Petro Matad has a lot left to explore in Block XX - Westhouse

Mongolia-focused oil explorer Petro Matad (LON:MATD) has extended the exploration period of the XX Block for another five years.

The company’s management is confident that Block XX, which hosts the failed Davsan Tolgoi project, still has the potential to be of significant value.

This morning’s extension comes with a commitment to spend US$47 million on exploration during the five year period.

However Petro Matad explained that the new spending commitments can be offset against previous expenditures that exceed past obligations under the PSC.

According to Westhouse Securities analyst Peter Bassett the prior ‘overspend’ equates to around US$25 million.

And as such he says Petro Matad will only need to an additional US$22 million to cover the five year commitments announced today – though he points out that the firm also needs funds for the exploration of the company’s other blocks, IV and V.

Bassett believes it is likely that some form of new funding will be required prior to the next phase of exploration.

And ideally this would happen by next spring before the start of the 2013 field season in Mongolia, he added.

Speaking with Proactive Investors, the analyst said that a farm out of some of the Mongolian exploration acreage could help meet these funding requirements.

While work at block XX has up until now focussed on the Davsan Tolgoi target, which disappointed last year, the company says there is ‘additional exploration potential in the north of the XX block and the southern part of block contains six ‘promising’ sub-basins.

It says that both the northern and southern parts of the XX block warrant more detailed exploration and time is needed to build on the initial positive results.

Bassets highlights the fact that Petro Matad has drilled only one of the many basins within block XX, and that as the original licence area was ‘almost the size of Wales’ there is much more of acreage left to explore.

“The licence is huge,” he said.

“The company still has a lot of (geological) structures still to explore. And the thing you have to remember is that these types of basins are productive in China.”

It is understood that Petro Matad has talked with potential partners locally.

“I don’t think it would be on the major’s list of destinations, but I think somebody local could come in (to the venture).

In the meantime Bassett says the upcoming confirmation of Petro Matad’s drill plans for the 2013 field season will be a catalyst for the shares.

The analyst expects this to happen at some point in the autumn. Such an announcement will give investors an insight into the group’s ambitions for next year, and Bassett says it will also give a better indication of how much cash the firm will have to raise.

Westhouse currently rate Petro Matad as a 'buy' with a 44p price target (current price: 8.75p).

This morning Petro Matad chief Douglas McGay said: "We welcome the extension together with the Government's appreciation of the exploration processes, the progress that Petro Matad has made and the need to systematically explore the remainder of Block XX.

“Over the last six years the company has made a significant investment in Block XX and has a substantial surplus to the historic minimum spending commitments that could be used to offset the new obligations if necessary,” McGay adds.

“We have accelerated our exploration activities on all prospective areas and the extra time that this extension grants us will allow us to carry out quality and thorough investigations to further define drillable prospects.

“Given the proximity of proven oil fields and our works to date we remain confident that Block XX has the potential to be of significant value."

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