Adjusting the focus
With its staged farm-in to the onshore New Zealand Puka field, MEO Australia Ltd (MEO.ASX) has repositioned itself away from the rollercoaster of pure exploration risk and provided shareholders with an opportunity to be exposed to near-term development and cash flow. Our core NAV of $0.05 more than covers the current share price and additional exploration value from the Breakwater prospect contributes to our RENAV of A$0.10. Beyond this, both the Beehive prospect and Tassie Shoals project provide significant longer-term re-rating potential, although both require further work before we can include them in our RENAV.
Cash flow cometh
If successfully developed, Puka will generate sufficient cash flow to easily pay G&A by 2016. MEO has executed a good farm-in with a distressed seller opening up strong value potential (and with no back cost outlay). The underwritten SPP all but guarantees Phase I, which includes the drilling of Puka-3, while future development upside is good and the historic strategy of exploration farm-down continues to add potential longer-term value for shareholders.
Catalysts are development led
In 2014, workovers of the Puka farm-in along with Puka-3 drilling are near-term drivers that, if successful, will trigger cash flow generation and bring the potential of initial independent reserves. This would be followed with Phase II development in 2015. MEO is also targeting a farm-out in 2014 to drill its WA-454-P Breakwater well. The Share Purchase Plan should cover expenditure on Phase I of Puka (NZ$4m, A$3.68m), but further farm-out on the Origin-operated Breakwater well (to be drilled in 2015/16) is required to reduce pressure on cash reserves.
Valuation: Puka underpins share price
Our Puka-driven Core NAV of A$0.05/share more than underpins the current share price, and may increase if the company is able to unlock more than the current 2C estimate of 3mmbbls gross. The Breakwater prospect contributes to our RENAV of A$0.10, even using a 10% chance of success (POS currently 30%). Beyond Breakwater and our RENAV, the 100%-owned Beehive prospect (925mmbbl, oil case) represents material exploration potential. MEO is seeking a farm-out to drill this in 2015-16, but once a drill plan can be funded we see strong upside from such a large prospect. The Tassie Shoal LNG and Methanol projects also remain an intriguing element of the portfolio and we note that commentary from the Ministry for Industry suggests marginal gas discoveries have to be developed sooner rather than later, thereby creating feedstock opportunities.
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