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Disappointing US reserves report sees prospects narrow at Mosman Oil & Gas (MSMN)

Mosman Oil and Gas (LSE:MSMN) rose slightly today after releasing a reserves report for its 27pc-owned project in Oklahoma. However, with the Stack Pay project offering just 336,000 barrels of oil equivalent (“BOE”) of proved and probable reserves, with only 64,000 BOE attributable to Mosman, this business is looks increasingly like a sub-scale operator. It is hard to see how the company will ever deliver a return for shareholders.

Mosman’s stake in Stack, which it can increase to 33pc, has an NPV10 of just $1.23m. Chairman John W Barr said: ‘Arkoma continues to meet the stated strategy of delivering operating cash flow and having development upside. It is very encouraging to have Proved Reserves at this early stage of development. We have now funded the agreed operational upgrades and, in the coming months, will evaluate operational data following the installation and operation of Electric Submersible Pumps (“ESPs”) planned for May 2018.’

Following the news, Mosman’s share price rose by 3.6pc, or 0.02p, to 0.7p, with the market presumably being buoyed by the substantial contingent resources (estimated at 2.4million barrels) despite the fact there is no guarantee these exist or could even be extracted. When put alongside Mosman’s recent financial performance, there is an argument that today’s news raises serious questions about the business’s prospects.

Mosman owns interests in three onshore producing projects in the USA – Arkoma, the Welch Permian Basin Project, and the Strawn project in Texas. It also holds two granted permits and one application in the Amadeus Basin in Central Australia and around 7.6 million shares in the TSX-V listed GEM International Resources.  GEM’s shares remain suspended due to the previous board failing to complete the required financial reporting.

According to Mosman’s half-year report released last month, in the six months ended 31 December, it generated revenues of just A$321,348 and gross profit of A$156,522, typical for an exploration company of its type. However, the firm also burned through c.A$1.8m cash over the period, split between A$474,161 on operating activities and A$1,295,400 on investing activities. It raised A$1,013,375 to mitigate this, but all-in-all it started the period with cash of A$1,666,139 and ended it with A$830,685. Comparably, it ended the six months ended 31 December 2016 with a cash balance of A$2,254,540.

So where is the money going?

The simple answer is boardroom pay.

In the financial year to 30 June 2017, the company paid Barr $287,500 and technical director Andy Carroll $290,000. Total ‘key management pay’ came in at c.$708,548 – a ludicrous amount given the limited scale of Mosman’s assets.

Show me the money

Since its last results, Mosman has raised £500,000 (A$920,680), claiming this would used to fund its evaluation of new acquisition opportunities and for general working capital purposes. In reality, given the cash burn, this is classic RNS double speak and what the company really meant was the additional funds would pay for another 12 months of Barr and Carroll’s services.

Since Mosman so obviously lack working capital, where exactly it is going to find the money to get the oil announced today out of the ground?

If not for the recent raise, the organisation would be running out of cash. In the three months ended 31 March 2018, revenues came in at around A$215,000, so it certainly won’t be from production.

Meanwhile, the firm’s latest half yearly results (to 31 December 2017) put its total current assets at A$1,558,382 and total current liabilities at A$702,170, giving it net current assets of $856,212. With Mosman currently valued at £2.1m (A$3.87m), the market suggests the company has an enterprise value of just over A$3million. It is very hard to argue that it is undervalued. Indeed, alongside today’s negligible attributable 2P reserves at Stack, this year has seen Mosman report that it was unable to sustain flow rates at Strawn in Texas and report an NPV10 of just £2m for its Welch project. While the company does have its stakes in the suspended investment company GEM and the Amadeus Basin in Australia, where it claims it will begin acquiring 2D seismic in 2019, the cold hard fact is that this business does not have enough working capital. What money it does have will simply be spent on the wildly excessive pay of the two guys at the top. Avoid.

Author: Daniel Flynn & Ben Turney

Disclosure: The author of this piece does not own shares in any of the companies mentioned

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