Petro Matad – The Pheonix Is Rising
Update: The Operational Update on 12th April 2017 has had a significant impact on the material presented below. Please ensure you read the operational update in tandem with this post.
Petro Matad has a Fully funded 4 well program for 2018 targeting 390 million barrels from exploration on blocks IV & V and 12-25 million barrels from exploration / appraisal on block XX. Directors and major holder Petrovis took 31.7% of the share issue, a major show of faith. The company has a portfolio of prospects and leads totaling 2.2 billion barrels of recoverable oil with upside of 5-7 billion barrels recoverable.
The 12 month high in February 2017 was 38p at a time when the company lacked the funds necessary to complete a drill campaign. Speculation of a JV and excitement around a drill campaign certainly played their role in this high. The market capitalisation at 38p was £110m.
If we take the 12 month high of 38p and adjust for dilution it becomes 21p today
The company is now in a significantly stronger position than it was at the 12 month high
The board of directors has been revitalised and realigned with shareholders. Ex CEO Ridvan Karpuz left the company along with Ms Amarzul Tuul. Mike Buck joined the board along with Tim Bushell and Nick Cousyn who bring a wealth of industry experience, industry contacts and exploration prowess with Buck having discovered brought into production over a billion barrels and in his career.
Ridvan Karpuz may have a lot to answer for in shareholders eyes due to the
$42 million convertible facility with Bergen that was signed on the 8th May 2017 and whilst providing cash, it also provided a significant downward pressure on the share price.
The refreshed board of directors have made extremely good decisions and put the company in to a position of strength by:
- Renegotiating the terms of the rig contract for block IV & V to secure significantly better terms for the company
- Cancelling the Bergen facility
- Acquisition of technical data progressed with Block V 3D seismic completion, 3D processing in progress and 2D seismic acquisition for block IV underway
- Raising $16m to fully fund a 4 well drill program for 2018 and refocusing away from the requirement of a farmout / JV to proceed with drilling
Well #1. Wild Horse. Block IV
- Targeting 290 million barrels recoverable (mid case)
- Additional prospects of 750 million barrels rec. (900 million rec. high case)
- Internal estimates give 20% chance of success
- Due to analogous basin geology across the border in China there is a higher than frontier chance of success for frontier levels of potential
- Notable Chinese productive basins include: Junggar Basin 10 Billion barrels recoverable, Songliao Basin 20 Billion barrels recoverable and Bohai-S. North China Basin with 40 Billion barrels recoverable.
- Rig mobilisation end of Q1
- Spud target for June
- Rig booked for a fixed fee and not incurring standing charges
- Well defined 4-way dip structure and amplitude anomalies that are indicative of hydrocarbons. CEO Mike Buck comments that it is “A must drill well”
- Endorsed by Wood Mackenzie by their inclusion of Wild Horse on their “one to watch wells in 2018” placing Petro Matad on a list alongside super majors like ENI and Repsol
Well #2. Falcon. Block V
- Targeting 100 million barrels recoverable (mid case)
- Additional prospects of 180 million barrels recoverable within 10km – (up to 400 recoverable high case)
- Internal estimates give 25% chance of success
- Same analog to Chinese basins applies
- Working petroleum system in place, proven by drill intercept of 200m of sandstone with petroleum shows
- Petroleum source rock so rich it catches fire
- Using the same rig as Wild Horse and will be moved immediately after completion, the move expected to take approximately 2 weeks
- Spud anticipated Q3, August
- If Wild Horse does not meet its anticipated goals then Falcon gives investors a back stop in the share price as investors may use any opportunity presented to take positions ahead of this next basin opener drill.
Wells #3 & #4. Block XX
- Targeting 15-25 million barrels
- 50-75% chance of success
- Very high chance of success as there have been discoveries in the adjacent block
- Appraisal level risk
- Success case for 15 million barrels gives an indicated NPV10 of $80m which backs the market cap at the 11.05p level.
- Success on Block XX provides a high probability safety net to exposure taken in the earlier high impact wells
- Likely minimum economic size is 3m barrels
- High chance of success of becoming a self funding company
- Early revenue by trucking to Chinese
- Spud indications from the company are that this happens after Falcon. However the company suggest that if rig contact comes in early then the board would be happy to run concurrent drills on Block V and Block XX
BG group had previously farmed in but after BG was acquired by Shell the decision was taken to withdraw as part of their rationalisation program against a backdrop of a weak oil market. It’s worth noting that BG farmed in when much less technical data (2D, 3D) was available.
Feedback from existing and new potential JV partners can be read in the Operational Update and Board Change RNS on 19th September 2017 :
“Funding / Farmout
The farmout process continues and a number of companies remain in active dialogue with management. These potential partners appear to be more willing to fund a strategy where additional seismic is acquired before a drilling campaign is undertaken. Several potential farminees have expressed a clear preference to de-risk certain prospects in the Tugrug basin using 3D seismic and better defining a number of stratigraphic ‘leads’ that have so far only been identified on 2D seismic data. They may also be better positioned to farm-in once their 2018 exploration budgets have been established, which could occur as early 4Q 2017. The Company remains optimistic with regards to bringing in a farm-in partner, as without exception, every company that has reviewed the opportunity has responded with very enthusiastic comments regarding the hydrocarbon potential of the licences.“
It’s worth noting that 3D for block V has been completed, pending processing and 2D for block IV is due for completion around the end of February.
Add to this that the risk for a potential JV partner has been significantly reduced by funds raised recently where some big names gave their support such as Miton and Ballie Gifford alongside Petrovis and Directors. The farm-in opportunity appears to have become much more compelling.
The feedback from parties in the data room has always been that the rocks are much loved but the challenge for companies has been entrance into a new country
Mike Buck, CEO, commented on the JV to say:
“The idea of farmout has not gone away”
“we are open to the idea of a farm in partner, to expand the work program to target more of the prospects in the portfolio”
Further comments indicated that because the company is fully funded and can go it alone that a JV is a nice to have and so Petro Matad are able to
“Negotiate a deal from a position of strength” after “rejuvenating the process with some of the new technical work we have done”.
Mongolia’s Success is Linked to Petro Matad Success
The Mongolian government has stated its intention to be energy independent due to the risk of its increasing dependence on Russia and China for fuel and energy. Mongolia imports approximately 90% of its petroleum from Russia.
This link in success is further highlighted in the terms of the Petroleum Sharing Contract (PSC)
- Duration: Exploration term 8+2+2 years in Blocks IV and V. 5+2+2+5 years in Block XX.
Enough time to rationalise the 10 billion barrel recoverable estimates
- Exploitation period 20 + 5 + 5 years
Enough time to capitalise on a potentially globally significant series of new oil field discoveries
- Royalty: Blocks IV and V 8%. Block XX 5%
Low cost in comparison to other jurisdictions
- Corporate tax: 0%
Speaks for itself, designed to encourage foreign investment
- Cost recovery mechanism: Exploration, development and operations costs recoverable against oil production with annual cap of 40% of total gross revenue. The remainder is carried over. Transportation costs are recoverable
This really needs shouting about!! Costs of Exploration, Development, Operations and Transport can be recovered in the success case. The implication for this is that on any success, when coming to arrange finance, this puts the company in a very strong position as it can demonstrate it can repay debt out of Gross revenue rather than profits. 88e had a similar mechanism for partial exploration cost recovery.. This is something quite special
- Contractor Profit oil split: Blocks IV/V 50% to 57%. Block XX 45% to 60%
This highlights just how aligned the Mongolian government is with the success case. Implications here for removal of red tape to enable a significant cash flow from production.
India Pledges $1 Billion for Oil Infrastructure
A visit from Indian Prime minister Narendra Modi in 2015 saw the pledge of a $1 billion infrastructure loan to he Mongolian government. $700 million was earmarked for the development of an oil refinery with capacity to process 1.5 million metric tons of oil (11.5 million barrels) per year. A further $264 million was earmarked for building oil pipelines.
The $1 billion Infrastructure loan from India is on a 20 year term with 5 year exemption from principal repayment. Which gives the likes of Petro Matad time to make discoveries and bring them onto production in time for loan principal repayments.
Recent developments in country show that the refinery plan has been approved and that construction will begin in Q2.
In my view this is the last piece in the puzzle for a farm in partner. India moving into the Mongolia is a massive derisking element to any potential JV partner looking to enter the country. The rocks are accepted and loved for their petroleum potential, now a sovereign nation has concluded through its due diligence that Mongolia is going to have the production capacity to feed 11.5 million barrels of Oil into a refinery and require pipelines to carry oil in country.
A Beautiful Setup
The structure of the drill campaign is a thing of beauty. Two frontier drills with better than frontier chances of success individually but combined we’re getting closer to odds on.
Calculations suggest that given:
20% Wild Horse 290 million barrel success..
25% Falcon 100 million barrel success..
Then the probabilities of 2 events = a 40% chance of either 290 million barrels or 100 million barrels coming in or both.
This only takes into account the first 2 drills, not including 50-75% chance of success block XX with 15-25 million barrels Recoverable target.
If we add Block XX as an additional event at a 75% success rate calculations show that there is an 85% chance of striking Oil at some point during the drill campaign.
A 15 million barrel discovery at Block XX gives us an $80m NPV10 based on company estimates which translates to ~£57 million which is ~ equal to the current market capitalisation of the company.
Success elsewhere on Block IV or V would be truly transformational not only for Petro Matad but it would also propel Mongolia onto the Global O&G scene.
Given that a 290 million barrel success at Wild Horse in Q2 may result in an NPV of well over $2 billion (based on extrapolation of company estimate of a 150m discovery yielding $1.27 billion) the current market cap of £57.3 million may look attractive to some.
Petro Matad offers exposure to one of the, if not the most exciting oil plays on AIM this year and offers an excellent opportunity to gain exposure to a low cost but high impact drill program. The unique set up of the order of the drills starting with the two back to back exploration wells and ending with two high chance of success appraisal wells is likely to attract interest at every stage ensuring that news flow and momentum will follow this story throughout 2018.
The wildcard is a JV landing before the first drill.. Certainly I’m sure there would be a scramble to sign on the dotted line after a success at Wild Horse but on what terms? For me, I see all the pieces falling into place and the readout from 3D seismic will be the clincher.
Place your bets
Written By David Marshall
Disclaimer: The author holds one or more investments / positions in one or more of the companies / commodities mentioned and therefore this note cannot be viewed as independent research. This note does not constitute investment advice or a recommendation to buy or sell or otherwise engage in any related activity / action with regard to any company or commodity mentioned or any other entity. All information is provided for entertainment purposes only and may be incorrect or outdated.