Petro Matad offers investors exposure to a fully funded exploration campaign targeting near-field, low-risk prospects as well as basin opening, high-impact potential. The 2018 two-well programme in blocks IV and V will test the yet to be drilled Baatsagaan and Taats basins in the heart of Mongolia, targeting 570mmbo of mid-case prospective resource. In Block XX, close to existing production, two low-cost wells will test extensions of proven plays in H218. In 2019 drilling returns to the Tugrug Basin to test a 200mmbo prospect, close to live oil shows and mapped on 3D seismic, as well as a 48mmbo target on Block XX analogous to producing fields to the north east. Attractive fiscal terms and the scalability of developments enable relatively small oil discoveries to be commercialised in the current oil price environment. Our risked valuation post assumed farm-out value dilution is 30.8p/share at 70$/bbl Brent long term. Valuation remains highly sensitive to oil price assumptions and exploration outcomes.
Petro Matad’s acreage combines high-impact exploration and low-risk targets across three blocks and multiple basins. Two exploration wells are planned for 2018 in Blocks IV and V, which offer frontier exploration but where good evidence of working petroleum systems is seen in surface outcrops. Block XX sits close to proven and producing fields in the Petro China operated Block XIX, providing potential early cash flow targets – two wells are planned for 2018. Three of the five Block XX lease line prospects identified have proven to be oil bearing in Block XIX.
Petro Matad’s prospect inventory benefits from low well costs, a simple development concept (using Block XIX as an analogue) and attractive fiscal terms that allow for cost recovery. Despite some uncertainty around offtake options, our analysis suggests an attractive risk/reward incentivising exploration. Even small oil discoveries (c 10mmbo) generate positive returns at $70/bbl Brent.
Valuation is based on the risked value of five identified and funded prospects. Petro Matad has identified significant exploration running room in the event of success. Our base case, risked valuation of 30.8p/share assumes 50% value dilution through farm-out. We note that the company expects standalone field developments to generate IRRs in excess of 50% based on a long-term oil price of $70/bbl Brent, hence our farm-out assumptions may prove to be conservative.