TER: Where investors can hopefully get a return on their money. Can you give us some of your favorites?
AH: Mart Resources... Only recently, the institutional investors have been paying some attention to Mart. In June, the company declared a very generous dividend payment to its shareholders of $0.05 per quarter.
TER: Even after the dividend was paid on July 19, the stock still behaved quite well. At times, after a one-time dividend, shares fall. But investors have favorably viewed this stock.
AH: When management declared this dividend, it made a strong statement about its commitment to return of capital to the shareholders. Although it was a one-time special dividend, management spoke of continuing special dividends in times of good cash flow.
TER: Can the regular $0.05/quarter dividend be sustained?
AH: I believe so, despite some of the risks the company faces. Since the end of October, Mart has not been able to produce and pump oil because of pipeline disruption . Losing 15–20 days of production from its only producing field made for a challenging quarter. But Mart has a large stash of cash it can use to pay the dividend as well as continue its development program. In the future, it expects to increase oil sales with the help of a second pipeline, at which point a $0.05 quarterly dividend should not be a big challenge.
TER: Does Mart have prospects for increasing its reserves and production?
AH: Let me address the production issue first. The field is averaging about 12,500 barrels per day (bbl/d). Depending on Mart's entitlement production, the production allocation to Mart goes between 50% and 82% but averages about 65%. It has drilled 10 wells so far, but the problem is that the field cannot produce to its maximum capacity.
The field has pipeline constraints. Five different producers in the area share the same pipeline, so there is a rationing of pipeline capacity. Unless that restraint is removed, Mart cannot produce to its maximum capacity, which I believe to be on the order of 15,000 barrels per day (15 Mbbl/d).
The company's management is working on two things to remove the constraints. First, it is negotiating with the pipeline company that it uses right now to expand the capacity. In addition, Mart and its partners, along with other E&P companies in the area, are building a second pipeline that will connect to a Royal Dutch Shell facility. A second pipeline should do two things—provide the company with redundancy and excess capacity, as well as giving it access to a second export terminal. That should allow Mart to significantly increase its production, which I expect to be achieved gradually between the beginning of 2013 through the end of the year.
TER: What is it about Mart's management team that impresses you?
AH: First, they have done a good job of building relationships in Nigeria. Mart's two partners for the Umusadege field proved to be sound partners. Secondly, the Umusadege field is one of the few marginal fields that have succeeded. Mart's management has shown that the marginal field is a viable concept and it works.
I'd also like to make one other point about Nigeria. The country is making some tangible progress in building a corporate culture, in building a civil society. It has created a middle class that's generating its own energy demand, which is good for natural gas production in Nigeria. With increasing demand for electricity, entrepreneurs are looking at natural gas as a source for electricity generation. If smaller E&Ps get a chance to sell their natural gas, that's a separate and new revenue stream for them. So the timing is also good for Mart, Oando and other independent junior E&Ps.
TER: Mart's market cap is now just over $600M. At that market cap, this is a company that now can be owned by mutual funds. Do you expect to see this transition from it being a retail story to an institutional story?
AH: Mart did not have any institutional coverage before. Institutional investors expect some institutional broker support while they take an interest in a company.