Continued from Part 2: Must-know valuation of Madalena Energy’s assets
Notes on the Blocks
CorionAmargo:
- 100% of 3D seismic done, 10 exploratory wells drilled on property
- Royal Dutch Shell owns two adjacent blocks and Shell Argentina announced increase shale capex to $500mm in ’14E from $170mm in ’13A.
Enlarge Graph
Curamhuele:
- Chevron, Total, Exxon and Apache hold adjacent blocks
- RBC retained to sell or find JV partner for farm-out
Cortadero:
- Apache is 60% partner, leaving Madalena 49,600 net acres of 124,00 total
- Apache is delivering on its obligation to spend capex in 2014Although Argentina requires 80% of petroleum profits to be re-invested,
Madalena can get around this because their Canadian subsidiary can receive payment from an entity of a major oil company (i.e. buyer/partner) located outside of Argentina. The company does not like to go advertising this fact, but it’s a reality – and in the end Argentina still gets its resource developed and still gets its revenue from the major oil company that ultimately takes over production.
Conclusion
Madalena is a self-sustaining company with a credible resource base, a deal savvy chairman, a JV with Apache and a team of bankers at RBC marketing 50,000 acres in the leading shale play in Latin America. The stock is 60c while the Canadian assets are worth 31c and the Argentine assets are worth between $2.31 and $1.79. So the stock overall is worth $2.10-$2.62, implying 250%-336% upside. If Argentina is worth nothing, then the downside is 31c (-48%), the upside is 250%-336%, and the ratio of risk/reward is 5.2x-6.7x. This bet is not for the faint of heart, but the environment for the oil and gas business is Argentina is improving, and Madalena’s management is focused on unlocking the value of its assets for the benefit of all shareholders.
Comps: America’s Petrogas (BOE CN, APEOF US), Crown Point Energy (CWV CN, CWVLF US), Apco Oil and Gas (APAGF US)
Related Companies: YPF SA (YPF US), Chevron (CVX), Total SA (TOT US), Exxon Mobil (XOM US), Apache Corp (APA US), Royal Dutch Shell PLC (RDS.A US)
Market Realist Take
Madalena Energy recently announced closing of a bought deal offering for gross proceeds of $9.2 million. On November 21, 2013, Madalena closed a private placement offering of CDE “flow through shares” for gross proceeds of $3.0 million, which combined with the above offering provides Madalena with aggregate combined gross proceeds of $12.2 million. It said the net proceeds will be used for further development of its Ostracod oil assets in the Paddle River area of West-Central Alberta and for general corporate and working capital purposes.
Competitor APCO Oil and Gas Corporation (APAGF) is also into exploration and production of oil and gas mainly in Argentina and has some assets in Colombia. It reported a net loss of $6.0 million for 3Q 2013, or a loss of $0.21 per share, compared with net income of $10.2 million, or $0.35 per share, in the same period a year ago. The decrease was a due a non-cash deferred income tax charge of $13.7 million related to the new tax legislation enacted by the Argentine government in 3Q 2013. In September 2013, the Argentine government enacted certain tax reform legislation related to dividends and capital gains. The tax reform imposes a 10% tax on dividends, profit distributions and remittances made to Argentine individuals and foreign shareholders. The tax reform also removes the income tax exemption on income derived from the sale of shares, titles, bonds and other securities that has been provided to non-Argentine residents since 1991. Therefore, the sale of such securities is subject to an effective 13.5% capital gain tax on the gross proceeds. Other factors for the decrease were lower sales volumes, greater costs and operating expenses and lower equity income from Argentine investment. Total sales volumes also declined due to fall in volumes from Apco’s Argentine operations, partially offset by the positive impact of volumes from its Colombian operations which began production during the third quarter of 2012.
For 3Q 2013, Americas Petrogas (APEOF) reported net revenue of $13.2 million, which was flat year-over-year. It saw a net loss of $5.6 million or $0.03 per share, compared to a net loss of $3.3 million or $0.02 per share for the equivalent period of 2012. The loss was attributed primarily to a non-cash, foreign exchange loss on an intercompany loan between the Canadian parent company and its Argentina subsidiary. It is also focused on the exploration and production of oil and gas mainly in Argentina. It saw lower sales volume in 3Q 2013 due to natural decline and the fact that the company did not drill any conventional wells during 3Q 2013. It said it is in the process of reviewing strategic alternatives for maximizing shareholder value.
Crown Point Energy Inc. (CWVLF) stated its oil production fell 8% to 159,201 barrels. Its revenue increased 2.5% to $5.04 million from $4.9 million year-over-year. Its operating netback declined 14% to $2.1 million. The company’s assets are located in the Austral Basin and Golfo San Jorge Basin in Argentina.