reserves & corporate governance

I find it amazing that many people on this forum are willing to accept the reserves are correct. Reserves are nothing more than the sum of expected future production. In the case of proved reserves you should be 90% confident you will meet or exceed the forecast future production. The implication of this is that is many cases if you fail to deliver expected production it is an indication the reserves are not present.

Sadly in the oil field whilst there is upside, uncertainty is invariably skewed to the downside. This is because there are more things that can go wrong and result in under-performance than can go well to result in over performance. E.g. a pump can break down and require maintenance which will lead to under delivery but a pump will not suddenly run twice as fast. Permeability if lower than expected leads to proportionally lower production but if it is higher the results are usually more moderate due to wellbore hydraulics and other downstream constraints. The list goes on and on.

A quality forecaster can incorporate this, but there is a problem across the industry of over optimism, however MAD have under-delivered to a far greater extent than most companies over the last 18months.

This seems to be a combination of issues:
1.) They are having operational difficulties resulting in a number of wells being shut-in. Insufficient detail is given to know what causes this but history of the fields pre MAD would suggest it is issues related to formation integrity when water is produced. This is going to be an ongoing issue and a basic analysis shows that >50% of oil is produced at a water cut above 70%
2.) A significant number of the proved wells are coming in dry or below expectation net thickness. This being the case they should be writing off the associated reserves unless they have an equal increase from a drilled well. However the constant underperformance of the drilled wells versus their own forecast shows this is not the case.

It is important to understand the relative contribution of 1 & 2. 1 can be fixed, or another company who thinks they can do better will pay handsomely for such a well located asset. 2 cannot be fixed as essentially it says the volumes do not exist.

Company reporting is opaque at best therefore it is not possible to quantify the split between 1 and 2. Final production from October has now been reported to the RRC and it seems “~500bbl/d” was actually 476bbl/d. Note though that the production they report includes royalty volumes so the production MAD are entitled to receive revenue from is actually 357bbl/d assuming 25% royalties as is fairly common in Texas.

They are already undershooting my production forecast (published previously and consistent with 9 MMbbl not 100 MMbbl) already which I will revise after the quarterly. There is also the outstanding question of how much has it cost them to achieve these results?

Based on their stated capex and assuming no dry wells were drilled they would have spent ~$4.2mln on wells, which should be very similar to their net revenue (after opex and royalties) over the period. Therefore any net drop in the cash balance will be due to dry wells and equipment purchases.

We know they have done the following, the costs are guesses:
1.) Drilled 1 shallow (Long Brach #55) unsuccessful exploration well, assume $0.5mln
2.) Drilled 1 unsuccessful high impact well, assuming that was 10,000ft and vertical it should have cost $1mln
3.) Acquired 5 well servicing rigs and 4 swabbing rigs assume total cost of $4mln
4.) Acquired 211 acres, assume $2mln
5.) Paid G&A, assume $2mln
6.) Given their previous cash balance was $64.5mln, and taking the above into account, their cash balance in the next Quarterly should be ~$55mln.

Given the operations they undertake are fast and easy, and should typically take 2 weeks or less to bring a well online, why are the results only going to become clear in Q1? Three months after management stock is released from escrow.

Worth googleing the person who carried out the reserves report. Compare this with a name that is more frequently used by ASX listed companies (e.g. Gaffney Cline, NSAI, Ryder Scott etc). Also the CEO (http://www.sec.gov/litigation/litreleases/lr16042.txt) as per a pervious comment.

I am short