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Magnolia Petroleum Plc, the AIM quoted onshore US focused oil and gas exploration and production Company, reports an update on its reserves and production.
Overview
– Assessment of net attributable proved and developed producing reserves (‘PDP’) estimated at 167 Mbbl of oil and condensate and 450 MMcf gas with an NPV10 of US$8.416 million
– Moyes estimates net production was 150 boepd as at 1 April 2014
– A detailed Reserves Report including 2P and 3P reserves has been commissioned and, given a reassessment of the Mississippi Lime geology in the US, is expected to show a significant downgrade in 2P and 3P reserves
Improved understanding of the following:
o Landing of the laterals within the Mississippi ‘wedges’
o The Woodford formation, being the ‘source’ rock for the Mississippi Lime
The Company’s net attributable proved and developed producing reserves (‘PDP’) have been estimated at 167 Mbbl of oil and condensate and 450 MMcf of natural gas as at 1 April 2014 with an NPV10 of US$8.416 million. This compares to the 158 Mbbl and 814 MMcf as at 1 August 2013 and NPV10 of US$7.243 million. The valuation was prepared by Moyes & Co. (‘Moyes’) and satisfies a condition of the Credit Facility as announced on 22 October 2013 for a six month reassessment of Magnolia’s PDP reserves, upon which the borrowing base limit of the facility, currently US$2.1 million, is adjusted.
A more detailed Reserves Report including the Company’s 2P and 3P reserves has been commissioned. The Directors expect the Report will show a reduction on the figures announced on 9 September 2013 due to a downgrade throughout the industry in net reserves assigned to the Mississippi Lime formation, Oklahoma. This is attributable to an improved understanding of the geology of the play among operators, including Magnolia. As more horizontal wells are drilled on the formation and more production rates are reported, the Mississippi Lime is increasingly being regarded as comprised of multiple wedges rather than a uniform resource. Production rates therefore vary markedly depending on whether or not a well encounters a very productive wedge. This industry wide re-evaluation of the Mississippi Lime will have a rebasing effect on the level of Magnolia’s 2P and 3P reserves.
Operators’ understanding of the geology of the Woodford formation in Oklahoma is also improving as the play matures and more horizontal wells are drilled. The Woodford, which lies below and is the source rock to the Mississippi Lime, is increasingly viewed by operators as the more prospective of the two formations in certain areas. This matches the Company’s own experience of receiving more proposals to drill Woodford wells on its leases in recent months. As the Woodford is at an earlier stage of development compared to the Mississippi Lime, the Reserves Report will not fully reflect the potential of the formation. This is expected to change as more wells are drilled to the Woodford.
The Directors are confident that a number of Mississippi Lime wedges, which can produce at prolific rates, are present on leases in which Magnolia has interests of up to 100%. The Company is therefore assessing the potential for it to drill, as operator, a series of vertical wells targeting identified locations through 2014 – 2015. At an estimated cost of US$750,000 per well, vertical wells are considerably cheaper than horizontals and have the potential to recover costs quickly.
Through its participation in multiple wells, Magnolia has identified those operators who have had the greatest success in maximising production from both the Mississippi Lime and Woodford formations. A number of these are now looking to drill horizontal wells with up to five lateral legs each to ensure the correct wedge of the Mississippi Lime is encountered. Going forward, the Directors will participate in wells drilled by those operators whose techniques and geological knowledge have consistently achieved the best results.
Moyes estimates the Company’s net production at 1 April 2014 was 150 boepd. This compares to average actual daily production in H1 2013 of 93 boe and H2 2013 of 116 boe. In addition the mix of oil and gas has moved from 47% oil and 53% gas in H1 2013 to 67% oil and 33% gas in H2 2013 and remains as such in the latest estimate from Moyes.
Moyes had previously estimated that Magnolia’s net production as at 1 August 2013 was 214 boepd. This was based on initial production rates of new wells that had just come online and subsequently have declined to a steadier rate of production. Whilst the estimated boepd number from Moyes has fallen, actual monthly production and therefore revenue has increased since August 2013.
Magnolia COO, Rita Whittington said, “We are highly confident that once Magnolia’s 2P and 3P reserves are rebased, they will soon resume their upwards trajectory as a result of further Woodford and Mississippi Lime wells being drilled on our acreage. We plan to continue to participate alongside operators who consistently achieve strong production rates. Armed with a better understanding of the geology, we are excited by our upcoming vertical well programme, targeting the Mississippi Lime. Vertical wells are low cost, hold leases by production and, thanks to our higher interests and subject to the results, can lead to a material increase in net production and PDP reserves.”
As previously guided, the Company will report revenues in line with market expectations and EBITDA ahead of prior guidance in its upcoming 2013 results which are expected to be released in the next two weeks.
