Petro Matad Ltd (LON: MATD) explores and drills for oil in Mongolia. They’ve had some success in identifying reasonable prospects, expect to be actually producing later this year. Petro Matad has also explained the area of exploration, is negotiating is the local government over reference price (this is how royalties are fixed) as Brent or Daqing and in general, the actual operations of the company look well enough.
This isn’t blanket approval of course, but certainly better than some exploration minnows (the market cap is just under £40 million) manage.
The real question about Petro Matad is why aren’t the shares higher? And that comes back to, likely enough, activities on the stock exchange, not those out on the steppes. For there’s an argument to be made that Petro Matad bungled a capital raise back in July last year.
Sure, every company requires capital, that’s why the stock exchange – and listings upon it – exist in the first place. But how that capital is raised is important, for getting it not quite right can leave a definite hangover afflicting a share price in the future.
This is the likely explanation for what happened at Petro Matad. Operational news was somewhere between OK and good, the share price was up at the 7 and 8 pence level. At which point there was an issuance of near 25% of the company’s equity. The issue price was 3.5p. That’s only 50% of the prevailing market price at the time which is a deep, even steep, discount.
Further, this came just after good news from Petro Matad. 7 July the company announces that a fully approved exploration l.icence has been issued, 14 July it issues 25% new equity at a steep discount. Well, that might well meet the company’s needs for operational capital but it does rather leave shareholders floundering. Which is the point here this half-year in the future.
If good news and a rising share price are to be immediately met by a deeply discounted capital raise then why would anyone bid up the Petro Matad shares on the basis of good news? Now, at some point, the flow of good news might well be enough to overcome this sort of fear but the company has created a hurdle to its own share valuation.
Which is the possible reason for the weakness in the Petro Matad share price in the face of the continued operational results in Mongolia. Continued work on coming into production, more exploration on other licences, getting the negotiations with the government over royalties right, sure, great stuff. But there’s that hurdle that means that a general improvement in operations isn’t translating into a general improvement in the share price.
A likely nett effect of this is that if and when the price starts to move it will do so swiftly. The problem is in working out when the effects of that capital raise have slipped out of the market’s valuation calculation.
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Tim Worstall is a freelance writer specialising in economics and the financial markets.