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MX Oil still keen on Mexico despite Nigeria move

Is MX becoming disillusioned with Mexico? Well no, not at all. Quite the reverse in fact.
MX Oil still keen on Mexico despite Nigeria move
Frangos is familiar with Aje, the asset offshore Nigeria.

The market was taken a bit by surprise when London-listed MX Oil (LON:MXO) suddenly upped and made an unexpected investment in Nigeria.

It had named itself after its core focus area, Mexico, and waxed lyrical about the golden opportunities there, now the country is opening itself up to foreign involvement in the oil and gas sector.

Is MX becoming disillusioned with Mexico? Well no, not at all. Quite the reverse in fact.

MX’s chairman Andrew Frangos told Proactive Investors: “We remain focused and very excited about our prospects in Mexico.

“Nigeria was an opportunistic opening, which we felt was too good an opportunity to not take up, but Mexico remains our focus”.

Confusion arose because the news announcement recently about MX taking a stake in the Aje Field on the OML 113 licence, offshore Nigeria came out around the same time that the first round of oil and gas licensing in Mexico for its privatisation programme had disappointing results.

Only two consortia out of a total of 14 bidders won acreage.

But as Frangos explained: “This round was for offshore blocks. Blue sky projects, if you like.

“Only the big companies would be interested.

“They have to go for something which is material enough to their interests and in the current oil price environment, many companies large and small have been reducing their exploration budgets.

“We have always had our eyes on the onshore conventional opportunities, which would come with near term production and exploration upside.”

The first round for onshore blocks is already underway and winning bidders are expected to be announced in December this year.

MX is a small company with a market cap of £13.5mln, and thus suited to the onshore rather than offshore.

It has been gearing up for pre-qualification, which is due for September, and submission of its bid in the last quarter of 2015.

It has formed a joint venture with Geo Estratos, one of the best known and well-connected oil and gas services companies in Mexico.

There are expected to be 26 blocks up for grabs in the onshore conventional round. MX is likely to go for five blocks and with Geo Estratos on board is hopeful of winning two of them.

They vary in size and prospectivity but typically an onshore block would be between 10 sq km and 100 sq km in size and would have many legacy wells.

They were drilled way back when, possibly in the 1970s and 1980s.

But with the discovery of super giant oil fields like Canterell and KMZ, which peaked at 2mln barrels per day and 800,000 barrels per day, and low oil prices these relatively small onshore fields were not considered worth developing by the then State oil Company, Pemex.

But for a company the size of MX Oil they are very attractive given that they are shallow wells, very low risk and are cheap to re-drill and work over – around US$1.6mln a pop for a new well.

Each well could be expected to produce between 200 and 2000 barrels of oil of day (bopd).

Frangos said that if successful in its bids, MX could see first oil out of Mexico by June the next year.

Meanwhile, the investment in Nigeria is moving rapidly ahead. Frangos said he was familiar with the asset and had a one-off opportunity to go into Aje by investing in cash-strapped Jacka Energy’s 5% net revenue interest (NRI) in the field.

Jacka bought the stake for US$16mln and has invested a further A$11mln in loans to the venture.

MX will invest in the loans to the tune of US$3mln. Once the new wells are in commercial production MX could effectively own 99% of Jacka’s 5% interest.

Just two weeks after this complicated deal was struck the first production well the Aje Field (Aje-5) has been spudded.

 Aje-5 is a twin to the Aje-2 well, which was production tested at the Cenomanian level in 1997, flowing approximately 3,700 bopd.

Thereafter, Aje-4, which was previously drilled in the exploration stage, will be re-entered as a second production well. The company anticipates that production could start from phase 1 by the end of 2015.

These first two production wells which constitute phase 1 are set to reach peak production of 11,000 barrels of oil equivalent a day (boepd) as per the recently commissioned competent person's report (CPR).

Phase 2 (requiring two further wells) is expected to see this rise to 19,000 boepd by 2018.

Frangos said that a price of US$60 a barrel there could be cash flow of circa US$23mln net to MX over the next four to five years. When Phase 2 comes into play, the company could make US$55mln over the next five year period.

Broker Hybridan commented on the day the Aje-5 well was spudded: “Despite MX Oil’s opportunistic investment, which has seen them earn an interest in a rapidly evolving development play (last month the company had no asset interests at all) the shares have drifted to 3.85p, 14% below the recent placing price. This may in some part be due to continuing pressure on the oil price.”

In the following days the shares took a further knock because of the misunderstanding over the Mexican bidding rounds and fell to 3.50p.

But at least Frangos seems confident about the future. He has recently bought 2.25mln shares at 3.9p.

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