Maha Energy investment thesis

Maha Energy – Early-stage O&G player at a depressed valuation

Maha Energy – Elevator Pitch

    • Maha Energy (Maha) is an O&G exploration, development and production company based in Sweden. It has a market cap of USD 135M and assets in Brazil, the US, and Oman.
    • This company is carrying out a transformative strategy since the appointment of a new management last November, who previously led 3R Petroleum’s growth and obtained a 650% return in less than four years.
    • Since then, it has announced the sale of its stake in two Brazilian fields, Tie and Tartaruga, for cash consideration greater than the current market cap. US assets are also for sale.
    • It also signed a definitive agreement for a business combination with DBO 2.0, setting the path of what we believe is a growth story in the Brazilian offshore industry.
    • In the last quarter, the company produced ~2600 boepd. After completing the sale and business combination, it will produce ~2400 boepd but having USD 150M more in cash.

Why is there an opportunity in Maha Energy?

Maha production is mainly comprised of oil. It has producing assets in Brazil and the US, and one exploration and development block in Oman.

It’s primary stream of cash flow has been Tie Field (Onshore Brazil), which produced 1868 boed last quarter. Illinois basin (US) asset produced 314 boed and Tartaruga field (Brazil) close to 200 boed. LAK Ranch (US) and Block 70 (Oman) are in a pre-production stage and development work is being carried out.

The main drivers of the new strategy are the new CEO, Paulo Mendonça, and new CFO, Bernardo Guterres, current directors of Starboard Group. They are ambitious and laser-focused, creating value as can be seen as follows.

  • Sep 28, 2022 – Kvalitena AB announced it had sold around 10% of the shares in Maha to Starboard, a Brazilian investment management firm.
  • Nov 4, 2022 – A new management and board led by Starboard is appointed in an Extraordinary General Meeting requested by one of the major shareholders.
  • Dec 2, 2022 – The board of directors announced that it is considering the potential sale of the Brazilian and US assets.
  • Dec 5, 2022 – Maha signed a binding term sheet regarding a business combination with DBO 2.0, a private upstream O&G company focusing on mature offshore fields in Brazil.
  • Dec 12, 2022 – Maha announced that its sale of a 35% interest in Oman’s Block 70 has been approved by the Omani authorities.
  • Dec 14, 2022 – Maha successfully completed a directed new share issue of 23,900,000 shares, raising proceeds of ~SEK203 million.
  • Dec 28, 2022 – The board of directors announced the sale of the Brazilian assets to PetroRecôncavo.
  • Jan 30, 2023 – Maha entered into a Joint Operating Agreement with Mafraq Energy LLC for Block 70 in Oman.
  • Feb 6, 2023 – Maha Energy enters into a definitive agreement regarding the business combination with DBO 2.0.
  • Feb 28, 2023 – Maha Energy completes the sale of its Brazilian assets to PetroRecôncavo.

As stated by the company, they want to replicate what they achieved in 3R Petroleum:

  • Funds managed by Starboard acquired control of 3R Petroleum in August 2019.
  • Signed 8 M&A transactions during 2019-2020.
  • 3R IPO in November 2020 at a market capitalization of USD 430 million.
  • 3R’s equity is now valued at USD 1.3 billion
  • Starboard obtained a return on investment in 3R of 6.5x CoC and the share price return since IPO has been ~60%.

To achieve it, they wanted to improve Maha’s capital structure, strengthening the balance sheet an cash position; optimize CAPEX and OPEX to capture enhaced returns for deployed capital; and conduct an analaysis of their asset portfolio to optimize it through divestments and new developments and M&A. As done in 3R, they intend to focus on mature fields and all type of acquisitions are of interest. As we can see, they have made steps towards fulfilling all of their goals in less than half a year. As they have said:

“The new strategic positioning contains M&A focused growth in order to maximize returns to shareholders”

Maha Energy Assets

Maha energy assets

After selling Tartaruga y Tie fields, Maha Energy has stakes in multiple fields worldwide. Currently, Illinois fields are the only producing assets with Lak Ranch still halted and Mafraq in Oman undergoing testing to determine its commercial viability. Only Mafraq should be expected to remain in the portfolio under the new strategy.

Maha Energy Brazil

Last 28th of December, the company announced the sale of Maha Brasil and therefore, this assets to PetroReconcavo, one of the major E&P onshore players in Brazil (and the former company of CFO Bernardo Guterres).  It was closed last 28thof February and it comprised up to a total of USD 186.9M, with two payments to be made: USD 95.9M already paid and USD 55M next 28th of August. Additionally, there will be an earnout structure in place that could result in an additional payment of $36.1M, whereof up to USD 24.1 million refers to the average annual Brent oil price for the next three years. It will start to be payable from USD 80 per barrel with a maximum to be reached if the price is above USD 90 per barrel. The remaining payment will be subject to synergies with Petoreconcavo’s potential new assets. The assets produced ~2800 boepd in 2022 net to the company and are the following:

  • Tartaruga field: Maha has a 75% working interest with Petrobras owning the remaining 25%. The field produces light oil (41º API) from the Penedo sandstone reservoir, which consists of 27 separate sandstone layers believed to contain oil, of which only 2 have been commercially produced. The field was acquired by Maha Energy in 2017 and was producing from a single well (using a hydraulic jet pump). A second well, TTG-2, produced sporadically on free flow and after Maha converted it to an artificial lift system production doubled almost overnight. A second well was drilled in 2020, but it was concluded that the northern fault compartment was affected by reservoir degradation. The focus shifted to the southern fault block where two wells are currently producing commercial quantities of oil. The handling facilities allow for 800 BOPD of oil processing and has storage capacity of 1,350 barrels. The field also sells associated natural gas to a third-party company. The Tartaruga field is producing steadily from two wells with very little production decline and Maha planned to drill an additional horizontal well into the Penedo sandstone. In 2022Q4 The Tartaruga 3 (TTG-3) well was converted to a temporary water disposal well which will reduce operating costs significantly. Additionally, Maha Energy submitted a competitive bid for Petrobras’ 25% working interest in the field. Average production, net to the company, during 2022Q4 was 195 boepd (186 bopd of oil and 55 MSCFPD of gas)
  • Tie field: Maha Energy owns and operates six onshore concession agreements in the Reconcavo Basin of Brazil, including the Tie field, which was acquired in 2017. The Tie field has two separate sandstone reservoirs, the Agua Grande (AG) and Sergi (SG), and at the time of acquisition was producing from two free flowing wells, GTE-3 and GTE-4, but with production limitations, including well productivity, gas handling capacity and 1,300 BOEPD oil and gas offtake limitations. By 2021, Maha had increased production by drilling four more wells and installing artificial lift systems and gas compressors. In 2022Q4, the well workover campaign that has been taking place much of the year was completed with all wells restored back to normal production. The GTE3 well was converted from a dual jet pump completion to a single comingled Electric Submersible Pump producer. The Tie-1 production well was recompleted as a single-string jet pump producer. The GTE-4 well had a leaking tubing string replaced. The oil is trucked to a refinery and two separate receiving stations, and the gas is disposed through a combination of compressed natural gas and gas-to-wire generators, and re-injection. Average production from the Tie field in 2022Q4 was 2,146 boepd (1,926 bopd of oil and 1,315 MSCFPD of gas).

There is not much to say about them as their sale has already been closed. They are selling them at a price above the multiples the market is valuing Maha Energy, so it is, indeed, an excellent move by the management as it creates value through the arbitrage of the multiples the Market values Maha.

US Assets

These assets consist of two different acreages that are producing ~313 boepd. However, they are the past of the company as the strategy has shifted and is management intention to sell them.

  • Lak Ranch oil field: Maha Energy purchased the asset from the Joint Venture formed by Derek Oil and Ivanhoe Energy in early 2013 and assumed operatorship (it has 99% WI). The oil is 19º API and is sold to a nearby refinery with discount to the WTI. However, The LAK Ranch heavy oil asset was shut in at the beginning of 2020 Covid-19 pandemic. For the time being, minimal work was done in 2022 apart from meeting regulatory requirements. During 2022Q4, no activity occurred other than routine maintenance activities. Unlike 2022Q3, were incidental production of 9 boepd was achieved, no hydrocarbons were sold during last quarter.
  • Illinois Basin: On 31 March, 2020, Maha acquired certain oil producing assets in the Illinois Basin, which is one of the oldest oil producing basins. This is a low-risk conventional oil play that requires low-cost drilling and stimulation operations. On 1 March 2022 Maha begun drilling the Glaze 11-5 well. This 4,000’ vertical well is located in the heart of the Mississippi Lime play targeting several stacked pay layers. Glaze 11-5 well was drilled and completed during the first quarter of 2022 and is now contributing to the daily production volumes. During the first quarter of 2022, the Company signed a 463 acre land lease in Indiana, adjacent to land already held in the area . The lease provides Maha the opportunity to drill up to 23 production wells on the leased land. The lease requires Maha to drill at least one well during the first three years of the lease and then at least one well every year thereafter to retain the land. Average net production from the Illinois basin during 2022Q4 was 280 BOPD of oil, sold at USD 3 discount to monthly average WTI.

In our opinion, management’s intention to sell these assets is an excellent decision, as they are non-core with low production and high capex required to make them a significant part of the company. They lack the scale to properly develop these assets and they want to regionally concentrate their portfolio on Brazil. Anything they can obtain from their sale should be viewed as positive.

Maha Energy Oman – Mafraq field

Maha Energy assets in Oman consist on block 70. Block 70 is an onshore block that includes the shallow and undeveloped Mafraq heavy oil field. The Mafraq field is estimated by third parties to contain between 185-510 million barrels of original oil in place (OOIP). The Block covers an area of 639 km2 and is covered by both 2D and 3D seismic data that has been acquired by previous operators that have been made available to Maha. Eight wells have been drilled within the block boundaries, five of which are on the Mafraq oil field. Maha’s commitment includes 8 producing horizontal wells, 2 appraisal wells and 1 exploratory well. As we can see in the figure below, the block is surrounded by Majors, so it would not be difficult to think of a scenario where the test is a success and they farm-out another stake of the block, they give up operatorship (as it is very easy to operate) or even sell it if price is good enough.

The 5th of October, 2020, the Company entered into an Exploration and Production Sharing Agreement (“EPSA”) with the government of the Sultanate of Oman, for Block 70. Maha became the operator of the block, holding a 100% working interest. During the first and second quarters of 2022, the Company continued to work towards the commencement of its 2022 drilling program, including securing necessary approvals and key service providers.

During 2022Q3, the Company entered into a farmout agreement with Mafraq Energy LLC which would grant Mafraq a 35% working interest in the Block 70 in Oman in exchange reimbursing Maha Energy for their prorated share of all past costs including the signature bonus, approximately USD 11-12M, which management expects will be paid in 2023Q1. Mafraq Energy LLC would also be required to pay their share of all future expenditures on Block 70. Last 12th of December, the Omani authorities approved the sale of the participating interest and the 30th of January, Maha and Mafraq signed a Joint Operating Agreement (JOA) on the block. The focus now is to collaborate to kick off the production testing stage as proving the productivity of the field is a key aspect to declare commerciality.

This block was a fundamental piece in the previous strategy held by the company and new managements also believes it. If fully developed, it could add significant reserves and production to the company. Currently, they are drilling their last production well in order to begin the testing process that has been delayed through 2022.  The company expects to start testing the wells in 2023Q1. Declaration of commerciality (if commercial) is expected by year end, full field development would happen in 2024. It could be a 10 to 14 thousand barrels per day development upon the success

Maha Energy Oman Assets


McDaniel & Associates Consultants Ltd. completed their first annual reserve and resource determination for Maha Energy 3rd of February. No reserves for Tie and Tartaruga were reported due to the expected divestment of Maha’s Brazilian assets. Brent prices between $78 and $84 were forecasted for the next 7 years.

Maha Energy Reserves (Million Barrels)

Maha Energy’s Team

The new management is comprised of Paulo Thiago Mendonça as CEO, Bernardo Guterres as CFO (both of them were appointed November the 4th), Alan Johnson as COO, and recently appointed Barbara Bittencourt as Chief Legal Officer. The board of Directors is composed of Fabio Vassel as Chairman, Paulo Mendonça, Harald Pousette, Viktor Modigh, Enrique Peña and Richard Norris, being all of them appointed in an Extraordinary General Meeting held the 3rd of November. They new board will be in charge until the close of the Annual General Meeting to be held in May, where the Nomination Committee (that also was appointed after the Extraordinary General Meeting) will prepare and submit their new proposals.

Paulo Mendonça (CEO) is currently a Managing Director at Starboard, responsible for private equity investments and advisory in special situations transactions. Paulo has previously been the Head of Investment Banking at Brazil Plural’s Investment Banking division, responsible for M&A, equity and capital market transactions and worked at the Asset Management in Brazil Plural. Furthermore, he has been Chairman and Board Member as well as Director of Business Development in 3R Petroleum, ~USD 1.75B public E&P

Bernardo Guterres (CFO) is a Partner and Executive Director at Starboard. He is responsible for sourcing, evaluating, and leading the execution of investment transactions. Bernardo has more than 15 years of experience in the investment banking, asset management, project finance and private equity industry, including being a board member at Petroreconcavo, a Brazilian onshore listed company with a total market capitalization of USD 1.7 billion, participating actively in the acquisition of the first onshore divested oil field made by Petrobras

Alan Johnson (COO) is a senior oil and gas executive with more than 25 years of experience working internationally in Europe, Africa, North and South America and Australasia. His experience includes varied technical, managerial and executive roles in drilling, production, reservoir, reserves, corporate planning and asset management. Alan started his E&P career with Shell International in the Dutch North Sea. He then held positions of increasing responsibility with Shell Canada, APF Energy, Rockyview Energy, Delphi Energy, BG Australia and Caracal Energy. His last role was Vice President, Asset Management at Gran Tierra Energy managing their portfolio of assets in Colombia, Brazil and Peru.

None of the new management team members has shares, options or warrants at the moment. Alan Johnson, member of the board, owns 683,450 options.

Combination with DBO 2.0

Maha has signed a definitive agreement regarding a business combination with DBO 2.0 for a consideration of 36,775,410 new shares in Maha (~USD 34M at current prices). The Transaction would increase Maha’s net 2P reserves with approximately 18.5 mmboe and is estimated to add around 2,100 boepd net production in 2023. The assets in DBO comes with all the necessary infrastructure, including the Papa Terra FPSO and Peroá production platform, lowering the operating costs, as no leases must be paid, and of which DBO indirectly owns its pro-rata share, as a shareholder of 3R Offshore. The Transaction is subject to customary conditions, including an Extraordinary General Meeting for approving the transaction. The merger is expected to close in the first half of 2023.

DBO 2.0 is the second vehicle of a group of Nordic investors that had huge success with DBO, a private upstream oil and gas company focusing on mature offshore fields in Brazil. DBO was established in 2017 to apply the most advanced North Sea approaches to identify additional reserves, develop mature oil and gas fields and increase oil and gas recovery.

DBO group has built a strong position in the Brazilian E&P market, investing about USD 40 million in equity in the sector through the years. Their last success was investing in onshore fields with 3R Petroleum (alongside Starboard).

Later on, DBO 2.0 was created to replicate the success of their first vehicle and building on the partnership with 3R Petroleum, DBO Energy became a 15% shareholder in 3R Petroleum Offshore S.A. (“3R Offshore”), whom has two assets offshore Brazil – the Peroá cluster (100% operated working interest) and the Papa Terra cluster (62.5% operated working interest). Therefore, DBO owns 15% WI in Peroá cluster and 9.375% WI in Papa-Terra.

Maha Energy combination with BDO
  • The Peroá gas cluster is located in the Espírito Santo basin, offshore Brazil in shallow waters. Approximately 72.4% gas has been recovered and remaining 2P reserves are estimated to 19 mmboe gross per year-end 2022. The cluster has a 55km gas pipeline connection to the Cacimbas gas processing plant (operated by Petrobras) and has an unmanned platform owned by 3R Offshore with OPEX of approximately USD 5/boe. The Peroá cluster includes the Peroá and Cangoá producing fields and the Malombe discovery. Malombe would be tied back to the Peroá platform if developed in the future and could add an estimated production of 16 kboepd (gross) at peak. During 2022Q4, gross production at the Peroá cluster averaged close to 3.5 kboe/d as stated by 3R Petroleum and Net Gas Price in the period was 8.8 USD/MMBTU. 3R Offshore agreed the acquisition of the Peroá cluster from Petrobras in February 2021 and the acquisition closed in 2022Q3. The concession ends in 2025 but it can be extendable by 27 years.
  • Papa Terra is a heavy oil field located in deep waters in the Campos Basin, a prolific area roughly 100km off the coast of the State of Rio de Janeiro, Brazil, that holds some of the most known fields in offshore Brazil, to be known Peregrino (operated by Equinor), Maromba (operated by BW Energy) or Tubarao Martelo (operated by PetroRio). Gross 2P reserves are estimated to 166 mmboe per year-end 2022. Approximately 2.4% of the oil has been recovered as of October, which compares with an average of 15.6% for the Campos Basin, suggesting further upside potential beyond the 2P reserves (when production started 380 million barrels of oil were expected to be recovered). During October 2022, gross production was 16.0 kboepd and production is expected to increase in the coming years due to increased drilling activity. The concession lasts until 2032 but, as before, can be extended by 27 years.
  • Papa Terra was discovered in 2003 and production started in November 2013, after an estimated capex of ~USD 5B. According to ANP data, the estimated original volume of oil and gas in place is approximately 2.0 billion barrels of oil equivalent, with a density between 12° and 16° API and low level of contaminants. The field is developed with an FPSO (P-63) and a Tension Leg Wellhead Platform (P-61), both owned pro rata by the owners of the oil field, with a combined processing capacity of 140,000 barrels of oil per day, a storage capacity of 1.4 million barrels and slots to connect up to 21 producing wells and 11 injecting wells. The divestment is a consequence of how disappointing production has been since its beginning, as facilities designed to process 140 kboed and it hit its low in April 2018, around 3 kboed.
Papa-Terra field production
Net production to BDO

Currently, 6 production wells and 3 injection wells are active, and all systems have idle capacity to implement revitalization and redevelopment activities, allowing EOR expertise from DBO to push further production expectations. 3R Offshore agreed the acquisition of Petrobras’ working interests (62,5%) in the Papa Terra Cluster in 2021Q3 and was closed last December.

Based on public reserve reports from 3R Petroleum, the 1P and 2P reserves have an estimated value (NPV10) net to DBO of USD 108 million and USD 166 million, respectively, based on an oil price of USD 71/bbl in 2023 and USD 66/bbl thereafter and a gas price in the range of USD 5.0-5.5/mcf. Subtracting USD 21 million relating to DBO’s share of 3R Offshore’s contingent payments, DBO 2.0 offers a net asset value of USD 86 million for 1P reserves and USD 145 million for 2P reserves. Net Cash Flow could be around USD 16 million in 2023 considering $71 oil price with cumulative net cash flow from 2023 to 2030 expected to be around USD 162 million.

The exchange of shares ratio in the combination implies for DBO a P/NAV (price to net asset value) of ~0.39 based on 1P reserves values, 0.23 based on 2P reserves values, and an EV/2P multiple (enterprise value to 2P reserves) of approximately USD 3/boe, while peers in Brazil, (to be known, PetroRio, PetroReconcavo and 3R petroleum) trade around USD 10/boe.

With the merger with DBO, Maha will include a group of leading investors that will help them achieve their ambitious M&A strategy. DBO 2.0’s major shareholders are Svein Harald Øygard (29.6%), Kjetil Solbrække (20.7%), Halvard Idland (20.7%), AGR Petroleum (9.1%) and Tore Myrholt (8.4%). And besides their role as investors, they have held management positions in several companies of reference, as Norwegian, TGS-NOPEC, McKinsey, Seadrill, Panoro, Norsk Hydro or 3R Petroleum.

In our view, the new management is acquiring stakes in assets they know well (due to their past as directors of 3R petroleum) while bringing in a long term and known partner, DBO. Furthermore, it is expected that Svein Harald Øygard  and Kjetil Solbrække  will be appointed directors in the EGM that will take place 29th of March. The transaction is accretive for investors, as they are acquiring them below their real value in every metric.

As stated by the company, Peroá is a low-risk asset while Papa Terra presents an interesting upside due to massive amounts of oil in place with just 2% been recovered, leaving the possibility to significantly increase production. Combined 1P production can reach >3,500 boepd by 2027, as it is shown below. And as they own the infrastructure, they can advance capex and increase production beyond current capex estimates if market environment and prospects are good enough.

Maha Energy Peroá production profile

Maha Energy – Capital Structure

Maha had at the end of Q3 ~120M shares fully diluted. The few warrants that exist have an exercise price above the current share price. 

Maha Energy Shares Outstanding

The Company has a long-term incentive program (LTIP) to issue incentive warrants as part of the remuneration package for management and employees. Issued but not allocated warrants are held by the Company. As of end of 4Q22, the LTIP was as follows.

Maha Energy Warrants

Last 14th of December, the company completed a directed new shares issue of 23.9M shares, raising proceeds of ~SEK203M. The subscription price was SEK8.5 per share and was determined through an accelerated bookbuilding procedure carried out by Pareto Securities. It was oversubscribed thanks to the participation of a number of Nordic and international institutional investors. An investment fund managed by Starboard Asset, Turmalina Fundo de Investimento em Participações Multiestratégia Investimento no Exterior (“Turmalina”), was allotted 7,200,000 shares, making it the largest shareholder. As a consequence, the number of shares in the company increased to 143,615,696 shares. Major shareholders of the company are as follow:

Maha Energy shareholders

Share price has not reacted positively to the recent raises, the share price has dropped by more than a 33% in the last 6 months, despite the company stating:

The net proceeds in the Directed New Share Issue are intended mainly for: i) necessary capital expenditures in exploration and production operation in Oman; ii) the Company’s general corporate purposes, including potential new business opportunities and M&As; iii) to strengthen the Company’s balance sheet and working capital, all aligned with the asset optimization strategy being implemented by the Company’s new management team.

The true objective was to bring long-term investors to the company, strengthening the capital structure with qualified investors and ensuring Starboard has a controlling position in the company.

As we can see, despite the new Management not having any shares, as they are also directors of Starboard Asset, which happens to manage the fund Turmalina, they have indirect control of Maha Energy. Since September, they have managed to own almost 20% of the company, strengthening the capital structure as it was one of their main focuses in the short term. Jonas Lindval, the former CEO and cofounder of Maha Energy in 2013 as a private company, is still a relevant shareholder.

Of course, if the above explained business combination with DBO 2.0 takes place, the number of shares will increase in an additional 36,775,410 shares. We would end up with a fully diluted outstanding number of shares of 180,391,106, being DBO the major shareholder with around 20.39%. Between Starboard and DBO, they would have ~36% of the equity, having full control of the company. Both management and directors would be, in our opinion, utterly aligned with shareholders to maximize the creation of value. We could see management team and board repeating their previous success with 3R Petroleum.

Maha Energy Valuation

Considering the issuance of ~33.75M shares related to DBO transaction, the NAV of the company looks as follow.

Maha Energy valuation

The market capitalization at 1st of March of 2023 is SEK 1400M, USD ~135M, which leads to a negative Enterprise Value once the second payment from PetroReconcavo and the payment from Mafraq takes places. The company is trading cheap on a P/NAV basis (like the majority of E&Ps), but not much if we look at Cash Flow metrics, as Peroá and Papa Terra are expected to yield around USD 16M of free cash flow in 2023. However, we expect the new management to deploy cash in M&A at similar rates than with the DBO acquisition. Therefore, it is a matter of time before the company’s current situation of “war chest” shifts to a more Cash Flow oriented position. In our view, it does not make much sense to provide a DCF model of the company and Target Price since we think the snapshot we could provide will be very different that the one we could have just a month from now. Additionally, EV metrics make little sense as the virtually big cash position currently held is expected to be used this year. Management has recently stated that they expect to close 3 or 4 transactions in the next couple of quarters. They are actively looking at cashflow-oriented acquisitions in the secondary market, no matter they are operating or non-operating stakes in mature fields.


The statutory income tax rate in Brazil is 34%; however, following application of tax incentives available to the Company in Brazil, the resulting tax rate was 15.25% for 2021 and 2020. The Brazil tax incentives begin to expire in 2029.

Royalties in Brazil are also noticeably low if compared to other jurisdictions. It is, in our opinion, a key part of the strategy to focus on Brazilian assets and one of the reasons management could be looking to sell their US assets (5-10% vs 12.5-18.8%). Also remarkable is the fact that in some Brazilian states, there are incentives programs such as SUDENE that can reduce up to 75% the income tax rate, increasing the Cash Flow assets yield (is the case of Espirito Santo state, where Peroá gas cluster is located). In this sense, Maha Energy has used SUDENE to reduce the corporate income tax from 25% to 6.25%, bringing the combined net tax rate to 15.25%. Also relevant is that loss carry forwards in Brazil are limited to a maximum of 30% of taxable income in the year in which they are applied, as Maha has tax shield, and so do the majority of target assets. All of the above make Brazil a competitive geography to have exposure whilst not being exposed to the risks Petrobras presents.

Main risks

  • Volatility in oil and gas prices can be a significant risk for any E&P company, as it affects the revenue and profitability of the company. If oil and gas prices fall, while we would not see losses like for some Shale Players, the company may have difficulty to cover it CAPEX commitments, stressing its balance sheet. Additionally, fluctuations in oil and gas prices can impact the company’s ability to make transactions, hindering its current strategy. However, due to the actual situation and supply forecasts, we expect relatively high prices in the mid-term.
  • One of the risks some may state is the possibility of the privatization of the company by the management at a low valuation (as it is utterly undervalued right now). However, as seen in the case of 3R Petroleum, we believe that both management and DBO want to be for the long term, or, at least, until they obtain a noteworthy return over their capital. As they have effective control of the company due to their shareholding stakes, we highly doubt an outside player could “steal” the company.
  • Political risks in Brazil due to Lula’s policies, which may increase royalties or taxes to finance social programs or renewable projects. This may be the biggest risk, as Lula has been very vocal about the future of the sector since his election. However, as Svein Harald Øygard (President of DBO) stated in an investor call on February 6, the last time Lula won the election nothing happened but Petrobras’ indebtedness, which led to a massive divestment of assets that players like 3R could take advantage of. Last 28th of February Brazilian government decided to tax crude oil exports at 9.2 percent for the next four months. Currently, no production of Maha is affected but it could affect Papa Terra in the future or development of new acquisitions. The sector does not expect further changes in taxation, only the creation of a “cushion” to stabilize diesel prices. However, such a burden would fall mainly on Petrobras, not on private players.

Conclusions about Maha Energy

The recent changes to Maha have led to a shift in its financial standing. Since the acquisition of 10% by Starboard in September 2022, the company has undergone a significant transformation, which involves increasing communication with the market, in line with what 3R Petroleum currently does. This is a relevant change that will positively impact the company’s share price, as they are ignored by the market (almost no mention in Twitter or Stocktwits).

In addition, the divestment of its Brazilian subsidiary for a sum of USD 150.9 million and potential earn-outs and the proceeds from the recent capital raise has improved the company’s cash position close to its current market capitalization. Cash, that we believe, will be used to close similar acquisitions to DBO, strengthening their position in Brazil, buying mature fields at cheap valuations as current management previously did in 3R Petroleum. The new management brings expertise and a vast network of contacts in Brazil that, we believe, will accelerate the growth of the company. Further catalysts could be the dual listing of the company in Brazil, since management has seen appetite and interest in Maha among Brazilian investors and valuation of peers there (3R, PetroReconcavo and PetroRio) are higher than the one Maha currently has.

In just a couple of months, the new management has sold 2 assets above the price the market was valuing Maha as a whole and has bought 2 more valuable and strategic assets (as they are partners of well-established operator 3R) at ridiculous prices (P/NAV 0.23x). With just these two movements, Paulo and Bernardo have created an impressive value for shareholders that we believe is not yet reflected in the stock price. Furthermore, they now have the cash to keep delivering and focusing on what they know (as stated by them in the 2022Q3 conference call), “to enhance the production in an organic side and chase good opportunities in the inorganic view”.

We know they are in discussions regarding the sale of the US assets, adding more optionality in the near future as they are non-core. Any cash obtained from their sale will be accretive, as it could be deployed into new deals in Brazil, which is the main focus of the team.

Our objective here in Maha is to make the company even bigger than it is right now. And basically, we are very open and keen to analyze global opportunities. […] Having said that, we obviously have the best experience in Latin America and Brazil. So I think this will be our [focus] to grow. […] We will be chasing opportunities where we know they are.

Despite a geographical concentration in Brazil, they want to diversify their production with more assets and more gas in the production mix:

I think in 5 years from now, we really see Maha being a company with further production with a diversification on its assets. Today, Maha’s production is concentrated in a few assets. And the idea here is to diversify, not concentrate the risk. Also having cash flow streams from gas assets, [which] can provide more reliability, more stable revenues and [in consequence] dividends, […] as some of the contracts are inflation adjusted.

Considering all, we see Maha as a compelling investment as current cash levels protect the downside and act like a floor to the share price while having a great upside, for example, if the production acquired from DBO is valued properly. Maha is a remarkable player to gain exposure to one of the most attractive regions in the oil and gas sector, Brazil, while having free optionality on the Omani block. Us, investors have the possibility to partner with a top management with a proven, successful strategy that was first tested with 3R Petroleum. We see Maha as a public company with the benefits of a private company. In conclusion, we are given the opportunity to invest in the early stages of an O&G success at depressed valuations.

Main Author: Antonio Lujano Luna

Disclaimer: The author has direct long exposure to Maha Energy

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