Petro Matad announced yesterday that the Red Deer-1 well in Block XX in Mongolia did not encounter hydrocarbons. The well was the second in a three well exploration and appraisal campaign and follows on from last week’s successful result in Heron-1. We valued Heron-1 at 3.3p/share, which has now been de-risked, and Red Deer-1 at 2.8p/share, which can now be discounted, but on balance we expect little to change in our last risked valuation of 21.6p/share The company will now complete its programme with the drilling of Gazelle-1 and the testing of Heron-1.
Heron-1 was targeting 25mmbbl gross recoverable reserves. The well recorded oil and gas shows between 2,803 and 2,880 metres and the reservoir interval seems similar to the productive reservoirs immediately north of Heron-1 in Block XIX, but with better porosity and permeability. 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%.
Red Deer-1 was drilled in the southern part of Block XX and carried the highest risk of the wells in the current campaign (GCoS of 25%). Although good-quality reservoir was present here, wireline log analysis confirmed that hydrocarbons are not present. The well was drilled on budget at $4m, and is currently being plugged and abandoned.
In the northern part of Block XX, Heron-1 has been temporarily suspended and management expects testing operations to commence in early October and to be completed by the end of the month. The Heron-1 drilling rig is now on location 5km to the west at Gazelle-1 and is in the process of being rigged up, with spud anticipated to be before the end of September.