Westhouse bullish on prospects for Petro Matad

Analysts at Westhouse have sounded a very upbeat note on prospects for Mongolia-focused oil group Petro Matad (LON:MATD) thanks to its increasingly successful exploration programme, strong and capable technical team and 'exceptionally large' prospective exploration blocks.

The analysts' highly positive stance on the company follows a visit to Mongolia to assess Petro Matad's operations and management at first hand. The group’s principal asset is a production sharing contract (PSC) over Matad Block XX, a petroleum block with an area of 14,250km² in the far eastern part of Mongolia, near the Chinese border.

Petro has also signed two PSC such contracts, for Bogd Block IV and Ongi Block V, which combined cover approximately 71,000km² in central Mongolia.

The Westhouse analysts - David Hart, Peter Bassett and Andrew Matharu - point out that the company has a very active work programme lined up for the next 6-12 months. In sharp focus will be Block XX, where exploration and appraisal drilling will be complimented by start of testing over the next few months. The company is continuing to make 'rapid progress' with its key DT-5 well on Block XX.

Westhouse reckons that the most likely near-term scenario for the company's drilling operation overall is the hiring of another rig to enable it to drill around 12 wells this year, comprising mainly of exploration wells within Block XX.

Petro Matad has already drilled four wells successfully on Block XX and the next step is to securing decent flow rates so that risks associated with the block’s resource estimates can be reduced.

For the Westhouse analysts, promising as the exploration and development work is, much depends on the quality of the Petro Matad's technical team and management in general. They were not disappointed on this score during their visit, noting that the high quality of Petro's team is "striking" and "stands out immediately".

The management team at Petro includes Rodney Graham as chief operating officer. Graham has an extensive understanding of Mongolian geology, having lived and worked in Mongolia for nine years prior to joining Petro Matad. Then there is exploration manager Jim Coogan who boasts 28 years of experience within the industry, academia and running his own consultancy. Their expertise is complemented by a team of Mongolian geoscientists led by Mr B Dendevchuluun, a geophysicist with over 38 years’ experience.

The analysts note: "The search for, and ultimate development of, oil and gas is, without question, a technically challenging endeavour, but by assembling such a strong team of professionals, Petro Matad has ensured that those efforts are well directed by highly qualified in-house personnel."

Another further positive for the group is that the Blocks it operates are very large relative to, say, a typical North Sea Block. Block XX, at 14,250km2, is the smallest, while Blocks IV and V cover an impressive 71,041km2.  In the US, the two blocks are equivalent to roughly the area of New Hampshire, Vermont and New Jersey combined.

Yet Petro Matad has only fully explored a small fraction of the total area under its control. With early-stage exploration activities already producing encouraging results, Westhouse believes the group’s huge acreage position suggests "substantial upside potential".

The analysts conclude that more than anything, their recent visit to Mongolia impressed upon them the significant achievements the company has accomplished to date, operating as it does in a region where the oil and gas industry does not benefit from a mature service sector.

They added: “Petro Matad has set up the first self-contained, professional petroleum exploration team in a country that was more accustomed to fly-in/fly-out consultants and extremely limited local sectorial services. However, rather than resting on its laurels, the company’s ambitions remain undiminished, as demonstrated by its full work schedule involving all facets of exploration and appraisal, from field studies right through to drilling and testing.”

Near term, Westhouse sees the completion of well DT-5 , the start of the next one, DT-6, and beginning of testing as near term catalysts for the stock. 

While each of these events stands out, the analysts are “particularly interested” in the outcome of the flow test results as commercial risk is, in their view, weighing unduly on the group’s share price.

At current trading levels for Petro Matad, which are significantly below Westhouse’s target price of 341p, the broker retains its ‘buy’ recommendation for the stock. Mid-morning Petro Matad shares stood unchanged at 168.5p, valuing the company at £310 million.