Mosman Oil & Gas - Speculative Appeal

http://mosmanoilandgas.com/

Mosman Oil and Gas Logo
One of the best things about the stock market is that there are many strategies that can be followed, and there is not a set way of thinking. That flexibility means that profits can be made in many different ways, and not necessarily just through finding the most fundamentally sound companies. Whilst having a large proportion of these types of companies should form the bedrock of a portfolio, there should be a small space for less fundamentally sound companies that you believe are capable of driving attractive investment returns. Mosman Oil & Gas (LSE:MSMN) is an example of one of these companies - as a newly listed oil & gas junior it does not have an established asset base, but it does have the speculative appeal that should see the company's shares trade higher than the 7.5p mid-price today. With 61.4m shares in issue, Mosman is currently valued by the market at £4.60m.


As is usual with company's that have recently IPO'd (Mosman did back in March 2014), technical analysis really isn't particularly useful. One of the most useful indicators is the volume indicator - as per the chart, volumes have been low since the IPO. It's therefore useful to try and ascertain why. It's also important to make an educated guess as to why the company is trading below its 8p IPO price.

Indeed, these two questions are intrinsically linked for Mosman. The company, which is Australia, has certainly had sub-par IPO coverage here in the UK, but that is related tot he company being very small in size. Furthermore, the company failed to raise the amount that it initially intended to - the initial plans were to raise £2.5m, but the end result was just £1.5m of gross proceeds (£1.2m net proceeds). When a company fails to raise its intended level of gross proceeds, it's usually an off-putting sign for investors. That could relate closely to the company having low traded volumes post-IPO. Combined with the resource market malaise (which has affected both the mining and oil & gas sectors), overall appetite for these kind of companies is fairly weak among large institutions. However, appetite amongst retail investors on AIM remains buoyant.

As mentioned earlier, Mosman has a low free float. That is because 36% of shares are held by directors, and are largely locked-in. A further ~16.7% of shares are held by Aorere Resources, after the company issued shares during an asset purchase. The shareholder list also includes several smaller parties, including Santina Ltd (4.89%), Clarisden Capital (3.26%) and Alfriston Group (3.26%). The latter two parties are pre-IPO investors who Executive Chairman John Barr have a directorship/partnership with, so in theory these two parties are unlikely to sell down their holdings. In the past, directors have subscribed for circa A$900k in shares, which is a good commitment moving forward.

Considering the size of the company, the management team is experienced, albeit the quite a lot of that experience came from dealing with small cap companies such as Thor Mining (LSE:THR). Most notably, John Barr has previously been heavily involved with Aquarius Platinum earlier in its history, which is impressive. The spread on the shares can fluctuate pretty significantly due to the low free float, and this can mean that the share price is volatile. That should benefit the company moving forward, given the low investor interest currently.

Turning to the assets, Mosman is an unlisted Australian company that was formed back in 2011. The company historically tried to acquire two projects; a gold exploration asset in Liberia and an oil and gas asset in Papua New Guinea, but both of these fell through at the due diligence stage. That past lack of focus can often also deter investor interest. However, the company has settled on acquiring stakes in two oil and gas projects, in New Zealand and Australia respectively. The first thing to note is that both of these locations are politically secure. The second thing is to understand that the Australian assets are largely valueless at the current point in time, as the company is only the 'preferred applicant' for its block, and several hurdles need to be navigated before any value should be attributed to it.

Before going deeper into the assets, the real reason why the shares haven't been in favour is because of one statement at the start of the admissions document: "The Directors believe that further funding of the company will be required in the future to fund the company's continued operations." That is usually a warning sign, but for the strategy of trading Mosman (which I'll outline later), it's not a major issue, especially in light of company statements further into the document.

The valuable asset as it stands is their New Zealand asset, which is formed in block PEP 38526. Mosman has a 100% working interest in the asset, having bought out Aorere's stake back in 2013. There has been significant historic drilling in and around the block, albeit not recently. Plans are to target shallow oil accumulations from a portfolio of 22 prospects/leads identified. 10 wells have been drilled by operators within the PEP area, although these have been commercially unsuccessful. Positively, oil shows have been seen across some of the wells. These well results, combined with past seismic, have been combined into a core model. This should allow Mosman to have a substantially better view of the block (and the best targets) compared to past operators, many of who drilled before the technological advances of the industry. As part of the asset evaluation, Mosman commissioned SRK to produce a Competent Person's Report.

Whilst appreciating that the accuracy of this report is probably low (given the limited recent work on the asset), it suggested a mean unrisked oil initially in place (OIIP) figure of 217.9 million st barrels of oil. That translates through to a mean unrisked recoverable oil figure of 26.6 million st barrels of oil. These are attractive figures for a company of Mosman's size. On the other hand, the PEP block is in the southern extension of the proven Taranaki oil system. The Northern side of this system has around 20 fields that have produced in excess of 400 million barrels of oil and 6 TCF of gas over its lifetime.

The second (potential) asset is in Australia. Mosman holds a 25% stake in APPPL, which is the preferred applicant for a block in the Officer Basin of Western Australia. This is a basin that is largely unexplored, only with 'scant seismic', that offers both conventional and unconventional (shale) appeal. The asset is not confirmed, as APPPL have not been granted the asset yet. A prerequisite to the permit grant is that native title agreements must be agreed upon, which involve certain admin payments and overrides. This uncertainty detracts from the investment appeal that Mosman holds, as investors aren't sure whether or not to ascribe value to the asset. Therefore, Mosman could be considered a one-dimensional play, which is true, but given the size of the company it's not a problem.

The potential asset is located North-East of Perth on largely flat terrain. Seismic coverage exists for the Northern part of the application area, plus 6 wells have been drilled in the past. Once again, the results were uncommercial so the company does not exactly have fundamentally sound assets. Nonetheless, a good source rock, excellent reservoirs, and oil and gas shows have been observed in the area and SRK have commented that "all the key elements" of a petroleum system are present. The oil window is relatively deep though. Some of this historic work was undertaken by Shell. Should the permit be granted, the share price would likely rise appreciably. Mosman would also become locked into funding 25% of the work programme below:
- 2D seismic processing
- 1 exploration well (estimated A$2.07m cost)
- New 2D seismic collection
- 1 exploration well (Estimated A$4.55m cost)
- Geological studies
- 1 exploration well on similar cost levels as the A$4.55m one above
The total cost of this work programme comes to A$14.54m, which is roughly A$3.64m net to Mosman. That would need to be spent, probably over the course of 2014 and 2015. Therefore, cash would be required either later in 2014 or in 2015.

Looking forward, Mosman are obliged to drill 2 wells at the Petroleum Creek (PEP) asset in New Zealand by September 2014. That provides the much needed catalyst that investors should look for in resource stocks. Moreover, the company is adequately funded for that program given that cash costs are estimated between £150k and £250k. The drill time is just 2 weeks as well. Admittedly, the prospect sizes are not huge, but the largest still has a Pmean 3.9 million barrels of oil, which makes Mosman a compelling speculative buy at this level.

So what's the cash position like? Post-IPO Mosman has estimated cash resources of approximately A$2.1m, which is around £1.2m. The New Zealand exploration plans for 2014 are planned to cost A$0.88m, which proves the low-cost nature of the drills. Add in guesstimated admin costs of A$0.6m this year, and cash at year-end would be around A$0.621m. On that basis, there is likely to be a cash raising either late in 2014, or earlier if there is a substantial share price increase. The reason why this isn't a problem is that the company is very unlikely to raise cash in the short-term at current prices. Indeed, they state "A further fundraising will be required, following the completion of the exploration programmes, to fund the company's activities in 2016 and beyond". The timescales that I am suggesting for this investment proposition is 2-3 months, so cash shouldn't be a problem over this timeframe. The company has briefly noted the possibility of other asset purchases, but that's probably not in the company's best interests at the moment. The current assets are exciting enough to justify a current market cap, and should be focused upon.

A couple of news statements have been released post-IPO in 2014 so far. In March the company announced that drill equipment has been acquired for the June 2014 drilling programme in New Zealand. Well locations had already been decided upon and the two wells are named Crestal-1 and Crossroads-1 respectively. The first will be drilled to a 400m depth, with the second a 500m-700m depth - both will target several distinct reservoir zones. Earlier this month, the company also signed Landowneer access agreements for New Zealand, which is effectively another box checked ahead of the drilling plans.

The rationale for an investment in Mosman is not obvious, but it's compelling. As the company nears its drill programme, speculation should start to bubble, especially since the company does not have a large retail following currently. This buying speculation tends to draw the share price higher. The company has a healthy cash balance at present, and that provides a backstop against a lower valuation - this is a technique that the site effectively deployed on Oilex (LSE:OEX). Whilst all investors have their own investing methods for oil and gas companies, the preferable one from my perspective is to trade the speculative rise, and not hold through the drill (as problems can arise). The likelihood of a speculative rise on Mosman is very high in my opinion.

Two research reports are currently available on Mosman. The Beaufort Research report states a target price of 13p, although you have to question the credibility of the report when Mosman is mis-spelt as Mossman on page 1! The second comes from SI Capital (SIC). SIC have estimates that suggest a 1 million barrel (mmbl) discovery could yield a flow rate of 504 bopd at its peak. A 5 mmbl discovery could yield a flow rate of 1,893 bopd at its peak. Once again, both of these figures are compelling, although in the grand scheme of things they don't mean a great deal. The focus here is very much on Mosman actually detecting oil first, and this trade idea doesn't even require that.

The last cog of these sorts of investment propositions is to substantiate my earlier argument that AIM retail investors have a liking for small cap oil and gas juniors. There is almost a psychological mindset that a company with any decent assets shouldn't be valued in the low £millions. A quick filter of sub-£5m O&G companies seems to support that argument - Mosman is currently ~10% less than the £5m barrier. These were the [few] filter results for that:

- Independent Resources (LSE:IRG) = Small asset interest. No clear catalysts
- New World Oil (LSE:NEW) = Financial problems and doubtful assets. Suffered a fall from grace
- Sefton Resources (LSE:SER) = Dire company, poor assets, no cash. Priced for bankruptcy
- Union Jack Oil (LSE:UJO) = Highly illiquid. Small exploration targets plus raised cash at a hefty discount
- UK Oil & Gas (LSE:UKOG) = Investment company with small indirect interests in UK onshore assets
- Wessex (LSE:WSX) = Poor historic drilling record. Uncertainty with respect to possible asset acquisition, which could be share-based

I'd strongly argue that the peer comparison for the market cap size proves that the company is lowly valued, and that retail investors are highly likely to drive it to a higher price. The company is currently being valued on par with companies that have appalling past drill records, and those that have miniature interests in assets. Mosman has large direct interests in the New Zealand asset, which has strong economics, and the fact that it is funded for not one, but two drills should see investors take up speculative stakes in the company. Moving ahead of the market should reap rewards for those willing to take on a higher risk investment. The downside from this level should theoretically be limited until the drill results are in, but as alluded to, the plan is to exit the investment prior to the drill completing. With a £4.60m market cap, the possibility of meaningful short-term upside leads me to attaching a Buy tag to Mosman at 7.50p, even if it is far from being fundamentally sound.

UPDATE (02/05/14) - I have moved Mosman from Buy to No Rating at 14.50p to lock in a 93% profit this morning. The price movement since the review has exceeded expectations, and there is the chance that the stock could fall back a little given that the drill is still a month away. The underlying fundamental re-rating has now taken place, and the target range was reached. Investors willing to take a risk should hold

7 comments:

  1. Succinct appraisal. Excellent job

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  2. Tnanks for taking the time to do these reviews El1te. I know you are very respected

    CraigJ

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    1. Ditto. The range of companies covered is a real attraction. I like the idea of not sticking to a set process and letting your mind run with new ideas. Not every idea will be successful but to be a well rounded investor its probably right that you cover all angles and not get stuck in a rut.

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  3. Hi El1te, great review. I'm in @ 8p. I see you have not set a target price to reach, is that because on this sort of speculation play, the upside potential is too hard to place a target at. Great movement on the share already, great job :)

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    1. Hi there,

      As you say, it's very difficult to set target prices for shares such as Mosman before there has been any price movement. However, now that there has been some, it's possible to put a simple market cap range, which the company could reach pre-spud. That range (in my opinion) is £9m - £11m, which translates into a price range of 14.66p - 17.92p. Whether that gets reached is down to momentum again, and I'd be tempted to take profits should it near that range, as I reckon the management could come back for more cash in the market. As usual, I'll update the site twitter feed (and the company review page) the moment that I switch Mosman from Buy -> No Rating.

      Hope that helps,
      El1te

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  4. El1te, thanks for the tip, got in @ 8p and out @ 13.50p. What made you decide to take the buy tag off, is it now fairly valued pre drill in your opinion? Have about 30% of my profit left in myself to run up to the drilling incase they hit a gusher :)

    p.s. You should have a donation link on the site to reward you for your hard work. haha.

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    1. Well done! It has certainly smashed my expectations in terms of the timescale to reach the target range, so it would have probably been a little greedy to not have taken profits. I reckon the company is now around a fairer valuation - quite a lot of the figures bandied around are pretty misleading in terms of what can be achieved from the two drills. That said, it could run a little higher, but taking profits when the market is liquid is normally best.

      El1te

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