Note from BMO on 10/12/13 (from OilJack) In light of the recent trading in Mart Resources, I wanted to send out a quick note in an effort to provide some clarity and insight into the recent volatility.
From the start of this week, over 20 million shares of the company have traded. This all seems to have stemmed from the combination of both a large seller who has slowly been putting stock up for sale and news that Shell Nigeria has shut down one of their main pipelines for repair. The combination of “more bad news” with respect to infrastructure in Nigeria, and larger sell volumes, sparked a precipitous decline in the stock over the past days, cumulating into a 10 million+ shares trading day . Negativity and selling pressure simply brings about more of the same, and this unfortunately happens to be another case of this.
After discussions with management and the analysts that cover the story, it’s imperative that we clarify a number of items and provide a review of the catalysts that could benefit the company over the next 6 months:
- Firstly, nothing has changed with respect to the fundamentals of the company. Production has been on-stream as it has over the past months and we should expect another production update soon.
- As losses on the AGIP Kwale-Akri pipeline (used by Mart) have spiked recently cutting into Mart’s share of the volumes from the Umusadge field, the company is currently in discussions with AGIP to acquire more information on the losses and has included the government in the process. While we don’t expect losses to return the historical levels (10-12%), we do expect them to stabilize and/or drop slightly over the coming months.
- The Shell pipeline that is currently down for repair IS NOT the Shell pipeline that Mart and its partners are currently working to connect to with the construction of their secondary pipeline. The line that is down is the Trans Niger Line, whereas Mart and its partners are working to connect to the Trans-Forcados pipeline. None of Mart’s volumes (currently or after the construction of their secondary line) will flow through the Trans Niger Pipeline.
- (The Trans-Niger Line currently under repair by Shell has been closed 5 times since early July due to multiple leaks from thefts and has resulted in the deferral of 150,000 boe/day and 500MMcf/day. While Shell Nigeria is working to reopen the line as soon as possible, the increase in oil thefts from all producers has garnered significant attention from the government which is finally taking greater action to stem its rise).
- Mart is currently producing from the wells it has drilled and tied in at the Umusadge field. As of the last update, production based on production days averaged 12,085 boe/day.
- Well-logging and flow-rates from their recently completed well (UMU-11) should be expected in the coming weeks.
- After the arrival of a 2nd drilling rig to the field, a water disposal well will be drilled, UMU-8 will be re-entered (to test for the presence of deeper zones encountered in UMU 9, 10, and 11), and a one horizontal well will be drilled.
- Completion of the above drilling should coincide with the completion of the UMUGINI line which is currently under construction and is expected to be completed Q1/14. The UMUGINI line is approximately 52km line connecting Marts production facilities in the Umusadge field to the Shell Trans-Forcados pipeline.
- With the drilling yet to take place, combined with the existing production, Mart could be in a position to deliver approx. 30,000 boe/day in Q1/14.
- The dramatic boost in volumes will be used to pay down debt (accrued in 2H/13 to fund the current dividend/conduct drilling) and potentially to increase the dividend later in 2014.
- While the shares are trading at a level they traded at back before the company initiated the dividend 1 year ago, no change to the current dividend payout is anticipated given the near-term cash-flow expectations and the $100MM debt facility which was recently put into place (approx. $25MM drawn).
- As mentioned at the annual general meeting, a TSX listing is being sought and Mart is looking to list on the TSX very early in 2014.
- Exploration drilling on either their East or West prospect will take place once the UMU-8 is re-entered and a horizontal well is drilled.
- As some of the majors in Nigeria have been divesting of production assets, Mart and its partners are in the position to make an acquisition should the opportunity present itself.
While macro-risks are always present, the risk-reward profile for Mart is still very compelling. With a dividend that looks to be safe and a number of catalysts in front of the company we are maintaining our positions