As the vote of confidence goes, it was fairly emphatic, particularly given the AIM-listed explorer has what can best be described as an “exotic” back-story.
Under the guidance of Mike Buck, who joined the group in October 2017, management has put together what it believes is a compelling story: a six-well programme at an all-in cost of up to U$25mln.
It’s a lot of bang for shareholders’ buck (no pun intended), so you can see why the backers of last year’s cash call chipped in.
Buck, meanwhile, brings with him frontier exploration experience garnered from a two-decade stint with LASMO, one of the leading independents of the 1970s, the 80s and 90s, and mid-cap Salamander Energy. In other words, he knows the ropes.
Work on the first two Mongolia wells from the aforementioned programme – Snow Leopard and Wildhorse – concluded last year with words nobody in oil exploration wants to hear: plugged and abandoned.
That said, data yielded from the latter, which had “good gas shows” along with light oil in the mud, will help guide the company’s thinking when the drill rig trundles west toward Block V later this year.
Focus on Block XX
More immediately, the focus will be on Block XX, which is in the east of the country and more pertinently is adjacent to the already-producing Block XIX, discovered by Soco in the 1990s and developed by PetroChina.
The first of the company’s 2019 wells, called Heron, is just 500 metres from lease line with Block XIX, so it will be tapping into the same oil horizons being exploited by the Chinese.
On this basis, it is being treated as an appraisal opportunity with the chance of success put at around 75%. Heron is expected to spud sometime in the second-quarter.
The exploration rig doesn’t have to move far to the Gazelle prospect, which, if all goes to plan, should be completed by the end of June before a move to Red Deer, to the south-west on Block XX.
If successful, the Block XX wells may be tested by local contractors, which means that flow rates should be established within weeks of them being drilled.
It should be pointed out the flow rates from the PetroChina’s producing wells in the vicinity of Block XX won’t exactly get the pulses racing.
Initial rates from the Chinese wells can be anything from 50 barrels a day to 300. That said, local intel suggests those rates could be higher if western stimulation and recovery methodology is used.
However, the economics work – as PetroChina has shown – as it has peppered its licences with low-cost wells.
Petro Matad’s internal estimates suggest it would require around 40 wells to recover 15mln barrels of oil. That would require an investment of US$45mln, rising to US$100mln for a 50mln barrel field.
However, the economics are impressive. On the lower recoverable figure, the net present value of Block XX is put at US$76mln, rising to US$299mln for the 50mln barrel case.
According to boss Buck, the company may stage the development and fund with the roll-out from oil sales if the investment cash doesn’t materialise in its full entirety.
“Although this doesn’t maximise the NPV [net present value] we can become self-funding,” said Buck.
Working in Petro Matad’s favour is the fact there are processing facilities around 20 kilometres away with spare capacity. There is also a ready market for the crude in the form of neighbouring China.
The light oil, which is waxy, trades at a modest discount to Brent.
By October, investors should have a much better handle on the economic viability of Block XX as the drill rig trundles west towards Blocks IV and V.
As Buck points out, their prospectivity hasn’t changed – it’s unlikely the Anglo-Dutch giant really delved into the data as it trimmed the exploration hoppers.
The final well of 2019 is planned to be high-impact exploration, potentially targeting a prospect with 200mln barrel resource potential.
Busy year ahead
Currently, their company is assessing two targets on Block V: Velociraptor and Fox. Each has its merits and also its drawbacks.
Post-well analysis of Snow Leopard will feed into the decision on Velociraptor, which is only six kilometres away.
While unsuccessful, Snow Leopard proved the existence of a working petroleum system on Block V.
Success on Block V would open up farm-out opportunities, says Buck. “The BG farm in showed the attraction of the acreage to the big boys and there were other companies interested before the 2018 drilling began although pre-drill proposals were not attractive,” Buck pointed out.
Last year’s drilling disappointments hit the share price, which, during March and June, traded between 11-13p. Today, the stock is changing hands for 3.2p.
Around the 3p level, Petro Matad shares are approaching bargain basement territory, according to the analysis put together by City firm Stockdale.
Okay, Stockdale is PM’s broker but it makes this irrefutable point: The company is targeting wells with a combined P50 prospective resource of 250mln barrels.
On that basis, analyst Richard Slape reckons the stock is worth 30p a share.
In a note issued earlier this month, he said: “We believe Petro Matad represents one of the most exciting stories in the UK-quoted oil and gas exploration and production sector.”
Buck, meanwhile, is happy to let others do his talking. “We’ve got a busy year ahead of us. Let’s see what happens.”