Petro Matad has multi-bagger potential in the run-up to production in Mongolia

Those with good memories will remember the fanfare surrounding Petro Matad when it first discovered oil in Mongolia in 2010. Petro Matad made a series of discoveries that made it one of the most exciting London-listed exploration companies of the time.

Recent developments for the company are reigniting this excitement, and rightly so. Brokers’ price targets suggest Petro Matad shares could appreciate multiples of the current price, and there is now a solid foundation for them to do so.

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UK Investor Magazine published ‘Four UK Small Cap Growth Shares to Watch Summer 2024’ just before the announcement of a material development for Petro Matad in late June. Should timings have been different, this selection would likely be Five stocks and include Petro Matad.

The company has been substantially derisked as an investment for new investors after raising $8.9m by way of a placing in late June. The funds will be used almost exclusively to take Petro Matad’s Heron project through to production in 2024/25, a milestone that will unlock substantial shareholder value.

However, it has not been plane sailing for Petro Matad, and many investors may have only recently considered the stock after a heavily discounted placing.

In 2010-2012, the Mongolian natural resources sector was in the limelight. Rio Tinto was developing the world’s largest copper deposit at the Olu Tolgoi copper mine, capturing the attention of global investors and Mongolia was opening up to overseas investors.

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Petro Matad rode this wave for a short period as evaluation of its assets revealed the extent of the resources in place at its Block XX field. The excitement around the quality of oil in place was replaced by frustrations at the Mongolian bureaucracy, and Petro Matad shares suffered dearly. Early investors were left licking their wounds.

Fast forward past numerous hurdles and bumps in the road, a ruling by the Mongolian government to certify Block XX and the Heron discovery as special purpose land in 2023 represented a step change in the authorities approach. A land usage agreement signed in early 2024 has paved the way for production to begin. 

Production from Petro Matad’s assets has been a long time coming. The first production-sharing agreement with the Mongolian government was signed nearly 20 years ago, in 2005. The Petro Matad saga should serve as a lesson to natural resource investors about just how long it takes for the production of promising assets to begin. 

With approvals and licensing agreements seemingly mostly complete, Petro Matad now has a clear path to production and the opportunity for share price appreciation.

Early production at the Heron project is expected to help support exploration, evaluation and eventual production across the rest of the Heron prospect, and the Gobi Bear prospect. The company has a 5-year plan to reach production of 9,000 barrels of oil per day.

In addition to oil production, Petro Matad is harnessing Mongolia’s landscape for renewable energy generation through a JV with SunSteppe, which already has a battery storage system and a green hydrogen project powered by wind power underway. Petro Matad’s transition to an oil producer and clean energy producer will provide diversification and potential revenue streams long into the future.

Broker targets

Zeus has a price target based on a Core NAV of 4.3p, rising to 28.7p for Total Unrisked NAV. The greater of these two price targets represents substantial upside to the current share price of 2.8p.

The Zeus price target, as with most broker price targets for AIM companies, should be taken with two shovels of salt. That said, it does provide some scale of where Petro Matad shares could go in the medium term.

For context, much of the Total Unrisked NAV valuation (17.9p of 28.7p) is derived from further exploration of the Saiga and Gobi Bear projects in Block XX. Zeus’s price target does not include the renewable JV.

Market conditions

The market conditions for early-stage natural resources companies favour Petro Matad. There has been a notable uptick in interest in the sector in recent months, and several companies have yielded investors very respectable returns, especially in speculative Helium-related plays. One would expect some of this cash to find its way into Petro Matad as the fast money spins into the next opportunity.

But this isn’t just a short-term play. The company says it expects the recent fundraise to take it through to production at Heron. This means cash flows and, very likely, further shareholder value creation through the evaluation of prospects in Block XX.

We must note, Petro Matad doesn’t come without potential operational setbacks that could pose a risk to the share price.

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