|Shares Out. (in M):||368||P/E||0.0x||5.0x|
|Market Cap (in $M):||515||P/FCF||0.0x||8.0x|
|Net Debt (in $M):||13||EBIT||0||0|
Mart Resources is a Nigerian oil producer that pays a 14% dividend yield. There are four stock price scenarios for 2014-2015 with the following names and price targets.
2014-2015 Target Cash Flow
Scenarios: Stock Price Probability Multiple
Civil Unrest $0.96 10% 3x
One Pipeline $1.28 10% 4x
Two Pipelines $2.43 60% 3x
Add New Wells $3.87 20% 3x
The weighted average target price is $2.46 plus $0.20/share in annual dividends.
Thus a buyer today should see a 90% return in the year ahead. The primary catalyst will be completion of a second pipeline called UMUSADEGE tie in that will allow Mart Resources to
triple oil production from the September 2013 level of 10,098 gross barrels/day to over 42,000 gross BOE/day in the “Add New Wells” fourth scenario.
Mart Resources is an on-shore Nigerian oil producer in the UMUSADEGE “Marginal” FIELD (3,771 acres).
Marginal fields are areas in Nigeria where large multi-national oil companies like Shell or Conoco discovered oil, but did not develop the fields as the oil reserves were not material to them. As a result the Nigerian government awarded these fields to smaller companies that would produce oil. In 2008 Mart’s local partners Midwestern Oil and Suntrust Oil were awarded the UMUSADEGE oil field. Mart was their technical partner and together they have become the largest oil producer in “marginal fields” in Nigeria. In exchange for its technical expertise Mart earns a minimum 50% of the ventures profits.
In the September 2013 quarter the partnership produced 10,098 “gross” barrels of oil daily, but production could have been double that rate. The opportunity for Mart is that they can produce 26,000 gross barrels/day, but constraints on the AGIP export pipeline prevent them from shipping more oil. The maximum allocation for Mart on the AGIP pipeline is 13,500 BOE/day. The addition of pumps in 2014 will expand this allocation to 18,000 BOE/day.
Mart is not waiting for AGIP and is striving to increase production by building a second pipeline. Partners are building a 54 kilometer Umugini tie-in pipeline to connect to the Shell export pipeline which reaches the Forcados terminal on the ocean 700 kilometers distant from AGIP. Pipeline completion is planned by June 2014, although this is one year behind the original target date. Mart will be able to transport 33,750 BOE/day on the Umugini pipeline.
Thus both pipelines will allow Mart to transport 18,000 + 33,750 = 51,750 gross barrels of oil daily by the second half of 2014.
Mart is drilling 5 wells in 2014 in the UMUSADEGE MARGINAL FIELD that should produce 16,000 – 24,000 gross barrels/day. Historically the company has a 100% success rate in drilling oil wells. Existing wells produce in a range of 3,000 – 10,000 barrels/day and have annual decline rates of less than 4% as pressure had been maintained.
If we combine the behind pipe production capacity of 26,000 BOE and add 16,000 BOE/day from 2014 drilling the total daily production for Mart is 42,000 gross BOE/day. Mart’s 50% allocation in the partnership will result in 21,000 BOE/day net production by 2015 in the upside “Add New Wells” case.
Why Has The Stock Price Declined (40%) In The Past Year?
Mart Resources repeatedly missed its oil production guidance during 2013.
First the AGIP oil pipeline (which Mart does not own) was shut down for 2 months for maintenance. Then extensive flooding in the Niger River Delta prevented Mart employees from safely engaging in oil production. Finally, the completion of the second pipeline was delayed by one year as Mart had difficulty getting local villages to give them “right of ways” to construct the new UMUSADEGE tie in pipeline.
As of February 2014 Mart has obtained all the required right of ways to complete construction of the second pipeline. One more approval is required by the Nigerian government to “twin the pipeline” which means adding a second side by side pipe in the trenches.
Abbreviated Financial Forecasts Below:
I have had difficulty inserting spreadsheets onto the VIC site that are presentable.
Thus I have been forced to compromise with some abbreviated numbers below.
The first scenario “civil unrest” does not require any spreadsheets and assumes $0.32 cash flow/share with one pipeline.
The other three scenarios are outlined below.
One Pipeline Two Pipelines Add new Wells
Gross Production 13,000 26,000 42,000 barrels/day produced
Pipeline Loss 26% 13% 10%
Brent Oil Price $105 $105 $105
Net BOE/Day 4,810 11,310 18,900
Total Barrels Produced 1,755,650 4,763,250 7,555,500
Net Revenue $184,343,250 $500,141,250 $793,327,500
Margin/barrel $67.41 $72.41 $69.00
Cash Flow/Share $0.32 $0.81 $1.29
Tax rate 65% 65% 65%
EPS $0.11 $0.28 $0.45
Cash Flow Multiple 4.4x 1.7x 1.1x
Mart Resources is sharing the two pipelines we have discussed. One of the big problems in the AGIP or pipeline #1 is that Mart loses 26% of the oil that it pumps into the pipeline. Other companies are pumping water into the pipeline and asking to be paid for oil. AGIP does not have a sophisticated way to measure this criminal behavior. Thus they deduct the water equally from all parties in the pipeline.
Pipeline #2 operated by Shell has modest pipeline losses below 10% of volume. Thus when the second pipeline is completed in June 2014, Mart is going to transport as much oil as possible through the Shell pipeline.
Additional Oil Reserves:
The Nigerian government is expected to award up to 31 new marginal field licenses in the next few months. Oil has been discovered in these fields from past drilling, but was never developed. Mart has an excellent chance of being awarded new fields. They are the #1 oil producer among all the marginal field operators in Nigeria and they have indigenous Nigerian partners. A marginal field with only 25 million barrels of reserves would add $0.50/share to NAV. We have not incorporated any upside from new oil field awards in our assumptions.
Acquisition Valuations in Nigeria:
The most recent announced acquisition of an oil company in Nigeria was valued at $41,628/barrel of production and $8.40/share in proven and probable reserves.
Mart Resources would be worth $1.88/share with these metrics if one assumes net production of 13,000 barrels/day, and 18 million barrels of P&P reserves.
RISKS – RISKS - RISKS
Delays In Completing Pipeline #2:
A delay in completion of the UMUSADEGE pipeline would clearly harm the upside case for the stock. Fortunately the downside case is still reasonably good. The consolation prize is that you are still earning a 14% dividend yield while you wait for the pipeline to start up. Valuation is reasonable at a 4.4x cash flow multiple with the assumptions of $105 Brent oil and gross production of 13,000 barrels/day. A company press release with an operational update stated that oil production was 13,151 BOE/day during the month of January 2014. Finally, a takeover valuation from one recent transaction in Nigeria would value Mart Resources at $1.88/share which is a 34% premium to the current stock price.
Nigeria is a young democracy that was created in 1999 after 33 years of military rule.
The government is a federal republic modeled after the Unites States.
Nigeria is a democracy where party affiliation is often a result of religious beliefs.
The population is evenly divided with 51% Christians (primarily in the South), and 49% Sunni Muslins (primarily in the North.)
A gentleman’s agreement exists that Presidential power rotates between a Christian and a Muslim after every 2 Presidential terms. The current President Goodluck Jonathan, a Christian, will have served two terms by the next election in May 2015. Based on the gentleman’s agreement a Muslim President should be elected. Nevertheless, current President Goodluck Jonathan is talking about standing for re-election in 2015. If he officially runs for re-election this would increase tension between the Muslim and Christian populations in Nigeria. It may even increase the odds of civil unrest if President Jonathan is re-elected in 2015. Clearly heightened political tension in Nigeria will lead to a lower valuation for Mart Resources.
Corruption & Theft in Nigeria:
Nigeria is ranked closer to the bottom or 139th out of 176 countries in the 2012 Corruption Perceptions Index that is measured by Transparency International. Nigeria produces 2.3 million barrels of oil daily which at a $100/barrel price generates $84 Billion in annual oil revenue. Much of the oil related tax revenue us misspent or finds its way into the pockets of corrupt politicians. There is also petty corruption where it is hard to do business in Nigeria without payments to public officials. Mart Resources has had difficulty getting approval to complete its pipeline expansion and petty corruption could be part of the obstacle.
Oil Price May Decline:
A $10/barrel or 10% change in oil prices will impact trailing cash flow by 12%.
One should adjust cash flow projections if one disagrees with the $105 Brent oil used in our forecasts.
Dividend Cut Possible:
In the “one pipeline” scenario Mart will earn $118 million in cash flow in 2014 relative to the $71 million dividend payment. The company has $200 million in NOLs so no taxes will be paid in 2014. If oil prices fall materially Mart will not be able to cover its dividend out of cash flow.
The company expects oil production and profits to double by July 2014 as the new pipeline extension is completed. Until the completion of pipeline #2, the dividend will be more of a financial burden.
The $0.05/share quarterly dividend equals $71 million annually. Management is committed to sustaining the current dividend and has two ways to fund the payments if oil prices fall. Mart recently increased its bank credit line to $175 million which can fund over 8 quarterly dividend payments. The 2014 annual capital expenditure budget is $85 million. Some of the drilling of new wells could be deferred to pay a dividend and there would be no negative impact on production as Mart’s current oil production is pipeline constrained anyway. If the second pipeline is completed in 3-4 months there will be plenty of cash flow to pay the dividend.
Tax Rates Will Increase After Net Operating Losses Are Utilized:
Mart has over $200 million in Net operating loss carry forwards. These NOLs will be consumed in about a year after the second pipeline is completed and Mart is able to double its daily oil production. At that point Mart’s Nigerian partners will pay a full 65% tax rate (likely in 2015) which is the rate for indigenous oil companies. Half of the remaining profits accrue to Mart Resources.
A reform of the Nigerian tax system for energy companies has been proposed given the current high tax rates. Mart is hopeful that future tax legislation will result in lower tax rates, but this outcome is not factored into our estimates.