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Is MX Oil worth re-visiting as profitability approaches?

After a difficult couple of years at its Aje field, offshore Nigeria, MX Oil announced this week that it anticipates generating free cash flow from the first half of 2020, once its project-level debt has been repaid. The update was accompanied by a £680,000 fundraise that saw a significant strategic shareholder inject a considerable amount of working capital into the company. With cash now underpinning a major portion of MX’s current £1.8m market cap, we look at whether the prospect of profitability can trigger a re-rate in the firm’s share price?

Nigeria development

MX’s principal asset is a licence called OML 113, where it owns a 5pc interest. The permit covers 835km2 offshore Nigeria near the Benin border and holds the Aje field, alongside numerous exploration prospects. Aje was discovered in 1997 and contains multiple oil, gas, and gas condensate reservoirs in Turonian, Cenomanian, and Albian sandstones. As announced this week, the field is currently producing at a stable rate of around 3,150bopd. Of this, 157.5bopd is net to MX.

MX has been through some difficulty with Aje over recent years, suffering notable setbacks at the hands of failed sidetracks in 2017. The organisation and its equity partners have made little progress at the asset since then, avoiding drilling activity in favour of focusing on repaying creditors with any production revenues generated. In October last year, the business was hit further when it raised cash immediately ahead of the most recent oil price decline. So, could things be about to change?

Cash flow positive

On Monday, MX announced that the two next ‘liftings’ of oil from Aje (a term used by the company to describe sales of oil) are expected to pay off all remaining project-level debt. With the field’s next lifting expected in June, it could reach this milestone in the not-too-distant future.

For context, Aje’s tenth lifting was completed last month, netting MX 17,323bbls of oil which it sold at $66.97/bbl to provide net revenue at project level of $1.16m. Assuming these cargo sales and market conditions remain stable, the business believes it will have repaid its share of Aje’s project-level debt by its thirteenth lifting.

This will be a breakthrough for MX as it will finally see its investment in OML 113 begin to generate material cash flow. Indeed, if operating conditions, capex, oil price and production rates remain at current levels, the organisation expects to move into profitability in the first half of 2020. MX’s chief executive Stefan Olivier elaborated on this point in this week’s announcement:

Once this debt is repaid, assuming the factors above, our investment should generate free cash flow from each cargo sale which are estimated to cover all the Company’s operating overheads at current levels, allowing the Company to move to profitability. It has been a difficult journey and I would like to thank shareholders for their continued patience. I am optimistic that we will shortly be in a position to provide regular updates from this point onwards.’

Strategic investor

Elsewhere this week, MX revealed that it had raised £680,000, before expenses, by placing 1.7bn shares at 0.04p each with warrants attached. It will use this money for working capital purposes. Notably, £534,000 of this figure was subscribed to by Shaikh Ahmed Bin Dalmook Al Maktoum – a member of the ruling family of Dubai and founder of Africa Middle East Resource Investment – through his private office.

According to MX, the private office expects to add considerable value to MX by using its knowledge, network and experience. The company added that, as part of its agreement, its strategic investor has the right to appoint one person to the MX board as a non-executive director.

On this, Olivier said: ‘I’m delighted to welcome an extremely influential and knowledgeable strategic investor into MX Oil who I believe can bring significant value and provide access to opportunities and partners who we would not be able to access without them. I look forward to welcoming their proposed nominee to the board as director and will update the market as soon as I am able to.’

Moving forward

Cash underpins a very significant proportion of MX’s current market cap following this week’s raise. It is not inconceivable, then, that this valuation will advance as the business starts to generate free cash flow and enters profitability. At the same time, the firm is working to bring profitability even closer by cutting its running expenses. Indeed, it announced this week that operational costs are now c.70pc lower than they were in 2018.

Meanwhile, things are also looking promising for the business over the longer-term. Indeed, this week saw the company announce that production modelling by both AGS Tracs and the RPS Group has suggested that the two producing wells at Aje are exceeding expectations. As such, the 2P reserves of both wells are expected to increase, and Aje’s CPR will be updated. With this in mind, it will be interesting to see the outcome of RPS’s ongoing technical work on the field, due to complete in the current quarter.

Speaking to TMS, Oliver expanded on these points: ‘This week’s updates are very significant as they indicate the support of a very substantial strategic shareholder and show that we are edging towards profitability. We have unusually stable production, and our declines are very low because our reservoir has turned out to be a lot bigger than we had modelled. We now think the wells have a much larger resource than we initially expected.

‘Because of the impact this will have on our producing wells, we think our free cash is going to exceed our market cap next year without another well or the need for a further raise. From our perspective, going cash flow positive means our market cap will double or triple with relative ease.’

The author was remunerated but does not hold shares in the company