My original post commenting on the reserves/production ratio for MAD was simply to point out that MAD is a major outlier using this benchmark. I do not use this as a way of valuing companies or fields, but to identify those with anomalously high or low values, and thereforth as a leading indicator of likely future negative/positive revisions. A very low R/P ratio is likely to have additions to reserves whereas a very high R/P ratio is likely to have reserves debooked.
As we all know reserves require judgement and interpretation whereas production is simply measured, when a company has an R/P value over 10 times higher than any other this is a potentially serious red flag for me. On this metric MAD sits firmly in the expect reserves debooking camp. At the moment it seems that people are just accepting the reserves figures as given ignoring the subjectivity and judgement involved.
Based on public records these fields have produced ~30MMbbl oil to date, having started producing in the 1940s. Over 300 wells have been drilled and a peak rate of ~5000bbl/d was achieved in 1953. MAD are forecasting that they can recover in the future 3 times the volume produced since 1940s from these depleted fields.
Reviewing the reserves methodology in the prospectus it seems that they have taken parameters (phi, Sw, thickness, N/G) from wells and core in the fields and applied these across large areas of their leases. This seems overly optimistic for a structural play where the net pay thickness will vary significantly, furthermore the stratigraphy is complex, hence a wide range of different pay thicknesses encountered by the various wells.
The prospectus states that they are expecting to increase the recovery factor for already depleted reservoirs, hence the 1P and 2P reserves. In the 2P case the recovery factor is supposedly going to be ~49%. This seems very high, especially for a field with 7cP oil and consequently unfavourable mobility ratio. Such a recovery factor would likely only be achieved after a very long time and with a lot of associated water production.
FDM Price at posting:
87.0¢ Sentiment: LT Sell Disclosure: Not Held
