FE Initiates Mart Resources with Outperform + $1.30 Target
From Nigerian Production to Shareholder Distributions
Mart Resources is a pure play on Nigeria. The Company is listed on the TSX main board and has a market cap of C$260 mm. With the recent acquisition of
Might be the smell of some shorts burning a little tomorrow.....enjoy
OML 18, this is a reserves and production growth story that also offers value. At a Brent price of over US$60/bbl, we anticipate the dividends would be re-instated, implying one of the highest shareholders’ distributions within our international coverage universe. With low cost onshore operations, 2015 cash flow from operations larger than the Company’s market cap, very sound financial standing and very attractive fiscal terms, our valuation is very resilient to oil price movements. We have an Outperform recommendation on Mart Resources with a target price of C$1.30 per share.
Investment Summary
One of the First Successful Listed E&P Juniors Onshore Nigeria
The Nigerian E&P sector has seen numerous public companies intending to benefit from the marginal field rounds in Nigeria. Mart is a junior that made an early entry into the country and has been particularly successful. In 2005 Mart managed to join a JV to secure a Service Contract (structured as a Production Sharing Contract) for the Umusadege marginal field, an undeveloped asset located in the swamps onshore Nigeria. Today, gross field production stands in excess of 23,000 bbl/d and Mart is expected to generate cash flow of about US$90 mm in 2014 and almost US$220 mm in 2015.
More than Doubling Production from 2014 to 2015…
The field’s production has historically been constrained by the volume available in the existing export pipeline owned by ENI. With (1) 30-32 mbbl/d overall unrestricted production capacity, (2) additional horizontal wells capable of delivering 4-5 mbbl/d production each, (3) a Central Processing Facility (CPF) capable of processing 35 mbbl/d and (4) progressive opening-up of a new export pipeline in 1Q15 boosting combined export capacity allocated to the Umusadege field to over 45 mbbl/d, production at Umusadege could more than double to 30-35 mbbl/d in 2015 compared to 2014.
… And Growing Reserves
The field’s YE13 gross 2P reserves reflect about a 44% recovery factor and net reserves for Mart have increased from 9.4 mmbbl in 2009 to 18.5 mmbbl in 2013 (about 36 mmbbl Gross 2P Reserves) excluding an additional 7 mmbbl (12 mmbbl gross) produced over the period. The vast majority of the reservoir sands have been flow tested and have demonstrated robust flow rates in excess of 2,000 bbl/d and over 4,000 bbl/d for horizontal wells. This gives us confidence in the 2P reserves currently booked. Also, given the long term strong well deliverability, low declines in reservoir pressure and the opportunity to drill horizontal infill wells, we believe that the Company has scope for further reserves increases in the core area of the Umusadege field.
Appraisal and Near Field Exploration Upside
The first exploration well targeting a new structure with 11.9 mmbbl gross prospective resources (pre-drill estimates) in the eastern part of the field has been successful and given the very good well test results could allow the firm to convert these resources into reserves. In addition, Mart has mapped one exploration structure at the west of Umusadege on seismic. It is the same signature as Umusadege and holds a total of 7.6 mmbbl gross prospective resources. In the summer of 2015 Mart will also test the deeper horizons of the central accumulation at Umusadege, targetting 2.5 mmbbl gross prospective resources. We also estimate there are c.11 mmbbl gross possible reserves that arise from improved recovery factor following the very good results of horizontal drilling. All future volumes discovered within the Umusadege area can easily be accommodated by existing processing facilities and export pipelines. Overall, our Unrisked NAV for appraisal and near field exploration upside is C$0.42 per share and is relatively low risk.
OML 18 Acquisition: Repeating the Success of Heritage Oil and Seplat Petroleum
Mart Resources is acquiring 10% WI in OML 18 from Shell. The gross discovered resources are reported to be over several hundred mmbbl and several tcf of gas reserves with recent production of 20 mbbl/d (oil) and 12 mmcf/d (natural gas). Mart intends to repeat the success of Heritage Oil at OML 30 or of Seplat Petroleum, which managed to accelerate the development of their fields and grow production. Seplat is already on track to grow production by over 50% in the space of two years on fields acquired from Shell.