The target price is close to four times the last Mako traded price of $0.105. The following is an extract from the report.
Funding Secured and Material Farm-out Approaching:
MKE has announced a capital raising of $3.85m which includes a $2.2m placement and a Share Purchase Plan of $1.65m (underwritten to $1.0m).
Recent discussions with management has highlighted MKE is close to securing a material farm-out to fund the drilling of both Rock Creek and the Duverney shale which we believe will re-rate the company in the near term.
We maintain our Speculative Buy recommendation with a slightly revised price target of $0.39/share (previously $0.42/sh).
Material farm-out approaching.
Recent discussions with management has highlighted MKE are close to securing a material farm-out to fund the drilling of both its Rock Creek and Duverney acreage. We believe a transaction could be announced in December 2012/1Q 2013 which would significantly re-rate MKE.
Farm-out terms uncertain but five wells would be ideal.
It is difficult to estimate the farmout terms which are being negotiated but MKE has consistently highlighted it would like to have a fully funded five well program to de-risk its acreage.
We assume the initial focus will be on the Duvernay given the intense industry focus on the play and estimate a five well carry could be worth ~$45m. We have assumed 3 vertical wells and 2 horizontal wells in our estimates. The see-through value to MKE (assuming MKE retains 50% of its acreage or 17,040 acres) would be $23m/$0.12/sh.
Intense industry activity supports MKE s farm-out initiatives.
We believe the recent acquisition of Celtic Exploration Ltd by global energy giant ExxonMobil for $2.9bn was a keystep change in the evolution of the Duvernay, providing a compelling endorsement of its potential.
In addition, well results continue to impress with the recent Athabasca Oil Corp well at Kaybob West, flowing at a final test rate of ~6 mmcf/d gas and 900 boe/d condensate (1,900boe/d). This intense industry activity will support MKE s current farm-out activities, in our view.
Funding secured and to be further consolidated with sale of Provost.
MKE has announced a capital raising of $3.85m which includes a $2.2m placement and a Share Purchase Plan of $1.65m (underwritten to $1.0m), both priced at 11c/share. In addition MKE plans to divest its producing Provost asset which could raise an additional ~$5m. These funding activities would ensure MKE is fully funded through 2013 if a farm-out is secured.
Black Swan Energy spuds first Duvernay well.
MKE's first Duvernay well (vertical) was spudded on its Rimbey, Alberta lands by JV partner Black Swan Energy Ltd (NYSE:BSE). MKE is fully carried on this well which will be drilled to 3,000 metres and retains a 10% interest. Following drilling, the well will be cored and evaluated after which BSE will decide on whether to commit to a horizontal well.
Key near term catalysts.
1) Farm-out transaction (Dec 12/1Q 13), 2) Encana farm-out of Duvernay acreage (Dec 12) and 3) Decision on Duvernay horizontal well by BSE (2Q 13).
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