The Long Case For Mitra Energy

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Includes: TLM
by: LivermorePartners
Summary

Mitra Energy is an overlooked/undervalued energy company with an opportunistic M&A strategy (fully funded with zero debt) and new/highly experienced management.

Acquires depressed producing (not exploration) assets with real cash flows from others forced to sell; focus in Asia Pacific with returns 2-3x than in North America.

Trades at only $15k a flowing barrel, 0.30x NAV; upstream risk significantly reduced via multi-year fixed-price gas contracts.

Catalysts include closing two current acquisitions, adding 2-3 new acquisitions, delivering production/CF stability, re-listing to more appropriate exchange.

Seeking Alpha conducted an email interview with David Neuhauser. Mr. Neuhauser has extensive capital markets experience. He began his investment career working in conjunction with financier Leon Greenblatt III in 1995 and founded Livermore Partners in 2009. Livermore is a private alternative investment manager specializing in energy, industrials and financials.

Seeking Alpha: What led you to take a position in Mitra Energy?

Livermore Partners: We felt the value was there and the timing was perfect. To transform the co by replacing mgmt and Board, and to then acquire depressed operating assets others must sell to de-lever their balance sheets and focus on core basins. Producing assets (not exploration) with real cash flows and deep value.

Seeking Alpha: Can you discuss Mitra's approach and how it differs from the domestic E&P companies U.S. investors might be more familiar with? What are the advantages (and disadvantages) of its approach?

Livermore Partners: New Mitra approach is based on an "acquire and exploit" strategy not unfamiliar to some domestic E&P companies, whereby bringing operating capability and new capital to under-invested assets (or assets in the hands of super-majors for whom materiality in future activity is a concern to them) can add significant incremental value. The difference with New Mitra is that this activity is focused on Asia Pacific opportunity where the returns are on average two or three times better than North America (IHS Herold annual performance reports), where the competition is very limited and therefore purchase price is very modest (often assets are sold on bilateral deals - no competition), and finally where opportunity options are on the increase. These characteristics make the thesis almost unique (compared with North America for example where the competitive bidding is intense). A final point is product pricing where oil is usually sold at premiums to Brent and domestic gas is contracted in the range USD7.50–8.50/mcf).

Seeking Alpha: Can you discuss the new management team?

Livermore Partners: Very experienced operating skills in Asia Pacific with 15-30 years' experience each. Longstanding relationships with key stakeholders and deep insight to a number of M&A opportunities. They have worked together for years in the region, and already built the most successful independent E&P business in Asia Pacific, Talisman Energy (NYSE:TLM). See the corporate presentation on Mitra's website for more details.

Seeking Alpha: M&A appears to be a major growth driver - can you discuss Mitra's approach, its recent transformative acquisitions, where it's seeing opportunities, how M&A fits in with the broader business model?

Livermore Partners: As described above, there is a growing number of M&A opportunities emerging with limited competition. Opportunities are increasingly being sold at distressed prices. The key value proposition however is the reinvestment that follows M&A. We look for almost an order of magnitude of reinvestment potential compared to acquisition price which drives 3-6 times MOIC. As the portfolio builds, the ratio of organic capital increases, giving optionality, diversity and control.

Seeking Alpha: The issue of financing is one of the most critical given the current level of energy prices - how does Mitra plan to finance operations and M&A?

Livermore Partners: Financing via a combination of equity and debt. The company currently has no debt on the balance sheet, and there is scope to finance against multi-year fixed-price gas contracts (very low risk). Existing shareholders are very supportive of financing through equity as Mitra is currently doing. Objective is to build production and cash flow to deliver largely self-funded growth in 3-5 years, particularly possible in Asia Pacific where average field declines are on average 5-10% pa. This is possible because at this decline rate, large capital is not required constantly just to maintain production flat.

Seeking Alpha: What is going to drive organic growth?

Livermore Partners: Organic growth will come from legacy assets which include gas developments in Vietnam and gas in Philippines, but longer term is largely driven by the reinvestment capacity in acquired (and under-invested) assets. As described above, there is on average 10 times reinvestment potential compared with purchase price on the type of assets that New Mitra is targeting.

Seeking Alpha: What is the market missing about Mitra? Is it simply a case of it being overlooked due to its small size or are there other factors?

Livermore Partners: It is largely overlooked because of current size, Venture exchange listed with assets in Asia Pacific, and because of new management and new strategy not yet being widely understood in the market yet. This will need some time to gain recognition and thereby release the significant trapped value in the portfolio. The market is definitely missing the Asia Pacific value story on product pricing, lack of competition and quality of opportunities.

Seeking Alpha: How is Mitra responding to the significant volatility in energy prices in terms of risk management, operational decisions, allocation of resources?

Livermore Partners: In an Asia Pacific upstream strategy approx. 50-70% of the reserves and production will be domestic gas, of which the majority is sold at long-term fixed prices with escalation clauses. This makes the business a natural hedge in a volatile price environment and takes away significant upstream investment risk.

Seeking Alpha: What are the catalysts (both near and long term) that will cause the market to re-price the stock?

Livermore Partners: Catalysts will be closing the two current acquisitions, adding two or three new acquisitions currently being targeted, delivering production and cash flow stability for the company for the first time since inception, recognition in the market that the strategy of new management is working and the value is being delivered, re-listing the stock on a more appropriate exchange, further delivered growth longer term.

Seeking Alpha: What is your price target and time frame?

Livermore Partners: We feel Mitra can be worth $2+ a share. Perhaps much more over time and as opportunities present themselves. Timing is tough to determine but today, even with our capital raise, the shares are very cheap. Trading at only 15k a flowing barrel, .30 NAVPS, no debt, and $20mm of cash on the balance sheet with plenty of capital to deploy. This is very compelling to Livermore Partners.

Seeking Alpha: What would cause you to question the thesis or exit entirely? Besides the obvious risk of lower energy prices, what are some of the other key risks?

Livermore Partners: Execution of the new mgmt team, available opportunities, and of course financing risks. Today, there are plenty opportunities, and we are fully funded. So we see much more upside as long as the current environment holds.

Disclosure: I am/we are long MTE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: David Neuhauser is on the board of Mitra Energy.