Description

Long: Molopo Energy Limited (ASX: MPO)

Current Price: AU$0.165

Price Target: AU$0.238

Return: 45%

Market Cap: AU$41.7MM

Background

Molopo Energy is small energy company trading at 69% of NAV which is mostly made up of cash. It is trading at a discount because the company repeatedly failed to deliver on past goals. For a more in-depth look at its past, please see previous VIC write-ups. However, the firm should be looked at completely differently now. New shareholders are in control, management has been replaced, the firm has drastically cut costs and sold assets, and the company is moving in a new, less risky, direction. In addition, the company should announce a transaction in the coming months which could be a catalyst to help close the gap between the stock price and NAV.

New Chairman

Well known hedge fund Scoggin Capital built a 9.1% position by 8/7/13. Metropolitan Capital Advisors (MCA) initially filed with Scoggin in the beginning of 2013 as a substantial holder but later began filing separately and had a 2.3% position as of 6/26/13.  MCA was founded by Jeffrey Schwarz and appears to be associated with Scoggin as they have made investments together in the past. Schwarz submatriculated from Wharton (undergrad + MBA in 5 years) and graduated summa cum laude. He was appointed as a director to MPO on 3/18/13 and became the Chairman on 9/25/13.

New Management

A new CEO, Steven Cloutier, was put into place early in 2013, at the same time Scoggin and MCA entered MPO. Cloutier was charged with maximizing returns to shareholders from the hodgepodge of assets held at the time. His expertise is more on the transactional/M&A side of oil & gas as opposed to exploration and development, making him the right person for the job.

New Direction

Since taking the helm, Cloutier and Schwarz have sold three out of five of MPO’s assets and drastically cut SG&A, including director fees. Previously, MPO’s operational strategy would be to take positions in early-stage, high risk/high reward assets. Going forward, MPO plans on deploying its cash position in more developed plays in Western Canada, specifically looking at situations that have much less development risk and are simply starved for capital. In his letter to shareholders dated 4/24/14, Schwarz said: “Since the beginning of this year, we have identified more than a dozen M&A opportunities (several of which continue to be active) and we are optimistic that one or more will come to fruition in the coming months.”

NAV

In addition to its cash position, MPO has three legacy assets: Wolfcamp, Quebec Shale Gas, and an interest in the profits of a gas asset in South Africa.

In 2010, MPO acquired its Wolfcamp position in the Permian Basin, wasted a tremendous amount of money developing it uneconomically, and is now looking to monetize the asset. At the end of 2013, MPO sold a small portion of its Wolfcamp acres (the better section) for $4.8MM and wrote down the remaining asset by US$34.8MM (after a US$55.0MM impairment in 2012). It is now held on the books for US$4.7MM or $283/acre with 16,600 acres as of 3/31/14. This seems relatively reasonable given MPO initially purchased the acres for $300-325/acre, Permian valuations have increased materially since 2010, MPO has spent money developing the asset, yet the asset has proven to be less prospective than primely located Wolfcamp acres.

In Quebec, MPO has a 100% interest in 1.4MM acres in the St. Lawrence Lowlands, prospective for Utica Shale. In 2008, MPO planned to IPO this asset but did not go through with it and blamed the economy. The government then put a moratorium on hydraulic fracturing in the area while it assesses the environmental impact. As a result, MPO took a AU$7.2MM impairment charge in 2011 and currently holds the Quebec Shale Gas asset on their books at $0.

MPO sold its South African gas asset but will receive 36% of the profits for the next 10.5 years up to a total of US$4.8MM. This is also held on MPO’s books at $0.

The below table calculates expected NAV as of 6/30/14:

The table illustrates how MPO’s NAV is almost entirely made up of cash. In fact, if you ignore all other assets, the expected NAV as of 6/30/14 only drops to AU$0.213, implying a 29% return. The NAV calculation above values MPO’s Quebec and South Africa assets at $0, leaving room for future upside. If the deployment of capital takes longer than expected, the cash burn will be relatively low. Annual G&A is expected to be US$3.0-3.5MM or ~AU$0.014/share. CapEx for 2014 is expected to be US$0.5MM or AU$0.002/share. This ignores revenue from production. However, G&A costs may be temporarily higher while the company searches for and vets potential transactions.

Please note that the financials are in USD and the stock is quoted in AUD.

Risks

• Capital allocation
  • The future of the company will be determined by future acquisitions which is risky given the high standard deviation of outcomes in oil & gas
    • This is mitigated by MPO’s focus on developed asset plays that simply need capital as opposed to early-stage exploration & development
      • Cloutier has M&A experience and his decisions will be overseen by Schwarz
• Lawsuit
  • There are 3 lawsuits outstanding relating to an asset sold in 2011 for which MPO has reserved US$5MM
• The suits are going to court which could take years and result in damages and costs higher than the reserve

Summary

MPO is trading at a large discount to NAV due to many horrendous missteps in its past. New shareholders and management have come in, sold most of the assets, cut costs, and are looking to deploy the cash in a less risky fashion. The current stock price offers 45% upside to NAV, more than enough to compensate for execution and litigation risks.

Catalyst

1. The consummation of one or more transactions that show the new leadership is competent and unlike previous leadership