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Madalena Energy Inc: THE INVESTMENT CASE

Madalena Energy well positioned as investment flows in Argentina’s shale

International investment continues to flow into Argentina's shale industry, and that bodes well for Toronto listed Madalena
oil workers
INVESTMENT OVERVIEW: MVN The Big Picture
Upcoming drilling will bring catalysts

Foreign direct investment continues to flow into Argentina’s emerging shale industry, with some US$5bn pledged this year alone.

Major oil companies like Total, Shell, and Chevron are among those investing large sums to unlock the potentially vast resources across the Vaca Muerta - tens of billions of barrels of oil have been estimated to exist there.

The investment and positive sentiment is supported by Argentina’s new president Mauricio Macri, who is seen as both pro-business and pro-energy. Significantly, state-supported prices mean Argentina is one of the most viable areas to develop new projects.

Toronto quoted Madalena Energy Inc (LON:MVN) is among the beneficiaries.

In 2016, it agreed a deal to farm-out a 55% stake in the Coiron Amargo Sur Este block (CASE) project for US$10mln of cash plus a ‘carry’ on the costs of work planned for 2017.

The upcoming programme will be a source of catalysts and potential excitement, though there’s more to Madalena.

A pure play in Argentina

Madalena describes itself as a ‘pure play’ giving investors exposure to the Vaca Muerta & Lower Agrio shale plays, as well as a scalable conventional petroleum operation.

The company is selling more than 2,000 barrels of oil equivalent per day (boepd), comprising 1,800 boepd of crude oil and liquids, and around 2.3mln cubic feet of gas natural gas per day.

For the first nine months of 2016 Madalena realised an average oil price of US$62.10 per barrel, and in the fourth quarter it is anticipated that the price will average US$54.

Upside comes from exploration and appraisal, and deal making (potentially).

CASE will be the focal point, initially, and investors can look to the neighbourhood for insight into what may be possible.  

The project is in close proximity to the Loma Campana project, where a YPF and Chevron partnership has flowed around 1,000 barrels oil equivalent per day.

PAE will fund a work programme of either two horizontal multi-stage frack completions in the Vaca Muerta shale, or one horizontal VM well and one deep Grupo Cuyo sandstone targeting natural gas.

The net benefit to Madalena is US$5.6mln.

Deals could deliver more catalysts

The PAE deal was a shot in the arm, though the company is working to secure further partnerships and the new inflow of investment bodes well.

It is in the market for a partner in a separate project, for a 56,216 acre concession that last year hosted a vertical well that flowed at 408 bopd over 24 hours. It was a very good test for a vertical well, Bill Newman, an analyst at Mackie Research says, and he reckons a horizontal well with multiple fracks would yield substantially higher rates.

"The new market friendly policies combined with clarity on oil and gas prices, and the massive resource potential from Argentina’s unconventional shale plays, has reignited foreign investment," Newman said in a recent research note.

“The massive injection of new capital into Argentina’s energy sector should help MVN secure a sale or JV on one more of its blocks that could result in significant near term stock price appreciation.”

Mackie has a ‘speculative buy’ recommendation for Madalena’s shares, and a 40 Canadian cent price target implies some 160% upside to the current share price.

“MVN holds high quality blocks within the Neuquén basin in Argentina that hold substantial Vaca Muerta and Agrio shale resource potential,” Newman added.

“At the current market price the company trades at a deep discount to its proved plus probable reserves value of $122 million ($0.23/sh), giving no value to the potential of the shale resource.”

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“Capital expenditures of $4.8 million were fully funded with cash flow," Mackie Researchr noted, as it reiterated its 'buy' recommendation and C$2 price target.

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