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UPDATE - Magnolia Petroleum to participate in 16 new US drilling projects

Last updated: 15:24 02 Jun 2015 BST, First published: 07:39 02 Jun 2015 BST

Magnolia_Petroleum_well,_birdseye
Magnolia is taking between 0.21% and 10.94% in the new wells

--ADDS BROKER COMMENT--

Magnolia Petroleum (LON:MAGP) told investors it will be participating in 16 new wells in proven US oil and gas projects.

It will have a minority interest, from 0.21% up to 10.94%, in these drill programmes which target formations such as the Bakken, in North Dakota, and the Woodford and Mississippi Lime plays, in Oklahoma.

Chief operating officer Rita Whittington said the wells will add to Magnolia’s daily production volumes and will continue the growth of reserves, which had increased to almost 1mln barrels of oil and 2.9bln cubic feet of gas by January 2015 (from 46,000 and 198mln cubic feet in October 2011).

The majority of these new projects are currently ‘awaiting spud’ though two wells are currently at the completion stage.

One well, the 10.94% owned Bowen 1-30 well, is currently in the process of being drilled. Magnolia’s share of the drill costs are US$64,083. The well is targeting a number of formations.

"We are pleased to see a number of new well proposals on our U.S. onshore leases from established operators including Chesapeake Energy and Whiting Petroleum,” Whittington said.

“The new wells highlight the value and diversity of our acreage and the multiple payzones that are being targeted.

“A number are low cost vertical wells targeting conventional plays. Others are horizontals targeting unconventional hydrocarbons including increased density wells on leases where production has been established, such as the Skunk Creeks wells.”

Whittington highlights that the Skunk Creek wells – Magnolia is participating in four horizontal wells there - demonstrate how far costs have fallen in the past eighteen months.

Previously, last January, Magnolia invested in four Skunk Creek wells and at that time each well had a total cost of around US$9mln, but, now these latest wells are budgeted at US$6.76mln each.

“Such a dramatic fall in costs has clear implications for payback, and goes a long way to mitigating the impact of the lower oil price environment,” she added.

Magnolia is investing around US$60,000 to each of those four Skunk Creek projects, for a 0.9% working interest.

The most expensive well (net to Magnolia) in the programme is Whistler 1-26, where the firm’s 5.4% working interest is expected to amount to US$165,288. This well is targeting the Hunton formation and it is currently waiting to be spudded.

SW Romulus 1 is expected to be the cheapest, to Magnolia, as it anticipates paying just US$1,563 for a 0.21% participation.

Magnolia, following a successful fund raise, is also planning to drill two majority owned (94%) wells though these are described as ‘low cost’ vertical wells and, according to Whittington, the company remains well capitalised to participate in additional non-operated drilling proposals in the coming months.

SP Angel analyst Zac Phillips highlights that Magnolia is benefitting from reduced costs and better leverage.

“We believe that there is never a bad time to add cash positive production, and none more so when you are in a low oil price environment,” the analyst said in a note.

“We believe that investors should be happy with this continued focus on net cash positive drilling, and while it isn’t a ‘slamdunk’ it is all pointing towards a stronger company.”

Charlie Long, analyst at Sanlam, in a note said:  “With circa $1.5m from the recent fund raise, plus the free cashflow generated from existing production, Magnolia is well positioned to take advantage of new well proposals as described this morning.

“It is good news that new well proposals are coming through the door (the lower oil price has negatively impacted rig count) and demonstrates that Magnolia has interests in the right, active, areas.”

Long highlights the observation that drilling costs have come down significantly and said that was particularly good news for well capitalised operators like Magnolia.

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