Looking at the current market action on MXP you’d think it’s playing to a Wes Craven Script. Don’t get me wrong – the ops update below is not pretty and to be honest could have been written much better. But let’s be clear this is not a horror story – but more of an Indian Jones adventure in the hunt for large black gold jewels.
Since the days of 2008, MXP investors have had plenty of curve balls or poisoned darts fired at them. The previous CEO and sidekick were ousted by the now managing board due to a ‘conflict of interest’. They were Australian and the first to introduce the Aussie bank Macquarie to MXP. A relationship that was set to prove to be a definitive hand in MXP’s future. In 2009 at the height of the Lehmans fallout, Macquarie sat across the table of MXP and like some Simon Cowell reality show had the option to give them the thumbs up or the thumbs down. Luckily for MXP share holders Macquarie agreed to put MXP through to the next round – but MXP had to sell its soul in the process. A huge placing at 2.5p ranges liquidated shareholders heavily but provided a new lease of life albeit ‘rented’. What happened next was poor by all accounts. Macquarie decided to syndicate the new shares that were issued to them. Selling them to various parties which in turn used the stock to ‘play’ with the MXP share price to suit their goals. In reality, the deal with MacQ was like signing up to a life long seda arrangement. Drip drip drip sell weights on the order book every day for the next 2 years+ was enough to stymie the sp from representing any meaningful progress by the business. And the business was making progress. The shallow well program has been a huge success and provided solid cash flow which is covering the debt repayments on the remaining debt pile.
It’s manageable and with production set to increase – the business is more than a going concern – it is cash generative. But and there is a but… the deep prospects which are the real Indian Jones treasures are big cash burners and need ‘wedges’ of cash up front. MXP had secured enough cash from a new loan via MacQ last year which would enable them to drill 2 x deep prospects. Today’s news suggests that the delays on the first deep well is likely to eat into the entire deep budget meaning that the second deep well is now not likely.
That is clearly disappointing but not the end of the world by any means. They still have issues to overcome on the first deep well but once through that – they are within a whisker of the prize and a 467mmboe one at that – should it be lying below of course and there’s no guarantee on that.
The irony is had MXP not gone hunting for elephants and concentrated purely on their shallow fields – the chances are they would have around 25mmboe in reserves, and 100mmboe upside exploration targets. Cash in the bank would be increasing from higher rates via exports (rather than local sales) and cash burn would be limited as the shallow wells take just a couple of weeks to drill compared to the near 6 to 12 month periods required for the deeps. A curtailed exploration type looking MXP as a completely different attraction to it – one that is relatively risk free.
But that’s steady eddy stuff and not really what MXP was created for. The shallows were there to simply provide cash flow and support so that the elephants could be hunted. The danger for MXP now is that they may fail to secure the second drill before the expiry on the ‘exploration’ licence in March 2013. It’s feasible that the Kaza gov could extend the period (it has been done before) but MXP would have to prove they have the financial backing to placate the kaza gov who are notoriously tough on exploration companies.
MXP have sufficient cash flow to raise reserve backed lending – but MacQ are clearly first in the cue and need to sanction any deal with any other credit provider.
MXP could sell the shallow fields for a good rate and fund the deeps via the proceeds. But then they become an outright wildcat exploration company and failure could ultimately result in the end of MXP.
But that’s high impact exploration for you – it’s what it is all about for many AIM listed companies. The likes of BOR, CHAR and others are outright exploration companies. There is no production. Just Seismics and massive upside ops.
So the big question for MXP BoD’s is do they dance with the devil again (MacQ) or do they give the devil the cold shoulder and sell their shallows to fund the bigger prize. It’s tantamount to placing all the chips on black but that has to be better than being pimped by MacQ for eternity.
But let’s not forget that MXP’s current NUR1 drill is just 2000 metres away from potentially hitting 467mmboe. The chances are that they’ll hit that level (once drill issues are solved) around August.
If successful – then this Indiana Jones script will end with a sunset, a wink and a tip of the hat.
Operational and Financial Update
22 June 2012
Max Petroleum Plc, an oil and gas exploration and production company focused on Kazakhstan, announces an operational and financial update.
The Company has experienced further delays drilling its NUR-1 well and as a result does not expect to reach total depth of 7,250 metres before August 2012. The delays largely result from the drill string becoming stuck in the top of salt in April 2012 at a depth of 5,718 metres. After side-tracking the well and setting casing at 5,681 metres, the Company drilled ahead. However, progress was slow as the Company drilled alongside the stuck drilling tools. After clearing the old wellbore, the well reached the Kungarian Salt on 19 June 2012. Due to encountering anomalously high pressures, the drill pipe has become stuck again at 5,722 metres, despite using the higher density mud specified for penetrating this section. Operations are now ongoing to increase the mud density further, free the stuck pipe by dissolving the salt with fresh water, and continue drilling through the salt to the next casing point at 5,900 metres.
Assuming near-term success in freeing the stuck pipe and normal operations going forward, the total costs for the NUR-1 well are now expected to be approximately US$43 million, with expected forward cost of approximately US$10 million. The Company will announce when it has resumed drilling ahead through the salt and, subsequently, after setting its next string of casing below the salt above the prospective pre-salt section.
In order to allow completion of its exploration drilling programme ahead of the expiry of the exploration phase of its Blocks A&E Licence in March 2013, the Company is working with its senior lender, Macquarie Bank Limited, and has initiated discussions with a number of providers of debt and equity financing, regarding the provision of additional capital. These discussions to date have been impacted by market conditions, as well as recent regulatory changes in Kazakhstan that currently prevent the Company from completing a conventional equity offering. The current outstanding balance on the Senior Credit Facility is US$54.2 million out of a total borrowing capacity of US$58 million through to 30 June 2012. The Company and Macquarie Bank Limited will review the borrowing threshold as part of their semi-annual budget review under the Credit Facility, as well as monthly amortization payments beginning in July 2012. In the absence of additional funding the Company may have to significantly curtail its intended exploration activities.