MMT.to - Mart Resources

[muscleman]

The report states:

The following companies mentioned in the interview are sponsors of Streetwise Reports: Mart Resources Inc. Streetwise Reports does not

accept stock in exchange for its services.

 

Mart is currently listed on the front page of The Energy Report.  theenergyreport.com

If you click through to mart's page on that site, you clearly see that they more or less only highlight good news about mart.

 

Sorry I didn't see that in the report.

Anyway, looking at theenergyreport.com, it does look fishy. The expert comments are very funny. I don't believe any investment banks would do this.

http://www.theenergyreport.com/pub/co/3448

[muscleman]

Can you show me the differences because it sure doesn't jump out at me?

 

UMU-10 release on 11/5/12

 

As previously announced, the UMU-10 well has reached a final total drilling depth of approximately 9,757 feet. UMU-10 is an appraisal well targeting the sands encountered in the UMU-9 exploration/step-out well, including the deep sand discoveries. Based upon comprehensive open hole logging, the UMU-10 well encountered 479 feet of gross pay in 20 sands. The reservoirs encountered are consistent with the findings in the UMU-9 well, with one additional oil-bearing discovery in the UMU-10 well that was wet in UMU-9. The five deep sand discoveries encountered in UMU-9, along with the additional oil sand encountered in UMU-10, have not previously been flowed to surface.  These deep sands are the primary testing and completion targets for the UMU-10 well.

 

Downhole pressure and fluid sample tests were taken over all reservoirs. Preliminary evaluations based on log and drilling data for the UMU-10 well show 19 light oil reservoirs and one gas/condensate reservoir. These conclusions are consistent with results of tests on the UMU-9 well. The down-hole fluid samples have confirmed hydrocarbon type, and will provide critical information for reservoir management and field development planning.

 

UMU-13 release on 12/4/14

The UMU-13 well has reached a final total drilling depth of 9,300 feet. UMU-13 is a vertical appraisal well with exploration prospects drilled on a seismically defined structure located east of the existing and producing Umusadege field. Preliminary evaluations based on well logging, pressures, and drilling data indicate that the UMU-13 well encountered approximately 220 feet of gross pay in 11 sands. The sands encountered by the UMU-13 well are consistent with the

findings of UMU-9 well, which was previously drilled west of the UMU-13 well on the main structure of the Umusadege field. The preliminary evaluations indicate nine light oil sands and two gas/condensate sands with total gross pay of 162 feet and 58 feet respectively. Down-hole fluid samples have been taken and laboratory results are pending. The down-hole fluid samples will be used to confirm hydrocarbon type and will provide critical information for reservoir

management and future field development planning.

 

The primary testing and completion targets for the UMU-13 well will be finalized upon receiving the down-hole fluid sample results. The completion program and production testing operations on the UMU-13 well will continue through December 2014.

 

Sorry my bad. These two do look similar.  :P

[Tim Eriksen]

 

Regarding cash flow per share, I have a different view. This is not a bank or a restaurant where you don't need much capex to consistently get free cash flow. This is oil and gas where you have to keep spending and the ONLY way to increase your shareholder value is to successfully discover new proved reserves through exploration. You may get $0.6 cash flow this year and next and then if you cut off capex, the year after, you suddenly get no more cash flow.

 

 

You are arguing against something no one is saying.  I understand the nature of oil and gas capex versus other industries.  Do you?  Your example of cash flow going from $0.60 per share (my number) to zero the next year is silly.  It depends on the production decline rate.  If the decline rate were extremely steep you would be right.  But for Mart it isn't.  So the whole assumption is flawed.  Secondly they have already spent the majority of the capex to more than triple production.   

 

Looking at the reserves:

If we assume $12 per barrel pure profit (netback, they call it), and we assume the entire 3P reserves are extracted with no problem, which is 23 Million barrels, then the total cash flow from the reserves is just 276 Million. I haven't applied discounted cash flow yet, which will drive the total value even lower. If we apply a generous $20 per barrel netback, then the total profit is $460 million. Still not impressive.

 

First problem is you are confusing cash flow and net income.  Netback includes depletion.  For cash flow you have to add it back.  Which are you wanting to discuss? 

 

Second problem is you are assuming that the reserve picture reflects current reality.  For a developing producer that is often not the case.  The 23 million would be with little additional capex since much of that has been spent in 2014 (moving possible reserves to probable or proven).  23 million barrels is four years of net production assuming a worst case 50% allocation.  So in 4 years they would recoup all their depletion costs plus any profit.  Use that to calculate your IRR.

 

Of course all this misses the point that the new horizontals and UMU-13 will greatly expand reserve totals.     

 

This conversation confirms why I titled the presentation "Add a Litlte Ick to the Mix"  You seem to be having an ick reaction without truly looking at the numbers.  Don't try to confirm whether it is good or bad.  Look at it objectively.  You may like it or you may not.  That is okay with me. 

 

[muscleman]

 

Regarding cash flow per share, I have a different view. This is not a bank or a restaurant where you don't need much capex to consistently get free cash flow. This is oil and gas where you have to keep spending and the ONLY way to increase your shareholder value is to successfully discover new proved reserves through exploration. You may get $0.6 cash flow this year and next and then if you cut off capex, the year after, you suddenly get no more cash flow.

 

 

You are arguing against something no one is saying.  I understand the nature of oil and gas capex versus other industries.  Do you?  Your example of cash flow going from $0.60 per share (my number) to zero the next year is silly.  It depends on the production decline rate.  If the decline rate were extremely steep you would be right.  But for Mart it isn't.  So the whole assumption is flawed.  Secondly they have already spent the majority of the capex to more than triple production.   

 

Looking at the reserves:

If we assume $12 per barrel pure profit (netback, they call it), and we assume the entire 3P reserves are extracted with no problem, which is 23 Million barrels, then the total cash flow from the reserves is just 276 Million. I haven't applied discounted cash flow yet, which will drive the total value even lower. If we apply a generous $20 per barrel netback, then the total profit is $460 million. Still not impressive.

 

First problem is you are confusing cash flow and net income.  Netback includes depletion.  For cash flow you have to add it back.  Which are you wanting to discuss? 

 

Second problem is you are assuming that the reserve picture reflects current reality.  For a developing producer that is often not the case.  The 23 million would be with little additional capex since much of that has been spent in 2014 (moving possible reserves to probable or proven).  23 million barrels is four years of net production assuming a worst case 50% allocation.  So in 4 years they would recoup all their depletion costs plus any profit.  Use that to calculate your IRR.

 

Of course all this misses the point that the new horizontals and UMU-13 will greatly expand reserve totals.     

 

This conversation confirms why I titled the presentation "Add a Litlte Ick to the Mix"  You seem to be having an ick reaction without truly looking at the numbers.  Don't try to confirm whether it is good or bad.  Look at it objectively.  You may like it or you may not.  That is okay with me.

 

Please don't go personal or emotional about the discussions. I already said in my first post that I do not have a good understanding of Oil companies.  :)

" Your example of cash flow going from $0.60 per share (my number) to zero the next year is silly.  It depends on the production decline rate. "

Well, I have pointed out on the first post that Mart's type curve is much better than SD. However, I believe that if the current 3P reserve number is accurate, we can ignore the type curve and just say that after a few years with no additional capex to explore new wells, the 3P reserve will be depleted, and the total amount of netback will be $276 million AFTER recovery of total project costs of $315 million. Yes, you said "netback includes Depletion". And I said the $276 million netback is AFTER recovery of total project costs of $315 Million. We are not in any conflicts right?

 

So if you buy today at $217 market cap, you will get $276+$315 million after, say 4-5 years when the 3P reserve depletes, IF not additional CAPEX is spent. What's wrong with my calculation here? You also agreed that "The 23 million would be with little additional capex".

 

Things get more complicated when there is additional capex spent on exploration, which is normal for all on-going oil businesses. But I think it is best to exclude them to see the true economics of the projects. When they produce cash, they can either give it to us, or spend on additional capex. If the return is good on additional capex, they should spend it. If the return is bad, they should return the capital to us.

They spent $315 million so far for their total projects and I expect them to recover that cost and make $276 million over the next 4 years. The return of these projects look to be quite low to me.

 

 

Another thing I want to point out is that this has nothing to do with "ICK". In your presentation, you mentioned oil theft, 3rd world and other anecdotal facts and call it "ICK". I agree with that. Most people would shy away when they see these facts. But we are purely looking at the numbers. There is no anecdotal facts involved.

[Tim Eriksen]

I apologize. 

 

So you pay 217 today and get cash flows of 150 each of the next four years.  I don't see why that stinks. 

[muscleman]

I apologize. 

 

So you pay 217 today and get cash flows of 150 each of the next four years.  I don't see why that stinks.

 

My only interest is to make money. I have no interest to make arguments just to win someone. :) Let's just put emotional aside and inspect the numbers.

I think paying 217 today to get 150 for each of the next four years is misleading. Let's look at the balance sheet and think about what will change four years from now on, assuming capex is 0 and no dividend issued.

http://www.martresources.com/wp-content/uploads/2014/11/Mart-Q3-2014-Financial-Statements-V-9-clean-FINAL.pdf

 

The only thing that will change is "Petroleumproperty interests" will drop from 215 to 0, and cash will increase by 600.

Shareholder equity as of today is 86. After four years, it will increase to 86+600-215=471.

 

Therefore, you are paying 217 to get 471 after four years, not 600. The rate of return would be around 28% per year for your investment.

 

This is not a bad rate of return, but this assumes the following:

1. Oil price is $100 instead of $60.

2. 3P reserve is accurate and all of the possible reserves can be 100% extracted. Let's look at the definition of probably and possible reserves:

http://www.investopedia.com/terms/1/3p.asp

"The 3P estimate is a rosy estimate of what might actually be pumped out of a well. Probable reserves are generally given 50% certainty (P50), and possible reserves are given 10% certainty (P10)."

 

Assuming a $60 oil price and after four years, according to my previous calculations, the cash will increase by only 46, and the "Petroleumproperty interests" will drop from 215 to 0, and the shareholder equity would be 86+46-215 = -83 million in theory. In reality, this will not happen because as soon as the revenue starts to dwindle, the bankers will jump out and try to protect themselves.

 

Please help me understand if my thinking process has any errors here.

 

 

[Tim Eriksen]

I apologize. 

 

So you pay 217 today and get cash flows of 150 each of the next four years.  I don't see why that stinks.

 

My only interest is to make money. I have no interest to make arguments just to win someone. :) Let's just put emotional aside and inspect the numbers.

I think paying 217 today to get 150 for each of the next four years is misleading. Let's look at the balance sheet and think about what will change four years from now on, assuming capex is 0 and no dividend issued.

http://www.martresources.com/wp-content/uploads/2014/11/Mart-Q3-2014-Financial-Statements-V-9-clean-FINAL.pdf

 

The only thing that will change is "Petroleumproperty interests" will drop from 215 to 0, and cash will increase by 600.

Shareholder equity as of today is 86. After four years, it will increase to 86+600-215=471.

 

Therefore, you are paying 217 to get 471 after four years, not 600. The rate of return would be around 28% per year for your investment.

 

This is not a bad rate of return, but this assumes the following:

1. Oil price is $100 instead of $60.

2. 3P reserve is accurate and all of the possible reserves can be 100% extracted. Let's look at the definition of probably and possible reserves:

http://www.investopedia.com/terms/1/3p.asp

"The 3P estimate is a rosy estimate of what might actually be pumped out of a well. Probable reserves are generally given 50% certainty (P50), and possible reserves are given 10% certainty (P10)."

 

Assuming a $60 oil price and after four years, according to my previous calculations, the cash will increase by only 46, and the "Petroleumproperty interests" will drop from 215 to 0, and the shareholder equity would be 86+46-215 = -83 million in theory. In reality, this will not happen because as soon as the revenue starts to dwindle, the bankers will jump out and try to protect themselves.

 

Please help me understand if my thinking process has any errors here.

 

Not a problem to put emotion aside.  It is more frustration than anger.  I have done fairly deep research on more than 50 oil and gas companies over the last ten years. 

 

I think there a lot of errors and problems in your post.  You suddenly jumped from cash flow generation to equity (in other words a DCF analysis to a liquidation analysis).  You need to stick with one or the other.  Equity is going to include OML 18 assets and debt.  We were discussing cash flow. 

 

Then while the cash flows yearly (or quarterly) you only want to assume it arrives at the end.  Why?  That doesn't make sense.

 

Then you assume the $600 million of cash flow assumes $100 oil not $60.  It doesn't.  But that brings it back to prior discussions where you see things differently (likelihood of lower production and depletion costs etc.)  I project cash flow of $145 million for 2015 using $65 oil and $193 million for 2016 using $70 oil  ($174 million using $65 oil). 

 

I personally think the 3P reserves are not very important.  You would need to study more about reserves to understand.  I am no expert, but in brief they don't get credit for the whole field due to well spacing and lack of exploration well completion.  I suspect actual economic reserves are a multiple to the reported numbers.  The field is huge and the decline rates are low (e.g. UMU-1 came online in 2008 at 2,400 bopd and last I saw was 2,000 bopd).     

 

Maybe the attachment will help you see what I am thinking.

Mart_Resources_2015-2016_est.pdf

[muscleman]

 

Not a problem to put emotion aside.  It is more frustration than anger.  I have done fairly deep research on more than 50 oil and gas companies over the last ten years. 

 

I think there a lot of errors and problems in your post.  You suddenly jumped from cash flow generation to equity (in other words a DCF analysis to a liquidation analysis).  You need to stick with one or the other.  Equity is going to include OML 18 assets and debt.  We were discussing cash flow. 

 

Then while the cash flows yearly (or quarterly) you only want to assume it arrives at the end.  Why?  That doesn't make sense.

 

Then you assume the $600 million of cash flow assumes $100 oil not $60.  It doesn't.  But that brings it back to prior discussions where you see things differently (likelihood of lower production and depletion costs etc.)  I project cash flow of $145 million for 2015 using $65 oil and $193 million for 2016 using $70 oil  ($174 million using $65 oil). 

 

I personally think the 3P reserves are not very important.  You would need to study more about reserves to understand.  I am no expert, but in brief they don't get credit for the whole field due to well spacing and lack of exploration well completion.  I suspect actual economic reserves are a multiple to the reported numbers.  The field is huge and the decline rates are low (e.g. UMU-1 came online in 2008 at 2,400 bopd and last I saw was 2,000 bopd).     

 

Maybe the attachment will help you see what I am thinking.

 

I think your projection of the EPS and cash flow for the next two years are reasonable.

My view of oil and gas companies is different from your view because this business is far different from See's Candy, which you can keep selling candies and making profits for almost indefinite number of years without much capex. In that case, it is good to say, the fair value is EPS multiplied by 10, plus excess cash on the balance sheet.

 

For oil and gas, they can report a higher EPS at the cost of faster depletion, so I really think the best way to view it is to do the liquidation analysis to see what's the balance sheet in the end.

This company's business contains two steps:

1. Make money by depletion of their reserves.

2. Reinvest the money to find more reserves and/or pay out dividends.

Both steps need to have reasonable economics to make this a viable investment. and keep in mind that you have to have cash on your balance sheet to do step 2. So it makes sense to do my previous analysis to see how much cash will be there over the years to do step 2.

 

My previous analysis is merely focused on step 1 so far, and I haven't gone to step 2 yet to figure out per well all in cost and the average Mbbl reserves found. Step 2 is even harder than step 1 to estimate the true economics.

 

Now getting back to the numbers, I think our primary disagreement is whether the 3P reserves is an accurate number or it understated the true 3P reserves, as you suggested.

Mart said their accounting method for depletion is Unit of Production. I did some research and this is a good explanation:

http://www.accountingtools.com/depletion-method

Please look at the last four paragraphs. If per unit depletion increases, that implies geologists down revised their reserve estimates.

 

Now getting back to Mart's latest financial report:

http://www.martresources.com/wp-content/uploads/2014/11/Mart-Q3-2014-Financial-Statements-V-9-clean-FINAL.pdf

 

Three months ended September 30 2014 vs 2013. Depletion cost is 9.9 M vs 6.3 M. What's the cost of depletion per unit?

According to here:

http://www.martresources.com/wp-content/uploads/2014/11/Mart-MDA-Sep-2014-v11-clean-FINAL.pdf

Mart's share of average daily oil produced and sold for the three months ended September 30, 2014 ("Q3 2014") from the Umusadege field per calendar day was 4,764 barrels of oil per day ("bopd") compared to 4,291 bopd for the three months ended September 30, 2013 ("Q3 2013").

 

They produced a total of 428760 barrels vs 386190 barrels. Depletion cost per barrel is $23 vs $16.

 

This is a red flag that they most likely have down revised the reserves. That's exactly the opposite of what you suggested that "actual economic reserves are a multiple to the reported numbers.", because if that's the case, the depletion cost per barrel would go down instead of going up.

 

[Tim Eriksen]

 

This is a red flag that they most likely have down revised the reserves. That's exactly the opposite of what you suggested that "actual economic reserves are a multiple to the reported numbers.", because if that's the case, the depletion cost per barrel would go down instead of going up.

 

I understand why you would think that way.  I obviously disagree on both points.  Mart says why the number went up - higher forecasted future development costs.  Companies do not typically revise their reserves mid year so I doubt your reasoning.  Reserve calculation is typically completed by a third part at year end.   

 

What I said does not contradict what happened at all.  I am saying that the field has much more oil than what the current reserve number indicates.  As they continue to delineate the field I believe this will show up over time.  Can I back that up mathematically?  No.  It is more based on experience of how these things play out.  In addition, I believe that the  cost to find, drill, and produce additional oil (not in current reserves) will be less than the current depletion.  The production profiles are too good for that not to be the case.  Mart can't count those additional reserves until exploration wells, certain tie ins, and market access is completed.

 

 

[muscleman]

I understand why you would think that way.  I obviously disagree on both points.  Mart says why the number went up - higher forecasted future development costs.  Companies do not typically revise their reserves mid year so I doubt your reasoning.  Reserve calculation is typically completed by a third part at year end.   

 

What I said does not contradict what happened at all.  I am saying that the field has much more oil than what the current reserve number indicates.  As they continue to delineate the field I believe this will show up over time.  Can I back that up mathematically?  No.  It is more based on experience of how these things play out.  In addition, I believe that the  cost to find, drill, and produce additional oil (not in current reserves) will be less than the current depletion.  The production profiles are too good for that not to be the case.  Mart can't count those additional reserves until exploration wells, certain tie ins, and market access is completed.

 

I see. I am still learning these things so I could be entirely wrong.  ;)

What I understand is that proved reserves can only be booked after well construction has completed. But I do not know if this is true for probably and possible reserves. Do you know?

Originally I thought all 3P reserves can only be booked after well construction completed. I think I am likely wrong on that. If that's the case, then surging development costs in the future should not impact the current depletion cost.

 

http://www.martresources.com/wp-content/uploads/2014/09/Mart-First-Energy-conference-15-16-Sep-2014-vcompr.pdf

Comparing page 10 with 21, I wonder why is the 3P reserve level almost flat from 2010 to 2014, while the number of wells online almost doubled.

 

They never disclosed the type curve. We know that UMU-1 is very good but there is no data on other wells. If the type curve is really this good for all other wells, the above chart looks strange.

Again, I could be completely wrong. Please don't get mad at me.  ;D

[Tim Eriksen]

Mart is not under US rules.  In 2008 the SEC announced that seismic 3-D analysis alone was sufficient to classify reserves as proven (1P).  I don't know for certain the rules for Canada.  It is my understanding that Proven reserves can still need some completion.  Probable reserves can need not only completion but additional wells (appraisal wells are sufficient to classify reserves as probable).  I checked my copy of Oil 101 to confirm.   

 

Mart's Q3 report says:

"Depletion of interests in the Company's oil properties is calculated using the unit-of-production method where the ratio of Mart's net share of production to Mart's net share of proved and probable reserves determines the proportion of depletable costs to be recorded in each period. Undeveloped properties are excluded from the depletion calculation until quantities of proved and/or probable reserves are found or impairment is determined to have occurred."

 

Mart is not totally clear.  The first sentence clearly states that the reserve base is proved plus probable.  The second implies that undeveloped properties (which is what I thought all probable reserves and possibly some proven reserves would be) are excluded.  Either way there are a lot of moving parts and assumptions. 

 

Regarding your question.  I assume the 3P level didn't change much since the reserves from those wells were already in probable/proven.  Funds were spent to drill and tie in but they already knew from nearby wells what was likely there (why there have been no dry wells).

 

Greater well disclosure would be helpful.  I can ask but I doubt they would release it. Since  they brag about UMU-1's flat production rate, I am sure it is higher than the other wells. 

[muscleman]

Mart is not under US rules.  In 2008 the SEC announced that seismic 3-D analysis alone was sufficient to classify reserves as proven (1P).  I don't know for certain the rules for Canada.  It is my understanding that Proven reserves can still need some completion.  Probable reserves can need not only completion but additional wells (appraisal wells are sufficient to classify reserves as probable).  I checked my copy of Oil 101 to confirm.   

 

Mart's Q3 report says:

"Depletion of interests in the Company's oil properties is calculated using the unit-of-production method where the ratio of Mart's net share of production to Mart's net share of proved and probable reserves determines the proportion of depletable costs to be recorded in each period. Undeveloped properties are excluded from the depletion calculation until quantities of proved and/or probable reserves are found or impairment is determined to have occurred."

 

Mart is not totally clear.  The first sentence clearly states that the reserve base is proved plus probable.  The second implies that undeveloped properties (which is what I thought all probable reserves and possibly some proven reserves would be) are excluded.  Either way there are a lot of moving parts and assumptions. 

 

Regarding your question.  I assume the 3P level didn't change much since the reserves from those wells were already in probable/proven.  Funds were spent to drill and tie in but they already knew from nearby wells what was likely there (why there have been no dry wells).

 

Greater well disclosure would be helpful.  I can ask but I doubt they would release it. Since  they brag about UMU-1's flat production rate, I am sure it is higher than the other wells.

 

Thank you for the explanation here!  ;D

I hope  they can release per well type curve.

 

I really don't have much to add to this discussion. I don't have much knowledge and experience as you do. I have no clue whether the 3P reserve base will increase and what's the dynamics of that would be. I will keep looking into it, but it is a too-hard for me right now. All I can say is that this investment feels much better than ATPG and SD to me. :)

[muscleman]

Haven't been following MMT since the discussion last year. The recent share price tank caught my attention.

 

http://www.marketwatch.com/story/mart-resources-updates-midwestern-financing-status-2015-08-18-81733132

 

"Mart Resources, Inc. (MMT) ("Mart" or the "Company") announces that further to its press releases of June 15, 2015, July 16, 2015 and July 27, 2015, under the terms of the Arrangement Agreement (as amended), Midwestern Oil and Gas Company Limited ("Midwestern") has until August 19, 2015 to complete the Midwestern Financing. However, Mart has been advised by Midwestern that it will not be able to complete the Midwestern Financing to acquire Mart at $0.80 per common share. Mart and Midwestern are continuing discussions regarding an alternative transaction at a lower price per Mart common share. There is no certainty that the discussions with Midwestern will result in an alternative transaction."

 

This is interesting. Does anyone have thoughts about this? Is this now a playable situation with limited risk? ::)

I am puzzled why MMT would agree to be acquired at 0.8 per share in the first place. They are debt light and they should be able to survive the low oil price better than other companies. Is this a sign that Midwestern checked their data and found that their reserve numbers are fake? Or is Midwestern's banker unwilling to provide financing?

 

[muscleman]

I just checked the oil prices. Looks like there was a large drop between July 17th and August 18th, so maybe the bankers gave Midwestern some trouble for the acquisition. If this is the case, then a lower priced acquisition should still be possible. Can anyone guess the reason Midwestern backed out?

[bizaro86]

Haven't been following MMT since the discussion last year. The recent share price tank caught my attention.

 

http://www.marketwatch.com/story/mart-resources-updates-midwestern-financing-status-2015-08-18-81733132

 

"Mart Resources, Inc. (MMT) ("Mart" or the "Company") announces that further to its press releases of June 15, 2015, July 16, 2015 and July 27, 2015, under the terms of the Arrangement Agreement (as amended), Midwestern Oil and Gas Company Limited ("Midwestern") has until August 19, 2015 to complete the Midwestern Financing. However, Mart has been advised by Midwestern that it will not be able to complete the Midwestern Financing to acquire Mart at $0.80 per common share. Mart and Midwestern are continuing discussions regarding an alternative transaction at a lower price per Mart common share. There is no certainty that the discussions with Midwestern will result in an alternative transaction."

 

This is interesting. Does anyone have thoughts about this? Is this now a playable situation with limited risk? ::)

I am puzzled why MMT would agree to be acquired at 0.8 per share in the first place. They are debt light and they should be able to survive the low oil price better than other companies. Is this a sign that Midwestern checked their data and found that their reserve numbers are fake? Or is Midwestern's banker unwilling to provide financing?

 

Midwestern should have known how good their reserves were before they bid, as they are partners on the assets in question. 

[Tim Eriksen]

Haven't been following MMT since the discussion last year. The recent share price tank caught my attention.

 

http://www.marketwatch.com/story/mart-resources-updates-midwestern-financing-status-2015-08-18-81733132

 

"Mart Resources, Inc. (MMT) ("Mart" or the "Company") announces that further to its press releases of June 15, 2015, July 16, 2015 and July 27, 2015, under the terms of the Arrangement Agreement (as amended), Midwestern Oil and Gas Company Limited ("Midwestern") has until August 19, 2015 to complete the Midwestern Financing. However, Mart has been advised by Midwestern that it will not be able to complete the Midwestern Financing to acquire Mart at $0.80 per common share. Mart and Midwestern are continuing discussions regarding an alternative transaction at a lower price per Mart common share. There is no certainty that the discussions with Midwestern will result in an alternative transaction."

 

This is interesting. Does anyone have thoughts about this? Is this now a playable situation with limited risk? ::)

I am puzzled why MMT would agree to be acquired at 0.8 per share in the first place. They are debt light and they should be able to survive the low oil price better than other companies. Is this a sign that Midwestern checked their data and found that their reserve numbers are fake? Or is Midwestern's banker unwilling to provide financing?

 

Mart is not debt light.  They are debt heavy due to a major purchase at the top of the market.  Midwestern is their partner, so they should have the same knowledge regarding the assets.  Who in their right minds would finance via debt, the acquisition of debt heavy money losing business?  Midwestern is already part of Mart's debt restructuring where they are allowed a deferral on principal payments. 

 

Everything that could go wrong, did go wrong with Mart.

When I presented this at the Value Investing Congress I listed these as the Risks to Thesis:

1.Pipeline theft continues or increases.

2. Additional production remains shut in.

3.Increased royalties and/or taxation.

4.Oil prices plummet

5.Government instability / Coup / expropriation

6.Dilution – it’s a Canadian small cap after all, and mgmt has expressed a desire to list in London

7.Some unknown event

 

Pipeline theft may have continued but it is unclear as no reports on theft have been released to the company this year. 

Additional production is not making it to market.

They are being sued for back taxes as the government appears to be trying to reduce the tax abatement after the fact. 

Prices tanked, they failed to hedge.

Dilution may be coming if oil prices don't climb.

They made a huge acquisition at the peak fully financed by debt.  The CEO committed illegal insider trading, got fired. 

 

Uggh!