Jennings $1.25 target MIRA RESOURCES: (MIRXF) $.30 Up $.03 & (MRP.V) C$.31 Up C.02.... MDO first recommended Mira Resources on January 18, 2012 at .24 cents. We are told it might be a good idea to review the story because of several recent events. There has been continued insider buying. As evidenced from press releases, the company has retained First Energy after an "unsolicited expression of interest". Also the debt issue holders converted debt to equity. This almost never occurs unless there is a very good reason. that big volume day Friday at month and quarter end . The dots connect pretty well here. Friday's volume in Canada was 3.2 million shares or 4x's the norm.
JENNINGS CAPITAL - INITIATING COVERAGE On Mira Resources; Speculative Buy; 12-Month Target C$1.25
CAPITALIZING ON MARGINAL FIELDS IN NIGERIA ....
1.) Developing an existing discovery with 8.7 MMBbl. Mira has a 48% working interest and operates the Tom Shot Bank Marginal Field in the east Niger Delta. It was originally discovered in 1980, but was never tested. Netherland Sewell has evaluated the Field and assigned 8.7 MMBbl of contingent resources (4.2 MMBbl MRP WI ).
2.) Good fiscal terms give Net Asset Value of %msg%.61 per share. Tom Shot Bank is designated as a Marginal Field which attracts preferential fiscal terms including lower royalties (slightly over 2.5%) and high cost recovery (80%). Pending validation of the contingent resources by the current workover program, we estimate that Mira's share will result in a Net Asset Value of %msg%.61 per share.
3.) Successful testing now will lead to appraisal drilling in Q1 and production by Q3 2012. Mira is currently reentering the TSB-1 wellbore to test two of the zones identified as containing virtually all of the contingent resources. Success will lead to an appraisal well next quarter (the Company has the rig slot reserved) and production starting most likely in Q3 2012. We expect an initial rate of 7,000 Bbl/d, resulting in %msg%.42 (annualized) CFPS in the second half of 2012.
4.) Potential for resources to grow to 100 MMBbl. The contingent resources have the potential to grow to as high as 60 MMBbl (29 MRP WI) through thicker pay, greater areal extent and additional zones. Other offsetting fields have shown similar growth trajectories as new technology has been applied to older discoveries. Tom Shot Bank also has been assigned 11 MMBbl (5.3 MRP WI) of prospective resources and the Company has additional leads and prospects that could add up to another 40 MMBbl (19.2 MRP WI).
5.) More Marginal Fields are becoming available. The Nigerian government is holding an auction for 56 newly designated Marginal Fields in November. Mira is participating and hopes to add two more.
INVESTMENT HIGHLIGHTS....
Development and Exploration in Nigeria .... Mira has a 48% working interest in the Tom Shot Bank Marginal Field1 in offshore Nigeria , in the east Niger Delta. The Field was originally discovered by Shell in 1980, but ultimately deemed too small to retain and develop. The Company is also actively pursuing additional Marginal Fields as they become available from the Nigerian government.
.... Tom Shot Bank has been assigned 8.7 MMBbl of contingent resources. The discovery well, TSB-1, was never production tested, hence the designation as resources rather than proved or probable reserves. The Company has commenced workover operations to test two zones that contain 99% of these resources. First results are anticipated close to the end of this month, and the entire program should be complete by mid-November.
.... If testing validates the contingent resources, we estimate that the core NAV for the Company would be %msg%.61 per share.
.... The contingent resources have the potential to grow to as high as 60 MMBbl. The incremental volumes come from three main sources:
1.) Pay thickness in the identified zones could more than double, as the original log suite lacked the resolution to conclusively define lower intervals which were laminated between shale breaks. Modern logging tools have overcome these limitations.
2.) One of the zones with contingent resources may have an areal extent nearly three times that currently assigned. Seismic data indicates an extended amplitude anomaly well beyond the expected drainage area around the TSB-1 wellbore. If this is confirmed, it could add 7 MMBbl, or even up to 15 MMBbl if the laminated pay also proves out.
3.) Mira has identified an additional underlying zone that could contain another 15 â€" 20 MMBbl. Offsetting fields, specifically Ebughu, Adanga and Ebok have shown similar reserve growth relative to early estimates as their operators have applied new technologies to old discoveries.
.... Prospective resources of 11 MMBbl have been evaluated, and there are additional leads and prospects within the bounds of the property that could bring the overall resource potential over 100 MMBbl.
.... Mira has made early stage arrangements with respect to tying in the Tom Shot Bank Field after a successful production test. It anticipates drilling a second appraisal well in Q1 2012 and commencing production in Q2 2012. While this is possible, we believe it is aggressive and have modelled a Q3 start-up instead. Assuming that later start-up, we estimate that Q3 2012 gross production will be 6,475 Bbl/d (3,108 Bbl/d MPR WI ), with resultant cash flow of $26.8 million (%msg%.12 per share).
SEEKING ADDITIONAL FIELDS.... Mira is actively pursuing additional Marginal Fields. Its strategy is to seek fields with a discovery and 3D seismic data. The Nigerian government is putting 56 new Marginal Fields up for auction in November, and the Company hopes to add two new concessions.
EXPERIENCED AND WELL CONNECTED MANAGEMENT AND BOARD.... Mira's president, Tom Cavanagh, has extensive experience in West Africa and Nigeria , as well as in other international venues. He has also assembled an extensive and experienced technical team poised to join the Company once testing validates the Tom Shot Bank Field.
The Company's Chairman, Mohammed Asibelua, is also the owner of the Equinox Group, which is the parent of Associated Oil & Gas, one of Mira's working interest partners in the Tom Shot Bank Field. Equinox also markets ~25% of the national oil company’s production volumes. His connections within both the business community and the government will be invaluable as the Company pursues additional fields.
ROBUST DEVELOPMENT AND EXPLORATION ECONOMICS.... The Marginal Field fiscal terms provide very strong economic returns, as shown in the table below:
Marginal Field Development Economic Parameters ($/Bbl).... F&D Costs $8.50; AT Netbacks $50.88; In Situ Value $30.65; Recycle Ratio 6.0
The Company's returns are further enhanced by the incremental 20% cost recovery it receives from its working interest partners. It is also well designed in that the improvement to Mira's economics does not impair its partners' returns so much that it could lead to disputes over whether to proceed with a project. Including that increment, Mira's Recycle Ratio improves to 6.1x, while the partners' declines to 5.9x, both well above the minimum of 2.0x generally regarded as the threshold to grow a business.
OWNERSHIP: Mira has a 48% working interest in the Tom Shot Bank Marginal Field, acquired via the purchase of 100% of Equinox TSB Development ( Nigeria ) Ltd. from the Equinox Group Ltd. earlier this year. Mira also gets 120% cost recovery on capital expenditures and a management fee of 4% of capital costs.
RESERVES: With a successful test on TSB-1, we believe the contingent resources assigned by Netherland Sewell ("NSAI") in the last formal assessment in 2010 would be upgraded to reserves status if re-assessed postworkover. The classification of such reserves may not correspond exactly with resource assessments (i.e., 1C vs. 1P, 2C vs. 2P, etc). There is a possibility that some or all of the 1C resources could be given probable status if the evaluator has any reservations regarding the status of tying the Field in for production. We believe this is unlikely, as NSAI did acknowledge contingent capital budgeted for the pipeline and tie-in in the 2010 evaluation.
PRODUCTION: No current production. Pending success, the Company anticipates tying in both TSB-1 and TSB-3 (to be drilled in Q1 2012) and commencing production by the beginning of Q2 2012. While hoping it succeeds in this, we have nonetheless modeled a Q3 2012 start-up. We have modeled initial gross production of 6,475 Bbl/d (3,108 Bbl/d MRP WI ), but this estimate is subject to revision after the test results are available.
FISCAL TERMS: The Tom Shot Bank Field falls under the Marginal Field Program in Nigeria , which is a form of profit sharing agreement. Royalties are deducted prior to the split between cost and profit oil, and income tax (the Petroleum Profits Tax or "PPT" is levied on profit oil. The industry is overseen by the Ministry of Petroleum Resources and the Nigerian National Petroleum Corporation ("NNPC").
THE TOM SHOT BANK ACQUISITION AND OWNERSHIP STRUCTURE.... Mira acquired its interest in the Tom Shot Bank Field via the acquisition of Equinox TSB Development ( Nigeria ) Ltd. from the Equinox Group Ltd. in February 2011. As consideration, Equinox Group received: US$1.8 million of back costs, and 8.33 million common shares of Mira. Mira will also pay two bonuses of US$2 million each. The first is due at the start of production, the second once cumulative production has reached 1 MMBbl. Each bonus is structured such that $1 million is payable in either cash or Mira common shares at the option of the seller (Equinox Group), and the other $1 million in either cash or shares at Mira's option. The other working interest owners in the Field are Associated Oil & Gas Ltd. ("AOGL") and Dansaki Petroleum Ltd. ("Dansaki"). AOGL is owned 70% by Mohammed Asibelua, Mira’s Chairman and the owner of the Equinox Group. Equinox TSB holds its position in the Field via farm-out agreements with both AOGL and Dansaki.
THE TERMS OF THE FARM-OUTS WITH AOGL AND DANSAKI ARE AS FOLLOWS....
.... Equinox TSB will earn a 48% working interest in the Tom Shot Bank Field.
.... Equinox TSB will pay a Reserve Bonus to Dansaki once the initial work program (the TSB-1 re-entry) is completed. The amount of this bonus is dependent upon the 2P reserves assigned to the property and ranges from nil (for less than 5 MMBbl) to a maximum of $1.47 million for reserves of 15 MMBbl or greater.
.... Equinox TSB will fund 100% of operating costs and 100% of capital costs until first oil production. After production commences, each party will pay its working interest share of all costs (ie, Mira 48%, AOGL 26% and Dansaki 26%)
.... Equinox TSB will receive 120% cost recovery on the expenditures it makes prior to first oil production. The incremental 20% will come from AOGL and Dansaki’s share of profit oil.
.... AOGL and Dansaki will pay a management fee of 4% of capital costs to Equinox TSB
.... The 54% Net Profit Interest referred to in the diagram above is a rough mathematical equivalent of the 48% working interest plus the 120% cost recovery plus the 4% management fee. The 54% is not stipulated in any of the farm-in or joint operating agreements.
Unlike most junior E&P companies operating in international jurisdictions, Mira will have significant production and cash flow in short order once testing has Validated the Tom Shot Bank Field. Therefore, we have included some weighting to cash flow in addition to NAV. The 20% weighting to calendar 2012 DACF reflects that production will only begin in the second half of the year. We have modeled initial gross production of 6,475 Bbl/d starting in Q3 2012. This is a risked value based on an unrisked rate of 3,500 Bbl/d per well and an immediate 25% annual decline rate. Other wells completed in the same Agbada sands in offsetting fields have typically produced at rates between 3,000 and 6,000 Bbl/d, with less severe declines. We will re-address this assessment once the test data on TSB-1 and TSB-3 is available.
We are assigning a discount rate of 13% (after-tax) for our valuation of Mira and its assets. This is higher than most Middle Eastern and African countries in which companies we cover do business, but still below the 15% we use for Yemen , where it is questionable whether there is a functional state at all.
FINANCING REQUIREMENTS.... Under the terms of the farm-in agreements with AOGL and Dansaki, Mira is responsible for funding all capital expenditures through until first oil production. Assuming that the next rig slot is available in Q1, the Company will have to fund 100% of both the tie-in to the Stubb Creek platform and drilling of TSB-3, which will run between $50 and $56 million in aggregate.
We have provided for this requirement in our model as follows:
.... With success on TSB-1 and a reasonably definitive timeline to first production, we anticipate the share price will respond, and Mira will be able to trigger the accelerated exercise provision on the 58.1 million warrants for proceeds of $23 million.
.... The tie-in to Stubb Creek is a long life, tangible facility and should be financeable with debt. We have assumed that the Company will arrange and draw $15 million.
.... For the balance, we are anticipating a new equity issue of $20 million, done at a price of %msg%.60 per share, equivalent to our estimate of core NAV, assuming the operations on TSB-1 validate the contingent resources, risked at 70% overall.
HIGHLIGHTS....
.... The Tom Shot Bank Field has been assigned 8.7 MMBbl of contingent resources, based on the TSB-1 well originally drilled by Shell in 1980. Pending validation by production testing, we estimate that these resources have a net asset value of %msg%.61 per share.
.... The production test for the TSB-1 well commenced on October 24, and will include the two zones that comprise 99% of the 8.7 MMBbl of contingent resources. First results are expected by the end of the month, and the entire program is anticipated to be completed by mid-November.
.... The contingent oil resources have the potential to grow to as high as 60 MMBbl through a combination of thicker pay that could not be defined with the older log suite originally run, greater areal extent of one of the zones, and an additional zone not previously identified. Similar reserves expansions have been experienced in several offsetting fields.
.... There is potential for up to 50 MMBbl of additional oil resources in evaluated prospective resources (11 MMBbl) and unevaluated leads and prospects within the defined field boundaries.
.... With success, Mira will drill a follow-up well (TSB-3) in Q1 2012. The Company has a third optional rig slot, expected in Q3 2012.
.... The Company hopes to commence production in Q2 2012, although we believe this to be aggressive. We are looking for a Q3 start-up, at an initial rate of 6,478 Bbl/d (3,108 Bbl/d MRP WI ).