(IDEA) Rubellite Energy
Note: Dollar references are to Canadian dollars unless otherwise specified.
Rubellite Energy (RBY.CA) (OTCPK:RUBLF) is a pure-play Canadian E&P located in the Clearwater play in central Alberta. It produces approximately 3,850 barrels per day (bpd) of heavy oil. The Clearwater has become one of the most economic oil plays in North America, which begs the question of whether RBY shares will be an attractive long-term investment. Our analysis indicates it’s too early in the company’s life cycle to consider the shares, so we’re taking a wait-and-see posture.
Rapid Growth from the Start
Perpetual began to acquire Clearwater acreage when the play began to emerge as a high-return play in 2018. Since then, the company has grown its footprint through more than 50 asset acquisitions.
On July 15, 2021, the public RBY entity was formed as a vehicle to fund the growth of Perpetual’s production and net asset value. Perpetual sold all its Clearwater assets to the RBY public entity for $65 million of cash, which RBY funded through a $59 million promissory note—as well as approximately 8.9 million of RBY common shares and warrants to purchase RBY shares at $3.00 per share exercisable for five years.
Since RBY came public in 2021, it has grown its production from 350 bpd to 3,855 bpd as of the end of October.
Source: Rubellite Energy November Corporate Presentation, Nov. 9, 2023.
RBY has kept a close relationship with Perpetual. Perpetual insiders own 37.4% of RBY’s common stock, led by Perpetual CEO Susan Riddell Rose. RBY is managed exclusively by Perpetual executives, who split their responsibilities between both companies.
Dedicated to the Clearwater
RBY aims to grow exclusively in the Clearwater. As with all E&P growth stories, it will require increasing scale to reduce its unit costs. If it can succeed in doing so, it will generate distributable free cash flow for its shareholders or be sold to a strategic buyer. RBY’s management plans to pursue M&A to grow in the play.
Clearwater oil production generates some of the highest operating netbacks per barrel among all North American conventional oil plays. Operating netbacks represent the cash flow left over after subtracting cash operating costs from oil and gas production sales, all on a per-barrel basis. The play’s high netbacks are attributable to its high oil cut and the abundance of tightly spaced multilateral wells that can be drilled and completed quickly. These wells generate large amounts of cash relative to their development costs, which, in turn, allows companies to pay back their development costs at a rapid rate and generate high returns on invested capital over their lives.
The chart below shows that the best Clearwater wells pay back their costs more rapidly than any other play in North America.
Source: Tamarack Valley October 2023 Corporate Presentation.