Petro Matad is now drilling Gazelle-1, the final well of its 2019 three-well exploration and appraisal campaign in Block XX, in Mongolia. Results are expected during October, alongside test results from the successful Heron-1 well. In the south-west of the block, the riskiest well in the programme, Red Deer-1, did not encounter hydrocarbons. We update our valuation on the back of results from the two first wells of the campaign. Red Deer, previously valued at 2.8p/share has been removed from our sum of the parts. We have de-risked Heron to a 68% chance of commercial success vs 45% in our last note. We now value the asset at 4.9p/share and will update the probability of success once the well test results are announced. Our risked valuation, post assumed farm-out value dilution, is updated to 20.1p/share (down 7%) at $70/bbl long-term Brent, which we expect to revisit after drilling Gazelle-1 and well testing Heron-1.
Gazelle-1 sits to the west of Heron-1 in a region on trend with existing Block XIX production, targeting 13mmbbls. Meanwhile, testing on Heron-1, which established a 77m gross oil-bearing interval in a structure proven productive in adjacent Block XIX, is due to commence in October. Sections of better than typical Lower Tsagaantsav reservoir identified in the well could point to improved deliverability.
The low well costs and attractive fiscal terms that enable cost recovery provide an attractive risk/reward in Mongolia. Petro China’s current production from Blocks XIX and XXI demonstrates commercial oil production and the presence of spare capacity at the existing nearby infrastructure should allow for rapid commercialisation in the case of success. Based on our analysis, the threshold for commerciality at Block XX is low, with development of small discoveries (c 10mmbbl) generating an IRR in excess of 10%.
Our updated base case risked valuation assumes a 50% value dilution through farm-down. We have removed Red Deer from our sum of the parts and de-risked Heron to a 68% chance of commercial success. Our risked valuation post assumed farm-out value dilution is updated to 20.1p/share (-7%) at $70/bbl long-term Brent, which we expect to revisit post-drill of Gazelle-1 and Heron-1 well test. 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.
