Today we are initiating coverage of Multi-Corp International Inc. (OTCPK – MULI). There is the potential for some really good news on Tuesday so read carefully lest that point slip by you. Now, if the news is neutral or bad the shares would go south but we are betting it will be good, rather than neutral or bad.
The bottom line is that we introduced you to NORX on Monday at $0.94 and it hit $2.06 earlier this week. This is another really unconventional junior E&P story that has long term potential if things go their way, in addition to the trading aspect alluded to above.
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Multi-Corp International, Inc. is an emerging exploration and production (E&P) company. The Company owns a 100% working interest in 2,800 acres in the Cave Pool Unit and field, which contains approximately 32 wells that have produced but are currently shut-in. The Company paid 12M shares of stocks in exchange for the interests.
An independent reserve evaluation prepared by Chapman Petroleum Engineering Ltd. indicates estimated Proved light oil reserves of 386,000 STB having a net present value of $11,954,000 at 10% DCF/annum and additional Probable reserves of 1,570,000 STB, having a value of $67,479,000 at 10% DCF/annum. Production of these reserves will be realized through drilling of wells on unexploited locations from the Grayburg sand identified on well logs of the existing wells on these lands. Some of the wells on these lands will be re-entered for production from previously uncompleted zones in the Grayburg reservoir. Combined estimated oil production is roughly 1200 BOPD (barrels of oil per day).
MULI just signed an LOI to purchase 100% working Double X property from bankruptcy for 3M restricted shares. Double X consists of 1480 acres of land holdings with 14 producible wells capable of producing 38 BOPD. Once undisclosed sanctioned conditions related to the bankruptcy are met, the property can be delivered to MULI.Cave Pool
The Cave Pool Unit property covers 2800 acres located within Eddy County, NM. It is located within the prolific Artesia Vacuum Trend, specifically within the Grayburg Jackson Pool. The Artesia Vacuum Trend play contains thirteen reservoirs with more than 1 MMBO cumulative production. Cumulative production from these 13 reservoirs was 796 MMBO as of 2000. Depths to the top of reservoirs range from 1290 to 4700 ft. This is a mature play, especially within the highly productive San Andres carbonates. Recent development of lower permeability Grayburg sandstones in the Grayburg Jackson reservoir during the mid-1990's has been successful to the point of reversing production decline and is a major focus of current and future development. There are currently 32 wells which are capable of producing approximately 40 BOPD with 30 MCF based on 40 acre spacing and over 100 possible drilling locations based upon 20 acre spacing.
Management has currently identified 10 wells that are currently shut-in that will be returned to producing status within the first sixty days of operation. Production should increase by a minimum of 20 BOPD once the 10 wells are placed on production. Water disposal is currently handled via the Cave Pool Units injection well which decreases water hauling costs thus increasing the economics of the Cave Pool Unit.
Oil PUD reserves of 3M BOE are based on third party reserves on adjoining offset leases (Doral - with 3 leases bordering Cave Pool on SE border) in the Grayburg only. The Cave Pool Unit produces from both the Grayburg and San Andreas formations and therefore credit for reserves on the San Andreas formation are not included.
The Artesia Vacuum Trend consists of reservoirs of the Upper San Andres and Grayburg Platform, extending in an east-west direction from the city of Artesia, NM to the city of Hobbs, NM. The play contains 13 reservoirs with more than 1 million BOE of combined annual production. Cumulative production from the 13 reservoirs exceeds 800 million BOE. Production in most reservoirs is commingled from the San Andres and Grayburg Formations, with depths to the top of the reservoirs ranging from 1290 to 4700 ft.
On Monday, June 10th, MULI management will be meeting with the New Mexico state authorities regarding licensing and bonding which essentially should give the green light for MULI to move forward with pumping on federal lands. A positive meeting, which would involve obtaining a targeted start date and the necessary licenses and permits, would be a huge positive for the stock.
Double X consists of 1480 acres of land holdings with 14 producible wells. The wells are capable of producing 38 BOPD. Production is from the Delaware formation. There is also sufficient acreage to drill 21 new wells. The Double X site is production ready with all pump jacks and infrastructure ready to go. This property has a past record of producing over 660,000 bbls oil and 1,207,026 mcf of hydrocarbon production.
In addition to these sites, management is contemplating acquiring more property down the road. Figure 1 is a summary of the size and capacity of the current properties in which MULI owns 100% interests. Management plans to increase capacity on both sites with new wells, as summarized below in columns 'Incremental Wells' and Incremental Capacity' which are additional to existing figures. These new wells listed in Figure 1 could be realized with just drilling alone on both sites maximizing the land space.
Multi-Corp plans to use various methods to increase capacity on both sites which include the following:
Based on these figures, we project that approximately 3,400 barrels/day can be produced if all of these plans are implemented in addition to the new wells listed above.
Despite rising costs, there is still a high demand word wide for oil which does not seem to be slowing down anytime soon. ‘Green Energy’ subsidized by government initiatives have neither demonstrated a competitive cost structure nor sufficient efficiency in comparison to traditional fossil fuels and oil. Additionally, there has been increased pressure on government to loosen regulation related to oil exploration, especially in the U.S., to accomplish several goals. These include the creation of jobs, an increase in the supply of oil in an effort to decrease prices, and create energy independence from unstable parts of the globe. For all these reasons, oil is not going anywhere soon.
One point to notice is that there has been a huge spike in consumption in Asia as China and other economies have developed. Another compelling and telling fact is the demand for oil over taking the supply in North America. The need for more exploration in this region is apparent if you subscribe to the 'energy independence' priority
The global economy is limping along, with each region dealing with its own maladies. One indisputable fact is that people are living longer; increasing the world population, which means demand for all types of consumable products, will continue to increase. Figure 2 is a projection showing the forecasted increase use of energy sources for transportation along with an estimate of relative efficiency improvements. It can be seen that oil is a major player, even with increased efficiency.
Figure 2: Projected Transportation Fuel Source Consumption and Efficiency
So what does it all mean? First, it is apparent that the need for oil will increase. Second, as the economy hopefully improves soon in the U.S., prices should rise allowing oil exploration companies improved margins. In our view, Multi-Corp International is a new player in the oil exploration space and poised to take advantage of this market.
Jean Mann, President, Chief Executive Officer
For the last 35 years, in addition to her private consulting business she has worked in the Oil and Gas industry preparing weekly gauge reports, Federal Production Reports to deal with the MMS and BLM, Texas Oil reports, and NM State Production reports, as well as working closely with the OCD, preparing working interest statements, Division Orders and assignment of Oil and Gas Interests plus transfers of ownership.
MULI is an exploration company with no current revenues or cash flows. Prior to generating any revenue, the Company must successfully obtain all of the bonding, licensing, and permitting on the Cave pool site and meet the conditions outlined in bankruptcy, for the Double X site.
While there is a very favorable and abundant history of oil on these sites, there is risk as to the presence of oil in the proposed drilling area. Additionally, there is risk in the execution of the drilling and fracking process even once the presence of oil has been established.
According to our projections, the Company may need finance subsequent drilling through revenues from the initial wells. However, if the first well is unsuccessful, additional financing will be required. In that case, should MULI fail to receive sufficient financing in a timely manner, the company will not be able to bring new productive wells online as rapidly as originally projected. This will impact both the amount of time needed to achieve positive cash flow as well as overall valuation. Even if MULI is able to successfully develop some wells, failures in one or more of the first few wells could significantly delay profitability and increase financing needs.
Fracking has become quite controversial due to the potential for environmental impacts. Opponents are concerned about the potential for fracking water, which typically contains chemicals, to contaminate drinking water. Some of these chemicals may be radioactive and/or known human carcinogens.
In our view, all of these risks are consistent with firms of MULI's size and standing and we believe that the Company's positioning, strategy, and favorable history data will enable it to succeed. A word of caution for traders: While we believe that on Monday June 10th, management will be successful, which would drive the stock higher, conversely, delays would negatively impact the Company.
In our view, MULI is an intriguing play as it is seeking to produce oil and gas on what could be viewed as unconventional properties with favorable history that offer great upside. Moreover, the stock could be a great trade as the entry point we have selected is a day ahead of a key meeting, which while fraught with risk, is more likely to be a success than a failure, in our opinion. The fact that there are less than 7M shares in the public float bolsters our aggressive expectation.
With key inflection points such as the New Mexico go-ahead and the Company meeting undisclosed bankruptcy transaction conditions around the corner, the stock could enjoy a couple of jumps prior to the commencement of production in 2H13. We rate MULI Speculative Buy with a $2.50 price target reflecting a 15x P/E on preliminary 2015 net income of $14M based on nearly full production run-rates.
Recent Trading History For MULI
Senior Analyst: Robert Goldman
Rob Goldman founded Goldman Small Cap Research in 2009 and has over 20 years of investment and company research experience as a senior research analyst and as a portfolio and mutual fund manager. During his tenure as a sell side analyst, Rob was a senior member of Piper Jaffray's Technology and Communications teams. Prior to joining Piper, Rob led Josephthal & Co.'s Washington-based Emerging Growth Research Group. In addition to his sell-side experience Rob served as Chief Investment Officer of a boutique investment management firm and Blue and White Investment Management, where he managed Small Cap Growth portfolios and The Blue and White Fund.
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