Monday, 13 January 2014

#Max - An old dog I have finally put down

And so it comes to pass, like all good things, they eventually come to an end. In this case I refer to my old dog and friend Max. Max woof-woof petroleum. Max (MXP) has been with me for a few years, one of the first of my Aim oil and gas strays I ended up caring for long past his usefulness. I’ve stuck by him through thick and thin, until last week when it was finally clear to me that he was serving no use to me at all and needed to go. It was, at the end of the day, time to say goodbye to a crippled, lame, dog of a share which in my opinion shows no sign of recovery from the accidents and mishaps that have befallen it over the past 3 years. And so, like all good farewells it was a little poignant, but this was at least one old dog that I was not sorry to see go. And having said goodbye, I feel like the lame part of my portfolio has been put down, respectfully, but it feels good.

To be fair, I have had the patience of a saint with Max. I originally bought in at 17p, when the commentators were saying that this was a great price to buy into a dream that was pre-salt layer deep exploration drills which were going to expose Max to potential billion barrel fields of oil. At the same time their shallow drill campaign was billed as the bread and butter for them, a way to prove up 2P reserves and provide ongoing and stable cash flows and profit to fund both further deep drill exploration and ongoing company production. It all sounded wonderful, low risk shallow drills, and high risk deep drills, underpinned by production and a degree of both security and transformational upside.

I watched with interest and excitement as the drill bit started turning. This was a drill that was going to stretch from the autumn of 2011 to the spring of 2012. After a long hibernation, the spring would bring with it the promise of penetrating the salt layer and opening up to multiple potential deep drills across the whole of Max’s licence areas. From 17p to £1.70, that was the 10 bagger dream.

Of course the reality was that drilling pre salt drills anywhere in the world is fraught with danger. The salt moves, the crust is unstable. Pressure and temperature can be astronomically high, and even if the layer is pierced successfully there can be no guarantee that the oil will be there, or will be commercial.

And so the spring blossomed but the drilling campaign didn't. In fact it moved straight into a winter of discontent. Challenges turned into problems, problems turned into near financial ruin. First the drill bit got stuck, and then the side track bit also got stuck. The costs escalated, the drill was abandoned (well “suspended” as they optimistically declared), and finally the shallow drill campaign which was meant to be the companies lifeline was called into question and the board announced that they no longer had the necessary financial security to continue as a going concern, were in breach of its covenants, and would need to start discussions with principle lenders.

To cut a long story short (and believe me it was a very tense waiting period) Max finally secured refinancing with its backers and new bankers, SB Sberbank JSC. The price was of this rescue was massive dilution. From several hundred million shares to over 2 billion in the space of 18 months. The share price fell from 17p, to 12p pre drill, to 8p on the stuck bit, and then to 2.5p on the finance news. Ouch. Or woof woof.

In for a penny, in for a pound, and so I stuck by my trustee dog, as it was slowly nurtured back to life and rescued from the brink. This summer, things seemed finally to have stabilised. The shallow drill campaign has been up and running again all year. Three drills have been turning across the licences, on the promise of an end of year production exit rate of 4500-5000bopd, conversion of more resources to 2P reserves, and financial progress to begin to be able to repay back the $82.9million debt that was the price of the lifeline. An updated Ryder Scott CPR was promised by the end of 2013, together with an operational update and perhaps even news on a new partner for the “temporarily suspended” deep drill. According to Max Halliburton have been working on the full project management for the deep drill so it was hoped that there might be news of a farm out as the licence has only been extended for 2 years to March 2015. So what did Father Christmas bring in his end of year operational update? I think you know where this is heading......

What we got was a rather huge bite on the bum from our old dog of a share Max Petroleum.

Here are some of the “highlights” from the interim results released on 30th December:

  • Production guidance for year ending March 2014 downgraded to 4kbopd.
  • Production down 4% from the same period last year
  • Revenue down 6% from the same period last year
  • Average domestic realised oil price down 28%
  • Operating cost per barrel up 13%
  • Cash generated from ops down 69% from the same period last year
  • Adjusted EBITDA down 23% from the same period last year
  • 2P reserves down 21% from the previous half year
  • 3P reserves down 32% from the previous half year.
  • Entire $90m senior credit facility drawn down since period end
  • An additional $6-11m capital expenditure to be incurred before the end of March 2014

To say that share holders were holding on for the half year report and that the half year report could barely have been any worse is the understatement of 2013 in my opinion! To think that since last March Max had 3 drill rigs drilling for most of the year across the shallow licences, drilled 31 wells, including 29 appraisal and development wells, of which 24 were successful, and yet have ended up with 2P reserves down 21% from previous report beggars belief and is quite frankly laughable. What’s it all been about? I have no idea.

And so, like all faithful but lame pets this one had to go. I read last weeks ops report and had sold by 8.15am. Thankfully I achieved 3.6p, horrendously down on my investment, but since then the share price has fallen further to stand at 2.4p today. And to add insult to the price, the big institutions, Henderson and UBS, have also started to offload their massive holdings in Max. I wrote about their holdings here... and if they continue to sell over the coming weeks then I can see under 2p coming.

Thanks for the memories Max. I've been a loyal friend to you but you haven’t been much use as a pet. Or as an investment. It was time to get rid. You’re the last of my “old” investments that were ill researched, based on speculation more than reason, and have generally been lame dogs. There's a lesson there for everyone. There are however some investors on the BB’s suggesting that this might be a good time to “load up” “average down” and “top up”. You know the type. In my opinion that would be a crazy thing to do. But best of luck to you if remain faithful to good old Max. Woof Woof.

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