foxdavies research

Below is the text of the latest FoxDavies report about MEO.

Discoveries not priced in
Trading at A$0.19, MEO’s share price reflects their $90mm cash position alone,
and not the 5 assets at the appraisal stage or the 11 exploration assets. With a
successful appraisal programme adding in excess of A$1.40 to the current
fair value and cash accounting for A$0.18, the shares are undervalued. We
are initiating with a target price of A$0.60 and a Buy Recommendation.
• 5 appraisal assets with prospective resources exceeding 500mm boe: The
Company has an interest in 5 assets that are subject to appraisal, 3 in Australia and 2 in
Indonesia, with combined potential reserves of more than 500mm boe. While principally
gas based, Asian gas prices remain strong, especially in light of the recent decline in US
gas demand.
• 11 exploration prospects targeting in excess of 1bn boe: The Company is exposed
to potentially game changing exploration targets, with in excess of 1bn boe in potential
resources. While further work is required to derisk the assets, all of the assets are
located in basins which have a history of development, well-established production
infrastructure and strong recent prospectivity.
• 3 well drilling programme in 2012 targeting 600mm boe: The Company has an
active period with the drill bit in 2012, with a three well drilling programme all spudding
in 3Q’12 ; Heron is an appraisal well (targeting 438mm boe), while Ibu Horst (225mm
boe) and G2/48 (unknown) are exploration wells.
• MEO’s current valuation essentially cash: MEO has approximately $90mm in cash,
which equates to A$0.18 a share, or 95% of the current share price. Consequently, the
value of the development portfolio (A$0.40) and exploration portfolio (A$0.12) is not
reflected in the current price. MEO’s current share price underlines the fact that the
Australian market does not efficiently value assets outside of its borders. As such, we
believe that the company would be better served on an alternate exchange, where the
value of the portfolio would be more likely to be reflected in the share price.
• Management has derisked its portfolio: Management has had significant success in
farming out its portfolio, in so doing managing its financial resources and risk profile;
the Company is carried through the majority of its near-term appraisal programme.
• Successful appraisal will add A$1.40 to the current value: While the company has
farmed down, it has retained sufficient working interests to have a meaningful
participation in the upside, with the potential to add A$1.40 to the existing fair value.
• We initiate with a Buy recommendation and a A$0.60 price target: Given the cash
position and its portfolio of assets, we believe that the shares are currently significantly
undervalued. Furthermore, MEO has significant exposure to the Asian gas market,
which structurally now appears to have a very strong future. As such, we are initiating
with a Buy recommendation and a A$0.60 price target, which we believe is a better
reflection of the risks within its undervalued portfolio.
YE Jun (A$mm unless stated) 2011 2012E

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