moving forward

Happy New Year Meomites.

I haven't posted for a while but after eighteen months of the Artemis marathon finishing in a one sentence conclusion I thought it was a good time to take a break whilst things settled down a bit. In any case, with little new info coming out of HO, there has not been much to comment on.

I am in the fortunate(?able) position that I was able to hold through the drilling of A#1 and take the 50% paper hit on and wait for better times. The upside of success was worth the risk IMO, especially after the CR which raised the cash VPS to 18.5c. This was my own calculated investment decision. Unfortunately it was the last straw for many holders and I feel for those that sold at a loss. Some would have been holding since pre-Heron days.

The outcome has been very fortunate for those buyers have been able to load up some very cheap shares in the company. Unfortunately circumstances dictate that I am not one of them this time around but I am still happy with my lot. The bottom was soon reached after the Artemis failure and has been tested with large volumes over time.

MEO will continue to provide a bounty for traders. At these prices even a 3c rise provides a 15% profit, as shown but the recent 'substantial holder' news. What it also showed was the number of pple still waiting in the sidelines ready to put their money into the stock, even after the past disappointments.

I have always looked on MEO as a long term investment and my position has not changed. Of course I would have liked to have seen HCs found in 360P, perhaps another well is on the cards but MEO have other projects. On the positive side, MEO has found itself in a far stronger financial position at the end of the process and we still have to see the final results from A#1 and where each of the PPs stand.

I notice that there have been a couple of requests for my opinion (from GWBushJR and others)sent my way so I will make a couple of IMHO comments on the present situation as I see it.

WA-360-P

Following the ann that there were no HCs encountered there has been no news about where to from here with the permit. MEO and PBR will be studying the drilling logs and comparing them with the seismic data to see where to go from here. Like WA-361-P and Zeus it must be determined where any HCs may have migrated to and if there is another trap within the area that may be holding HCs.

MEO has now fulfilled its obligations as operator in drilling A#1. For PBR to continue with the agreement, in its present form with MEO the key words are 'upon success'. The only way to prove success (depending on the A#1 log analysis) would be for another wildcat well to be drilled. If PBR decide to continue as participants in the JV then a sub-clause may be added to the agreement that all PPs pay their share of the costs. For a $40m well the break up would be:

PBR 50% - $20m; MEO 25% - $10m; CUE - $6m; MOG - $4m.

Perhaps PBR will take over MEO's costs of a further wildcat well to partly fulfill the agreement of 'two further wells'.

The question still remains if PBR decide to take over as Operator and who will decide the position of any further wells. If the permit goes to renewal at the end of the year it will be up to the individual PPs to decide whether or not to continue. As far as MEO is concerned, real estate within the NWS is valuable so I assume they will continue to participate like they did with WA-361-P. The question will be how to decide which seven blocks to let go.

Until we hear further from MEO or, more importantly, PBR, any future scenarios are all speculation.

A company should not be determined on the success of one wildcat well. Investing on this premise really is just gambling which is why successful traders have coined phrases such as BESBS, buy on rumour sell on fact etc.

As LT investors we need to look at all the other factors included in a company's business plan.

The Heron farmout

The data room has been open since 14 Oct 2010. During the AGM the CEO indicated that he would give potential farmees time to study the data. This is because the permit has just entered year one of its renewal and the fact that MEO now owns 100% of the permit. The option for Petrofac to buy back a 5% interest each in NT/P68 and TS will expire on 30 June 2011.

JH also indicated that it would be difficult to negotiate a similar lucrative agreement as was obtained with PBR for WA-361-P. The fact that there is gas in Heron is a plus. The quantity and quality still needs to be determined.

During the CEO's Open Briefing after the A#1 failure JH stated that 'Our published expectation is to conclude this process by the end of Q1 2011 or early Q2 2011.'

From this we can assume that we won't have any news until March at least, but experience with MEO has dictated not to set deadlines. I still wonder if the farmin could be dependent on other investment decisions by companies in the area are still being played out.

Blackwood, Tassie Shoal and surrounding stranded gas.

Since my last post regarding the MGN/STO/Evans Shoal deal the deadline is looming closer. YEP have guaranteed MGN the funds for the purchase and MGN have stated they are still waiting:

'MPAL and Santos agreed to extend the date for closing the acquisition until January 31, 2011 in order to allow additional time for the parties to obtain customary transaction approvals.' as per the Magellan quarterly report released 31 Jan 2011.

Until we hear differently, the deal is still on. Any unsourced media reports can only be read as speculative. The West Australian report says STO 'are ready to pull the pin.' If STO still feel comfortable with the transaction then they will grant another extension.

There again if STO feel there is another player in the area that does show they have the funds available then perhaps they will weigh up their options. Approvals from a number of other sources are also needed. They received FIRB approval in June 2010 so what are these other approvals? But this is only speculation on my part.

If the deal does go through and MGN become the new operator of Evan's Shoal then, hopefully, the other scenario comes to fruition where the ES JV is looking for a quick solution for processing some of the gas in a nearby Methanol Plant within the permit.

I notice that MGN is in a trading halt as I write with details of a confirmed extension to be released, so the intrigue continues:

The agreed extension is noted in the MGN ASX release here

Whatever the outcome of the potential ES JV, MEO is still looking for a gas feed for TS projects. Hopefully Heron (5Tcf?) will provide enough LNG quality gas for the TSLNG project. A 3Mtpa LNG plant requires approximately 3Tcf of gas to operate for 20 years.

Both the TSMP and TSLNG projects are designed 'to share infrastructure, logistic support systems and benefit from a number of production process synergies.'

For the TSMP, MEO will still hold 100% of Blackwood in the NTP68 permit. An MEO release has stated that: 'there may be 1700 Bcf of raw recoverable gas at Blackwood. The first methanol plant proposed for the Tassie Shoal Methanol Project requires approximately 1400 Bcf of raw gas (including inerts) to produce 1,750,000 tonnes per annum for 20 years of operation'.

Gas with high CO2 content is required for Methanol production and, whilst the quality of gas in Blackwood is known, the quantities need to be tested. A gas feed from Evan's Shoal would be ideal but the status there is in limbo at present. It must also be noted that the (<.15%) CO2 from the LNG processing (out of Heron) could be stripped and added to the CO2 going to the Methanol Plant.

It must also be noted that ConocoPhillips has put its 60% controlling stake in the Barossa-Caldita gas fields up for sale. It appears that whilst Conoco do not want to develop the fields a stipulation is that the gas must be processed at their plant at Wickham Point in Darwin. It is interesting to note that the Barossa-Caldita gas fields contain an estimated 3.5Tcf of gas >10% CO2. The Wickham Point�s annual production capacity is 3.2mtpa - comparable to the TSLNG/Heron project

Whilst this solution does not fall into the TS scenario I cannot see the Oz regulatory authorities seeing this as fair trading/competition especially in the realm of the use it or lose it policy.

Commonwealth environmental approvals have been granted to MEO for the development of the proposed Tassie Shoal Methanol project and the Timor Seal LNG project. These approvals are in place until 2052. This must be a beacon for companies wanting to produce gas in the area both in cost savings outlined in numerous MEO presentations and time saving and security with government approvals already in place.

For years now the hold up for the TS projects has been the supply of gas, but there is plenty of CO2 challenged gas in the area. The CEO hinted in the 'Open Briefing' 16 Dec 2010:-

'Concurrently we will continue our efforts to secure gas for the TSMP. This may be via acquisition of equity in a field suitable for direct supply or blending with Blackwood gas, or through a gas purchase agreement with any of a number of the regional undeveloped gas fields.'

Hopefully this year we can see a solution forming on the horizon.

Other projects

There has not been much said about these apart from the acquisition of AC/P50 & AC/P51 with some other mystery bids put in for new releases. I am sure the new Chief Geologist is looking for new opportunities.

The SP action

Since the demise of A#1 there has been a turnover of c.585m shares. 18c was hit on the day of the bad news and has traded between 19.5 and 25c since then. It appears that the SP is holding above the new low of 19.5c.

With the shares are very good value at the moment it is not surprising to see some accumulation. According to the initial substantial holder lodged last week it appears that Credit Suisse is acting on behalf of a new holder. I hope this new player can see the potential of MEO's plans and will become involved in the growth of the company. What I wouldn�t like to see is another algorithm based vehicle to give us long term MEOmites further headaches.

Looking at today's T20 notice:

On the MEO website here

We can see that there have been a number of moves by institutional investors. Apart from the new substantial holder with holdings in CS Forth with 18,125,000 shares and HSBC with 9,538,769 shares (as per notice) one HSBC account has been emptied (13.9m shares or 2.58%) whilst one of JP Morgan's accounts has been increased by 9.8m. The other HSBC account (linked to CS Europe) now has 14,339,888 shares so it will be interesting to see whether this difference of 4.8m shares is more accumulation by CS Europe or another entity.

The new list is in a different format so it is difficult to work out the changes now but overall the T20 has increased by 1.5%. There always seems to be someone ready to take up the slack as the large volumes of shares go through.

We have been here before and I don't think there is much difference between now and post Heron and Zeus as the SP has again gone back to cash value with little regard for the other projects. The main difference is that the GFC is all but over and the fact that management has brought MEO into a financially strong position through adversity is a credit to them. This has helped manage the risk for LT investors. Instead of major investors selling (post Heron) we have new boys on the block showing interest in the company. The global stresses will always have an effect on the SP but a month down the track has proved that it has been harder for traders to push down the SP which is an indication of strength.

There will always be the discussion of LT vs ST interests but the pendulum will always find a balance depending on the fundamental and technical situation of any stock at any given time. MEO will continue to provide for both sides.

Sale of shares

I notice there has been some talk of the CEO selling some shares. It is none of my business how the CEO or his family trade shares but the shares that were sold were those held in a family trust. It is all in the detail of the 3Y anns. The accumulation began with a purchase of 100000 shares on 30 Apr 2010. At that time JH held 1.261m shares:

Holding by entity controlled by spouse of Director

This was just after the PBR farmin agreement was announced. Because of the confidentiality agreement there would have been a blackout of Director Purchases and we all know how long the negotiations took. Since then the trust increased its holding to 464000 shares over time with the final purchase of 25000 shares 3 Dec 2010.

From the latest 3Y release it can be seen that it was the 464000 held in this trust that were sold. This accumulation was post farmin ann and may have been a play on the possible success of A#1. Perhaps JHs wife had some money to invest and took the punt, like so many others, based on the possible success of Artemis. It appears to be an individual decision and perhaps the funds were always needed post A#1 drilling. Rather than producing a free carry, which success would have achieved, the shares had to be liquidated. I am sure it would have been a reluctant sale. This unfortunate scenario happened right through MEOland.

The important thing to note is that JH still has his original holding of 1.261m shares. Since the A#1 drill no actual directors have sold shares and Mr Short has increased his holding by 95000 shares. According to the Ann Report four Directors and three Executives hold a total of >5m shares without any sales over the last two years.

Finally.

MEO always seems to be in farmout mode and the law of averages must deem that success will come one day. We have a small but dedicated team who are working towards building a company using sound management practices through adversity.

The basic fundamentals of MEO are still strong IMO. Like the management, those LT holders who are left will need to continue to be patient as the MEO story unfolds.

#:>))

My apologies for the long post and if I have repeated any info already posted. I have not listed all sources but they are all in cyberland somewhere.

This is only my own opinion I put forward. Please DYOR as my LT investment approach may not suit all MEOmites.