prosperman,I stumbled upon MEO relatively recently when...

prosperman,

I stumbled upon MEO relatively recently when researching Woodside’s Ananke-1 well. It was drilled in the permit next to MEO’s WA360P in the Carnarvon Basin. Although it was an important well for Woodside for its Pluto LNG expansion, there was very little information (or should I say none) about its prospects released by Woodside. But to my surprise I found a lot of geological information in various company releases made by MEO from which I was able to get a very good idea of what the well was targeting and its potential size.

Although the well was (apparently) dry, from the information gleaned from MEO I wondered whether it was drilled in the right place to test the potential of all the possible reservoirs. I believe that the play could still hold potential for Woodside and also for MEO with its Maxwell Prospect across the border.

As a result of my research, I found that I was relatively impressed by MEO – although I was pilloried by some bloggers for suggesting that MEO’s forthcoming Gurame well in Indonesia should be targeting the oil legs not the gas.

I was impressed because for a relatively small O&G exploration company like MEO, I believe that it has built an excellent and diverse acreage position. Not only is its acreage portfolio good, but it has been able to attract astonishingly good farmin deals from major international companies such as Petrobras and Eni based on I would guess, excellent technical work (based on what I had already seen) in MEO’s announcements.

Farmouts are particularly important for a small exploration companies with a small capital base. These farmouts together with a relatively modest capital raising two years ago (some will quibble about its timing during Artemis-1 drilling) placed MEO in a great position to further expand its exploration acreage portfolio.

Artemis-1 was a disappointment but two discoveries from four wells is still an extremely good result. You must also remember that drilling these wells secured MEO’s continued participation in Australian exploration permits under the program bid regime for offshore blocks.
So with Eni spudding Heron South-1 what why is MEO’s share price plummeting? Why is a large investor exiting the company?

It comes down to Gurame and MEO’s decision to drill the well 100% after failing to secure an attractive enough farmin offer. Personally I think that the company needed to do a farmout deal even if it wasn’t all that it wanted. I think that this was a stumble that MEO did not need and probably did not anticipate. Very disappointing for a much vaulted management who seems to have got caught up in its own rhetoric, attempting to push to a market which didn’t see as much value in the deal as MEO did. When going back to look at company announcements, it appears that the MD indicated that the company would be prepared to drill a well on a 100% basis even before the company had received all of the 3D seismic data the company itself had shot. A big call!

The Gurame well will cost $25 million on an untested basis with say another $10 million (likely given that this is a known oil and gas accumulation) to test giving a total cost of $35 million. On top of this well, MEO have also committed to drilling another well offshore Thailand. I haven’t seen any cost estimates for this well but let’s say another $8 million. This gives a total expenditure of $43 million this year. MEO’s cash position at the end of July 2012 was $62 million. With administrative overheads running at some $700,000 per month (say $4 million for the remainder of the year) this will leave MEO with just $15 million in the bank at the end of the year without considering any other exploration expenses.

The consequences of failing to farmout Gurame is that MEO will be forced at some time to do a capital raising. It is just when they decide do it. Despite all the other attractive things about MEO, this is what is spooking the market right now.

It is going to be interesting to see what the company does to get confidence back in the market. It doesn’t want to go down the same path as Nexus where its ambitions did not match its financial capability. I hope not.