Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.

Magnolia Petroleum and the danger of locking yourself into garbage

By Ben Turney

14 July 2014 11:51

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Five months ago, Tom wrote this damning assessment of Magnolia Petroleum’s (MAGP) business model and market capitalisation. So far, his view has been entirely vindicated. Despite the howls of protests from Magnolia’s ardent supporters, not to mention the absurd accusations I’ve read over the months accusing ShareProphets of being involved in a shorting conspiracy, I actually don’t think Tom went far enough in his criticism of this company. The business model is not clever and it is not shrewd. If you told American private investors about what this company did, they’d laugh at you. There is a very good reason why this company is listed here, with its American holdings, American directors and American headquarters. And I’m afraid to say that reason isn’t because certain British private investors represent the savviest money in global markets...

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Comments

Steve

14 July 2014, 12:10

Ben,

You indicated once that you were planning a write up on Caza – is this still in the pipeline?

I’m enthusiastic about Caza and have a target price in mind of 30p, however I would welcome any contrarian opinions (or support of my target price).
wildrides

14 July 2014, 13:19

If you must hold a company like this then buy Nostra . They at least tell you what the wells are producing and claim to be covering costs from oil sales at an operational level .
brambles

14 July 2014, 17:46

wildrides

Nostra tells you what a 10 day average is and then keeps stum for 12 months, and you then have to work out what they are producing from the yearly accounts, which is still nigh on impossible!!!

and as for covering costs on an operational basis from oil sales, where are the figures to back this up, it’s only one Mans word, and he fails to publish the Boepd .
Richard

14 July 2014, 18:28

Thanks for the interesting article, Ben. Though, as a Magnolia shareholder, I guess I’m at the receiving end of this critique but I do appreciate that you don’t find it necessary to use intemperate language when writing a scathing piece.

There are some instances where I – and I’m sure many others – would not take issue with you. Many on the bulletin boards have already called for production figures ; we are well aware that IP rates do decline pretty significantly.

However, I take it as a positive that the Company is funding new well participations out of revenues and a credit facility at a very good rate, currently 4.25 % ; far better than any type of equity based funding, especially at that rate, imo . And Maggie’s NRI percentages are increasing as we move forward. (badly needed, I would agree)

Your point, Ben, about overheads including PLC costs, while valid, surely is not peculiar to Magnolia. In any case, these costs should remain relatively stable and become a diminishing charge in percentage terms as revenues increase.

I guess I’ll be hanging on to my shares. Maggie may not be the most exciting share around but I feel the model will work. – omo, of course.
wildrides

14 July 2014, 19:55

Brambles
the points you make are valid and I am not advocating buying Nostra except in preference to mag . Both are shite but mag is more shite .

reach for the barge poles is a better strategy .
Ben Turney

15 July 2014, 10:10

@Steve – Caza is on my list. I do need to get round to that one.

@Richard – thank you for your courteous reply. I agree the problem of the PLC costs isn’t unique to MAGP, but we do cover this in other stocks. There are plenty of companies, which I don’t believe deserve to be listed as they stand little to no chance of ever genuinely delivering shareholder value.

I take your point about the credit facility and that the company is going to pay for participation in new wells, using internally generated funds. However, with the current valuation of the stock, I don’t believe either can sustain the market cap on fundamental basis. There just isn’t the upside on offer to justify the current price.

I do wish you the best of luck with it though and hope you can prove me wrong!