With new projects the world over languishing under $30 oil, Argentina’s world-class shale venues, supermajor deal-making, $68 oil, and a new pro-business government which continues to impress, it looks like the only junior on the scene is poised for gains.
Madalena Energy (CVE: MVN; OTCQX: MDLNF) has been oversold in the downturn, presenting an opportunity for big returns as some analysts reiterate a C$0.75 share price target--a tripling of today’s price from the current C$0.25 level.
The prized Vaca Muerta shale has attracted major players such as Shell (NYSE:RDSA), Chevron (NYSE:CVX), Wintershall, ExxonMobil (NYSE:XOM), Total SA (NYSE:TOT), Petronas, PlusPetrol and others. And with these supermajor investment deals ranging from US$500 million to over $3 Billion per block, Madalena is well positioned with over 950,000 acres in Argentina and 12 blocks—three of them strategically positioned in the Vaca Muerta and Lower Agrio shales.
With great horizontal drilling results by Shell, Chevron and YPF offsetting Madalena’s acreage per acre land valuations in the Vaca Muerta are set to hold strong. Implied per acre valuations in Argentina’s unconventional shale plays have ranged from $5,000 to $17,000 per acre in the oil window, and up to $5,000 per acre in the liquids-rich gas window. And Madalena’s prime land value alone looks great against a current market cap of just over $100 million.
Shale gas assets are also starting to attract attention, as seen by the latest American Energy Partners (AEP) deal right next to Madalena’s Cortadera block.
Last week, Argentina’s state-run YPF announced a new joint venture deal for $500 million in investment in Madalena’s backyard in the Neuquen basin. The deal is between YPF and AEP, which is the brainchild of the founder and former CEO of U.S. giant Chesapeake Energy--a pioneer of the U.S. shale boom.
AEP’s bet on Argentina’s shale at a time of tanking oil prices gives further credence to the theory that Argentina—home to the second-largest reserves of shale gas and the fourth-largest reserves of shale oil in the world--is ground zero for the next shale revolution. It’s the first major Vaca Muerta shale deal since the inauguration of Argentina’s new pro-industry government led by Mauricio Macri.
Let’s take a closer look at why the investment community should care about Madalena Energy:
10 Reasons to Watch Madalena
1. Everyone agrees: this is the next shale revolution
Argentina is home to 27 billion barrels of recoverable oil and 802 trillion cubic feet of natural gas. Its two shale basins could end up being bigger than the Eagle Ford and Bakken.
Chevron, Shell and ExxonMobil all see Argentina’s Vaca Muerta shale as one of the world’s top-tier unconventional plays.
As Goldman Sachs puts it, Argentina is the Bakken of South America, with the “largest and most predictable production growth outlook in Latin America over the next five years.” The average productivity of a well here rivals that of the best U.S. wells.
2. Madalena is sitting on prime unconventional shale acreage in Vaca Muerta and Lower Agrio
Let’s take a quick look at three of Madalena’s unconventional shale blocks at Coiron Amargo, Curamhuele and Cortadera:
• The Company’s Best Estimate Contingent Resources attributed to the Vaca Muerta Shale at Coiron Amargo (a prime oil block in the sweet spot of the shale fairway) are 152 Million barrels of oil equivalent, and the block has over 500 horizontal multi-frac Vaca Muerta shale locations in inventory.
• On the Curamhuele block, which is a strategic land block for the Lower Agrio Shale, and the Vaca Muerta shale (gas and oil), the Company’s Lower Agrio Shale Best Estimate Prospective Resources are 365 Million barrels of oil equivalents, with over 570 horizontal multi-frac locations in the Lower Agrio Shale alone. In addition, the Vaca Muerta Shale at Curamhuele bodes over 1.1 Billion boe of potential recoverable resources and a massive inventory of horizontal locations.
• Add in Madalena’s gas block in the Vaca Muerta at Cortadera--where the company has exposure to highly over-pressured gas in the Vaca--and likely over 500 million boe of prospective resources, and an even more interesting picture emerges.
Simply put, the opportunity on these strategic acreage positions and Madalena’s remaining 9 additional blocks in Argentina is significant for a supermajor like Exxon or Shell, not to mention a junior like Madalena. And it far exceeds the company’s current market cap of just over $100 million.
3. Lots of incentive for frenzied drilling--highest oil prices in the world and a gas market 2X to 3X North America
Argentina’s regulated oil prices are set at a premium to Brent (at US$67.50/bbl of oil). This is a very smart move by the new government to ensure the industry continues to invest and increase its unconventional shale activity while the rest of the world is struggling with oil that’s hovering around $30.
Gas prices in Argentina are also expected to continue to be strong as Argentina is a large net importer of gas and has historically been subsidizing the costs to import. With gas prices 2X to 3X that of North American gas prices at $4+ / mmbtu to $6+/mmbtu for many projects, gas also remains highly attractive here.
4. YPF’s ‘Super Horizontal Well’ offsets Madalena’s acreage….looking forward to a Madalena Vaca Muerta horizontal
When YPF and Chevron announced the discovery of a super well, the Loma Campana 992, it was with an impressive initial production of 1,630 barrels per day. After three months, this horizontal was still over 1,000 boe/d. Not only is Madalena working on its first multi-stage frac well right next door, but it’s acreage also offsets Shell’s horizontal drilling, which is seeing top tier horizontal results in the Vaca Muerta.
Madalena’s operations have been further de-risked by Shell’s signing of a 35-year deal to drill and exploit on two Vaca Muerta blocks directly offsetting Madalena’s assets.
5. Two JV deals to generate $500 million in drilling right next to Madalena and ExxonMobil committing Billions to this Top Tier Unconventional Shale Play
The first YPF-AEP joint venture is the Bajada de Anelo—a 50,400-acre bock just west of Madalena’s Coiron Amargo. The pilot JV project has a $447 investment commitment to be completed by 30 June 2018. The second JV is for the 92,665-acre Cerro Arena Bajada de Anelo block, which is directly adjacent to Madalena’s Cortadera block, with a $60-million investment commitment.
Couple this latest deal with the $14 billion mega-deal by ExxonMobil, which was reported to sign a massive investment deal in the Vaca Muerta shale. This sets the stage for billions to be poured into Argentina’s unconventional shales. As reported by Platts in December, Exxon will put an initial $229 million into horizontal development work, but stage two will feature an investment of $13.8 billion for the drilling of 556 horizontal wells.
Such a deal is unprecedented in international shale. It firmly puts Argentina in the lead to be the next global unconventional superstar. Watch for knock-on deals from major and junior E&Ps in this space.
6. Four strategic resource plays
Drilling four strategic resource plays in this market-defying venue, Madalena could be an important ‘sleeper’. Focused on unlocking its strategic unconventional shale and scalable resource plays in the Vaca Muerta (light oil and gas), Lower Agrio (light oil), Loma Montosa resource play (light oil) and Mulichinco tight sands (liquids-rich gas) this company has significant torque to the upside given its unique positioning as a small-cap in these large-petroleum-in-place assets.
Upcoming is a big well on the Company’s Curamhuele block to evaluate two additional strategic plays in the Agrio Shale (oil) and Mulichinco (liquids-rich gas). In late November, Madalena successfully deepened the Yapai.x-1001 well on the Curamhuele block to 3,802 meters, drilling through 550 meters of the Lower Agrio formation, with the bottom 270 meters encountering continuous oil and gas shows in the significantly over-pressured target zone. Successful multi-stage frac and testing results at Curamhuele could be very significant for Madalena strategically.
7. Land holdings worth way more than enterprise value
Madalena's land holdings in the country could be worth several times the enterprise value at current land valuations. This in itself makes it an interesting target.
8. Market-defying and well managed balance sheet by a focused & experienced management team
Madalena is bucking the financial trends for small-cap explorers. It enjoys positive working capital and is basically unlevered on the debt side. It’s also generating substantial operational cash flows and has a sustainable production platform.
The company realized a Q2 2015 oil price of CDN $96.33/bbl and $6.28/mcf for natural gas, and has also increased its oil and gas production by 155% from 2014, to 3,996 boe/d. It also saw a 30% increase in revenues to $83.50/boe, up from $64.08/boe from the same time in 2014. Corporate operating netbacks were over $37/boe in Argentina.
9. Last remaining junior on this explosive scene
The supermajors have scooped up almost everything here. The only way left to get in on this pending Argentine shale boom is through the last sustainable junior, Madalena. This is clearly a highly intuitive junior that’s positioned itself right among the biggest players in the world. They are drilling with a frenzy, and with impressive results. At the end of the day, this is the only small independent player in the sweet spot.
10. The price is right for this potential acquisition target
Madalena is a potential target for acquisition due to its unique position in Argentina, and analysts are on to it, predicting a tripling in share price to C$0.75 with the positive changes on the political front, he highest oil and gas prices in the world, and a uniquely positioned set of unconventional shale and scalable resource plays.
For more information on Madalena’s Argentina operations, please click here.
By James Burgess for Oilprice.com
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