Description

There is no free lunch, however Maha Energy, a Sweden listed E&P company with assets in Brazil, Oman and to a lesser extent the US, offers a truly outstanding risk reward. The net cash position is equivalent to 99% of the market cap, and cash will be re-invested by a management team with an excellent M&A track record. In addition, you get producing and development assets with a fair value of around SEK 7.5 per share, i.e. equivalent to the current market cap.

Maha is as a company in transition, they sold their core operating business in Brazil last year, with the final USD 55m tranche of the purchase price due in August. Once Maha receives these funds, the Enterprise Value of the company is close to zero, i.e. to be precise 1.3 USDm. In addition to the 55 USDm for Maha Brazil, we have also treated the 4.2 USDm outstanding from the Mafracq farm-out as cash. 

Of course, this valuation might be justified, if we would have a value destructive management team squandering the cash. It is however rather the other way round:

The new management team was installed in early November 2022 after an EGO and the new chairman Fabio Vassel and CEO Paulo Mendonca have both been MDs of the Brazilian PE Starboard Group. Starboard boasts a strong track record being the architect of Brazil listed 3R petroleum, which it formed in August 2019 only to IPO the company in November 2020. This transaction reportedly yielded more than 6.5 times the invested capital (the 3R petroleum IPO more than doubled in the first 6 months after listing). Starboard acquired its stake from Swedish property investor Kvalitena (mentioned ESG concerns as one reason for the sale) when the stock was trading somewhat above SEK 9 and acquired another 5% in a capital increase for SEK 8.5 in December (Starboard purchased 30% of the offering). Thus, at the current share price you are not only acquiring the company close to its net cash value, you are also investing alongside a successful PE with a better entry price.

Now that we have established the cash side, let’s look at the assets other than cash that you are getting.

Just shortly after the sale of Maha Energy Brazil the company bought DBO which holds a 15% share in 3R Petroleum Offshore, and the expected 2023 production net to Maha of around 2.1 kboepd is pretty similar to the 2.2 kboepd that Maha Brazil produced in the H2 2022 on average. Maha issued 34.8m for the acquisition which at the time of the acquisition was just around 33 USDm while it sold Maha  Brazil for more than 155 USDm. In our view testament to management’s M&A capabilities. We value DBO, Maha’s new Brazilian assets at 60% of 2P NPV10 (based on 66 USD oil as of 2024). As the field is expected to ramp production from the current 2 kboepd to around 3.6 kboepd by 2025 this should add a nice growth angle to the cash flow profile. Maha/ 3R Petroleum is reporting production rates monthly, after some issues in May they were again at 2.1 kboepd in June.

Mafraq is a heavy oil field in Oman that was already discovered in the late 80ies. Reserves are still miniscule, but Maha is currently testing the field for commerciality. The well test delivered decent flow rates, however they have to sort out a problem with too high viscosity. We value the 65% stake with 20.8 USDm, i.e. the terms of the farm-out of a 35% stake last year. Should they prove commerciality of the 1C resources, we would expect Mafraq to be worth at least 60 USDm (rough estimate based on same NPV10 per boe than the existing Oman reserves). 

Both the Illinois Basin and Lak Ranch are non-core assets to be disposed of. LAK Ranch is non-producing and should have been sold in Q2. We have assumed a value of 10% of the original purchase price, however this was pretty arbitrary and basically any price they get should be good. For the Illinois assets we assume a discount of more than 50% to NPV10 and selling this subscale asset is strategically sensible.

The final block for our valuation are the contingent payments for the sale of Maha Brazil. They are based on the synergies the buyer realizes (1/3) and the average oil prices in the next three years (2/3), with payments starting from 80 USD and the maximum value being reached at 90 USD. We include 1/3 of the 36 USDm maximum in our valuation, i.e. essentially the non-oil price dependent part.

Thus, in its current shape we calculate a fair value of close to SEK 15, i.e. more than 100% upside.

While this is already very attractive, the real trigger is acquiring additional assets at favorable terms. Looking at the DBO transaction, i.e. paying around 25% of NPV10, management has demonstrated their skill. Focus of M&A will be Brazil, i.e. the home turf of the management team. The key interest rate of the Brazilian Central Bank is at 13.75% i.e. capital is scarce and expensive and should allow attractive deals for Maha. Thinking for example of Valeura’s (VLE-TSE) acquisitions in Thailand, whose share price more than tripled in the month following the announcement, we consider M&A a powerful catalyst, even more so, as management does not consider the terms of the DBO deal an outlier.

On the operational side achieving commerciality in Oman is another trigger and we should receive updates in the next couple of weeks.

Furthermore, the first-time consolidation of DBO will mean that cash-flows are to improve from the figures seen in Q1 2023.

Catalyst

- M&A

- Oman development