Maurel et Prom MAU
February 25, 2011 - 10:07am EST by
Dogstar
2011 2012
Price: 13.10 EPS $0.45 $1.95
Shares Out. (in M): 121 P/E 29.0x 7.0x
Market Cap (in $M): 2,190 P/FCF - 10.0x
Net Debt (in $M): 200 EBIT 65 325
TEV ($): 2,390 TEV/EBIT 37.0x 7.4x

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Description

Summary:
Go long Maurel & Prom stock at €13.10 to make a 50% return over the next year. I recommend looking at Maurel as a backdoor E&P play on Colombia. Current reserves in Gabon and Nigeria alone support the current stock price. The company's Colombian portfolio is worth another €7.50 to €20 a share, and ignored by French investors.


Trade Idea:
Numerous factors are behind the Maurel & Prom's discount to NAV.  A lack of a US listing (trades on the Paris Stock Exchange under the ticker MAU), investor unfamiliarity with Gabon, a portfolio of assets scattered across several countries, and some dry wells in early 2010 all helped to keep the stock cheap.  Over the next year I expect low risk drilling, farm outs, and the conversion of reserves from 3P to 1 and 2P to clarify the deep value in the stock.

Chances are you've never heard of Maurel & Prom. It's not well known by North American energy investors.  The company is based in France; and holds exploration and production assets in Gabon Nigeria, Tanzania, Colombia, Italy, Namibia and Venezuela.  Maurel currently produces close to 24,000 barrels a day of high quality, light sweet oil sold at Brent from fields in Gabon and Nigeria. The company has 140mm barrels of 2P reserves, and 217mm barrels of 3P reserves.  Gabon is very interesting growth story. I think you will see successful drilling in its northern area of its Onal field that just might could double reserves in a year.  Nigeria will surprise the market as well over the next 18 months. Net production will probably triple to 12k bbl/d over that time. 

But Colombia is really what makes Maurel & Prom worth spending time on.  The company has five exploration blocks in Colombia.  Two blocks:  Sabanero (100% working interest) and CPO 17 (50% working interest), are particularly interesting as they're in the heart of the Llanos Basin.  For those unfamiliar with Colombia, the Llanos is the continuation of the Orinoco heavy oil trend that begins in Venezuela and end up Ecuador.  The Llanos hosts a chain of giant heavy oil fields: including the 4 billion barrel Rubiales field (held by Pacific Rubiales and Ecopetrol), the 3 billion barrel Quifa field (also held by Pacific Rubiales and Ecopetrol), and the CPO 6 block (held by Pacific Rubiales and Talisman) which looks to have 2+ billion barrels of oil in place.  In the area are also the Occelote field which was sold by Maurel to Ecopetrol in 2009 for $800mm, the Caracara field that sold by Hupecol for $920mm, and EcoPetrol's Cano Sur.  The Llanos is responsible for the majority of Colombia's current 800,000 barrels a day of production, which the government expects to increase to 1.5 million barrels a day by 2015.

Maurel has already drilled 3 successful wells on its Sabanero block, and has confirmed a porosity and quality of oil comparable to that on Pacific Rubiales field next door.  It looks to me like Sabanero contains a major heavy oil deposit. Over the next 6 months the company will drill multiple wells here and I think prove out a field containing between 100 to 300mm recoverable barrels. At $8 USD a barrel, this field would be worth $800mm to $2.4bn USD or €5 to €15 a share. 

On top of this Maurel just announced a major discovery on its CPO 17 block, which it holds 50/50 with EcoPetrol.  Based on the 9 meters of significant oil saturation in the press release, it looks like CPO 17 indicates the presence of another major field.  As a result of their discovery, Maurel and EcoPetrol will accelerate their plans for this block's development, and drill multiple stratigraphic wells over the next few months.   The drilling program should lead to an interesting chain of press releases as each well shouldn't take more than 3 weeks to complete.  If CPO 17 turns out to be comparable to Sabanero, it could be worth anywhere between €2.50 and €7.50 a share.  In total these two blocks alone potentially represent €7.50 to €22.50 of value to MAU shares.  This ascribes zero value to the company's other interest in Colombia (SSJN-9, Musica, Tangara, and COR 15).  Also, my estimates do not include any upside associated with enhanced heavy oil recovery (a la Star fire-flooding technique being developed by Rubiales) which could double the amount of oil ultimately produced. Nor am I giving MAU per barrel premium because of the unusually low royalty rates the company has on production in its blocks (the company's royalty structure with the ANH was determined in 2005). 

The equity market doesn't yet understand the value in MAU's Colombian holdings.  I think the company's valuation today is supported exclusively by the reserves in Africa and Mau's drilling business.  It's somewhat shocking how the Colombian assets have been neglected by investors.  Colombia has been a hot market for some time now year, and a dozen major discoveries over the last two years have resulted in some respectably sized exploration companies.  But when you ask investors in EcoPetrol ($83bn USD market cap) or Pacific Rubiales ($8bn USD market cap) or PMG ($4bn USD market cap) or Gran Tierra ($2bn USD market cap), about Maurel & Prom, the most often response you'll hear is that they didn't even know this company exists.  Over the next few months, on the back of a couple more well results, I expect a rotation of funds from some of these established names into Maurel. 

The sell-side is little help here.  The one bulge bracket bank that covers the company values the the Colombia portfolio at less than a euro. It's an ignorant valuation, and highlights how poor a grasp the European sell-side has on Colombia.  I suppose it's understandable though since, apart from BP and Repsol, there really aren't many publicly traded European oil companies involved in Colombia.  I encourage you to compare Maurel's Colombian exploration portfolio to that held by Pacific Rubiales, Gran Tierra, Canacol or PMG. The prospectivity here is undeniable.


So to summarize, Maurel & Prom's current stock price:

  • Undervalues the company's existing reserves (light sweet West African crude sold at Brent) at less than $14/bbl.
  • Does not reflect the high probability of continued success in the company's drilling campaign in Gabon and Nigeria, and the material implications drilling will have on the company's year-end reserve report.
  • Overlooks the highly prospective nature of the company's exploration portfolio: including Colombia, which could be worth more than €20 a share.
  • Doesn't realize that in the past year Maurel & Prom has changed from a high risk exploration vehicle to a low risk production play. The company increased net production from 2k barrels a day (bbl/d) in early to 2010 to over 20k bbl/d today. Maurel will be at 30k bbl/d by year end, and 50k bbl/d by 2015 from Africa production alone. I estimate the company is trading at sub 5x 2011 EV/EBITDA.
  • The company largest share holder is the CEO, and I think there's a decent possibility of M&A here. There are numerous deep pocketed Asian oil companies looking to acquire misunderstood properties in frontier markets (consider the stories about Carlos Slim buying into the Llanos just this week, and rumors of him buying Pacific Rubiales floating out there). The number of E&P deals struck in 2011 alone so far has been impressive and this trend is going to continue.
I'm betting Maurel & Prom stock outperforms as the market better understands these five points. I won't be surprised if Maurel trades like Pacific Rubiales did after the discovery and development of its Quifa field in 2010.

Catalyst

Short term catalyst for MAU include additional well results from CPO 17, additional drill results from Sabanero, any sort of joint venture announcement concerning the company's assets in Syria or Namibia, drilling in the north of Onal in Gabon, and clarity on the company's strategy for Nigeria's development on the company's call on April 1st
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