Magnolia outlines plans to build on its Oklahoma success

The recent drilling success in Oklahoma points the way forward for Magnolia Petroleum (LON:MAGP).

Its participation in the Sundance well with industry giant Chesapeake (NYSE:CHK) repaid the initial investment in just three months.

“That got us really interested,” said chief operating officer Rita Whittington.

Magnolia has a deal with a local geologist to use his data and analysis covering 21,000 gross acres in the state to evaluate other potential sections.

Earlier this month it acquired 1,200 net acres with interests of up to 100 per cent along with minority interests in leases covering a further 284 acres in the state.  It is targeting the Mississippi formation.

Chief executive Steven Snead likens Oklahoma to the prodigious Bakken formation in North Dakota and Montana before the advent of modern drilling techniques that have transformed the once dormant oil frontier.

It is understandable that the company’s principles Whittington and Snead should make the comparison, because they took the company into the Bakken just before it exploded back into life.

It now has interests in 64 producing oil and gas wells (though the focus is very much on oil), mainly in North Dakota. Twenty two of the last 23 wells have been a success.

Its participation in these wells has been modest. Its average working interest is 1.46 per cent and its net revenue share is 1.1 per cent.

But from small acorns giant oaks have grown. Chesapeake is a graphic illustration of this as it has worked its way up the value chain to become one of the biggest explorers and domestic producers in the US.

Magnolia’s track record hasn’t been too bad to date. The US$320,000 invested in the last 23 wells is currently valued at close to US$960,000. And the company is generating monthly cashflow in the order of US$60,000 a quarter.

A recent £1.2 million fundraising and move to AIM has set the scene for a more dramatic expansion programme, where Magnolia’s well interest will increase to 20-25 per cent. It even plans to become an operator.

These Mississippi targeted Oklahoma wells are far less expensive than their Bakken contemporaries at $3 million versus $8-9 million for the deeper lying prospects.

“There is a big difference here in what we can accomplish with our dime,” said Snead.

“You are not getting quite the reserves, but you are getting some awesome wells. Any time a well pays out in three months it is an awesome well.”

While Oklahoma offers some real excitement, there is still plenty to go for in the Bakken where it holds almost 34,000 gross acres, bought at an average of US$1,500 an acre.

Land there now changes hands for US$7,000 an acre.

The net present value of those assets, at a 10 per cent discount rate, is over US$10 million.

And there is what Snead describes a “table top underneath the Bakken”, called the Three Forks Sanish formation, which is shaping up to be an important new horizon for explorers.

There are 4,000 wells on the Bakken producing an estimated 600,000 barrels of oil equivalent a day.
Official estimates put its recoverable reserves at 4.3 billion barrels (with the Three Forks Sanish adding a further 2 billion). However there are some in the industry that reckon the figure could be considerably higher.

This of course underlines the value of the land package Magnolia has managed to eke out in the region. Work carried out to date suggests it has bags of potential.

“What we have now is people are coming through and drilling on our acreage,” said Whittington.

“We can have four wells per spacing unit in the Bakken and four wells in the Three Forks Sanish - so we have 97 PUDs (proven undeveloped opportunities) in the Bakken and 106 or 107 in the Three Forks.”

The past six months have seen the share double in value to 1.63 pence. However, if broker Daniel Stewart is correct then there is still plenty more upside.

In response to the acquisition of the significantly larger working interests in the Mississippi formation, it raised its price target to 3.6p from 2.02p.

Meanwhile, Mark Parfitt at City firm Hardman believes management is right to make Oklahoma’s Mississippi play a central focus of its plans, particularly after the Sundance success.

“Return of capital in the oil and gas business over this (three month) time frame is extremely enticing and large entrants in the play like Sandridge Energy, (the brainchild of former Chesapeake partner, Tom Ward) are expanding their businesses on the back of these endeavours,” Parfitt said.

“Magnolia intends to follow this lead, while making the transition to becoming an operator, announcing it has entered into an agreement to lease working interests on a series of Mississippi Lime prospect areas.”