|Shares Out. (in M):||70||P/E||0.0x||0.0x|
|Market Cap (in $M):||119||P/FCF||0.0x||0.0x|
|Net Debt (in $M):||-28||EBIT||0||0|
Magellan Petroleum Corporation (MPET) is an oil and gas exploration company with some production. The company has assets in Australia, Montana, and the United Kingdom. The stock is a compelling value today with an enterprise value of $91 million at $1.70/share (assuming full conversion of the in the money preferred stock and subtracting cash of $28mm), as there are a number of catalysts within each of the company’s assets that could reveal as much as $597.8 million ($8.50/share assuming 70mm fully diluted shares) in value over the next nine months.
The company has the following assets:
United Kingdom Acreage, Value, Catalysts:
The United Kingdom is on the verge of an unconventional energy renaissance. With declining production from its North Sea gas field and higher landed natural gas prices and unstable geopolitics (Russia), the crown, the prime minister, and key members of both political parties now support unconventional energy production. The United Kingdom is well known by geologists to have thick layers of highly prospective shale for both oil and natural gas and political pressure to drill and frack is increasing.
In June of 2013, the British Geological Survey (BGS), came out with a report on the Bowland Shale which is located to the northwest of London. In the report, the BGS estimated that there was approximately 1,300 TCF of gas in place in this emerging play (enough to fuel the UK for forty years). An interesting link summarizing the report is found here:
Immediately following the report, Total and Centrica Energy cut farm out deals with IGas Energy and Caudrilla, two of the largest landholders in the Bowland Shale, valuing the acreage at $2,119 per acre and $2,239 per acre (see slide 18 of MPET April 2014 investor presentation). After this report was issued, IGas stock (IGAS LN on Bloomberg) nearly doubled in less than a month and remains well above pre-announcement levels.
The next basin that is scheduled to be reviewed by the BGS is the Weald Basin as noted in the hyperlink above. The Weald is one of the oldest oil plays in the UK where BP developed the largest onshore find at Wytch Farm. The BGS was originally scheduled to release its report prior to Easter, although it appears they will now release it after the May 22nd European elections. Based on interviews with geologists who are knowledgeable of the Weald Basin, the play contains significant layers of Kimmeridge Clay which is the source rock for 90% of the oil and gas produced from the North Sea field. Cuadrilla, a private company, recently drilled on acreage that is contiguous to MPET’s acreage, found “good oil shows”, and renewed its lease on the land for thirty five years. Cuadrilla is headed by Lord Browne, the former CEO of BP.
Geologists believe that MPET’s Weald acreage is in the “sweet spot” of the Weald Basin and that the impending BGS report will be bullish on the resource in place in this basin. After the BGS report, I anticipate that land values will climb to at least the levels seen up north in the Bowland Shale ($2100-$2200 per acre) and over time will go higher as this is expected to be an oil play.
According to a recent article in the Guardian:
“The British Geological Survey (BGS) has been studying the shale potential in Jurassic formations in the Weald and Wessex basins, which span the Home Counties.”
“Michael Fallon, the energy minister, had promised the report (BGS) would be published “by spring” this year. It will now not be released until after the European elections on May 22 because of “purdah” preventing significant or contentious announcements being made in the run-up to polling day.”
“Mr. Fallon has described the southern region as “the second great belt of shale” after Bowland in the North, where the BGS reported there could be enough gas to fuel Britain for more than 40 years.”
The link to the article can be found here:
Along with its partner Celtique Energie, MPET is the largest landholder in the Weald Basin. With MPET’s 125,000 net acres in the Weald, I anticipate that those acres will re-rate to at least $2,100 per acre, or in total, $2,100 x 125,000 = $262.5 million. I expect this re-rating to happen as the market absorbs the magnitude of the resource in place estimate and MPET/Celtique begin drilling. At IGas (IGAS LN on Bloomberg), the identical catalyst took 3-4 weeks for the market to assign the appropriate value to their shale gas acreage in the Bowland. For MPET, this equates to a value of just the Weald core acreage of $3.75 per share.
It does bear noting that the largest risk to production occurring in the UK is environmental activist unrest with respect to horizontal drilling. While this is the biggest risk to the acreage ever producing, it will not get in the way of the immediate marking of a significant asset hidden with MPET’s portfolio. Over time, it is likely that fracking will be permitted on a wide scale and proceeds from the royalties will fund a sovereign wealth fund to develop sustainable energy use in the United Kingdom. However, first oil could still be years away as permitting takes a long time and the trespass laws must be amended to allow for horizontal drilling. News flow will certainly add to volatility with respect to the public market pricing of this asset.
Horse Hill & Other UK Acreage, Value, Catalysts:
In February, MPET performed a farm out of approximately 25,000 acres to Angus Energy, Solo Oil and Stellar Resources at $617 per acre. Planning permission has been received from the local governments, the preparation work has started, and drilling is set to begin in August. The gross prospective recoverable resources have been estimated to be 87mm barrels of oil and 164Bcf of gas. It is interesting to note that the company does not consider that acreage “core” but nonetheless the value of MPET’s remaining working interest using what the local farm out team paid values the play at $5.4 million. Obviously, positive news from this first well could be significant.
I value the remaining 50,000 acres (direct and non-operated acreage) at the same value, or $617/acre, as they are not in the sweet spot of
the Weald Basin, which equates to an additional $30.9 million. This value is the squishiest of all estimates as I anticipate that the company and its operating partner on most of this acreage, Northern Petroleum, will hand back some of this land to the government.
In total, the value of MPET’s UK asset is $262.5 million + $5.4 million + $30.9 million = $298.8 million. Key catalysts are as follows:
One interesting angle to explore will be a spin of the company’s UK assets in a UK listed IPO after additional development in drilling and regulatory framework occurs.
Montana Poplar, Value, Catalysts:
The company owns through production 22,000 net acres in the Montana Poplar oil field. Current production is approximately 228 barrels of oil per day. The PV-10 value of the field is $97 million. As a base case, I believe that the field could be sold for approximately $100,000 per flowing barrel of oil (which now is in excess of 300 barrels per day of oil), or $30.0 million. There is downside protection there but it isn’t as optimistic as the company’s PV-10 calculation.
The upside at Poplar will be realized through CO2 flooding. The geology of the field is similar to the Weyburn and Midale fields in Canada and the Bell Creek and Beaver Creek fields in Wyoming. The company recently injected CO2 in the ground at the Poplar field and expects results to be announced by December 2014.
The Weyburn project produced at 150 barrels of oil per day before the full field development of CO2. After the CO2 flood, the Weyburn field had peak production of 5,000 barrels of oil per day ($5 billion value at full throttle). That field had a full water flood which reduced additional recoverable oil. At Poplar, there has not been a water flood so it should theoretically require less CO2 injected per barrel recovered than these other plays. MPET management expects that the project will release at least 50 million additional barrels of reserves to the company over time. Given that a successful pilot will still require a stable source of CO2 and an additional investment in full field development, I value those barrels at $5 per barrel pre-full field development. While the upside could be significantly higher with a full field development, the devil will be in the details. As such, I anticipate that the company will unlock at least an additional 50 million barrels x $5 per barrel = $250 million in value once the Poplar pilot results are announced in December of 2014.
Of note, a supermajority of piloted CO2 flood projects have worked in the United States. It appears that the risk is less geological and more of an engineering hurdle. The key statistic in the pilot will be how many Mcf’s of CO2 will be required to extract an additional barrel of oil. The industry standard is around 8 per barrel and the all-in cost should be no more than $20 of CO2 per additional barrel of oil recovered. This will be the key data point (along with reserves booked) in December 2014.
Another data point to consider is that CO2 flood projects are highly dependent on long term economic contracts for CO2. While MPET doesn’t have a long term contract, they are in the middle of three potential sources. Unlike the Permian basin where Kinder Morgan is a near monopoly, MPET should be able to obtain a competitive rate for CO2.
On Shore Australia, Value, Catalysts:
On March 31st, MPET sold its onshore Australia assets for $35 million AUD. The proceeds consisted of $20 million AUD cash and $15 million AUD stock in Central Petroleum (CTP AU on Bloomberg). The current value of the Central Petroleum stock is 39.5 million shares x $0.515 AUD x 0.9354 USD/AUD = $19 million USD.
As a result of the sale, the company was able to jettison $2-$3 million in annual operating costs associated with keeping an office open to manage the onshore assets. As such, I now believe that with reduced overhead costs and increased production at Poplar associated with the CO2 pilot and some water flooding, the company is very near operating breakeven excluding growth capex for CO2 and UK drilling.
Off Shore Australia, Value, Catalysts:
The company also owns a block offshore Australia in the Bonaparte Basin (NT/P 82) that is prospective for natural gas. 3-D seismic has been shot and the reserve estimate for the field is estimated at 1-3 Tcf of natural gas. The company intends to farm out the asset to a major and assumes a hypothetical NAV of $30 million if it maintains a 50% stake in the play and costs to drill one to two wells are funded by a partner. The company expects to announce a farm out agreement in the July-September quarter.
MPET is a cheap option. If none of the values work out as anticipated in detail above, an investor would be left with $10mm in cash (assume $8 million remaining investment in CO2 flood and $10 million to drill two wells in the UK), the Poplar field producing 300 barrels per day valued at $30.0 million, Central Petroleum stock valued at $19.0 million, a $5.4 million farm out in the UK with Angus Energy, and some residual option value for the offshore Australian block and other UK licenses. Assuming the preferred does not convert in that case, I foresee downside to equity holders to around $0.80.
On the upside, I see the following values:
In sum, these values point to approximately $597.8 million in value or $8.50 per share. Some of that value will have to be bartered or traded to raise capital in the next step in either Poplar or the UK (unless debt financing avails itself for the CO2 project). However, if Poplar or the UK hit, the values here will be conservative. As such, you have an option here with $0.90 in downside and $6.75 in upside with high probabilities that the outcomes described above will hit.
Link to MPET investor presentation: