What happened at Magnolia's AGM?

At the time of our Admission to AIM in Q4 2011, we set out how the management team has in the past generated considerable value in the US onshore sector, and how we planned to do so again, this time for shareholders in Magnolia. Our proven strategy involves acquiring both non-operated and operated leases in historic US onshore formations where geological risk is low, and then proving up the reserves through drilling, either by participating alongside established oil and gas companies or operating our own wells with 50% plus interests. At the last count, Magnolia had interests in 193 producing wells on leases covering approximately 13,500 net mineral acres.

The non-operated side of our business is driven by the number of proposals we receive to drill on our leases. Last year we received 83. Of these, 48 matched our investment criteria which we duly elected to participate in at an average cost of US$65,000 per well. Lower oil prices have inevitably impacted drilling activity, which has had a knock on effect on the number of proposals for new wells on our leases in Q1 2015, compared to the same period last year. However, we continue to receive a sufficient level of proposals to grow the business, as highlighted by our participation in 16 new wells (see announcement of 2 June 2015), which brings the total for H1 2015 to 25, in line with the 48 we participated in FY 2014. In our view this not only highlights the excellent address of our leases in terms of geology, but also the attractive economics of drilling, even in the current low oil price environment.

While the non-operated side of our business is ticking along nicely after an understandably slow start to the year, H2 2015 will see us resume our own drilling programme as operator. By adding recoverable reserves of up to 56,500 boe to Magnolia in 2013, the Roger Swartz#1 well showed how drilling our own wells in which we retain a large interest can significantly add to net proven reserves. Working with a highly experienced geologist, we have identified multiple low cost drilling locations on our operated leases, and we plan to drill at least one of these in the second half of the year.

The drilling of Magnolia’s first well this year, Shimanek#2, is due to commence within the next few months and is located in an established field and therefore associated with low geological risk. The Shimanek #2 well can be drilled at a relatively low cost of approximately US$550,000. With such low costs, a 94% / 76.5% working / net revenue interest and relatively gentle decline curves, this well, subject to flow rates, has an attractive payback even at US$55 oil prices, which will enable capital to be recycled into further drilling activity. With a long pipeline of drilling targets on our operated leases, we are therefore well placed to scale up our revenue and reserves growth profile, as we look to deliver on our objective and prove up the value of our reserves.