ASX:MAY Bearish Analysis

Hello All,

I would like to give the bears just as much time as the bulls, here is my bearish analysis:

1) "Following the money":
On the 4 May 2022, Andrew Purcell (Executive Chairman of ASX:MAY),acquired 1,116,122 for a value consideration of $99,999.68. (4 May 2022,ASX:MAY, Director's Interest Notice -Andrew Purcell). Then on the 18/05/2022, Andrew Purcell was granted 31,812,050 performance rights. The chairman then chose to dispose of 10,000,000 fully paid ordinary shares for a value consideration of approximately $965,293.08 for the following reason: "to meet past due and upcoming tax bills." Mr Peter Stickland also sold some shares "for personal reasons" (18 May 2022, ASX:MAY, Changeof Director's Interest Notice).

Whilst I agree that selling for tax purposes does seem legitimate, I believe this could also be viewed as a bet against Zapato-1's success (if they sold after the outcome of Zapato-1, then maybe they would get less for that quantity of shares sold [maybe the price will go down on a dry Zapato-1 well]). And... there would easily be a period to sell after Zapato-1 (after any quarterly or half / annual report, according to Melbana's own “security trading policy”).

Some commentary of the sales:

2) Security trading Policy:
The reason Melbana's "security trading policy" limits the sale of insider shares on market to "each period between the first of January,April, July and October until 24 hours following the release of the Company's quarterly results to ASX."

https://www.melbana.com/site/cpfile/522194ae-f857-4b5b-b7b3-5127c438a53e/200625_MAY_GOV_TradingPolicy_APPROVED.pdf
is possibly to reduce the likelihood of insider trading.

Interestingly....when you listen to the following video published on the 05/05/2022you can hear:

https://www.youtube.com/watch?v=lE-tdBHzO8I&ab_channel=InvestorStream&t=5m15s

Andrew Purcell: "Let me finish these meetings, then we'll have a proper update for the market on my return, on what we'vedecided what the work plans are, a proper recap of what's going on in Cuba, just to give everybody the full picture again, given the rapidity of the news flow..." Would this classify as "insider information" yet to be released to the market? (please review this youtube video, I cannot quite hear clearly the words "what we've decided", which would change the context considerably). If you read the announcement the chairman is referring to, you would come to understand it was a "price sensitive" announcement... 1 Jun 2022, ASX:MAY, Block 9 Operations Update, which disclosed information that was not available to the market, but was available to the insiders (since the "week of meetings in Havana last month")

So the timeline is thus:

• 4 May 2022: Andrew Purcell (Executive Chairman of ASX:MAY), acquired 1,116,122 for a value consideration of $99,999.68
• 05/05/2022: video published on the 05/05/2022 describing the intentions to release an announcement to market "what the work plans are" https://www.youtube.com/watch?v=lE-tdBHzO8I&ab_channel=InvestorStream&t=5m15s
• Then on the 18/05/2022, Andrew Purcell was granted 31,812,050 performance rights. The chairman than chose to dispose of 10,000,000 fully paid ordinary shares as well as 250,000 options for the following reason: "to meet past due and upcoming tax bills."
• Then on the 1 Jun 2022, there was a price-sensitive announcement released by ASX:MAY, titled: Block 9 Operations Update, which described the following: "Melbana held a week of meetings in Havana last month with its partners to discuss the forward plan.... technical and financial plans for these forward operations are now being developed .... Melbana is currently seeking the necessary approvals to appraise the three oil bearing zones... left on production..." etc etc... Source: 1 Jun 2022, ASX:MAY, Block 9 Operations Update.

I am not worried about this... but some might think this crosses the “line”, but it would all depend on whether or not the 1/06/2022 announcement released anything "new" and "price sensitive" which was "known" by the "insiders" when they "sold".

3) Seismic Processing:

“Drilling progress has slowed, as predicted but higher than prognosed, due to the hardness of the formations now being encountered.” 16/06/2022, ASX:MAY, Zapato-1 Drilling Update.

The “calculated” gravity and magnetic values, are dependent on the densities, and magnetic susceptibility of the strataattributed to the estimated subterranean layers.

If they encounter a layer which is more dense or “harder” at a higher depth than prognosed, this could mean either their depth calculation is incorrect, or incorrectly calibrated, or the layer itself was miscalculated as a layer with a lighter density. This possibly incorrect density then would mean another layer somewhere else in that particular column could have an incorrect density (as the column of densities is supposed to match the observed value for that cross section, therefore, the target “oil bearing” layer may not actually have the necessary density and magnetic susceptibility that is required, meaning it might not be oil bearing source rock at all).

At least they got the ophiolite slab correct, therefore maybe they are not as far off as they could have been, if the ophiolite slab was also incorrect.

4) Water in Alameda-1

Andrew Purcell: “… well one of the explanations for water is that you have reached the bottom of the reservoir,you’ve reached the oil-water contact..”

“but even if it is the bottom of the reservoir we have a 300m interval here”

Source: https://www.youtube.com/watch?v=zaoQB63H9To&ab_channel=InvestorStream

Source: James G. Speight Natural Gas: ABasic Handbook, Gulf Professional Publishing, Elsevier Inc. 2019.

Therefore, Marti might not be as big as was anticipated.

5) The Gravity and Magnetic alignment of Zapato:

“Zapato prospect has indicated a strong gravity and magnetic alignment with the structural interpretation Melbana’s technical team derived from seismic and surface data.” 12 Jun 2018, ASX:MAY,Cuba Gravity & Magnetic Study Supports Large Prospect

Andrew Purcell: “..gravity has identified for us, as well as the seismic a very large structure at Zapato…” source:https://www.youtube.com/watch?v=OtuIJGuaU3Y&ab_channel=EnergyNewsAu

“Zapato-1 to test a structure identified by strong gravity and magnetic results that aligns with structural interpretation derived from seismic and surface data” -ASX:MAY 04/08/2021

Source: 61991737

Both left and right of the Zapato-1 drill line potentially have“stronger” alignments, they are drilling this location because that is the crest of the seismic structure… (in an ideal world you would rather drill in a place that has stronger magnetic/gravity alignments and a structural crest)…

A quick comparison of the prospects tells you Zapato and Alameda arequite different:

	Prospects:	Magnetic Strong?	Gravity Strong?	Prospect historical oil shows
1	Alameda, Amistad, Marti	No (Flambeau’s visual comparison of the maps1,2,3)	No (Flambeau’s visual comparison of the maps1,2,3)	Yes (ASX:MAY 27/01/2022)
2	Zapato	Yes (ASX:MAY 04/08/2021)	Yes (ASX:MAY 04/08/2021)	No (no drills into Zapato)

1- 2 Jan 2019, ASX:MAY, MELBANA ENERGY LIMITED, Binding farmout agreement signed for Block 9
2- E. Johnstone and D. Johnstone et. al, Research and Development into.Predictive Geologic Models for the. Structural Geology of Cuba Block 9 andBeyond. Havana, Cuba - April 2019. https://www.melbana.com/site/cpfile/1ad34e99-eff1-4231-8119 b14e3a6ec87f/PresentationGeosciensias2019v3FINAL.pdf
3- 12 Jun 2018, ASX:MAY, MELBANA ENERGY LIMITED, Cuba Gravity & Magnetic Study Supports Large Prospect

Therefore, if Alameda-1 found oil with relatively low magnetic/gravity,then we might expect the inverse result for an area with relatively stronger magnetic/gravity signals (like Zapato). What we learnt from Alameda-1 was that low magnetic/gravity alignment yielded oil, therefore the same might be trueover the rest of Block9, meaning Zapato is less likely to have oil.

Explanations for why geologists would persist with relatively higher magnetic/gravity alignment is:

i)“Magnetic measurements demonstrated the formation of these magnetic minerals peaked at 250 °C for all rock samples… The newly formed magnetic minerals are suggested to be primarily pyrrhotite, though magnetiteand greigite are also thought to be present. The sizes of the magnetic minerals formed suggest a propensity to migrate together with oil potentially explaining the magnetic anomalies observed above and within oil fields.” R. Abubakar et.al. Formation of magnetic minerals at hydrocarbon-generation conditions, Marine and Petroleum Geology, Volume 68, Part A, 2015, Pages 509-519, ISSN 0264-8172,

ii)“In order to explain the origin of these magnetic mineralsand their association with hydrocarbon reservoirs, two basic mechanisms havebeen proposed: (1) abiotic, and (2) microbial.” E.A. Burton, H.G. Machel, J. QiThermodynamic constrain on anomalous magnetization in shallow and deephydrocarbon seepape environments. Soc. Sediment. Geol., 49 (1993), p. 15

iii)“Variability in responses are generally supported bythermodynamic modelling, which predict a wide range of diagenetic behaviours ofmagnetic minerals in the presence of hydrocarbons depending on background rockmineralogy, depth, sulphur presence etc.” Abdulkarim Maryam A et. al. Effect ofHydrocarbon Presence and Properties on the Magnetic Signature of the ReservoirSediments of the Catcher Area Development Region, UK North Sea, Frontiers inEarth Science, vol10, 2022.

Therefore, the literature suggests, prospects like Alameda might nothave had variables like rock mineralogy, depth, and sulphur presence which couldcontribute to a thermodynamic magnetic signal. It would have been likelyAlameda also did not have a microbial magnetic genesis. On the other hand,Zapato may indeed have variables contributing to thermodynamic or microbialmagnetic genesis.

However, if you go off the most recent data (the Alameda-1 well) we seethat a presence of hydrocarbons was detected at that depth in Block 9 withoutrelatively high magnetic/gravity signals.

6) Potential for the Operator of Block 9 to change:

Sonangol may choose to become the operator of Block 9 in accordancewith the joint venture agreement. “Melbana to remain operator, until thecompletion of the two well drilling campaign thus, maintaining responsibilityfor operations and management of costs.” 23 Dec 2019, ASX:MAY, Farmoutagreement signed for Cuba Block 9 PSC

Andrew Purcell: “Sonangol a very well resourced company who want us tocontinue as operator, forward..” https://www.youtube.com/watch?v=hVzDsv0q5Eg&ab_channel=InvestorStreamMar 9, 2022. It is true, theyare to “continue as operator”, however the agreement was for Sonangol to havethe option to take over after the two wells are complete, so both might be true(Melbana continues as operator until Sonangol takes over?).

The downside to not being the operatorfrom a shareholder perspective is: potentially less news catalysts, AndrewPurcell said “We appreciate the opportunity to be the operator of thistwo well drilling program as this will allow us to monitor costs and seek todrive the agenda,” https://themarketherald.com.au/melbana-energy-asxmay-signs-hoa-with-sonangol-for-cuba-block-9-psc-2019-12-23/

7) Dilution, Options expiry: 10/09/2022

Source: 26/07/2022, ASX:MAY, Application for quotation of securities –MAY

People might prefer to sell their shares to finance the conversion oftheir options before 10/09/2022 (this might add selling pressure and furtherdilution via converted options).

8) Cuban Government:

The Cuban Government have political ties to Russia. Is there apossibility Russia asks Cuba and Angola (another historically soviet backedcountry) to cease co-operation with countries that are helping Ukraine, likeAustralia?

If you look at Russian supplies of oil to Europe, you will discoverthat the Russian oil “taps” might be turned off, this might further exacerbatea volatile situation. Source: https://voxeurop.eu/en/ukraine-europe-russia-turning-off-the-oil-tap/

When asked about the Cuban political ties to Russia, Andrew Purcell saidtheir agreement is backed by Cuban law. https://www.youtube.com/watch?v=hVzDsv0q5Eg&ab_channel=InvestorStream

9) The depth of Zapato prospect crest, controversy:

“Target structure estimated to begin at approximately 2,650 metres” 29Jun 2022, ASX:MAY, Zapato-1 Drilling Update

“Target structure estimated to begin at approximately 2,650 metres” 16Jun 2022, ASX:MAY, Zapato-1 Drilling Update

“Zapato-1 now at 1,233 metres with target structure estimated to beginat 2,650 metres” 7 Jun 2022, ASX:MAY, Zapato-1 Drilling Update

“Zapato-1 drilling ahead, now at 586 metres. Target estimated to beginat 2,650 metres” 1 Jun 2022, ASX:MAY, Block 9 Operations Update

“Crest of structure~2,000 metres with nearly 1,000 metres vertical relief” 22 Nov 2019, ASX:MAY, AGM Presentation

“The Zapatofeature has a crest at approximately 2,000 metres and is a robust structure with nearly 1,000 metres of vertical relief.” 07/08/2018, ASX:MAY, Independent Expert Upgrades Prospective Resources in Cuba Block 9 and Beehive

A fairly clear diagram showing a crest at approximately 2000m, WITH THE PROPOSED Zapato-1 drill location source: https://www.youtube.com/watch?v=RKADdOoGRv8&ab_channel=InvestorStream

9 Mar 2022, ASX:MAY, Investor Webinar

Source: 22 Nov 2019, ASX:MAY, AGM Presentation

Annotation: Interpretación interválica litológica / Interval lithological interpretation
Source: E. Johnstone and D. Johnstone et. al, Research and Development into. Predictive Geologic Models for the. Structural Geology of Cuba Block 9 and Beyond. Havana, Cuba - April 2019. https://www.melbana.com/site/cpfile/ 1ad34e99-eff1-4231-8119 b14e3a6ec87f/PresentationGeosciensias2019v3FINAL.pdf
Probably the most trustworthy of all the sources I found was the “Interpretación interválica litológica / Interval lithological interpretation” in the report by E. Johnstone and D. Johnstone et. al, Research and Development into. Predictive Geologic Models for the Structural Geology of Cuba Block 9 and Beyond. Havana, Cuba - April 2019. If you look at the diagram in the published media, and if you zoom in, you can read the depth on the side of the diagram, which contradicts the “2650m” announcements.

Source: 62445264

If avthold04’s theory is correct and the company was trying provide abuffer for shareholder expectations, usually that would be perfectly fine,however if the company’s ASX publications were incorrect, then I take a dimview of that behaviour.

Another theory postulated today was that the definition of "structure" and "target" might be different, e.g "structure" = seismic structure, "target" = hydrocarbon accumulation, or more specifically: "the structure is what they are drilling, the target is an accumulation of hydrocarbons though" (62753704). The biggest problem with this theory is the lack of scientific evidence, what evidence are they using to guess where the gas/oil interface is (hydrocarbon accumulation)? If it is based on nothing, and if it is baseless, then it does not deserve a right to be published by the ASX. I believe this is why we saw no reference to the "Target structure estimated to begin at approximately 2,650 metres" mentioned in today's "Zapato-1ST Drilling Update", for the first time...

Why would they need to incorrectly suggest 2650m is where the target structure is estimated to begin? I wonder what their motive was for this.

10) Time to drill to target:

The estimated time to drill Zapato-1 was said to be approximately 55days:

“Zapato-1 is estimated to take about 55 days to reach itstarget depth..” 28 Apr 2022, ASX:MAY, Quarterly Activities/Appendix 5B CashFlow Report

Then, the “drill string became stuck”. 18/07/2022, ASX:MAY, Zapato-1Drilling Update

Using a 10-5/8” bottom hole assembly, the drill rate has increasedprior to the drill string being stuck. Which makes sense as this BHA is about13% smaller, which means it drills through 13% less material. However, thiscurrent drill rate is much faster than I anticipated. If this drill ratecontinues then the 2000m structure may be penetrated in 9-10days from now. If we do not encounter hydrocarbons in 9-10days, either the drill rate slowed down, or maybe there was not hydrocarbons are a depth of 2000m or maybe the Zapato prospect is dry. (to be fair, my own interpretation of Interval lithological interpretation [E. Johnstone and D. Johnstone et. al, Research and Development into. Predictive Geologic Models for the. Structural Geology of Cuba Block 9 and Beyond. Havana, Cuba - April 2019] suggests the structure is to be penetrated by about the 2235m mark).

11) Financials:
When the quarterly and production plan is released, we will check the status of the financials to determine if Melbana could be able to fund their share of the yet to be announced "production plan".

FAQ: Why am I holding? The share price went up today, there was money to bemade, so I bought in to ride the wave to the quarterly/Marti assessment.