Mart Resources Inc MAUXF

Mart´s 2014 Cash flow projection

[Fernando2010]

I tried to figure out what level of production would be necessary in 2014 (after giving effect to anticipated increases in royalty and income tax rates) in order to preserve the annual dividend (US$ 70.000.000 per year) and capital expenditures recorded in 2012 (US$ 70.000.000). After modelling the income and cash flow statements, I found that a gross production of 24.000 bopd (based on producing days) will provide an annual cash flow (net to Mart) of US$ 141 millons, enough to afford the 2 above mencioned items.
 
Here are my calculations to arrive to that conclusion:
 
1. Production numbers
 
Projected gross production (based on production days): 24.000 bopd
Mart´s share of production: 67% (similar to 2012)
Production net to Mart : 16.080 bopd (before considering downtime and pipeline losses)
Downtime: 92 days per year (25% of the year) (similar to 2012 levels)
Annual production before pipeline losses (net to Mart): 4.389.840 bls
Pipeline losses: 16% (level of pipeline losses estimated by Mart for Q2 2013)
Production net to Mart (after pipeline losses): 10.103 bopd
Total annual production net to Mart: 3.687.466 bls
 
2. Consolidated statement of income
 
Revenue
 
Petroleum sales: 10.103 bopd
Annual sales: 3.687.466 bls
Sales price: US$ 105/b
Total gross sales: US$ 387.183.888
Royalty: US$ -92.186.640 (note 1)
Community development costs: -US$ 756.850 (note 2)
Net petroleum sales: US$ 294.240.398
 
Costs
 
Production cost: US$ -47.273.309 (US$ 12,82 per barrel, similar to 2012)
G&A cost: US$ -16.297.000 (similar to 2012)
Tax benefit contribution: 0 (see note 22 to 2012 FS)
Interest: US$ -5.000.000 (note 3)
Depreciation (of fixed equipment): US$ - 4.083.000 (similar to 2012)
Depletion (of oil properties): US$ -52.730.758 (US$ 14,3 per barrel, similar to 2012)
 
Income before taxes: US$ 168.856.331
 
Income tax expense (note 4)
Current: US$ - 84.111.948
Deferred: US$ -25.644.667 (note 5)
 
Net income for the year: US$ 59.099.716
 
Consolidated Statement of cash flows
 
Net income for the year: US$ 59.099.716
Depreciation: US$ 4.083.000
Depletion: US$ 52.730.758
Deferred income tax expense: US$ 25.644.667
Operating cash flow for the year: US$ 141.558.141
 
 
NOTES

Note 1: royalty
Royalty rate for 25.000 bopd production: 20% (see Mart April 12 presentation, page 6)
This rate applies on annual producton before pipeline losses (4.389. 840 bls)
4.389.840 bls X US$ 105/b X 20%: US$ 92.186.640
 
Note 2: Community development costs
Similar to the amount paid in 2012. See 2012 MD&A report, page 7
 
Note 3: interest charge
I assumed (prudently) an average net debt for the year of US$ 50.000.000, and an interest rate of 10%.
Financial debt at the end of Q2 2013: US$ 23 millons
 
Note 4:Income tax expense
 
According to Apr 12 presentation (page 5) the income tax rate, absent the Pioneer incentive status, will be 65%.
Regarding the chance of offsetting future taxable income with loss carryforward, Mart informed that “The Company has a variety of loss carryforwards that are available to offset future taxable income in Canada and Nigeria” (see note 21 to 2012 FS)
But, in spite of that, Mart hasn´t recorded any deferred tax assets in the balance sheet.
In my oppinion, this situation casts a doubt about the possibility of Mart offsetting future taxable income with accumulated tax losses, taking into account what is stated in note 3 to 2012 balance sheet:
 
Deferred tax assets:
􀁸are recognized to the extent it is probable that taxable profits will be available against which the unused tax losses, unused tax credits and deductible temporary differences can be utilized; and
􀁸are reviewed at the end of the reporting period and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.
So, until new evidence is provided regarding the amount and viability of potential loss carryforward, I didn´t consider them in my projections
 
 
Note 5: deferred income tax expense
 
As some poster repeatedly stated, estimating Mart´s tax liabilities is one of the most difficults tasks when trying to model the company´s future cash flows.
I understand that Mart´s deferred income tax expense is produced basically by the difference between the accounting and tax values of fixed assets and oil properties. In the particular case of Mart, I understand that the Deferred Income Tax Liability is strongly related to the different treatment of annual capital expenditures (capex) for accounting purposes (capex considered as an increase in fixed assets) an tax purposes (capex considered as an increase in taxable loss for the year). This can be inferred from the following assertion written in MD&A report for Q3 2012 (page 17): “The Petroleum Profit Tax is based on oil receipts less royalties and community development costs, production costs, general and administration costs related to production, capital allowances and investment tax credit
For that reason, I estimate that, for each given year, the amount of the Deferred Income Tax Liability increases in direct relation to the amount of capex of that year, due to the fact that those annual capex are treated in a very different way for accounting and tax purposes, as was explained infra..
So, assuming a level of capex for 2014 similar to 2012 (US$ 70 millons) I calculated  the amount of the increase in the Deferred Income Tax Liability for 2014, taking into account the increase in the liability recorded in 2012 (US$ 11.836.000), and adjusting that number to reflect the increase in the  profit tax rate for 2014 (from 30% in 2012 to 65% in 2014).
So, the increase in the Deferred Income Tax Liability for 2014 (recorded as Deferred Income Tax expense in the Statement of Income) will be:
US$ 11.836.000 X 65% / 30%: US$ 25.644.667

[maxamillion]

I think your prety close,, well done! max

[zeus55]

Now that was the best post I have ever seen from anyone, here or on InvestorVillage. Awesome DD, Fernando The only question I have is on the royalties. At a level of 25,000 boed, isn't the royalty rate 26% But again, great job.

[Fernando2010]

Thanks Zeus. Regarding the royalty, Mart has clearly indicated a combined royalty rate (Farmout royalty + government royalty) of 20% for a gross production of 25.000 bopd See page 6 of this old Mart presentation: https://www.martresources.com/wp-content/uploads/2012/10/April-24-2012-%E2%80%93-Mart-Resources-%E2%80%93-Developing-Nigerian-Assets-Presentation.pdf

[zeus55]

I was using their SEDAR filings, which are probably more dependable than their presentation. I wonder what the royalty rate would be if they ever got to the 50,000 boed production level that has been touted on the IV MMT board? Although, if they were pumping 50,000 boed, I probably wouldn't care what the royalties or tax rates were! :o) Odd that MMT traded down today while Brent spiked up

[Fernando2010]

Zeus:  do you have any link to confirm the 25% royalty rate for a 25.000 bopd gross production? Thanks Fernando

[zeus55]

To be perfectly honest, I cannot remember which particular document had the chart, as I have looked at far too many, and it becomes a blur after a while. But it did show the different royalties involved, and the level of those royalties for increasing levels of production. Unfortunately, the chart ended at 25,000 boed, at a royalty rate of 26%, so it is unknown what the rate would be at higher

[lepton1]

Mart hasn't been putting the royalty table in their filings recently, but look in the MD&A for the year ended December 31, 2009, on page 4, which gives a full description of the marginal field royalty due the Government and also the royalty owed the previous licenseholder.  Also please note that the royalty is calculated on an incremental sliding scale basis, so

[elaine0356]

A little help from IV: https://www.investorvillage.com/smbd.asp?mb=12706&mn=6584&pt=msg&mid=13078223

[ballspec]

If this still may help ... From Stonecap securities, Nov 2012, page 16 (https://www.stonecapsecurities.com/PDFs/Reports/2012/November/Mart=Resources=Inc.%28Report11012012%29.pdf) Mart Resources Inc. November 1, 2012 16 Production Economics Mart and its partners sell oil to Ente Nazionale Idrocaburi (ENI) under a Crude Sale and Purchase Agreement. Umusadege field crude