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MIE presents an attractive investment story. The recent acquisition of Emir-Oil is expected to significantly boost its oil reserves and output. There are also favourable developments at its PSC projects in China. The company’s shares are also trading at low valuations.
In mid-September, MIE completed the acquisition of Emir-Oil which has four oilfields and six prospects close to Aktau in western Kazakhstan. According to Chapman Petroleum Engineering, Emir-Oil had 1P and 2P oil reserves of 23.5m bbl and 85.0m bbl, respectively. The acquisition will boost MIE’s 1P and 2P oil reserves by 72% and 162%, respectively. By ramping up the output of Emir-Oil, we expect MIE’s 2011-13 CAGR in oil output to accelerate from 12% to 33%. The acquisition of Emir-Oil will provide a new growth
driver for MIE.
More importantly, the acquisition gives MIE the access to the oil industry in Kazakhstan, a rising oil-producing country. According to BP Statistical Review of World Energy, Kazakhstan was the 18th largest crude oil producer in the world in 2010. The crude oil output of Kazakhstan posted a CAGR of 9.0% in
2000-10, much faster than the 0.9% CAGR for the world over the same period. Kazakhstan also ranked the eighth in terms of proved oil reserve and reserve life among all countries in the world in 2010. The establishment of a foothold in Kazakhstan makes MIE a much more interesting company and we
do not rule out further acquisitions in Kazakhstan over the longer term.
In China, Daqing oil has been trading at a premium to Brent since April 2011. This will translate into higher realised oil price for MIE’s three PSC projects. On the other hand, the company has not been affected by the recent reform of resources tax on crude oil and natural gas as the Chinese government has clearly stated that existing PSC projects will continue to follow the old system. In addition, the company will benefit from a possible increase in the threshold of windfall tax.
It has seen encouraging results from the six infill wells drilled in 2010 and they accounted for 70% and 99% additions to 1P and 2P oil reserves respectively in Daan Oilfield in 2010. The company plans to drill 455 more infill wells over time, with 36 of them planned for 2011. This could translate into more significant reserve addition in future.
Overall, we increase our 2012 and 2013 EPS forecasts by 5% and 34%, respectively, mainly to reflect the higher realised oil price for the production sharing contract (PSC) projects in China, and the inclusion of contributions from Emir-Oil.
We reiterate our BUY call on MIE although we lower our target price from HK$3.51 to HK$3.09. The reduction in the price target is mainly because we now set our target price at our PV10 valuation, instead of at a 10% premium we previously adopted.
JP Morgan １１年１０月１３日
Seeing is believing: Our visit to the various fields and bases of Emir Oil made obvious the reason for lack of production growth and decline under BMB Munai. Lack of cash at BMB led to a neglect of the assets and a difficult relationship with the suppliers as they were not getting paid. We also note the presence of fields “nextdoor” to Emir’s assets - Jupiter Energy's (Australia listed) Block 31 has shown good test results on two exploration wells (third one soon), while MMG (50:50 CNPC: KazMunaiGas JV) has 3 fields (Alatobe, Accop and North Asar) next to Emir's acreage also under exploration and development.
Acquisition can add 30-40% to 1Q11 reported production by 1-2Q12E: Work-over at the neglected wells is the quickest way to add production, with each well possibly adding between 0.2-0.5kbopd. Moreover, MIE is currently working on a budget for next year outlining the program for the next 1-2 years. For reference, MIE’s current production is 10kbopd in China and 2.5kbopd in Kazakh. Emir Oil currently has three rigs available, adding another one early next year, potentially adding 10 wells a year.
Production updates to provide re-rating triggers: We believe MIE's production updates would help increasing investors’ comfort to this high growth name. For a company expected to effectively double production over the next 3 years and generating around 25-30% ROE, we deem MIE’s current valuation at 4x 2012E EPS, EV of US$14/BOE proven and US$5/BOE proved+probable reserves, as too low.
5 years investment break-even: On current production, MIE generates around US$30-35mn/year net cash from Emir Oil, which would take it 5 years to recover acquisition cost. In our base case, we estimate US$240mn capex over 2011-2015 period, which would help Emir ramp up production from current 2.5kbopd to 10.3 by 2015. On our oil price assumptions of US$95/90/85/85 /bbl for 2012/13/14/15, we estimate MIE would cover its acquisition cost+capex by early 2015, with US$70-80mn/year subsequent
net cash generation potential (this is what generates positive NPV).
Recent Kazakhstan developments: Aside we also note Kazakh government’s recent positive inclination around solving Karachaganak’s (2010: 360kbopd production and 5bn BOE ultimate recoverable reserves)
tax dispute and ownership structure with BG, Eni, Chevron and Lukoil. We take this development as a constructive signal from the govt to collaborate with foreign oil companies.We spent the previous week travelling through Kazakhstan on a field visit to Emir Oil to gain first hand experience of what MIE has just bought. In a nutshell, the assets are there (!), operating (producing) and ready to receive fresh working capital and capital spending required to restart the development plan which was halted due to previous owner BMB Munai’s difficult financial position. MIE has outperformed Hang Seng small cap index by 47% since its Dec 2010 listing but we believe there is still substantial value to be generated from Emir Oil with MIE as new owner.