With its drilling programme about to get into full swing, oil explorer and producer Petro Matad (LSE:MATD) is poised for an explosive 2018, after several years of stalled progress at its three promising sites in Mongolia. Under new CEO Mike Buck, Petro Matad underwent a £16.8m fundraise in January to allow it to make the most of its first-mover advantage in Mongolia by drilling four low-cost wells. The share price has nearly doubled since the deal was announced. Can it build on this momentum under Buck’s leadership?
Petro Matad’s claims that the wells could lead to it being cash flow generative within two years have been welcomed by the market with open arms. With the drill programme also having the potential to de-risk numerous other leads at Petro Matad’s sites, this could attract farm-in interest from bigger players in the industry. 2018 could well mark the start of a long-term transformation for the firm. Further news flow is very likely as the programme continues, providing many catalysts for upwards share price movements. With that in mind, Petro Matad could be worth a punt at its current 11.8p share price.
Mongolia – land of opportunity?
Mongolia offers an interesting opportunity for oil explorers, with numerous prospective oil sites that are geologically similar to prolific oil producing basins in nearby China. Mining activity provides a vital contribution to the country’s $12bn-a-year GDP, and all 21,000 barrels of oil that are produced domestically every day are currently exported to China for refining. Mongolia’s government has been fighting hard to further exploit it’s domestic oil potential. Production of 30,000bopd is needed to justify the construction of a proposed domestic refinery, which will almost certainly be a game-changer for the country’s domestic market. However, a lull in global exploration in recent years due to weak oil prices has made this difficult, with many businesses holding off on launching into new countries that have limited historical success.
Outside of the producing fields that were established in the nineties, very few petroleum exploration activities have occurred in the country. Indeed, just three exploration wells have been drilled across all of Western Mongolia. Petro Matad is one of just three internationally recognised exploration and production players operating in the country – the other two are Petro China and Sinopec. The firm has secured full ownership of more than 60,000km2 of untouched acreage across three blocks, which it estimates to collectively contain more than a whopping 2bn barrels of potentially recoverable oil. If Petro Matad’s reserves estimate turns out to be accurate – and drilling is successful – then it could seriously benefit from first mover advantage in Mongolia while taking advantage of the country’s low drilling and operational costs.
Mongolia’s largest fuel importation and distribution company Petrovis certainly seems convinced. It is a major shareholder in Petro Matad, has aspirations to participate in the entire oil value chain in Mongolia and would be well placed to play a leading role as a domestic refining capacity develops. Buck believes success could also prompt interest from upstream companies that had previously held off.
In an exclusive interview with ValueTheMarkets.com, Buck said: ‘I have had a few conversations with the big oil companies in the Asian region who have basically said, “Once you find something, give us a call. If you find what you think is going to be there, then you are going to need some help”. They are interested in the large potential.’
New kid on the Block
Within Mongolia, Petro Matad currently holds the leases for Blocks 4 and 5 in the southwest of the country and Block 20 in the east. Blocks 4 and 5 currently have 12 prospective basins identified, as well as 55 prospects and leads which could hold eye-watering recoverable potential reserves of more than 2bn barrels. Getting this oil out of the ground would be relatively cheap as well, with exploration drilling expected to cost between $4m and $7m per well and exporting oil by truck to Chinese refineries and buyers costing between $5 and $8 a barrel
Petro Matad’s high success case for the blocks suggests gross production could hit 10,000bopd in 2020 before shooting up rapidly every year and reaching peak gross production of nearly 80,000bopd by 2023. If this is the case, then the sites could potentially push total Mongolian production past 30,000bopd, meeting the requirements for a proposed domestic refinery. This marks the site out as a potential game changer nationally. Block 20 has a more modest recoverable potential of 15MMbo to 28MMbo. However, as it is situated next to existing fields operated by PetroChina which have an established trucking export route to the Chinese border and refineries beyond, it could be a vital first step in Petro Matad reaching near-term commerciality. Petro Matad has identified five lease line prospects here, three of which are continuations of oil bearing structures drilled in neighbouring Block 19 and have been covered by 2D and 3D seismic.
Under a success case scenario, based on nearby producing prospects, Petro Matad believes that with access to spare capacity in the neighbouring facilities Block 20 could achieve gross production of 1,500bopd by 2020 before reaching peak gross production of 5,000bopd by 2023. Buck believes that although blocks IV and V may be described by many as frontier exploration in as much as they have yet to be drilled, their geological similarity to existing, producing basins in China and other blocks elevate them above this status.
He said: ‘Because of all the evidence in the surface, and all the evidence in the subsurface from core holes we have drilled, this is frontier exploration with a much-better-than-frontier chance of success.’
Work in progress
Investors have been waiting for Petro Matad to drill for years, and its share price has struggled to gain traction as a result. All of this changed in January when, under new boss Buck, the company underwent a $16.8m fundraise. In combination with an existing cash balance of $4.7m, the proceeds have been put towards a four-well drilling programme. This will take place throughout 2018 across all three of the firm’s blocks.
Buck told us: ‘When I joined in October, I said, “We need to do some drilling, this is the only thing that will crystallise value for shareholders, so how are we going to do that?” This problem has been solved by the raise, which has given us a very active 2018. We were only able to do this because the market has warmed somewhat to exploration in recent times.’
Wild Horse, as the first well will be known, is slated to spud in the second quarter, costing around $4m. Well 2 will spud in Q3 at Block 5 at a cost of $7m while Wells 3 and 4 are expected to spud at Block 20 in Q4 at a combined cost of $4.5m.
Perhaps the most exciting element of this programme from a shareholder point of view is the potential for near-term transformational cash flow generation it could offer once production begins. Wild Horse is reported to offer 290m barrels of recoverable oil potential and Well 2 is expected to hold 100m barrels. Petro Matad estimates that even a 50m barrel discovery offers an NPV10 of more than $450m and an internal rate of return of around 100pc. Meanwhile, the two wells at Block 20 offer an NPV10 of $80m with an internal rate of return of 42pc. With adjacent infrastructure allowing for rapid development, they should be quick to monetise through the immediate appraisal of successful wells and truck-based export. All told, on the current schedule, if drilling is successful at every site, Petro Matad expects to be cash flow generative by 2020/2021. It also worth noting the upside potential that success could generate at surrounding leads. Petro Matad estimates that success at Well 1 will de-risk 13 prospects and leads across Block 4, opening up a resource potential of 750Mbo. Similarly, success at Well 2 is expected to de-risk seven prospects and leads across Block 5 containing a resource potential of 180Mbo
Investors have responded well to the announcements Petro Matad has put out since the drill programme commenced. After an initial drop, the sudden surge of news flow has led shares to rise from 7.1p to 11.1p over the last month. It seems likely that this bull-run could continue as further news flow and updates continue to trigger investors’ attention.
To farm-out or not to farm-out
As mentioned, Mongolia as a whole has struggled to gather the attention of the international E&P community. These difficulties have been mirrored in Petro Matad’s efforts to attract farm-out interest from other oil players. In 2014, BG Group farmed into Blocks 4 and 5 after undertaking painstaking due diligence on Mongolia, Petro Matad, and its assets. However, although this remains a testament to the potential on offer, Shell pulled out of the farm-out as part of its rationalisation programme after taking over BG Group. Naturally, this was disappointing for both Petro Matad and Mongolia. But it was not until Buck took over in October that the company shifted its focus away from farm-outs towards alternative sources of financing for its drilling programme. Now that a work programme has been set out and the road to future commercialisation looks clearer for Petro Matad, Buck says he is looking at farm-outs in a different light. It looks like the time to pick up the phone has come.
‘A farm-out is not as essential to us now as it was in the past, when it seemed the only option for funding. However, if someone wants to come in and pay to enlarge the drilling programme and some more seismic then that could be attractive. Now that we are much closer to drilling and funded to do it, we are getting ready to re-engage with people who have been on our list for a while to see if they are still interested,’ he said.
Buck told us that a farm-out could be particularly key if drilling is successful at Blocks 4 and 5, as they are likely to have multiple field potential.
‘The combination of low operating costs, low drilling costs and very very good fiscal terms mean it is not only a very good resource potential but economically looks pretty spectacular in the success case,’ he said.
If Petro Matad’s reserve estimates and claims that its prospects are geologically similar to successful basins in China are correct, then it is sat on a massive resource in a country where first mover advantage and experience are game-changers. The firm may not yet be generating cash, but with a fully-funded work programme looking set to lead to cash generation in the next two or three years it is certainly headed in the right direction after years of slow news flow. What’s more, it has spread its risk across several assets rather than taking the potential risky route of putting all its eggs into one basket.
January’s fund-raise may have hit Petro Matad’s shares but they have been on the rise since. And with Buck open to the idea of using farm-out to extend the business’s work programme, there is a good chance that additional growth can be achieved without further diluting shareholder value. When one considers the fact that success in the current work programme could also de-risk many further leads across Petro Matad’s sites, its current c.£60m market cap looks pretty cheap given the potential reserves on offer. With multiple catalysts for a jump in the company’s share price almost certainly on the way over the next two years as the work programme progresses, it could be worth getting in now while shares still sit at 11.8p.
Buck’s sums this point up in the following way to us: ‘Now we have been able to say exactly what we are doing. People have been appreciative, but a number of shareholders have waited for anything to happen for a long time, so we are keen to make sure we deliver on the programme and the schedule that we said we would. Fundamentally, this is exploration and comes with certain risks, but I would not have joined if I did not think there was a very good chance of success.’
Author: Daniel Flynn
The author does not own shares in the company mentioned in this article