The recent discovery of a ‘super well’ in Argentina’s prized Vaca Muerta shale has further raised the stakes in this market-defying venue, positioning the only junior left on the scene for even bigger gains, while a strong showing in presidential elections by a pro-business candidate promises another boost to energy prospects.
Argentina’s state-run YPF on 9 October announced the discovery of a super well, the Loma Campana 992, with an impressive initial production of 1,630 barrels per day— initial production figures that are higher than anything ever seen before.
The ‘super well’—discovered by YPF in partnership with Chevron (NYSE:CVX) in the Vaca Muerta block in Neuquen, offsets Madalena Energy Inc.’s (MVN.V) Couron Amargo acreage, where this last remaining junior in the sea of supermajors is conducting a multi-well horizontal program.
At the same time, the energy industry took home a significant victory in presidential elections when Conservative pro-business candidate Mauricio Macri, beat out President Cristina Fernandez de Kirchner’s chosen successor, Buenos Aires province governor Daniel Scioli, in a November 22 run-off election.
The news could not have come at a better time for Madalena, which is now preparing its first multi-stage frac well in the Vaca Muerta, not only right next to the YPF/Chevron ‘super well’, but also offsetting Shell’s impressive horizontal drilling results.
A picture emerges here of a small, ambitious and highly intuitive Canadian energy company sandwiched right in between the biggest players in the world, who are coming up with discovery after discovery in a venue poised to host the next U.S.-style shale boom.
All eyes are on Madalena as it drills with two rigs in Argentina’s high-impact Curamhuele block, targeting two unconventional plays, and another rig at Coiron Amargo. So while the world’s most promising shale play has attracted the attention of majors such as Chevron, Shell and ExxonMobil (NYSE:XOM), it is Madalena that stands out for investors because it is the only remaining junior in this big game.
Argentina: On Everyone’s Shale Radar
Argentina is home to the second-largest reserves of shale gas and the fourth-largest reserves of shale oil in the world—and it is here, most believe, that the next major shale boom will unfold.
In its October 2015 report, “Argentina: Tapping the Bakken of South America”, Goldman Sachs notes that Argentina has the “largest and most predictable production growth outlook in Latin America over the next five years.”
This is largely because the average productivity of an Argentine well rivals that of the best U.S. well, while domestic oil and gas prices are fixed above international benchmarks and costs per well could decline by 25 to 30 percent. And the icing on this shale cake is the government’s $11-million-plus incentivized oil program that has spurred growth across the industry and attracted much more drilling investment.
As Goldman Sachs advises: “Since the completion of the first shale gas well in the Vaca Muerta area in July 2010, Argentina has brought this unconventional oil & gas resource basin – whose name translates to “Dead Cow” and whose dimensions are roughly the size of Belgium – into output and reversed six years of falling national energy production. It has implemented market-friendly initiatives to foster E&P investments and attracted joint ventures, drawn by the basin’s favorable geology and ready access to existing logistics and infrastructure.”
Argentina is home to 27 billion barrels of recoverable oil and 802 trillion cubic feet of natural gas and its two shale basins could end up being bigger than the Eagle Ford and Bakken. Combine this with regulated oil prices coming in at $75-$77, despite low global prices, drilling proceeding at a frenzied pace, and discoveries continuing to pile up, and it looks increasingly likely that Argentina could emerge as a major shale production region.
Macri’s party, Cambiemos, has called for the continuation of the price initiative—at least until international oil prices regain ground. Significantly, these fixed oil prices under the current government were set to expire on 31 December.
Madalena: In a Hot Spot at a Hot Time
Madalena Energy is the only small independent with positions in key unconventional Argentinean resources; it is debt-free, generates substantial operational cash flow and has a rapidly increasing production and resource.
Madalena is focused on drilling four strategic resource plays in 2015 and 2016, and has been described as a ‘sleeper’ that awakened earlier this year with successful horizontal test results on the Loma Montosa oil resource play at Puesto Morales.
Madalena is also drilling back-to-back horizontals on its Coiron Amargo block, which is a prime Vaca Muerta shale play that also has attractive conventional development across multiple light oil pools—even more so now with the ‘super well’ discovery.
Beyond this, the company has drilled a significant well on its Curamhuele block to evaluate two additional strategic plays in the Lower Agrio Shale (oil) and Mulichinco (liquids-rich gas). In late November, the company successfully deepened the Yapai.x-1001 on the Curamhuele block to 3,802 meters, drilling through 550 meters of the Lower Agrio formation, with the bottom 270 meters encountering continuous oil and gas shows in the significantly over pressured target zone.
Madalena is gearing up in the first part of 2016 to conduct a multi-stage frac and test of this Curamhuele well to delineate and unlock 365 million barrels of oil equivalent of risked recoverable resources where the Company has over 500 net horizontal locations in the Lower Agrio Shale alone.
And recent Q2-2015 financial and operational results show steady progression with a strategy balanced nicely between horizontal development drilling to enhance future cash flows and high-impact strategic drilling to unlock large, scalable resources.
Madalena realized a Q2 2015 oil price of CDN $96.33/bbl and $6.28/mcf for natural gas. The company has also increased its oil and gas production by 155 percent from 2014, to 3,996 boe/d. Topping things off, Madalena saw a 30 percent increase in revenues to $83.50/boe, up from $64.08/boe from the same time last year. All this while corporate operating netbacks were over $37/boe in Argentina, with funds flowing from operations an impressive approximately $6.2 million (not including a one-time charge).
Even in a tough energy market, it has been a solid year for Madalena, with each new discovery and each new horizontal well drilled by the supermajors right next to its own land position further re-risking operations and making this one of the most valuable juniors in the international energy sector.
Shell’s recent signing of a 35-year deal to drill and exploit on two Vaca Muerta blocks offsetting Madalena’s assets has added to the junior’s attractiveness, and Shell’s next phase of horizontal pad development right on Madalena’s border will be a further boost.
This led in late November to an increase in Madalena’s price target by TD Securities to C$0.75—up from C$.40.
The YPF/Chevron discovery of a ‘super well’ in the Vaca Muerta—offsetting Madalena’s own assets—is the season finale for this success story. It’s the story of a junior that is sitting on a significant portion of Argentina’s recoverable shale resources—possibly three times the amount of all of Texas’ resources. And while Shell’s move to phase two and its 35-year drilling commitment secured Madalena’s position as the most wanted junior in the world and the only way to gain real exposure to the next shale boom, the ‘super well’ right next to it will be the jackpot.
In the meantime, all industry eyes are Argentina’s newly elected president and the prospect of ushering in a new investment-friendly era of Argentina shale.
For more information on Madalena’s Argentina operations, please click here.
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