Santos/Total decision could double Melbana’s share price

By Trevor Hoey. Published at Aug 22, 2019, in Energy

Hartleys oil and gas analyst, Aiden Bradley ran the ruler across Melbana Energy Ltd (ASX:MAY) this week, making some interesting observations regarding various recent developments and flagging the upcoming decision by Santos and/or Total to drill an exploration well in the group’s Beehive prospect (WA-488-P), offshore Western Australia.

While acknowledging that the termination of Melbana’s farmout agreement for Block 9 in Cuba, along with the departure of the group’s chief executive officer had created negative investor sentiment, essentially placing downward pressure on the company’s share price, Bradley sees the potential for a substantial recovery.

In fact, Bradley’s price target of 2.2 cents implies 100% upside to yesterday’s closing price of 1.1 cents - however this is speculative.

Bradley sees the decision regarding Beehive as the main catalyst for a rerating.

Indeed, a decision by Santos and/or Total to drill an exploration well should increase the value attributed to Beehive.

Will a decision by Santos and/or Total to drill an exploration well benefit Melbana?

Melbana free carried for US$50 million drilling program

In terms of the proposed farmout agreement, Melbana will have a fully carried interest in an exploration well estimated to cost approximately US$50 million, a coup for a company with a market capitalisation of $20 million.

Should a decision be taken to drill the well, Melbana will still have a 20% interest in an asset with a best case recoverable prospective resource of 388 million barrels of oil equivalent.

However, the 2 October deadline for the formalisation of the agreement looms large, and there is a real ‘will they, or won’t they’ question mark hanging over Melbana.

It could be argued though that an affirmative decision isn’t factored into the share price, and in terms of weighing up the pros and cons of a green light, Bradley is of the view that the case for drilling the well is ‘quite strong’, citing the size of the potential resource.

This underpins the broker’s speculative buy recommendation he has attributed to the stock.

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