MAD is currently trading well below our fundamental valuation on...

MAD is currently trading well below our fundamental valuation on just the production of the 1P reserves, and therefore we continue to have an outperform recommendation.


Our valuation includes the production of the ~100mmbbls of 1P (Proven) reserves announced by MAD, resulting in $1.12ps for those reserves alone.
At these share price levels, the market is essentially saying that less than half of MAD's Proven reserves are real. In our view, that is too much.
We believe in the reserves report. However, even if the market only values half of the 1P reserves, at this share price there is still upside from here for high impact potential and the rigs and surface equipment that MAD owns, in our view.
High impact results will be both positive and negative, but at these levels the share price is including nothing for high impact in our view.
A comment on the share price
The MAD share price has declined significantly over the last quarter. We believe there could be several factors contributing to this, including disappointment in the June and September quarterly production declines, profit taking ahead of the US tax changes, delays in the Gulf South funding announcement, anticipation of the voluntary escrow shares coming on market, and a high number of short selling on the stock.
We believe MAD has addressed the majority of these concerns in its announcements. In our view, the monthly increasing of production over the December quarter is positive (from 500bopd to 735bopd as at 19 Dec). We were disappointed in the two quarters of declining production but believe that the company is back on track with a focus on fairway drilling and we believe the monthly production will continue to increase. MAD has looked expensive on production but cheap on reserves compcos. We believe that as MAD increases production again, the market will recognize the future potential.
We believe it will take more than one quarter of increasing production to convince the market, and that the March quarterly announcement (released in April) will be important. However, this December quarterly announcement should provide some information that in our view should arrest the decline in share price and give confidence to the market on further production increases.