MKGP Due Diligence #2 –
Note: If you have not already read DD #1 then I strongly suggest you do so first.
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The Road of Two Journeys:
The First Journey
To help understand the value going forward for the shareholders in MKGP, I want to take you on two separate journeys. Typically when we invest in a penny stock with a core business in Oil & Gas we are focused on a few particular fundaments of a company. A few of the items we focus on includes how many shares are issued and outstanding, what is the float, what is the revenue, what are the liabilities or debt, how much is the net profit or in most cases the net loss, and finally as we grow comfortable with those items then we want to know what is the potential going forward.
The share price of a stock generally does not reflect what it is worth today but instead the share price most often reflects what investors believe a stock will be valued at down the road. If a stock is profitable with good fundamentals and value going forward then it most often trades way ahead of current value. If a company is not profitable, is bleeding money, is debt heavy, and the future looks grim then it often trades well below current value.
A typical road selected by many of us Oil and Gas penny stock investors is to select a company that meets our requirements from the list I gave earlier. At that time there are two things that stand out to us, the first one is the potential of the stock going forward based off huge reserves, most often unproven reserves, that only need to be developed. The second thing that stands out to us after review of the financials is the cash position or lack of cash to develop these reserves.
For some reason we tend to ignore the second item and try our best not to think about it as we somehow believe someone is just going to give them free money to develop the lease. Instead we tend to focus our attention on the value of the reserves and how much revenue the well will generate if they are successful in drilling. We think of this as if they are going to pull all the oil out of the ground at once. In the back of our mind we think for a moment, how are they going to pay for this? Well we really don’t want to think about that so we quickly change the subject back to how much revenue will this new well generate. Then for a moment we wonder how long will it take for the company to actually show a profit from the well after carrying out the drilling costs associated with the new well and the cost of production. Well that doesn’t sound too good either so we go right back to how much revenue the new well will generate and we pretend it is all net profit.
Time passes as they set a date to drill the well, lots of volume but the stock begins to struggle under heavy selling pressure, you wonder to yourself who in their right mind is selling shares just before they drill this new well. They start drilling and yet their still continues to be some idiot out there selling an endless supply of shares. Then all of a sudden some investors thinks he has it all figured out, the stock is being naked shorted!!! Well, we have all heard that one before. Then a savvier investor picks up the phone and calls the Transfer Agent only to find that the O/S has already increased by 33% from where it was just a short while back. Now this savvier investor finally accepts the fact the company had no money to drill the well and thus came the dilution and convertible debt. Next this perfect stock pick announces another well they plan to drill. The savvier investor thinks to himself that this dilution will never end and exits the stock while the others in denial continue to complain how the stock has been naked shorted and in most cases the end result is a reverse split in which everyone unfortunately loses except the company.
MKGP - The Second Journey:
Maverick is a different investment than the typical Oil & Gas penny stock. The difference really starts with the structure of the management team. A typical Oil & Gas penny stock has a management team of either oil guys or it is a company that was in say the software business and as they realized the hot sector was Oil & Gas then they changed their business model and entered the Oil & Gas sector though not one of them knew the first thing about Oil & Gas.
Maverick on the other hand already has a proven track record of profitability as shown below –
For the period ending September 30th 2006
1. Maverick saw an increase in Revenue of 25.6% from the previous Quarter.
2. Maverick saw an increase in Net Profit of 36.2% from the previous Quarter.
3. Maverick reduced Total Liabilities by 16.1% from the previous Quarter.
4. Maverick increased Stockholder Equity by 60.2% from the previous Quarter.
Financial Data from Quarter Ending September 30th 2006
Total Revenue............................$1,173,936
Net Income................................$200,752
Total Liabilities........................$1,691,760
Stockholder Equity.....................$582,192
Financial Data from Quarter Ending June 30th 2006
Total Revenue............................$934,589
Net Income................................$147,387
Total Liabilities........................$2,016,276
Stockholder Equity.....................$363,340
http://www.pinksheets.com/quote/finance.jsp?symbol=MKGP
The proven track record of profitability is a result from an edge Maverick has on other Oil & Gas penny stocks in that the management team is diversified in a way that they have all the right talents and experience to grow a profitable company. The core management team is made up of CEO James McCabe who since 1979 has held a senior management position in various Oil & Gas Companies along with President Richard Bednar and CFO Brice Bogle who are both Certified Accountants with an extremely impressive biography. http://www.maverickenergygroup.com/AboutUs.htm The fact Maverick has two CPA’s managing the money and making business decisions has obviously plaid an important part in Mavericks proven track record of profitability.
With no disrespect to James McCabe, I am going to focus more on Mr. Bednar and Mr. Bogle, our two CPA’s. (Remember that CPA = Conservative) Mr. McCabe is the oil guy. Mr. McCabe is likely the one who searches out opportunities for Maverick to participate in. Before Maverick goes head first into any opportunity, it only makes sense that that the President and CFO must give it the stamp of approval. When you consider that our President and CFO are both CPA’s with impressive backgrounds, they are not going to give any opportunity the stamp of approval unless it makes financial sense on the conservative side.
This now leads us to what Maverick refers to as it’s Crown Jewel, their ownership of Z2 and participation in the Big Foot Field. This business transaction is what separates Maverick from many of the other Oil & Gas penny stocks we know of. What separates Maverick from the rest of the companies is that Maverick profits from the success achieved in the Big Foot Field but in this case there is no cost associated in the revenue Maverick generates from this partnership.
Quick Refresher: Maverick currently owns 11.517% interest in a private Oil and Gas company called Z2, the owner of the lease referred to as the Big Foot Field. Along with the 11.517% interest in Z2, Maverick also holds an Option to increase this interest to 24.7% by July 17th, 2007 for a one time cost of $1,000,000. In addition to Maverick holding an interest in Z2 and three separate drilling programs, which I am not touching on in this summary, what is also important to note is that Maverick is the paid Operator of the Big Foot Field.
What obviously made this ownership of Z2 make sense to our two CPA’s is that after the initial cost of only $1,000,000 to bring Mavericks ownership up to 24.7%, Maverick should be generating a cost free annual revenue stream or net profit from Z2 alone at a rate in excess of $1,500,000 by the end of 2007 based off current oil prices while continuing to increase with each of the 200 proven undeveloped wells drilled each month.
To show how this works, I will extrapolate two items from an e-mail alert sent out on Jan 23rd to registered members by Mavericks paid IR representative, MicroCap-Reports. The reason I will use information from MicroCap Reports is because they are the companies IR and they are a lot closer to the company than any of us are. Because of this point, I expect their information to be closer to the truth than my own speculation. The two items I will use from MicroCaps-Reports is their statement that Maverick will average 2 new proven undeveloped wells at Big Foot per month and that Z2’s cost on revenue generated from these new wells will be around 50%. Keep in mind that MicroCap-Reports stated they were leaning on the conservative side and if you look at where Maverick is in their drilling program, you start to see they may even be ahead of the rate MicroCap-Reports suggested. In the latest PR dated February 22nd, Maverick stated they would begin drilling the fifth well on February 23rd.
Let’s now take a look at how this works and what it means to the growth and value to Maverick and why Maverick is different from other Oil & Gas penny stocks.
(2 new proven wells per month) x (12 months) = 24 new wells per year
The recent PR dated February 20th announced the flow rate of the first two wells. The average flow rate from these two wells combined was 23.5 bbl per day per well. Keep in mind that as they continue to drill additional wells and prove out flow rate on those wells, this average could be adjusted up or down.
(24 wells per year) x (23.5 bbl per day) x (365 days in a year) = 205,860 bbl per year
(205,860 bbl per year) x ($60 per bbl) = $12,351,600 Z2 revenue per year
($12,351,600 Z2 Revenue per year) x (50% Z2 revenue cost) = $6,175,800 Z2 Annual Profit
I will now assume Maverick will exercise their option to increase their ownership in Z2 to 24.7%. It really doesn’t matter if Maverick uses cash from their profitable operations, a one time dilution of 12.5 million shares at today’s current share price of 8 cents, or a combination of dilution and cash generated from their profitable operation, I believe it is safe to assume they will exercise the option because it only makes sense from an accounting perspective.
($6,175,800 Z2 Annual Profit) x (24.7%) = $1,525,423 MKGP Annual Revenue
The most important thing that I can’t emphasize enough to everyone is the very thing that separates Maverick from the others and that is - not only is this revenue generated by Maverick, there will be no cost to subtract from this in their financials, the annual net profit will increase by the amount of revenue generated from Mavericks ownership in Z2.
Most Oil & Gas penny stocks do not own more than 25% interest in any drilling project, many own significantly less. What interest they do own in a drilling project still has to have cost subtracted from it thus leaving them with very little to be recognized as profit. The interest Maverick holds in Z2 is essentially a net profit interest and not a revenue interest. Are you starting to see where I am going with this and why I believe Maverick to be so much better a journey to travel than the typical Oil & Gas penny stock? There is just so little downside risk to shareholders in this stock, any dilution that may occur to exercise the option will be so little and well worth it. The more wells they drill, the higher the share price will go. The higher the share price goes, the less number of shares they will need to sell if they can’t generate enough cash from their already profitable operation.
Maverick’s most recent financial release reflected a net profit of $200,752 which was a 36.2% increase over the previous quarter. For conservative speculation, let’s just say their net profit continues to be only $200,000 per quarter, this would be a net profit rate of $800,000 per year. Now if you look down the road to the point where they have completed 24 new wells and they are generating $1,525,423 annually from Z2 then Mavericks financials will reflect an annual net profit rate of -
($800,000) + (1,525,423) = $2,325,423 MKGP Annual Rate of Net Profit
Now lets remember that we have only looked at 24 of the 200 proven undeveloped wells, Maverick would still have 180 more wells to drill so as they continue drilling during the following years, if oil prices hold $60 or better then MKGP would realize a net profit injection of more than $1,500,000 each year to follow.
The other significance to realize from this is the cash position allows Maverick to grow with no dilution. Maverick is not going to just put this money into a savings account and let it grow, Maverick, like any company, is going to reinvest this in other opportunities but instead of paying their way with dilution like the typical Oil & Gas penny stocks we discussed earlier, Maverick will use cash from operation.
Not everyone can see the value I see with my investment in Maverick as a long term holder. I firmly believe this stock will turn current penny investments into dollars in the very near future. I believe the upward trend we see in the chart is going to continue up for a very long time at little to no downside risk from wherever the share price is over the course of this next year.
While on the fence between any Oil & Gas penny stock, an important thing you need to ask yourself is even if they do have huge oil reserve potential, where will they get the cash to develop these reserves? Will it come by way of significant dilution, convertible debt, or cash generated from operations?
I have put this DD together to help everyone understand the value of this stock going forward. I urge anyone looking at this stock as an investment not to take my word for it but to conduct their own thorough due diligence. I urge all of you to confirm the information I have provided, read Mavericks financials, read their PR’s, and call Maverick yourself and speak to a member of management. These are all steps I have taken to come to the confidence in my decision to invest in this stock.
The due diligence I have provided is factual to the best of my knowledge from the public information I have available to me with exception to speculation where I have stated as such. Always do your own DD and make your own investment decisions.
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