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Madagascar Oil Ltd: THE INVESTMENT CASE

Madagascar Oil poised for catalysts as Tsimiroro advances

Tsimiroro advanced significantly in recent months, partnering may be the next trigger
Madagascar Oil poised for catalysts as Tsimiroro advances
INVESTMENT OVERVIEW: MOIL The Big Picture
It is time to move onto Tsimiroro’s development, according to CEO Robert Estill

It is very rare for a company as small as Madagascar Oil (LON:MOIL) to have a resource as large as Tsimiroro, so says recently appointed chief executive Robert Estill.

Tsimiroro, a large heavy oil field on the Island of Madagascar, is host to some 1.7bn barrels of recoverable contingent resources; yet MOIL is valued in the market at a little over £60mln.

That equates to just pennies per barrel.

The revolving door on MOIL’s boardroom appeared to finally stop turning this January with the appointment of Estrill, who brings expertise not just in heavy oil but also in the field of corporate responsibility and local community engagement.

MOIL has in a just six months advanced Tsimiroro significantly.

Indeed, a rally of around 145% in the share price since early March speaks to the significant strides that the project has made.

Investors began to wake up to the company’s potential in April when the Madagascan authorities approved the Tsimiroro field development plan.

Momentum has since then continued to grow as two key milestones were reached; first the appointment of investment bank Jefferies to aid the search for a development partner, and secondly the submission of an environmental impact assessment for the initial phase of field development.

“Now it is time to move onto the development of the asset, and in order to that we want to have the right strategic partner,” Estill said in a recent Proactive Investors interview.

A sceptic could too quickly dismiss the farm-out process as too hard a sell in the current environment, where crude is worth around US$60 per barrel.

Estill is, however, confident in Tsimiroro’s credentials.

He highlights that the large resource is all onshore, although the heavy oil requires enhanced recovery the reservoirs are relatively shallow and as a result the wells are relatively low cost.

Estill says the development’s breakeven cost is estimated in the US$40 to US$50 range, and he believes it will be seen as attractive to larger companies that are looking to replenish their reserves.

With the assistance of Jefferies the AIM quoted company is also considering other ways to fund the project’s start-up; and that may include partnerships with oil field service groups and infrastructure partners.

The Tsimiroro development begins with what the company calls the ‘anchor’ stage.

Around 400 new wells will be drilled in this initial phase which will see production established in the range of 7,000 to 10,000 barrels per day by late 2018 or early 2019.

MOIL will require between US$200mln and US$400mln to fund the anchor stage of the field development.

The ‘anchor’ stage will be followed by a ‘fast track’ stage, whereby production will be expanded up to 50,000 bopd by 2021/2022; at a capital cost of US$400mln to US$600mln. And a subsequent ‘enhanced’ stage will then be funded by cashflow, and will see production ramp up from 50,000 bopd to over 100,000 bopd.

Ordinarily at this point in our Big Picture features we like to examine a company’s investment proposition and, ideally, take a hopeful look at how potential may translate to pounds and pence for shareholders.

Fortunately for us, the team at VSA Capital has already done the calculated guess work.

VSA Capital, which helped arrange September’s US$20mln funding, carried out what it called an ‘illustrative’ analysis of MOIL’s potential, through to 2030.

The broker does, however, state that theses longer term value estimates do not represent formal price targets.

VSA estimates that during phase 1 (2016-17) a strategic partner could provide funding at a premium valuation, equivalent to 20p per Madagascar share.

Before that though, the broker anticipates another funding directly into MOIL, of around US$30mln, which could take place this year at an assumed price of 6.25p per share.

Marc Anis-Hanna, VSA’s analyst, says that investors in the funding could see ‘significant value uplift’, as long as MOIL meets its project funding milestones.

Setting aside VSA’s actual 35p per share target price, the broker estimates MOIL could be worth around 45p per share by 2017; during the project’s anchor development stage.

Looking further ahead, to the fast-track development phase, and VSA estimates the share could be worth 52p in 2018 through to 73p by 2020.

By 2022, once the project expansion is funded by free cash flow, the broker sees the share price above £1 and by 2029 the value is estimated at £2 per share.

As a word of warning, however, Anis-Hana highlights that the introduction of a strategic investor and a fundraise as “the most critical” of remaining elements of the project.

“We believe this to be more important than the 2018 raise to build pipeline infrastructure, as our analysis estimates that MOIL will be producing 10kboe/d and have 100mmboe of 2P reserves in 2018, enough to attract sufficient investor and bank interest by itself,” the analyst said.

“Should MOIL reach its three funding milestones for the project, it should be able to successfully develop the full field, with potentially significant value uplift along the way.”

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