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Must-know valuation of Madalena Energy’s assets

Mike Winston, CFA of Interactive Buyside

Madalena Energy stock has an upside potential (Part 2 of 3)

(Continued from Part 1)

Canadian Assets
MVN holds a 78% average working interest in 200 sections (128,000 acres gross, 99,840 net) in the greater Paddle River area of west-central Alberta. The company has interests in three separate horizontal plays:
(1) medium risk Ostracod light oil
(2) lower risk liquids rich Mannville channel
(3) the emerging oil and liquids rich Nordegg. In addition, MVN controls roughly 100 sections for the emerging Duvernay unconventional oil play

MVN has 5 producing horizontal wells in Ostracod and is drilling two more in 4Q13. Four of the five wells they have drilled produce 266 boe/day on average, but their most recent well is flowing at over 600 boe/day. Next year if we get the full year benefit of five new wells, at say 240 boe/day, that would imply incremental production of roughly 1,200 boe/day.  That production valued at $40,000/boe would be worth $0.14/share.  So, existing production (17c/share) and production we expect to come online in 2014 (14c/share) account for 31c, as mentioned earlier.

Argentine Assets
Madalena’s 135,000 Argentine acres are divided into three separate parcels:
(1) Corion Amargo
(2) Curamhuele
(3) Cortadera

The table below contains a valuation of these assets based on $1.00/boe equivalent and the P90 evaluation drawn from a report by a petroleum consulting firm called Ryder Scott.  Ryder Scott has done work for most of the major oil companies in the basin, including YPF and Chevron. Madalena selected Ryder in part because they knew that potential buyers would respect the assessment.

Although the price of oil is in the $90/barrel range, I assumed that the value to the company of an undeveloped barrel of oil equivalent was $1.00, to reflect the cost, risk and time value associated with production and development. In addition, I chose to multiply $1.00 by the P90 estimates. The consultant’s P90 estimate represents the amount of BOE equivalent recoverable with 90% probability. These assumptions turn out to be internally consistent with the price per acre implied by recent transactions (see pp. 20-21 of the Haywood report from October 17th).

Recent transactions in the Curamhuele area have been done in the $5,000 to $10,000/acre range. So, at $5,000-$10,000/acre, Curamhuele alone is worth $0.69-$1.38; note that the midpoint of this range is $1.04 and the valuation I arrived at in the table below is $1.05.  By making conservative assumptions I independently calculated a figure that agrees with the mid-range of the comparable per-acre transaction prices, so I like this approach given that E&P valuation is as much art as it is science.

Corion Amargo is likely to be sold and Cortadera is already stated net of an existing JV with Apache. Curanhuele may be either farmed out or sold. If it’s sold, then I estimate the value at the $1.05 stated in the table above. If it is farmed out, however, then Madalena may have to give up some working interest. Let’s say they give up 50%, so Curamhuele would then contribute only 53c to the valuation instead of $1.05. That would mean the stock is worth $0.36 + $1.05 / 2 + 0.90 = $1.79 instead of $2.31. So, under these assumptions, if they sell Curamhuele the stock is a triple, and if they JV it out, then the stock is a double.

Market Realist Take

Madalena said its latest Ostracod horizontal well was brought on stream in early November 2013. During the well’s initial 24 operating days of production, the average rate of production was about 606 boe/d (84% oil & NGLs). The exploration period for Coiron Amargo Sur (southern portion of the block) was extended until November 8, 2014 by way of an official decree signed by the Province of Neuquen in Argentina on November 12, 2013. Coiron Amargo Norte (northern portion of the block) is currently under a 25 year exploitation (development) concession.

Competitor APCO Oil and Gas Corporation (APAGF) participated in the drilling of 20 development wells and three exploration wells in the Neuquén basin in the first nine months of the year. An additional three wells were in various stages of drilling and completion at the end of the quarter. In Colombia, Apco participated in the drilling of two wells in the Llanos 32 block. The Bandola-1 well was put on production in the second quarter. The second well was determined to be unproductive. It said it was behind its drilling activities planned for 2013. Due to increased industry drilling activity in Argentina, it has seen delays in procuring equipment to drill planned wells in its Coirón Amargo, Tierra del Fuego and Sur Río Deseado properties.

Another peer Americas Petrogas (APEOF) said it obtained a one-year extension of its exploration contract terms for the Loma Ranqueles block. As well, it continues to work towards an extension of its contract terms for Totoral, Yerba Buena and Bajada Colorada while Apache, its joint venture partner on the Huacalera block, continues to work towards an extension of the contract terms on that block.

Peer Crown Point Energy (CWVLF) said the 10-well drilling operations in the Tierra del Fuego well is expected to commence in 1Q 2014. Its 25.78% working interest in the Tierra del Fuego (“TDF”) area of Argentina covers approximately 489,000 acres (126,000 net acres) in the Austral Basin and includes the Las Violetas, Angostura Sur and Rio Cullen Exploitation Concessions (the “TDF Concessions”). The TDF Concessions are high quality, natural gas weighted assets possessing the capability to deliver increased levels of production and reserves in an expected increasing natural gas price market. It also plans to drill an exploration well in 1Q 2014 on the La Hoyada prospect. Its 100% interest in the Cerro de Los Leones Exploration Concession in Argentina covers approximately 306,646 acres in the Mendoza portion of the Neuquén Basin. Geologic and reservoir modeling work has been completed to determine the resource and economic potential of both structures. Well bore design has been completed, costing and pre drilling logistics are in progress. It said it has submitted its formal proposal to the Argentine Government for participation in the New Gas Program announced by the President of Argentina. The New Gas Program is designed to encourage and compensate gas producers by paying cash compensation to companies who increase production above a corporate base production rate provided that their natural gas production remains at or above a negotiated committed level of production.

Continue to Part 3

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