Max Petroleum: Broker slashes price target amid drill delay & financial stress 

(MENAFN - ProactiveInvestors - UK) Merchant Securities today slashed its target price for Kazakh focussed oil explorer Max Petroleum (LON:MXP).

Last week Max revealed that it may need to 'significantly curtail' its exploration activities amid rising costs following drilling problems in the NUR-1 well " a well which aimed to make a 'high impact' by exploring deep targets in what is referred to as the 'pre-salt'.

It said that for the second time the drill bit had become stuck. The well had already been sidetracked.

Max reckons the well will cost US43 million, with an additional US10 million in forward costs, should the drill bit be freed soon. It is currently supported by a US58 million loan facility, of which US54.2 million has now been drawn. Max says it will seek additional capital and it has now initiated talks with a number of providers of both debt and equity financing.

In a note to clients today Merchant Securities analyst Brendan Long said that even the 'best case' scenario going forward would see significant equity dilution.

"We believe that the fortunes of the company are now dependent on the decisions made by its creditors."

Long adds: "The rising costs of the NUR-1 well should be considered in a context of financial precarity. Both the Macquarie Bank and the convertible bond holders have been lenient in past debt restructurings in return for equity type benefits.

"However, it is uncertain that the creditors will be incentivised to hold Max Petroleum equity (and derivatives thereof) if the upside of the Emba-B prospect is no longer on the table."

The analyst downgraded his recommendation to 'hold' from 'buy' and said that while he estimates the group's NAV at 9.9p a share, the fact that Max is under increasing financial stress means he has given this valuation by an 50 per cent haircut arbitrary, to a 5p a share price target.