Northland Capital Partners View on the City: Magnolia Petroleum

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August 22 2014, 8:30am

OIL & GAS: MAGNOLIA PETROLEUM (LON:MAGP)

CPR UPDATE: MODERATE DOWNGRADE TO 2P VALUES RESERVES AT $35M (c. £21M)

CPR UPDATE AS AT 1st JULY 2014

 

  • Net proved, developed, producing reserves (bankable) of 252Mboe; 162Mbbl of oil and condensates and 0.5bcf of gas with an NPV10 value of $9.1m. Total proved reserves were 1.07MMboe; 719Mbbl of oil and condensates and 2.1Bcf of gas, with an NPV10 of $31.8m.
  • 2P reserves totalled 1.1mmboe; 749Mbbl of oil and condensate and 2.3bcf of gas with NPV10 of $34.7m (c. £21m). This represents a downgrade of $12.3m (c. £7.5m) from last year’s update (August 1st 2014). 
  • As expected, the biggest downgrade was registered in the P3 reserves category. Total P1, P2 and P3 amounted to 1.3mmboe (877k bbls and 2.55bcf). However, P3 reserves were given little weighting in our valuation and accorded no value by the market.
  • The report reflects reclassification of the Mississippi Lime formation following an industry wide realignment of the understanding of the geology. The formation is now considered to contain highly productive wedges and areas of lower potential.
  • Magnolia expects to convert multiple highly productive wedges to reserves with development. 
  • In addition, the report ascribes little value for the potential of the highly productive Hunton formation favoured by many operators as the most prospective and present in much of Magnolia’s Oklahoman assets.

 

PRODUCTION/CORPORATE

 

  • Average production as at 1st July increased to 257 boepd from 150 boepd at the start of April. 
  • Production remains volatile but on a rising trend. July benefited from a number of IPR’s but the increase demonstrates progress.
  • Magnolia has appointed Derec Norman as VP of Accounting. A former Acquisition and Divestiture supervisor at Chesapeake Energy Corporation (NYSE: CHK) managing deals worth over $10m, Derec has spent the last eight years working in the Oklahoman oil and gas industry.

 

SUMMARY: The update confirms our suspicions that the share price reaction to the reserves downgrade was significantly overdone. NPV10 of $34.7m (£21m), (predominantly P1) contrasts against an undemanding market valuation of c. £9.6m. Upside is highly likely from development activities given that recognition for the P3 has largely disappeared with this update and tangible results elsewhere in the Hunton formation suggest an upgrade is likely. However, P2 value, the main measure for UK markets, has shed only £7m and in Magnolia’s case this is predominantly comprised of lower risk P1 value. Overall, we expect reserves to tick up as wells are added in the Lime and Hunton developments. In addition, whilst we recognise that it may be skewed to some high impact IPRs, resurgence in production to 247boepd as at 1st July, demonstrates progress, though well rates remain volatile. Magnolia is operating in cash flow positive territory and is strongly underpinned by production revenues. The company will grow these revenues from capital recycling and use of its low cost (c. 4%) production backed debt facilities. As outlined in its recent update, we see scope for Magnolia to act as a consolidator to more rapidly achieve scale. Upcoming interim results should provide further detail on both trading and strategy.

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