National Bank Financial initiated coverage Thursday on Madalena Ventures (CVE:MVN), with an outperform rating and a 12-month price target of $1.00, saying that current share price levels offer an attractive entry point for investors ahead of several key Canadian and Argentinian well results.
The junior oil and gas E&P company is focused on ramping development across three key light oil and liquids-rich resource plays in Canada while delineating large-in-place shale and unconventional resources in Argentina.
Analyst Darrell Bishop notes that domestic assets provide "solid foundation" for growth. The company holds 153 net sections of land in the Greater Paddle River area of Central Alberta, containing three oil and liquids rich plays - Ostracod, Wilrich/Notikewin, and Nordegg.
The company is on track to drill between four and five horizontal wells in the region before spring break-up, and with steady drilling planned through 2013, production could grow from 900 barrels of oil equivalent per day (boe/d) to more than 2,000 boe/d at exit this year, the analyst predicts.
"A large inventory of horizontal locations provides running room to support long-term production growth," he adds.
Meanwhile, the company's international assets "offer tremendous unconventional exploration potential", Bishop says. Madalena holds three large blocks - Coiron Amargo, Curamhuele, and Cortadera - within the prolific Neuquén Basin of Argentina.
The blocks, which are stacked with conventional and unconventional plays, are also surrounded by majors, with the company's near-term focus on delineating the large in-place resource potential across the "world-class Vaca Muerta and Agrio shales", alongside high impact conventional and tight sand plays.
Bishop notes that the company is just one of a handful of early entrants into the Neuquén Basin, as key acreage positions within the unconventional shales have since been locked up with limited options available to those looking for entry or to grow existing land positions.
Madalena’s Coiron Amargo concession is next to YPF’s Loma La Lata block, the epicentre of Argentina’s shale revolution, and in the neighborhood of $2.5 billion of shale resource joint ventures announced in the last three months.
An initial resource report for all three blocks is expected late this quarter or early in the second, and could be a major catalyst, Bishop says, while a blend of seven to 10 high impact new drills and re-entries are expected to provide "plenty of news flow" through 2013.
The analyst also took note of some key risks, both operational and regulatory. In Canada, while vertical well control has been shown across the plays, the application of horizontal multi-stage frac technology is early stage.
Meanwhile, in Argentina, he says that while there are "several positive leading indicators" over the past two months pointing to the start of a turnaround in 2013, the analyst sees a need for the government to extend "additional olive branches" to investors if they are to regain the market's confidence.
Many Argentinian stocks were severly impacted by the nationalistic policies enacted by the Argentina government in early 2012, following the expropriation of YPF from Repsol S.A. in April last year.
Still, Bishop believes that investment appetite is returning in Argentina as the government is beginning to work with industry again as highlighted by the reinstatement and extension of some previously revoked exploration permits, as well as by cuts to oil export taxes and the pledge of higher domestic gas prices.
There are also signs that industry is getting back to work, as seen by two recent large joint ventures signed between state-owned YPF and majors Chevron and Bridas/CNOOC.
"With valuation trading below that of its nearest Argentinean peer and supported by the junior domestic peer group, combined with several recent positive leading indicators of an Argentina turnaround, we believe current levels offer an attractive entry point ahead of several key Canadian and Argentinian well results and the company's inaugural resource report for all three Argentinan blocks."
The analyst also highlights the company's Canadian assets, which not only provide the opportunity for aggressive growth, but also provide stability and buy time to delineate the substantial unconventional resource potential in Argentina.
Madalena also received coverage Thursday from broker Casimir Capital, which maintained its $1.30 price target on the junior following an update on the Coiron Amargo block today. The company's CAN-8 development well was successfully completed for production, and is flowing at 234 boe/d after 12 days without fraccing.
The oil and gas producer also noted it is making progress on plans to tie in four to five wells before spring break-up in Alberta, with its goal nearly achieved.
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