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Maverick Drilling: Tempting & Idiotic

Shares in old Motley Fool favourite Maverick Drilling & Exploration (ASX: MAD) are taking it on the chin, plunging 12% to 62 cents after releasing a disappointing quarterly report to December 2012.

The honeymoon for Maverick has well and truly ended. No longer is the market valuing it on potential. Today, the market wants to see the money, or in the case of Maverick, the production of oil.

Today’s report was underwhelming on the production front. For a company valued at $265m, cash received from oil sales in the quarter of just $US3.4m just isn’t going to cut the mustard.

Littered with plugged wells

The quarter was littered with plugged wells, and the company messing around with attempts to hit a home run with one of their speculative wells. The market had its say this morning, sending the shares down 12%.

As ever, Maverick’s potential remains as alluring as ever. And, with US$55m in the bank, they’ve still got a decent chance of hitting it large.

High impact wells and tests start February. A very financially attractive 12 well joint venture program with Gulf South has commenced. The rig fleet has been enhanced. Drill, drill, drill…

Back amongst the field

I still hold Maverick, but thankfully sold some off in April last year at around $1.30.

From a portfolio perspective, what was once my largest position in my self managed super fund (SMSF), by some distance, is now back amongst the field.

A further investment in Maverick is both tempting and idiotic.

Tempting: Joint venture partner Gulf South sees value, paying $US333,333 for a 33.3% interest in 12 development wells which will cost Maverick an average of $$US250,000 in total.

What do Gulf South see that the market doesn’t?

On a reserves basis, after stripping out Maverick’s cash balance, their 100m 1P barrels of oil are currently being valued by the market at just over $2 per barrel.

Is this the bargain of a lifetime?

Idiotic: Why throw more money at what’s a risky, speculative company that’s future depends on the success, or not, of the drill bit?

Gone is the talk of massive reserves. The only thing that matters now is production, and on that count, since the March 2012 quarter, average barrels of oil per day (BOPD) have been disappointing.

Eye off the ball

In interviews and discussions we’ve had with the Executive Directors, Maverick have emphasised they are focused on the long-term.

The reserves still exist. They’ve raised money, at share prices significantly above today’s 62 cents, to fund an aggressive drilling program.

In the excitement of their massively increased reserves, and no doubt the rocket launcher that got under their share price in 2012, management took their eye off the ball.

Now they have to earn back the trust of the market. The ball, and the drilling rig, is firmly in their salt domes.

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More reading

The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.  This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool analyst Bruce Jackson owns shares in Maverick Drilling & Exploration.

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