Key points: * Our target price for MAD is a risked target price based on a SOTP valuation. We currently attribute A$0.36ps for Blue Ridge Production with an additional A$0.28ps for additional reserves on Blue Ridge that could potentially be produced. We could potentially increase these figures if MAD were able to increase their drilling program and average production. We currently don't have them producing all of their 2P reserves over a 25 year period. We have A$0.10ps in the valuation for exploration. On an unrisked basis, our valuation for MAD is A$1.98 and risked is $0.76ps. * Awaiting sustained flow rates and reservoir characteristics from Boling Dome and Nash Dome- We value exploration with a 10% probability of success. Included in that figure is the potential for Boling Dome, Nash Dome, and Edwards Reef to become producing assets. As Boling Dome and Nash Dome are similar in geology to Blue Ridge Dome, we valued them by looking at comparable potential producing acreage sizes and using Blue Ridge Dome parameters prior to risking the value. In order for us to reduce the risking on Boling Dome and Nash Dome, we would like to see results from the test wells being drilled - including flow rates and reservoir characteristics. We can compare these to nearby offset wells to get a better idea of the field potential. If flow rates are sustained at levels higher than for Blue Ridge (ie. initial flow rates for Nash Dome were 60-80bopd) we have the potential to increase the valuation we put on the fields. For example, increasing the probability of success on exploration to 25% adds A$0.16ps to the valuation. Or with reserves numbers, we can do a DCF valuation of the field. * Maverick also has potential from deeper plays and other zones in their fields. Maverick has run seismic on these areas, and we are awaiting results. We currently have no value for those plays. * MAD has traditionally been valued on its production. It is currently producing at 900bopd on average, with five or six wells set to come onto production. On our estimates, we have them producing 1500bopd by end FY12 and 2000bopd by end CY12. This puts them on an EV/EBITDAX of 13x on our estimates. An acceleration of this production might enable us to increase the valuation on the field. We think the market is now valuing them on potential, using reserves multiples and valuing optionality, as you would for a resource play. With 2P reserves of 72.8mmbbls, this puts them on an EV (A$)/2P of 3.55x, which is below the average for oil producers. * Investment view - We like the cash flow that MAD is now generating as well as the longer term potential of Maverick and the optionality on the acreage. However, with minimal knowledge of the actual characteristics of the acreage, it is hard to derisk it yet. In addition, even with large reserves numbers, we do not see how MAD can produce all of the reserves given its current number of rigs - so we discount the valuation on a reserves basis. If the flow rates are higher in Boling Dome than Blue Ridge, we expect resources to be diverted to that field and production to start soon. Increased near term cash flow from increased production would be beneficial to the valuation.
* Catalysts - - initial flow rate from Boling Dome (expected by the end of this week) - initial reserves on Boling Dome and Nash Dome (expected by end FY12 (June). The company has suggested this may come earlier.) - Achieving a flow rate of 1500bopd (expected end June, but may come earlier) - Any announcement about additional prospects on their acreage - Any announcement of a JV
FDM Price at posting:
77.5¢ Sentiment: LT Buy Disclosure: Held
