rbs morgans

This out recently:


Maverick Drilling and Exploration Ltd (MAD)
Market Cap: A$272m
Recommendation: Buy
Share price: A$0.73
Price target: A$0.76
Subject: MAD potential valuations based on upcoming announcements



As MAD has reached our target price, we wouldn't be uncomfortable with people taking some profit. However, we see real upside potential from the additional acreage, and are awaiting announcements on flow rates (expected this week for Boling Dome), reservoir characteristics, targets, and initial reserves. We would anticipate that positive news on any of these points would enable us to reevaluate the risking on our current valuation. We note that there may be a need for MAD to raise funding if they want to increase drilling and evaluation activities in the near term rather than waiting and funding through expected increasing cash flow, but that increases in drilling activity would also lead to increases in valuation. Therefore, for those that can handle some risk, we suggest holding for upcoming catalysts or buying on pullbacks.

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.
In order for Maverick to really take advantage of its acreage and reserves, we see a need for it to increase the number of rigs it has on the fields, or to farm out some of the acreage in a JV arrangement. Purchasing of additional rigs and training crews might need additional debt or equity funding. Maverick had ~$7m in cash at the time of the December quarterly.
* 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
* Action -
As MAD has reached our target price, we wouldn't be uncomfortable with people taking some profit. However, we see real upside potential from the additional acreage, and are awaiting announcements on flow rates, reservoir characteristics, targets, and initial reserves. We would like to see average production of 1000bopd for the month of February to make sure the field is continuing to perform. We note that there may be a need for MAD to raise funding if they want to increase drilling and evaluation activities in the near term, rather than waiting and funding through expected increasing cash flow. The main risk to the MAD valuation is the oil price, as they have a high fixed cost per bbl.