Small Caps | Dec 09 2011
– DJ Carmichael initiates on Mako Energy with a Spec Buy
– Mako has attractive oil and gas acreage in Canada
– Potential farm-outs and asset transactions possible catalysts
By Chris Shaw
Mako Energy ((MKE)) is a small cap oil and gas company with operations in West Central Alberta in Canada. The group's assets include the Duvernay shale gas project and tight oil and liquids rich acreage at Rock Creek.
Perth-based stockbroker DJ Carmichael has initiated coverage on Mako Energy with a Speculative Buy rating, attracted to the leveraged exposure provided by the two assets and the potential for a number of positive catalysts over the next 6-12 months.
As noted by DJ Carmichael, the Duvernay shale formation is one of North America's hottest shale plays, with the likes of Chevron, Talisman and Encana acquiring material acreage in the area. Mako has a holding of 41,280 net acres that compares well in the broker's view.
Reservoir characteristics compare favourably to more established shale plays in North America, while DJ Carmichael notes early drilling results elsewhere in the formation have been encouraging. Positive results are likely to be value accretive for Mako.
The potential of Duvernay is shown by the fact in June of this year C$749 million was paid for 497 sections of land in the area, which equates to an average of C$2,355 per acre. Many of these sections are nearby or surround Mako's acreage.
Looking just at Mako's rights in Duvernay, DJ Carmichael notes the stock is trading on an enterprise value of around C$740 per acre. This suggests a significant discount to the C$2,355 per acre recently paid and supports the view Mako is undervalued at current levels.
At Rock Creek, Mako holds 42,880 net acres of rights, the formation a tight reservoir located at shallower depth than Duvernay. The Rock Creek formation is thought to be liquids rich and DJ Carmichael sees the asset as offering Mako shareholders both additional upside and some diversification.
In coming months DJ Carmichael expects solid news flow from Mako. Potentially these could include farm-out and asset transactions in the first quarter of next year and the commencement of drilling programs at both assets from the second quarter of 2012. Other positives are an expected OTCQX listing this month and a potential listing on the Toronto Stock Exchange in the first half of 2012.
To hold the Duvernay rights by production one well per section needs to be drilled and completed across Mako's joint venture's acreage within a five year time-frame. This means 129 gross wells need to be drilled by mid-2016, DJ Carmichael noting near-term capex demands on Mako are therefore demanding.
This highlights the need for asset transactions or farm-outs, with a number of submissions received in relation to this. DJ Carmichael sees potential for a transaction to be announced by the end of this year. Such a transaction would provide a good see through valuation for Mako.
To reflect the potential value of Mako's assets, DJ Carmichael has set an initial price target for the stock of $0.40. This is based on a risked valuation of C$1,650 per acre. There is little basis for comparison, as given a market capitalisation of a little under $30 million at present there is no coverage on Mako Energy by brokers in the FNArena database.
Shares in Mako today are unchanged with a last sale price of $0.15. Over the past 12 months the stock has traded in a range of $0.094 to $0.37.
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