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Melbana Energy (ASX: MAY) up 40% on oil find - yes, but will Cuba pay for it?

There’s a problem with business in a communist dictatorship - can the leopard change his shorts? 

Update : 28 Aug 2023, 02:18 PM

Melbana Energy (ASX: MAY) (OTCPK: MEOAF) shares are up 40%. MAY shares rose on the back of results from their Cuban oil exploration. These results are good and logically deserve to push the share price up. The problem is as it always is in doing business in a dictatorship - especially a communist one. Which is that it is less than certain that the contractual terms will be adhered to. Having actual experience of this, North Korea very rarely does, while the Soviet Union adhered to its foreign contracts religiously. Cuba has been known to wander a bit. This produces something of a valuation problem.

The results announcement: “Peak flow to surface 1,903 barrels of oil per day from Unit 1B (stabilised average flow rate 1,235 barrels of oil per day). Significantly lighter (19° API) and lower viscosity (30 cP) oil compared to other units in the Amistad Formation. Over 1,000 barrels of oil produced and trucked away during testing.” Well, OK, that’s great. There’s further information on the basic idea and area here.

But here’s the thing. Resource extraction, by definition, depends upon the goodwill of the jurisdiction in which the resources are being extracted. If the government decides to vary the terms, well, there are always those international courts, ISDS procedures and so on. But they’re expensive, take years and there’s no certainty to them. So the value of any such resource - oil, gas, other minerals, a mine and so on - does depend upon the government of the place living up to the contract it has signed. There are parts of the world where this is less than a certainty. 

Melbana Energy share price from Google Finance

So we need to weight the value of oil in Cuba by how confident we are that Cuba will pay for all the oil. We have experience of this too. For Sherrit International has been producing in the next block over for decades now. And they have had problems at times: “However, one analyst said the pressure on the stock was more likely tied to worries about Sherritt's Cuban oil assets, after Havana revoked a 16-year-old production sharing agreement on Friday involving Sherritt and small Canadian oil producer Pebercan PBC.TO.” We also recall discussions in Sherrit’s accounts about how difficult it was to get actual money for the oil they were producing. Leading to complicated offset agreements against their nickel production on the island and so on. Matters have been, in recent years, satisfactorarliy conclude but there’s a certain variable meaning to the word “satisfactory” there. 

We’re not trying to insist that Melbana is going to get stiffed having now found oil. Rather, that the value of that oil in terms of the impact on the corporate valuation is going to be less than if the oil had been found in a more legally stable jurisdiction.

We’d also suggest that American citizens take a very good look at the Helms Burton Act before thinking about any position here.

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