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Mosman Oil & Gas over-reacts to very average news at best!

By Gary Newman | Tuesday 13 June 2017

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.

Private investors often seem to have very short memories, and although many have previously been badly burned by putting money into Mosman Oil and Gas (MSMN), some were flocking back into the company again today, sending its share price rocketing.

At one point the share price was up around 90% on yesterdays close, and it all seemed to revolve around a very average update, at best, and helped along by the usual rampathon that you often get with this company on any news that can be spun as being even vaguely positive. The RNS today gave a corporate update, including information about progress at its two recent acquisitions.

Mosman acquired 50% of the Strawn Oil project in Texas for $75,000, and will spend a further $75,000 over the next six months on workovers, which would tend to suggest that there was hardly a massive queue of oil companies looking to get their hands on this prize asset!

Today it revealed that during May the asset had produced a total of 496 barrels of oil, or 248 barrels net to Mosman, and that some of that included existing inventories that came with the asset.

There are 27 wells in total at Strawn so it may well be able to up that level of production from the work that is being carried out, but nothing so far suggests that it will make any really meaningful contribution to revenue, and was why the field was being sold so cheaply – it doesn’t actually have any booked reserves either.

Its other recent acquisition, the Arkoma stacked pay project, does look slightly more interesting as the vendor, Inland Oil and Gas, has estimated gross reserves and resources at 8.48mmboe, based on wells drilled so far, along with 3D seismics. So far Mosman has purchased 10% of the project for $500,000, but with options to take that up to 55% by March 2018 for a further $1.425 million.

But once you look into all the details it doesn’t look quite so good as the two currently producing wells – Wise 1-25 and Williamson 5-25 – are only 20% and 25% owned by Inland, respectively, resulting in a maximum net interest of 11% and 13.75% for Mosman, and that is once it has exercised all of its options. These assets made a total profit of $300,000 during 2016, but that was excluding any capital investment, so given the current Mosman interest in them, the money is hardly exactly going to be rolling in here either.

Further work is currently being carried out, so that total revenue may well grow, but it still isn’t going to leave Mosman flush with cash any time soon, and in my opinion both of these assets look far better at first glance at the headline figures – the 8.48mmboe for instance - than they do once you look at them in more detail.

I certainly can’t see the revenue from these two assets even coming close to covering the overheads of running the company any time in the near future, given that it made a loss of A$850,000 odd for the six months up to the end of 2016 – with a fair chunk of that being down to consultancy fees of A$332,000.

It did have a fair bit in the bank at that time, with A$2.25 million in cash and equivalents - plus A$289,000 from the sale of its remaining shares in Hemisphere Energy for a massive A$9,741 profit - so it is unlikely that it will need to raise funds in the short term unless it really starts to accelerate work on its new assets.

It may seem cheap at a market cap of around £2.8 million at its current share price of 1.4p to buy, but I can’t really see anything at the moment to justify that – and especially not today's increase in value of circa £1 million off the back of that RNS. Once the usual ramping runs out of steam in the next few days or so I would expect this share to drift back down again, as it has always done in the recent past.

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