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THE BIG PICTURE - Magnolia Petroleum continues to scale up

Like jig-saw pieces, hundreds of small stakes in producing oil wells are being put together to form a valuable, cash-generative junior oil business. With the addition of stakes in two more projects today, it now has interests in over 200 wells in a number of key formations in North Dakota and Oklahoma.
THE BIG PICTURE - Magnolia Petroleum continues to scale up

The picture is coming together for Magnolia Petroleum (LON:MAGP) as it adds scale and continues to build a significant US onshore oil company.

Like jig-saw pieces, hundreds of small stakes in producing oil wells have been put together to form a valuable, cash-generative junior oil business.

With the addition of stakes in two more projects today, it now has interests in over 200 wells in a number of key formations in North Dakota and Oklahoma.

Its remit is to rapidly build production. The strategy is to acquire minority stakes in each of these wells, though few junior companies could boast of amassing such a tally of operations in such a short space of time.

Magnolia came to AIM in November 2011 with plenty of ambition, and it has continually hit its own growth targets.

Upcoming full year results, for 2013, are due shortly and investors will be keen to see how the second half compares with the strong start. 

In the fourth quarter alone it added over 200 barrels of daily oil production, and it continues to top up the portfolio.

A project update last month, however, hinted at “game changing” potential as operators in Oklahoma’s Mississippi Lime play are now starting to develop fields with greater well density – or in other words will begin drilling wells closer together.

This is expected to increase production and should allow more reserves to be unlocked. And City broker Northland Capital reckons Magnolia’s current footprint could host as many as 600 producing wells.

Northland rates the AIM share as a ‘buy’ with a 4.6p target (current price: 2.05p).

At the same time the recent developments in the Mississippi Lime also represent another important facet of Magnolia’s continuing development. Here it is progressively increasing its exposure to each new well. For example, it committed to what it called an “above average” involvement in recent drilling proposals – in recent wells it has taken stakes between 3% and around 9%.

Chief operating officer Rita Whittington, last month, told investors she was confident Magnolia could, as a result of the increased drilling, build upon the “excellent momentum” of the past year, specifically in terms of production and reserves growth.

"With production already established on the relevant leases, increased density wells are very much the low hanging fruit by which US onshore operators can rapidly increase production, maximise recovery rates on individual spacing units, and upgrade reserves to the proven developed producing (PDP) category,” she said.

Growing PDP reserves are key to Magnolia’s strategy because it is those reserves that can be leveraged to secure financing, to in turn pay for more drilling.

And it is this incremental production growth that has made Magnolia such a compelling story for investors.

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