of the field as described by recent third-party technical studies. These two fields account for ~90% of our gross asset value.

Increasing valuation range to 0.71-0.86p/sh

Incorporating higher oil and gas price forecasts our risked NAV based valuation range increases to 0.71-0.86p/sh from 0.36-0.47p/sh, an increase of ~90% at the mid-point. The shares offer ~75% upside at the lower end of our valuation range - which is set in-line with our core producing/development asset NAV and excludes West Newton and Romania. At the upper end of the range, set in-line with our Discovered resource NAV which includes the potential for higher recovery factors at West Newton, we see ~110% upside potential. Given the volatile picture we provide extensive sensitivity analysis in this note.

Performance(1)	1w	1m	3m	12m
Absolute(%)	(1)	16	186	(38)
Rel. Oil & Gas(%)	(4)	9	152	(49)
Rel. MSCI Small Cap(%)	(0)	11	217	(37)
Financials	12/20	12/21e	12/22e	12/23e	Valuation metrics(2)	12/20	12/21e	12/22e	12/23e
EPS, Adjusted (p)	(0.04)	(0.03)	(0.02)	(0.03)	P/E (x)	-	-	-	-
EPS, Company (p)	(0.04)	(0.03)	(0.02)	(0.03)	Net yield (%)	-	-	-	-
EPS - Refinitiv (p)	(0.04)	(0.01)	(0.01)	0.04	FCF yield (%)	(9.3)	(5.5)	(2.1)	(3.6)
Net dividend (p)	-	-	-	-	EV/Sales (x)	3.3	-	1.3	3.0
EV/EBITDA (x)	-	-	-	-
Sales (GBP)	1,035	1,231	1,832	1,291	EV/EBITA (x)	-	0.8	-	-
EBITA, Adj. (GBP)	(1,624)	(1,952)	(1,016)	(1,448)	EV/CE (x)	0.3	-	0.1	0.2
Net profit, Adj.(GBP)	(2,489)	(2,861)	(2,015)	(2,600)
ROCE (%)	(12.6)	(14.8)	(5.6)	(8.0)
Net Debt/EBITDA, Adj. (x)	-	-	-	-

(1) In listing currency, with dividend reinvested (2) Yearly average prices for FY to end-12/20,

Price (24 March 2022)

0.40p

Market cap (GBPm / EURm) Free float (GBPm / EURm) EV (GBPm / EURm)

41 / 49

41 / 49

2.5 / 3

3m avg volume (GBPm / EURm) Refinitiv / Bloomberg

0.2 / 0.2 RBDR.L / RBD LN

Country / Sub Sector

UK / Exploration & Production

All valuation metrics based on adjusted figures

Source: BNP Paribas Exane (estimates), Refinitiv (consensus) 12/21

SPONSORED RESEARCH: Exane is receiving compensation from Reabold Resources to cover and produce research on the stock.

* Date and time (London Time) on which the investment recommendation was finalised. It may differ from the date and time of broad dissemination on the website. See Appendix (on p37) for Analyst Certification, Important Disclosures and Non-US Research Analyst disclosures.

Contents

Strategic value of undeveloped energy assets significantly increased3

European energy prices likely to remain high for an extended period _____________3

We increase our price forecasts; sensitivity analysis is key _____________________3

Russia holds a significant position in global oil and gas markets _________________4

Gas market outlook - key charts _________________________________________4

Oil market outlook - key charts___________________________________________ 7

Valuation range increased ~90% at the mid-point _______________ 10

Detailed NAV breakdown ______________________________________________ 10

Examining the sensitivities to oil and gas prices_____________________________ 13

Strategy - add value to assets starved of capital _______________ 18

Monetisation: Victory, UK North Sea gas __________________________________ 18

Value-add: West Newton, UK onshore oil & gas ____________________________ 22

Monetisation: California sales process underway____________________________ 27

Value-add: Romania, onshore gas _______________________________________ 30

Financial forecasts_______________________________________ 31

Appendices - price forecasts and futures curves _______________ 34

Investment case, valuation and risks _________________________ 36

Company profile and financial highlights ______________________ 42

Strategic value of undeveloped energy assets significantly increased

European energy prices likely to remain high for an extended period

The Russian invasion of Ukraine has had a material impact on commodity markets, pushing prices significantly higher from already elevated levels. The environment is characterised by high levels of uncertainty and volatility is likely to remain high.

This commodity cycle is not just about oil; Europe has stated its intent to significantly reduce its reliance on Russian gas, which will take time. This indicates robust competition for available gas supplies, suggesting gas prices are likely to remain high in a historical context.

Some governments have begun to sanction Russian oil & gas and companies have increasingly moved to 'self-sanction' (particularly in oil). Russia has also threatened to shut-off gas supplies via the Nord Stream 1 pipeline in retaliation to sanctions.

In a scenario whereby peace talks result in a de-escalation we believe we will not return to the status quo. We do not believe Europe's intention to reduce reliance upon Russia will reverse when hostilities cease.

We increase our price forecasts; sensitivity analysis is key

We revise our forecasts to reflect changes to BNPPE's oil and gas price outlook. We readily admit that with volatility almost certain to remain extreme, our absolute forecasts are likely to be proven wrong given the cross commodity, political and economic uncertainties. We do, however, have conviction that oil and particularly gas prices will remain elevated for an extended period, and that reducing European reliance on Russian energy supplies will take time and cause pain. Energy demand needs to fall and high prices will be the tool by which this is achieved.

Our base case forecasts assume Russian gas exports will not be sanctioned and that Russia will continue to supply European gas markets; consequently we forecast European gas prices will retrace as we move towards warmer spring weather, assuming continued Russian supplies.

We expect gas inventories to rebuild during 2022, aided partially be initiatives to reduce demand and source alternative supplies. The REPowerEU initiative calls for legislation to ensure EU gas storage facilities are filled to at least 90% of capacity by 1 October each year, which would provide a buffer during the winter heating season.

Although there is elevated uncertainty, we can begin to draw some conclusions:

• - European gas and power prices are likely to remain elevated

• - Increased importance will be placed on security of energy supply in Europe

• - There is strategic value in domestic energy reserves and supplies

• - The energy transition in Europe is likely to be accelerated

• - Investment in European energy infrastructure, including generation and storage, is likely to ramp-up even more rapidly to reduce reliance upon Russia

Reabold's portfolio of undeveloped oil and gas assets has the potential to be positively impacted by these trends.

In this note we update our commodity price forecasts and, in the context of heightened uncertainty, analyse the sensitivity of our valuations to a range of commodity price outlooks. We summarise our oil and gas price forecasts in the table below; in the appendix we show these forecasts in chart form compared to current futures prices.

Figure 1: Summary of oil and gas price forecasts

2020	2021	2022	2023	2024	2025	2026	2027	2028	2029	2030
Brent (US$/bbl)	42.3	70.5	110.2	85.0	70.0	70.0	70.0	70.0	70.0	70.0	70.0
NBP gas (p/th)	25.0	117.3	221.8	185.0	111.0	125.5	98.9	72.2	45.6	45.6	45.6

Source: BNP Paribas Exane estimates

Russia holds a significant position in global oil and gas markets

Russia is a major producer of oil and gas, with a ~10% market share in crude oil and a ~18% share of global gas markets.

Figure 2: Russia produces 10% of the 100mb/d global oil market and 18% of a 3800bcm global gas market

Russia is a major producers and exporter of oil & gas

Russia represents 10% global oil supply (c10mb/d) Russia represents 18% of global gas supply (8% exported)

Russian oil Domestic, 3.6, 4%

Russian oil exports, 6.5, 6%

Exports pipeline,238.1, 7%

Domestic, 359.5,10%

Russia, 92.9, 90%

Source: BNP Paribas Exane estimates

Gas market outlook - key charts

Although the impact of recent events is being felt in both oil and gas markets, we believe the impact is likely to be most severe for gas. The charts below provide an overview of our outlook for European and global gas markets.

The below left chart shows how declining Russian gas volumes to Europe, even prior to the Ukrainian invasion, were being replaced with LNG. The chart to the right shows the proportion of gas consumed in European power generation is relatively unchanged over this period, despite reduced gas supply.

Figure 3: LNG compensates for reduced Russia supporting gas in a power mix that's little changed.

As Russian imports have faltered LNG has played an increased role in import supply. Supporting power

European imports pipe and LNG (%)

Europe's estimated power mix (%)

100%

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%Russia

North Africa

Norway

UK/Netherlands

LNG

Gas

DecHydro

JanFebMar Apr

CoalOffshore windMay JunOnshore windJulSolarAugSepBiomassOct NovNuclear

Source: BNP Paribas Exane estimates

LNG capacity growth is at the low point of the capital cycle

Plans (or perhaps ambitions may be a better word at this stage) to reduce European demand for Russian gas incorporate increased LNG purchases to fill a significant proportion of the shortfall. Unfortunately the below left chart shows that LNG liquefaction capacity growth is currently at the low point in the cycle, and Russian projects account for a significant proportion of future planned growth. These Russian projects look likely to be delayed.

The below right chart shows a significant shortfall in global LNG supply vs forecast demand growth, i.e. high LNG prices will be necessary to destroy some demand to match the available supply.

Simply put, planned liquefaction capacity additions are towards the low-end of the historic range in the near-term, and competition for LNG cargoes looks likely to remain high. Unfortunately Europe tends to buy LNG on the spot market, with only ~20% of historic volumes secured through long-term contracts, hence Europe is exposed to near-term strength in LNG prices.

Figure 4: LNG is now at the low point of the capital cycle with asset utilisation also faltering on supply

As the build cycle rolls the asset base is maturing and fields also appear to be seeing greater inefficiency

Capacity additions by region 2016-26E

Estimated capacity utilisation in liquefaction

US

Australia

Russia

Other

40.0

35.0

30.0

Capacity growth (MTPA)

25.0

20.0

15.0

10.0

5.0

0.0

2025

2016

2017

2018

2019

2020

2021

2022

2023

2024

2026

Source: BNP Paribas Exane estimates. Note estimates for future Russian capacity additions are included on the above chart, however, these are likely to be delayed.

We forecast European gas demand needs to fall ~10%, even if Russia meets its contractual supply commitments

If Russia continues to supply Europe in-line with its contractual commitments (which sit ~28bcm below 2021 actual supply levels on our estimates) and Europe seeks to rebuild inventories to 90% of available capacity (which requires a ~20bcm injection on our estimates) we estimate broader European demand (including Turkey and the UK) would need to fall >10% this year (~58bcm).