MEO Australia Experiences Turbulent 3 Months
Edison | Feb 23, 2015 06:25AM ET
Securing deals and tightening belts
It has been a turbulent three months for MEO Australia Ltd (ASX:MEO) shareholders. The Neon merger has fallen by the wayside and NZ production has been shut in. While an unsolicited offer remains on the table, which the board of directors urges shareholders to reject, MEO has undergone a rapid review of costs and has cash to weather uncertainty for a reasonable time. The entry into Cuba weeks before softening of decades-old US sanctions is one to watch and deals in Australia are being executed.
Mergers
The Neon merger (discussed in our November update) would have made sense for both sets of shareholders. The latest unsolicited off-market bid is from Mosman Oil Gas (LONDON:MSMN, which in the opinion of the MEO board should be rejected by MEO shareholders. MEO acknowledges that a meaningful offer would be considered from potential candidates, but highlighted the Mosman deal has too much uncertainty, in particular around funding and cash positions.
Operational shift
Shareholders would have been further disappointed with the announcement in early 2015 that production at the KEA Petroleum- operated(LONDON:KEA) Puka field had been shut in due to unresolved mechanical issues. Production in Q414 totalled 3,070bbl net to MEO. However, the entry into Cuban exploration, weeks ahead of the US’s move to re-establish diplomatic relations with the Caribbean Island, is one to watch. MEO continues to seek farm-ins for the Breakwater asset (operated by Origin), which is due for a well before mid-2016 (and the only well within the next 18 months) and has recently executed a farm-in to the Beehive prospect to an unidentified partner, subject to final approvals. New CEO Peter Stickland has initiated a cost-cutting initiative and is looking to reduce G&A to A$2.5m/year from March 2015 onwards. This should preserve the cash reserve of A$9.7m (December 2014) and actually places MEO in a stronger position than most junior E&Ps.
Valuation: Remaining steady
Our current core NAV for MEO is amended mainly due to the shut-in of Puka. There is no clarity on the restart, but we note the expected reduced capital expenditure plans plus the Neon merger break fee have cushioned cash outflow. This moves our core NAV in Australian dollars to 0.65c/share (RENAV is 5.43c/share). There will be a number of catalysts to drive MEO forward but, in our opinion, no great strides will be made in the current macro environment. The cash reserve, if managed prudently, should see MEO through the near term.
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