2019 Mongolia drilling campaign kick-off

Petro Matad 12 July 2019 Update
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Petro Matad

2019 Mongolia drilling campaign kick-off

Company update

Oil & gas

12 July 2019

Price

7p

Market cap

£46m

US$/£1.29

Net cash ($m) at 31 December 2018 (includes $19.2m financial assets)

21.3

Shares in issue

662.2m

Free float

80.8%

Code

MATD

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

11.7

71.8

(2.2)

Rel (local)

10.3

70.3

(0.2)

52-week high/low

9.35p

1.95p

Business description

Petro Matad is a pure-play Mongolian exploration company with a 100% equity interest in Blocks IV, V and XX. Management plans to drill three exploration and appraisal wells in 2019, targeting low-risk prospects in Block XX.

Next events

Heron-1 Spud

July 2019

Red Deer-1 Spud

July 2019

Gazelle-1 Spud

Q319

Analysts

Sanjeev Bahl

+44 (0)20 3077 5700

Carlos Gomes

+44 (0)20 3077 5700

Elaine Reynolds

+44 (0)20 3077 5713

Petro Matad is a research client of Edison Investment Research Limited

Petro Matad is set to kick off its 2019 exploration and appraisal campaign targeting a series of low-cost, near-field and low-risk targets. Drill sites for the three Block XX wells have been constructed and management expects drilling to begin in July 2019. Prospects Heron-1 and Gazelle-1 are analogous to producing fields to the north-east in Block XIX, while Red Deer-1 is more material at 48mmbbls and is located further away from known oil. Petro Matad is funded for 2019 from the net proceeds of equity raised in 2018. However, additional funding would be required to commit to additional exploration and to support G&A in 2020. We update our valuation based on the company’s increased estimate of Heron-1 prospective resources at 25mmbbls (gross) from 16mmbbls. Our risked valuation stands at 21.6p/share (+6%), which we expect to revisit post-drill.

Year-end

Operating cash flow ($m)

PBT*
($m)

Net debt/
(cash) ($m)**

Capex
($m)

EBITDA
($m)

12/17

(2.5)

(9.9)

(8.1)

(0.1)

(9.7)

12/18

(19.6)

(18.5)

(21.3)

(0.1)

(18.2)

12/19e

(4.8)

(5.0)

(6.5)

(10.0)

(5.0)

12/20e

(5.0)

(5.0)

(1.5)

(5.0)

(5.0)

Note: *PBT is normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. **Including financial assets.

Block XX low-cost, low-risk targets

Block XX’s location immediately south of existing production in Block XIX is the target of three low-cost, low-risk drill targets in 2019. The first well, Heron-1, is an appraisal of the T19-46 oil field located on Block XIX. Petro Matad is targeting 86mmbbls across Heron-1, Gazelle-1 and Red Deer-1. Based on our analysis, the threshold for commerciality for Block XX is low, with development of small discoveries (c 10mmbbl) generating an IRR in excess of 10%.

Rapid appraisal in success case

In the Block XX success case, we expect Petro Matad to emphasise the appraisal of prospective resource de-risked by the 2019 exploration programme. In this event, drilling in frontier Blocks IV and V will likely be postponed to 2020. Management expects the higher risk/reward Block V exploration programme to start with the 201mmbbl Velociraptor prospect.

Valuation: Base case risked valuation of 21.6p/share

Our updated base case risked valuation of 21.6p/share (+6%) assumes a 50% value dilution through farm-down. A 6% increase in RENAV from our last published note is driven by Petro Matad’s recent upgrade of Heron prospective resource. The company increased its assessment of the mean prospective resources from 16mmbbls to 25mmbbls following mapping of reprocessed seismic. Petro Matad is fully funded for 2019 and we assume a farm-down to fund future development. However, further issues of equity at the current share price could be significantly dilutive to our per-share valuation.

2019 exploration and appraisal programme

Petro Matad’s 2019 three-well drilling campaign in Block XX will begin in July 2019, with the spud of the Heron-1 appraisal well utilising DQE's rig 40105. Red Deer-1, in the south of the block, is expected to commence drilling shortly after, using the company’s second rig, DXZ1. Gazelle-1 is scheduled to be drilled after completion of operations at Heron-1. The company has completed site construction for all drilling locations and rig mobilisation is currently underway.

Exhibit 1: 2019 Block XX exploration campaign schedule

Source: Petro Matad

Petro Matad will look to rapidly appraise any discoveries in Block XX during the 2019 drilling season, potentially delaying frontier exploration in Blocks IV and V to the 2020 drilling season. Technical work is ongoing on Blocks IV and V, incorporating results from the 2018 drilling campaign; the 201mmbbl Velociraptor prospect has been selected as the next target in Block V.

Heron-1 well

The first well in the programme, Heron-1, is an appraisal of the Petro China-operated T19-46 oil field immediately to the north in Block XIX. Petro Matad increased its assessment of the mean prospective resources by over 50% from 16mmbbl to 25mmbbl following mapping of reprocessed 2D seismic and this has been confirmed by 3D seismic recently provided by Petro China. The mapping indicates that the majority of the 13km2 structure sits in Block XX and the updated estimate includes potential to the east of the prospect, which has now been confirmed as part of the Heron structure. Heron-1 will be drilled to a planned total depth (TD) of 3,050m and is expected to take around 40 days to drill and log.

Red Deer-1 and Gazelle-1

Red Deer-1 is expected to spud by the end of July 2019 and will target mean prospective resources of 48mmbbls in a basin centre, fault-bounded, structural closure in the southern part of Block XX. It is located in an undrilled basin but is adjacent to productive basins that have the same geology and petroleum systems seen to the north-east in Block XIX. The well will be drilled to a TD of 2,100m and is scheduled to take 35 days to drill and log.

Gazelle-1 sits 5km west of Heron-1, updip of proven oil and on trend with the best-producing wells in Block XIX. The company estimates that the well contains mean prospective resources of 13mmbbls. However, this is based on the structural trap and there is potential upside in a stratigraphically trapped part of the accumulation. The well will be drilled back to back with Heron-1 and is expected to take 35 days to drill and log to a TD of 2,500m.

Valuation

Our valuation of Petro Matad is based on risked value for the company’s drill-ready and committed prospects in Block XX (Heron, Red Deer and Gazelle) and Block V (Velociraptor). Details of the prospects are provided above. We calculate economics per unit volume ($/boe) using modelled company development plans for Block XX and Block V. Our unit values are shown below and are driven by discovery size (for more details, see our outlook note published on 28 January 2019).

Exhibit 2: Block V and Block XX unit NPV12.5

Exhibit 3: Modelled capex, opex and tariff costs

Source: Edison Investment Research

Source: Edison Investment Research

Exhibit 2: Block V and Block XX unit NPV12.5

Source: Edison Investment Research

Exhibit 3: Modelled capex, opex and tariff costs

Source: Edison Investment Research

In our base case valuation, shown below, we typically include elements of dilution, of which investors need to be mindful when investing in the small-cap E&P sector:

While we do not currently include equity dilution through a future fund-raise, this has the potential to be significantly dilutive to our per-share NAV valuation.

We include asset-level working interest dilution through the farm-down of discoveries made during the exploration phase.

We include a total of $21.3m ($2.1m FY18 year-end cash balance and $19.2m financial assets) to fund the 2019/20 exploration campaign, contingency and SG&A.

Exhibit 4: Petro Matad base case valuation

Recoverable reserves

Net risked value

Risked value per share

Asset

Country

Diluted WI

Pc**

Gross

Net

NPV12.5/boe

NPV12.5

12.5%

10.0%

15.0%

%

%

mmboe

mmboe

$/boe

$m

p/share

p/share

p/share

Net cash - end 2018

2.1

0.2

0.2

0.2

Financial assets - end 2018

19.2

2.2

2.2

2.2

SG&A - NPV12.5 of 3yrs

(11.9)

(1.4)

(1.4)

(1.4)

2019/20 committed prospects

(15.0)

(1.8)

(1.8)

(1.8)

Core NAV

(5.6)

(0.7)

(0.7)

(0.7)

Exploration

Block XX - Heron 2019

Mongolia

50%*

45%

25.0

12.5

5.1

28.5

3.3

4.1

2.7

Block XX - Gazelle 2019

Mongolia

50%*

36%

13.0

6.5

5.1

11.8

1.4

1.7

1.1

Block XX - Red Deer 2019

Mongolia

50%*

23%

48.0

24.0

4.5

24.3

2.8

3.7

2.2

Block V - Velociraptor 2020

Mongolia

50%*

15%

200.0

100.0

8.4

125.7

14.7

18.0

12.0

Exploration NAV

286.0

143.0

190.3

22.2

27.4

18.1

RENAV

286.0

143.0

184.7

21.6

26.8

17.5

Source: Edison Investment Research. Note: *Reflects value retained after assumed development farm-down. **Pc = Pg x Pe. Pg assumed at 50% for Heron, 40% for Gazelle, 25% for Red Deer, 20% for Velociraptor. Pe assumed to be 90% for Block XX and 75% for Block V. Number of shares = 662m, FX: US$/£1.29.

The valuation waterfall below provides a breakdown of our risked valuation prior to farm-down at 43.8p/share, followed by what this could look like post farm-down. Our updated base case valuation of 21.6p/share (+6%) is on the basis of a $70/bbl Brent long-term (2022) oil price and 50% asset-level value dilution through farm-down (please see Appendix A for further details on our farm-down framework). The main change in our valuation is the update in Heron’s gross prospective resource estimate to from 16mmbbls to 25mmbbls.

Exhibit 5: RENAV waterfall and post-funding risked valuation range (NPV12.5)

Source: Edison Investment Research

Financials

Petro Matad closed FY18 with $2.1m of cash and $19.2m of financial assets, enough to cover its four-well 2019/20 exploration and appraisal campaign. Additional funding would be required to commit to an exploration programme and to support group G&A beyond 2020. We assume a short-term debt facility for the initial two years of development (over 2021 and 2022).

We assume a capex cost of $15m for the 2019/20 well programme including contingency but excluding overheads and PSC costs, with a cost of $3m for Heron, $3m for Gazelle, $3m for Red Deer, $4m for Velociraptor and $2m for geological studies.

Exhibit 6: Financial summary

 

 

$m

2016

2017

2018

2019e

2020e

Year-end: December

 

 

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

18.9

0.2

0.6

0.0

0.0

Cost of Sales

0.0

0.0

0.0

0.0

0.0

Gross Profit

18.9

0.2

0.6

0.0

0.0

EBITDA

 

 

11.1

(9.7)

(18.2)

(5.0)

(5.0)

Operating Profit (before amort. and except.)

 

 

10.9

(9.9)

(18.4)

(5.0)

(5.0)

Intangible Amortisation

0.0

0.0

0.0

0.0

0.0

Exceptionals

0.0

0.0

0.0

0.0

0.0

Other

0.0

0.0

0.0

0.0

0.0

Operating Profit

10.9

(9.9)

(18.4)

(5.0)

(5.0)

Net Interest

(0.1)

0.0

(0.1)

0.0

0.0

Profit Before Tax (norm)

 

 

10.8

(9.9)

(18.5)

(5.0)

(5.0)

Profit Before Tax (FRS 3)

 

 

10.8

(9.9)

(18.5)

(5.0)

(5.0)

Tax

0.0

0.0

0.0

0.0

0.0

Profit After Tax (norm)

10.8

(9.9)

(18.5)

(5.0)

(5.0)

Profit After Tax (FRS 3)

10.8

(9.9)

(18.5)

(5.0)

(5.0)

Average Number of Shares Outstanding (m)

287.5

308.5

571.8

662.2

662.2

EPS - normalised (c)

 

 

0.4

(0.3)

(0.3)

(0.1)

(0.1)

EPS - normalised and fully diluted (c)

 

 

0.4

(0.3)

(0.3)

(0.1)

(0.1)

EPS - (IFRS) (c)

 

 

0.0

(0.0)

(0.0)

(0.0)

(0.0)

Dividend per share (c)

0.0

0.0

0.0

0.0

0.0

Gross Margin (%)

100.0

100.0

100.0

-

-

EBITDA Margin (%)

58.9

-

-

-

-

Operating Margin (before GW and except.) (%)

57.7

-

-

-

-

BALANCE SHEET

Fixed Assets

 

 

16.1

15.9

15.6

25.6

30.6

Intangible Assets

15.3

15.3

15.3

15.3

15.3

Tangible Assets

0.8

0.6

0.3

10.3

15.3

Investments

0.0

0.0

0.0

0.0

0.0

Current Assets

 

 

12.2

8.6

21.7

6.7

1.7

Stocks

0.5

0.3

0.2

0.0

0.0

Debtors

5.2

0.2

0.2

0.2

0.2

Cash

6.5

5.1

2.1

6.5

1.5

Financial assets

0.0

3.0

19.2

0.0

0.0

Current Liabilities

 

 

(1.4)

(3.4)

(1.3)

(1.3)

(1.3)

Creditors

(1.4)

(3.4)

(1.3)

(1.3)

(1.3)

Short term borrowings

0.0

0.0

0.0

0.0

0.0

Long Term Liabilities

0.0

0.0

0.0

0.0

(5.0)

Long term borrowings

0.0

0.0

0.0

0.0

0.0

Other long-term liabilities

0.0

0.0

0.0

0.0

(5.0)

Net Assets

 

 

26.9

21.1

36.0

31.0

26.0

CASH FLOW

Operating Cash Flow

 

 

1.8

(2.5)

(19.6)

(4.8)

(5.0)

Net Interest

0.0

0.0

0.0

0.0

0.0

Tax

0.0

0.0

0.0

0.0

0.0

Capex*

(0.6)

(0.1)

(0.1)

(10.0)

(5.0)

Acquisitions/disposals

0.0

0.0

0.0

0.0

0.0

Financing

(0.0)

4.2

32.8

0.0

5.0

Dividends

0.0

0.0

0.0

0.0

0.0

Net Cash Flow

1.1

1.6

13.2

(14.8)

(5.0)

Opening net debt/(cash)**

 

 

(5.3)

(6.5)

(8.1)

(21.3)

(6.5)

HP finance leases initiated

0.0

0.0

0.0

0.0

0.0

Other

(0.0)

(0.0)

0.0

0.0

0.0

Closing net debt/(cash)**

 

 

(6.5)

(8.1)

(21.3)

(6.5)

(1.5)

Source: Edison Investment Research, Petro Matad accounts. Note: *Farm-in proceeds to cover capex beyond 2020. **Including financial assets.

Appendix A

We use a farm-down framework when valuing E&P assets that are not self-funded through to first oil. In general, the extent of value dilution we assume through farm-down decreases as asset certainty and risks decrease, as shown in Exhibit 7. Given the current uncertainty with regard to unrisked resource size, productivity, oil quality and costs, we use a generic assumption of 50% value dilution (stage 2 of our framework) for Petro Matad, which we intend to refine post-drill.

Exhibit 7: Edison E&P farm-down framework

Source: Edison Investment Research

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This report has been commissioned by Petro Matad and prepared and issued by Edison, in consideration of a fee payable by Petro Matad. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

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This report has been commissioned by Petro Matad and prepared and issued by Edison, in consideration of a fee payable by Petro Matad. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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