The Hoards of Mongolia
Petro Matad is a Mongolian focused E & P company which is anticipating a step change in its operations now that it has secured the Exploitation Licence for its Heron-1 oil discovery from the Mongolian authorities.
The company is now making plans to start an early development in 2022 from which it can generate cash flow. This will then be utilised to proceed with a staged full field development and then allow the company to execute an exploration programme. This has the potential to add significantly to asset valuation.
- Petro Matad is finalising its field development plan for the Heron field in Block XX in Mongolia where it has a 100% working interest. This is a 33 mmbbl discovery, with upside potential. It is expected that this plan would involve an initial development where the crude would be produced and trucked to the Petro China operated adjacent block for processing and then shipped to China for refining. This will generate cash flow which can then be used in a full field development. The company hopes that with better drilling techniques (such as horizontal drilling) it can increase the recovery at the field, with an upside potential of 58 mmbbl of recoverable reserves.
- The company has a relatively weak balance sheet following its major exploration programme in 2018/2019, which successfully discovered the Heron Field. With the approval of the Exploitation Licence by the Mongolian Government, which grants the company a 25-year licence over the Heron Field and surrounding prospects, much of the risk in this project has reduced. This will allow management to look at ways of getting finance in place to enable acceleration of the development project. This could involve a mixture of farming out a portion of its licences, raising new equity financing, and bank financing.
- Subject to such financing, management is eager to complete an exploration programme involving three wells – two around the Heron field, and a further well in Block V where the company also has a 100% working interest. The wells around the Heron fields (Saiga and Gobi Bear) are targeting 70 mmbbl which could be easily tied into the Heron facilities.
The well in Block V (Velociraptor) is a higher-risk prospect targeting approximately 200 mmbbl. Success at any of these wells would have a material impact on asset valuation. - We have looked at the valuation of the operations through a standard RENAV (Risked Exploration Net Asset Value) derived from discounted cash flow. Using a flat Brent oil price of US55/bbl, we believe that the base Heron development could be worth approximately 9.3 p/share. We have assumed a 50% chance of the company being able to increase Heron’s reserves up to the target level which would add a further 9.4 p/share to the valuation. The risked exploration would then add a further 10.1p/share to this value. This gives an overall RENAV of 28.7p/share. Investors should view any valuation in the context of their own assessments of the relevant risks.
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ANALYSTS
Peter Hitchens
+44 (0) 20 7781 5304
phitchens@progressive-research.com
