Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

ALPHA DEAL GROUP INTELLIGENCE: MNP PETROLEUM MAY STRIKE BIG AMONG THE BIG OILERS IN CENTRAL ASIA

Summary

Central Asia sitting on huge oil and gas reserves, much of it untapped.

Tajikistan is particularly attractive due to historical underdevelopment of hydrocarbon reserves.

MNP Petroleum is shifting from exploration to production in the region.

Central Asia - As Big An Oil Market Player As The Mideast

Central Asia is one of the most oil and gas-rich areas in the world, with reserves estimated to be as abundant as in the Middle East. Some of these reserves, in Azerbaijan and Kazakhstan mostly, have been exploited for quite some time now by international oil and gas companies but what makes the region particularly attractive is that a lot of this potential is still untapped, especially in countries like Tajikistan, where oil and gas exploration and development was not a priority while the country was part of the Soviet Union, not to mention Turkmenistan which is estimated to have one of the greatest natural gas reserves in the world. Although the oil and gas reserves in Tajikistan are deeper than those in neighboring countries, they are prolific and big oil market players have already started to move in, with Tethys, Total, CNPC, and MNP Petroleum (OTCPK:MNAP) already operating there. Another factor to support the active development of Central Asian oil reserves is the fact that this region is basically surrounded by big energy consumers, such as China and India, and Europe to the West. In Alpha Deal Group's initial due diligence call, CFO Peter-Mark Vogel highlighted that all this points to a bright future for MNP Petroleum and its focus on Central Asia's oil and gas potential, with China striving to reduce its overreliance on coal due to environmental, healthcare and political concerns, and Europe eagerly looking to diversify its energy sources, reducing its reliance on Russia.

Tajikistan - A Reservoir Untapped

The bulk of Tajikistan's oil and gas reserves are concentrated in the Bokhtar region, a 35,000 sq km area that is part of the Amu Darya basin that contains significant oil and gas reserves. The deposits in Tajikistan are estimated by Gustafson Associates to hold as much as 8.5 billion barrels of oil and/or gas condensate as well as 114 trillion cubic feet of natural gas. All this could be worth as much as a trillion dollars, according to sector analysts Gabe Collins and Bo White. It's hardly surprising then that big oil companies have started turning their attention to this Central Asian country. MNP Petroleum is one of these companies, focusing on deposits in the Tajik region of Sugd, in the Fergana Basin, spanning central and southern Tajikistan. The Basin's reserves are estimated at four billion barrels of oil, of which just 25% has been discovered to date.

MNP's Tajik Portfolio

The Swiss-based company, which is now turning from exploration-only to production as well, has two licenses in Tajikistan that it operates with a 90% working interest. The total area of the two license plots, Western and North-Western, spans 839,000 acres. So far the Company has carried out 2D seismic research on 1,310 km, identifying a number of drillable spots and leads and plans to start drilling at three of these in 2014, after the expiration of the exploration phase of its licenses. MNP is operating the licenses under a production sharing agreement with confidential terms, under which 100% of its costs will be recovered but no royalties will be paid. Under this agreement the Company will not be liable to profit tax and will have no limitations with regard to exporting the crude.

The unrisked prospective resources in MNP's Northwestern license are estimated at 1.037 billion barrels of oil originally in place, and those in the Western license are projected at 544.9 million barrels. Prospective resources in the Northwestern license area are calculated at 286.2 million barrels and the resources of the Western license area are estimated at 277.5, bringing the total prospective amount to 563.7 million barrels.

So far, two exploration wells have been drilled, Kayrakkum, with a target depth of 5,200 meters, and West Supetau, with a target depth of 4,500 meters. The Kayrakkum well neighbors the Niazbek-Karakchikum field, and the West Supetau prospect neighbors the fields Mingbulak and Mahram. The reservoir from which oil is pumped from the Mingbulak field holds reserves exceeding 250 million barrels of oil equivalent and it's the reservoir from which oil is planned to be pumped from West Supetau. The Mahram field is in the initial stages of its development.

The production sharing agreement for these assets envisages a development and production period of 30, including an option for two five-year extensions. So far the MNP has invested $15 million in 2D seismic research and the drilling costs are estimated at $22 million for each exploration well.

In Tajikistan MNP is also on course to acquire eight already producing fields in view of rehabilitating them. The current rate of extraction at these fields is less than 300 barrels of crude daily, while the combined P2 reserves are estimated at more than 30 million barrels. The assets are run down due to insufficient technology and investments which makes them suitable for rehabilitation and redevelopment. The Company plans to invest in new equipment and reviving first the still active wells at these fields. It will then go on to the shut-in and abandoned wells, redeveloping them and completing the development of the currently incomplete production structure. It will also look into extensions and prospects that may have been missed. The output from these fields will be sold locally at competitive prices

For its production operations in Tajikistan, MNP plans to use funds from its own cash flow, making use of the already available infrastructure in the area to increase the output from its assets to over 3,200 barrels per day, increasing recovery from 14% to 22%. The total cost of these projects is estimated at $60 million over a four-year period.

Competition and risks

Among the main competitors of MNP in Central Asia and Tajikistan more specifically is British TethysPetroleumLtd. The company operates oil and gas fields in Tajikistan, Kazakhstan and Uzbekistan. Its assets in Tajikistan are located in the southwest part of the country, in the Afghan-Tajik Basin. Tethys was the first oil company to enter Tajikistan and later partnered with Total and CNPC to develop its reserves. The company's strategy is focused on tapping underdeveloped areas and then partnering with sector players on exploiting the resources uncovered. One of the major risks for the oil industry in Tajikistan is geopolitical. This is a poor country with a weak, unstable political system and a sudden influx of oil-related revenues could have a destabilizing effect in an environment still plagued by nepotism and corruption. According to Platts estimates, its annual revenue from gas alone could reach $6.39 billion.

Operations in Mongolia

MNP's second biggest operation is in Mongolia, in the East Gobi Basin, where it is the operator of two blocks, with a 74% working interest in partnership with local Shunkhlai Group, which has a 10% stake in the venture, and two investors from Switzerland in Hong Kong, each with 8%. The exploration blocks are located around a plot that is being developed by Chinese Sinopec at a daily rate of 1,600 barrels, and covers 744,000 acres. So far, the Company has done 2D seismic research on an area of 1,946 km, focusing on two subbasins, holding an estimated 362.69 billion stock tank barrels of crude.

Under the production sharing contract for this project, MNP will get royalties of 12%, plus a profit on the oil ranging between 36.5% and 56.5%, depending on the output. Again, it will be able to recover 100% of costs and will not be limited in its export plans. The project is currently in its exploration phase which will end in May 2015, although there is the possibility for an extension by two more years. The production licenses are for 20 years with an option for two five-year extensions. The main benefits of the Mongolian deposits are that the exploration is shallower than in Tajikistan, with the cost per well at $1 to $2 million, and that the Company can again make use of existing infrastructure on site. The main markets for the crude in East Gobi are the Mongolian domestic one and China.

Financial Profile

For 2013 the Company posted a net loss of $10.961 million, down from $11.779 million a year earlier, thanks to lower exploration costs. Operating expenses were $6.543 million at the end of December 2013, down from $11.968 a year before that. This 45% reduction in expenses was a result of lower exploration activity in Tajikistan and Mongolia. Personnel costs were $2.302 million, down from $2.654 million, due to a tapering of the activities in Mongolia as well as lower costs associated with equity awards under the Company's stock compensation and stock option plans. Exploration costs totaled $1.147, down $5.784 million a year earlier, again on the back of winding down exploration activities in Mongolia after a moratorium MNP entered into with the Petroleum Authority of Mongolia.

The Company's cash balance at end-December 2013 stood at $3.064 million. Total current assets were valued at $10.925 million and total current liabilities were $1.093 million. Shareholder equity stood at $20.707 million and the net working capital totaled $9.832 million.

Conclusion

Concluding our due diligence call, Vogel stated that the Company is aiming to take advantage of development, rehabilitation and redevelopment opportunities in a region with proven oil potential with an asset portfolio sufficiently diversified in areas carrying different degrees of risk. In view of the considerable oil potential in Central Asia and Tajikistan in particular, MNP Petroleum's decision to move from exploration to production is only natural. Vogel highlighted that the Company will adopt a more aggressive approach and a building block strategy to developing a production base that would yield cash flows and seizing new exploration opportunities via acquisitions. It will be expanding its strategic partnerships and focusing more on farming out projects to further reduce risk and build value. In light of our initial due diligence call, we view this as an ideal entry point for long-only value market players.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: This article was written by the Analysts in the Intelligence Unit of Alpha Deal Group as a collective of writers and Analysts. The submission was sent by one writer among the collective of Analysts and writers who wrote this article. I am the lead contributing Analysts among the group of writers who wrote this article, and I am involved in the initial due diligence on the company on behalf of potential buy-side clients, which may lead to a potential business relationship with or investment in the company.

Additional disclosure: I am the lead writer and Analyst, one of the contributing Analysts among the group of writers and Analysts who wrote this article, and I am involved in the initial due diligence on the company on behalf of potential buy-side clients, which may lead to a potential business relationship with or investment in the company.