Each week The Motley Fool will highlight a company on our radar. With proven oil reserves priced under $7 a barrel, this week's company is an undervalued oil exploration and production company with experienced, shareholder aligned management.
Maverick Drilling & Exploration Limited (ASX:MAD) belongs to the small group of companies that under promise and over deliver. Since listing 11 months ago Maverick has exceeded both their drilling and oil production targets. They have increased proven reserves 59% and probable reserves by 104%, and more upgrades are likely.
Drilling below Maverick's recent listing discovers a 35-year old company that has 'perfected a streamlined system to drill, complete, produce and sell oil'. Key personnel have over 30 years of experience in the industry and 20 years' experience in their primary lease area.
The directors and management not only have the experience we love to see in our companies, they have their money invested alongside shareholders. With directors owning almost a quarter of the company it is no surprise their key focus is building long term shareholder value by reinvesting in reserves.
Two key executive directors are currently visiting Australia, from their US base of operations. With their updates to institutions and a steady stream of positive announcements, the market has started paying attention to this small-cap gem. The share price has jumped over 20% in the last month and 40% in two months.
But, rather than anchor to past prices we prefer to look ahead to see the value of Maverick.
What is Maverick Worth?
A reserves based valuation highlights the potential. Maverick has 12.4 million bbls of proved oil reserves and 52.4 mbbls of 2P (proved + probable) reserves on just one of their three salt dome leases. Ignoring the 2P reserves, the market currently values the proved reserves at $7 a barrel. That's cheap!
By comparison, Linc Energy Ltd. (ASX:LNC) recently paid $11.50 per barrel of 1P reserves for fields near Mavericks. Even better, we expect to see further upgrades to Maverick's proved reserves as drilling and production commence this year on their other two salt domes. With 3,200 of their 5,000 net salt dome acres yet to have reserve estimates, those increases could be substantial.
Maverick presents a compelling risk reward picture, with limited downside and excellent market trouncing upside potential.
Maverick is currently producing 700 barrels a day, is profitable and, most importantly, in June sold $1.4M worth of oil. That cash flow should continue to drive shareholder value. Maverick is sensibly ploughing all their cash flow back into drilling to increase shareholder value. According to the CFO, Andrew Crawford, the cost of drilling each well is a low $220-230k. Mr Crawford also said that while increasing reserves is important, the company is focused on cash flow.
That's music to our Motley Fool ears.
Maverick is a simple business focused on cash flow and production. By owning their rigs and being close to Houston they are able to keep drilling and production costs low. Of the 26 wells they have drilled, 24 are expected to be successful oil producers. That's a great strike rate for a company that is planning to drill over 400 more wells.
Maverick's key assets are three salt domes situated close to Houston Texas. Blue Ridge Dome (1,800 acres) is currently being drilled and producing over 700 bopd. Drilling will commence on Boling (2,500 acres) and Nash Domes (700 acres) later this year. Owning four top drive drilling rigs and five workover rigs allows for low cost drilling of the leases.
With $8.4M cash and steady cash flow Maverick are well funded to expand their drilling program. Maverick has significant short term debt, but most of the debt is a non-interest bearing promissory note held by the Chairman's family. Consequently it is likely to be rolled forward later this year.
Time to Buy?
Despite the recent share price run-up, we continue to view Maverick as undervalued. With both further reserve upgrades probable this year and next, and sales increasing every month, Maverick deserves a closer look.
Dean Morel is The Motley Fool's Investment Analyst. In the interests of full disclosure, Dean already owns shares in Maverick Drilling & Exploration, having bought them on June 29th 2011. The Motley Fool's disclosure policy is as sane as they come.