Madalena Energy (MVN CN, MDLNF US) is a small-cap Canadian E&P company with a 135,000 net acre position in the Neuquén Basin of southwest Argentina and a 100,000 net acre position in the Greater Paddle River area of west-central Alberta. The Neuquén Basin contains the world’s second-largest shale gas and the fourth-largest shale oil formation. The Argentine acreage appears to be worth two to three times the stock price, so we get the Canadian assets for free.
The stock is cheap because Argentine energy assets have fallen out of favor. However, on December 14, 2013, Barron’s wrote a feature story related to a shift in sentiment entitled An Educated Bet on Argentina. Madalena has retained RBC to sell or to find a joint venture partner for roughly 50,000 acres in Argentina, and I would expect news of a deal to be a catalyst for the stock.
Madalena has no debt, net cash of $20 million, and $13 million of revolver availability. With 364 million shares outstanding at 60 cents per share, the market cap is $218 million and total enterprise value is $198 million. In addition to its position in Argentina (which produces 189 barrels of oil equivalent per day, or boe/d, from exploratory wells), it has new and growing production (1,604 boe/d) from five wells in Alberta. Both its Canadian and Argentine operating entities are break-even, and the company does not expect to raise additional equity. Comparable Canadian companies trade on $40,000/boe (on the low end), so the value of the Canadian production alone accounts for $0.17per share. That value should rise to 31 cents as it brings another 1,200 boe/d online in 2014E. But as before, we sort of don’t care because we get this for free.
I took note of this situation because:
- The company is self-sustaining.
- The Argentine resource base has been independently confirmed by a well-known petroleum industry consultant.
- It has a joint venture with Apache in Argentina on one of its three holdings already.
- The chairman of Madalena (Ray Smith) is the CEO of a $1 billion market cap company called Bellatrix. Bellatrix is also in the Canadian E&P space, and its shares have appreciated 70% this year (to $7.30 as of December 12, 2013, from $4.30 on January 2, 2013) largely because Smith attracted joint venture partners from abroad (Korea) to develop the company’s Canadian assets. Aside from Smith, two other Bellatrix board members also sit on MVN’s board.
The Market Realist Take
The company’s revenue rose 175% to $4.84 million in 3Q 2013 from $1.76 million in 3Q 2012. Net loss narrowed to $118,000 from $916,000 in 3Q 2012. It also announced that it has expanded its 2013 capital budget to $42 million that will be especially used for its Ostracod oil project. Its 3Q oil production averaged 1,177 barrels of oil equivalent per day (boe/d) (46% oil and liquids), up 16% from 2Q 2013, and an increase of 345% from 3Q 2012. It is anticipating increase in revenue to $21 million for FY 2013.
Madelena Energy peers that own assets in Argentina include APCO Oil and Gas Corporation (APAGF), Americas Petrogas (APEOF) and Crown Point Energy Inc. (CWVLF). Major companies operating in this space include Chevron (CVX), Total SA (TOT), Exxon Mobil (XOM) and Royal Dutch Shell PLC (RDS).
A Barclay’s bank report on Global 2014 E&P Spending Outlook stated that global E&P spending is expected to increase 6.1% to $723 billion in 2014 from $682bn in 2013. 2014 should mark an acceleration of growth in North America to over 7% (led by the U.S.) coupled with continued solid growth (+6%) in international markets, particularly in the Middle East, Latin America, and Russia.
In Barclay’s view, a wave of shareholder activism has proved successful in pushing for change among mid-size International Oil Companies (IOCs) and raised questions about the potential for greater focus on returns and cash flow growth among the majors. Companies such as Hess Corp (HES), Chesapeake Energy Corporation (CHK), Talisman Energy Inc. (TLM) and Transocean (RIG) have been targeted by activist investors in the recent past that have brought about changes that drive shareholder value. The report further stated that slowing CAPEX growth from the majors is also impacting global oil markets.
Small cap E&P companies are usually considered to be trading at a discount to the actual value of its assets. Analysts and industry experts consider investing in these companies as risky as it is more exposed to the fluctuations in energy prices. The companies operating in emerging economies like Argentina are also prone to government interferences. Madalena peer Crown Point Energy Inc. (CWVLF) stated in its earnings release that Repsol has reached a preliminary agreement with the Argentina Government for the compensation payable for the 2012 nationalization by the Argentine Government of Repsol SA’s 51% stake in YPF. It added that any agreement intended to resolve the dispute between Argentina and Repsol is expected to be positive for the oil and gas industry in Argentina. Any progress on the same would be key to unlocking foreign investment in the energy sector and critical in helping reverse the country’s declining energy production trend and reducing the existing energy deficit over the midterm. In turn, new foreign direct investment would help to mitigate the drain of international reserves, which is a top priority for the Argentine government. According to analysts, investing in small cap E&P companies like Madelena Energy can prove to be attractive over the long term as the companies continue to develop its assets and progress on its exploration activities.