Description

Long Maha Energy

All values are given in USD unless otherwise stated

Maha Energy is an interesting situation where you are buying a company at almost net-net values (it used to be a net-net a few weeks ago), has an option with an Oman oilfield which in case of success is probably worth close to the current market cap, and has an interest in 3 producing fields which have an NPV equal to the the current market cap.

Sounds interesting?

Background

Maha Energy was a company started in 2013 by Jonas Lindvall, who used to be the managing director for Tethys Oil in Oman.

He build the company to acquire and exploit existing discoveries which could be optimized to enhance production.

In this way the company acquired 5 fields. The first was LAK ranch, a 21 degrees API heavy oil field in Wyoming. The company was taken public with the promise of increasing production of this field. Maha tried a few hot water floods since the field was too small for SAGD methods but this never really took off. In 2021 they took a write-off on the field and now it just sits on their books doing nothing and is for sale. I don’t expect much here, even having a slight negative value due to a decent lease cost they have to pay to the owner every year despite the absence of production over the last few years.

The second acquisition was a stake in the Tartaruga oil field (which they later increased to 75%). Tartaruga is a small oil field offshore Brazil with multiple stacked but thin reservoirs which could be developed from onshore. Despite the company drilling a few wells in the field, production never really increased above 750 barrels a day. Luckily opex was quite low. The field is on the books at cots.

In 2017, Maha finally had a lucky break with the acquisition of the Tie field. Tie came with (then) 2P reserves of 10 million barrels. They acquired the field as part of the sale of non-core Brazilian assets of Gran Tierra, at the bargain price of 35 million. This is a field with a very low opex (under 10 dollar per barrel). The company spend most of their capex over the next 4 years drilling wells to increase production, eventually getting production above 4000 barrels a day in 2021. The hope was to increase and maintain production of the Tie field with infill drilling and water injection to a 6 year plateau around 4-5000 barrels. However, soon after reaching peak production in 2021 they had problems keeping production high and by the middle of 2022 production went down to below 2000 barrels a day. The issues were mostly related to reliability issues and bad luck, but it got shareholders agitated.

In the middle of the 2020 oil price fall they picked up for 4.25 million the US Illinois basin assets from Dome AB, a troubled Stockholm listed oil company. This is a small ‘conventional field’ with over 100 drilling locations of vertical wells with a some completion, which are very inexpensive to drill compared to horizontal fracked wells. At the time of the acquisition, they had an NPV10 of 31 million.

Again in 2020 the company announced that they will be awarded 100% of block 70 containing the Mafraq oil discovery in Oman. This plays into the diversification theme of management with the aim to be active in multiple jurisdictions and given the previous CEO's background, Oman was a logical choice. I will talk more about this field later, given the high option value in this asset.

Enter September 2022, and after continuous disappointment of the company, especially the troubles at the Tie field, Starboard saw potential in the company and acquired a 10% interest from then leading shareholder Kvalitena AB. Kvalitena AB at the time owned about 20% of the company’s shares and has since sold their remaining stake (at least below 2%).

Starboard immediately set off on a complete turnaround of the company, organizing a special shareholders meeting to add 3 new board members and change the chairman with one of these new members. After the board change they hired a new CEO and CFO.

Shortly after the board change, Maha announced their plans to divest the Brazilian and US assets (Tie, Tartaruga, Illinois and LAK Ranch), proceed with the sale of a 35% stake in the Oman block and announced the acquisition of DBO 2.0 for just under 37 million shares in Maha to the owners.

In the meantime, Starboard announced (for themselves) an opportunistic capital raise of 24 million shares at 8.5 SEK (netting 203 million SEK), just 2 weeks before announcing the sale of Maha’s Brazilian subsidiary (the Tie and Tartaruga fields) for 138 million and a 36 million possible milestone payment (of which management claims around 30 million is very likely to get triggered) and the sale of a 35% interest in Block 70 to Mafraq Energy LLC, netting them an additional 11 million as reimbursement for past expenditures of the company on the block.

The CEO and CFO gave some lame excuse for the capital raise that none of these deals were a certainty and that they needed cash to cover future commitments (like the Oman drilling program which is ongoing right now). However, I still think that was the ideal way for Starboard to increase their exposure at a favorable price given this is not so liquid (trading between 500 and 750k shares on average) without raising the price by buying it on the market.

Cash rich

Maha ended Q3 with about 40 million in net debt. I would assume that the Oman campaign will cost them around 15 million over 2 quarters, and cashflow for the quarter from the Brazil operations will probably be between 5 and 10 million. Add to this the proceeds from the capital raise (about 20 million), the proceeds from the 35% sale of Block 70 (11 million) and the proceeds from the sale of the Brazil assets (138 million) and you should end up with net cash around 120-130 million.

There is additional upside possible. According to management, around 28 of the 36 million contingent payment is very likely to get triggered.

All of this together and you are looking at around 150 to 165 million in cash and receivables over the short to medium term.

This compares very favorably with the current market cap of 175 million fully diluted at the price of 10.25 SEK.

USA

According to Maha, the NPV for the USA business is around 20 million. This unit is for sale, although I believe the sale of 1 of the 2 fields can be somewhat challenging (LAK). If we assume they can sell the USA entity for between 1/3 and 2/3rds of NPV, that should net anywhere between 7 and 14 million.

Brazil sale

In this writeup, I will assume the sale of the 2 fields goes through. The buyer, Petroreconcavo, is a respected player in the Brazil oil and gas industry and I see no financing issues here since they they are on track to make more profit last year than the total takeover price of Maha Brazil. And they have about double the purchase price of cash and equivalents on their balance sheet. The regulator has already given their approval, and only shareholder approval is necessary. There is a clear synergy given that the Tie field blocks neighbor some Petroreconcavo blocks where they operate a number of oil fields.

Oman

This is probably the most difficult one to value, but if (very) successful can be worth more than the current EV of the company alone (there is still some uncertainty of around 80 million barrels with regards to the total OOIP of the field).

Block 70 is a block which was re-carved out of an older Harvest Natural Resources Block 64 which they relinquished after an unsuccessful exploration effort on 2 prospects which came up dry. From what I could gather, they were never really interested in developing Mafraq itself. Mafraq is a 1988 heavy oil discovery (13° API), which had been delineated with five wells, of which well MF-5 tested 15,700 bbl of 13° API oil over a period of 24 days from a single well. The well tested 100% oil for less than 1 day after which water encroachment stabilized at a 25-28% water cut. This averages around 650 barrels a day over a 24 day period. And let’s not forget, this was a test done more than 30 years ago, when oil prices were around 20 dollars a barrel and many heavy oil fields with similar API’s were deemed uncommercial (look at the North Sea Kraken and Mariner oil fields or many of the smaller Canadian heavy oil fields operated by players like IPCO or Hemispere as mentioned on this site at quite low production costs).

If they can achieve anything close to these results, and the field could produce between 20 and 40 million barrels (which was the 2C and 3C guestimate by Chapman for their 65% stake), you are probably looking at a value which is very close to the current Market Cap. As a comparison, Tethys Oil which operates just next block has a market cap of around 190 million (and EV of 150 million) and has 2P reserves of 24 million barrels (of lighter oil, but still). Do take into consideration that the government of Oman has a 30% back in right, so the ultimate economics can change in the case of success.

Given that the acquired fields of the previous management was a mixed bag in terms of results, there is a lot of uncertainty about the final outcome. There are however 2 mediating factors. The previous CEO had quite some experience in Oman, given he was the company head of Tethys in the country. Additionally, the party that has bought into 35% of the field has experience operating as an oil company in Oman and an oil services firm. So let’s hope their judgment is better.

At this stage, most of the capex has already been done for this field so this is practically a free option on “heads I win, tails I don’t lose much” within 1 quarter time (first wells are expected to be on test production in Q1 2023).

DBO 2.0 assets

The DBO 2.0 Acquisition contains a 15% interest in 3R Offshore, a division of 3R petroleum, owning 2 offshore assets.

The first asset is a cluster of gas fields (Peroá, Cangoá and Malombé). The first of these 2 fields have been developed but are at the end of their useful lives. They used to be decent sized gas fields, but have produced more than 72% of their reserves, so future decline rates are expected to be low given the nature of gas field decline rates (relatively steep in the beginning, slowing down over time). Even after the majority of their reserves have been recovered, the opex per boe is around 5 dollars a barrel equivalent. So production can decline a lot, these fields will stay quite economic.

The last field of this cluster, Malombé, is a 2011 deepwater gas discovery containing around 11 million boe’s of recoverable gas (about 1.5 million net boe’s to Maha). According to management, there are plans to develop this field with a tieback in the future (which would trigger a 3 Million net to Maha contingent payment to Petrobras). The capex to develop Malombe is estimated to be around 6 million net to Maha (35-40 million on a 100% basis)

Additionally, there is quite some scope to increase the recovery factor with infill drilling. The current recovery factor used in the reserves calculation stands at 39%, which is very low for a gas field. This offers optionality for future production extension at a low cost.

A Gaffney Cline report estimates the NPV10 to MAHA of these fields at 6 to 13 million back in 2021, and at 23 million at the end of 2022. The big rise in NPV over 1 year is because the sale of gas from these fields is oil price linked.

Production is estimated to last until 2036 according to the reserve report, so decommissioning costs (estimated at a mere 4-5 million net to maha) are a long time away.

These assets are operated by 3R Petroleum, a company in which Starboard had a large share when they IPO’ed the company, but which they have already sold with a very nice return.

The second asset is the most interesting asset in my opinion, and offers the most upside.

This is a 15% of a 62,5% interest in the Papa-Terra oil field, again as a 15% share of 3R Offshore, the operator of the field.

The field lies on the Cabo Frio High, a part of the Santos Basin containing a number of heavy oil fields (Polvo en Tubarão Martelo, operated as a cluster by PetroRio, Peregrino by Equinor, Tubarão Azul which bankrupted OGX after disappointing flow rates, Maromba by BW Energy and Papa Terra which used to be operated by Petrobras with Chevron as JV partner).

All of these fields, except for Maromba which hasn’t been developed yet, had some difficulties or challenges at their development due to more complex reservoir as initially anticipated. In the case of Papa Terra the reservoir are turbidite sandstone, with quite heavy oil. All of the above mentioned fields had a learning curve, but once cracked prove to be quite lucrative fields.

PetroRio for example bought Polvo and Tubarão Martelo, fields which were thought of at the time of purchase to have become marginal fields. They managed to lower production cost to the low teens from 30-40 dollars a barrel, doubled production from one of the fields and extended field life by decades.

Peregrino had their recovery factor upgraded from 9% at sanction to around 20% over the years due to a better understanding of the reservoir over time (and additional capex off course).

Papa Terra is a story of some disappointment, and opportunity. The field had almost 3 billion in capex by the original owners, including a fully owned FPSO.

The field has a very large OOIP (Oil Originally in Place) of around 2 billion barrels. Currently it has recovered 2.5% of its OOIP. This is very small, compared to many large offshore heavy oil fields easily producing 10-20% of their OOIP. Management targets they can get recoveries closer to the mid teens, which would equate to around 30 million barrels net recoverable to Maha.

The 5 wells at Papa Terra came onstream below expectations of the previous owners. However, since only 5 production wells have been drilled there are ample opportunities to drill infill wells on the 21 slots tension leg platform. The learning curve effect comes into play here with future developments. For example, the last 2 wells drilled in the field are the best producers, and 7 years of production data on the different wells has increased geological knowledge of the reservoir.

Current production is around 15,000 barrels, creating an opex per barrel around 30 dollars. The plan by 3R is to increase production to 30-35,000 barrels over the coming 3 years by drilling additional wells, do workovers on 2 existing wells and lower operating costs. Their ambition is to execute a very similar plan to what PertoRio has done, namely increase production and lower costs, and aim for an operating cost in the lower teens range per barrel.

The NPV10 for this field according to a DeGolyer and MacNaughton reserve report is 122 million net to Maha. This NPV is calculated at a very conservative 71 a barrel oil price in 2023 and 66 barrels in perpetuity thereafter, net of contingent payments. So there is quite some upside here if oil prices stay high.

Production from these 2 assets net to Maha is around 2000 barrels right now, and is projected to increase with further investment to about 4000 barrels. 
As of now, these fields bring in the region of 25 million in EBITDA and 15 million in cash flow net to Maha, enough to keep the lights on I woudl say (i.e. cover G&A expenses).
Future capex on these assets (starting in 2024 at the earliest I have been told) would be covered by the OCF from the fields.

So everything added together, Maha has an NPV from producing assets of 166 million consisting of the US, Peroa and Papa Terra fields, or just about the current market capitalisation.

Catalyst

Some of the possible catalysts are results from the Oman campaign and good execution on the 2 acquired fields.
In the medium term there is the possiblity of future acquisitions. The CEO and CFO have hinted at using most of the cash from the asset sales to acquire new assets, very probably in Brazil. They mentioned a timeframe of a few quarters until the closing of these acquisitions, so the coming months are about to get interesting for shareholders of Maha Energy.

As to the question of how much they can acquire with this 150 million, that can be quite interesting.

Some of the Petrobras divestments have been done at firesale prices, or prices with many contingent liabilities.
Take for example the sale of the Peroa cluster of gas fields. These were sold for 13 million, with 42,5 million in contingent liabilities.
So a lot can be bought in Brazil, with a minimal initial cash outlay.

Of course, a focus on Brazil comes with political risks, but at the current price you are well compensated I think.