The last quarterly report by Marquee disclosed strong results from Michichi. The company reported 4 of its horizontal wells averaged 182 boepd (57% oil) per well over a period of 60 days (IP60). At an all in cost of $2.25M per well, that comes out to $12,300 per barrel of production added. There aren’t many resource plays with similar capital efficiencies in the WCSB.
The market however focused on the reduced guidance and sold the stock.
In its Q2 report, Marquee reduced its 2012 capital budget by 17% and its exit rate to 3,200-3,400 down from 3,600 boepd. This market hates it when a company misses guidance as much as it hates excessive debt. Even if reducing guidance was the right thing to do for MQL in order to protect the balance sheet, it still got punished.
There are 2 factors behind the reduced guidance:
- Lower commodity prices in Q2 impacted cash flow; remember the company had no hedges.
- Tie in delays! There’s a lot of money lost waiting 2 months to tie-in a successfully drilled well.
The first item can be mitigated; MQL has started to layer in hedges on their heavy oil production. I look forward to a significant amount of oil hedged in Q3’s report.
As for the second item, the CEO assured me that the tie-in delays are unacceptable and that other options are actively being explored. The CEO has done a great job so far since he took the helm so I am confident this issue will get addressed in the coming months.
Too bad the market chose to ignore the important data coming out of Michichi.
Michichi is a multi-zone play with the potential to produce from the Banff, Detrital and Ellerslie formations. All 3 have been successfully tested by the company. Production from the Banff and Detrital formations is 70% weighted to oil.
Multizone potential also means some wells are candidates for recompletion. A well that produced from the Banff can be recompleted to produce from another zone if it’s present. The capital efficiencies would be even stronger!
Now here’s the fun part.
Recent land sales in Marquee’s area fetched $750,000/section. The company assembled 86 net sections since the beginning of the year paying on average $64,000/section.
Now let’s assume that not all the land is equally valued. Let’s assume the land is worth on average $250,000/section with 84 out of the 86 sections undeveloped. What is Michichi worth on its own?
$250,000/section * 84 sections = $21M for land
900 boe/d production * $70,000/boe = $63M for production (70% oil)
That’s a total of $84M; divide it by 52.7M shares and you get $1.59 per share. That’s higher than the actual market cap of the company!
If we remove the $44M in debt, we still get $0.76 per share.
At the current share price MQL.V 1.15 [+0.03], you not only get the Cardium for free, you get Coutts for free and Lloydminster for free. Don’t you love free stuff?
So much for market efficiency!
When you invest in a company, management is as important as the property. MQL in my opinion has both; they put together a large land package in a very short period of time. At this rate, I wouldn’t be surprised to see them exit 2012 with more than 100 net sections of land at Michichi.
Marquee now enjoys a lot of running room at Michichi having assembled more than 100 net drilling locations. Each of these wells pays out in 12 months or less allowing the company to quickly recycle its cash. But let me remind you that it is crucial for the company to address the tie-in delays in the area going into 2013.
Due to the strong economics of heavy oil at Lloydminster and light oil at Michichi, this is where the remaining $12M in capital will be spent. For the remainder of the year, Marquee plans to drill 2 net HZ Banff wells in Michichi and 3 net VT wells at Lloyminster. Production additions will also come from 5 wells (1 HZ and 4 VT) awaiting tie in at Michichi.
Management is confident they will hit the exit rate guidance of 3,200 boepd for 2012.
The company is currently trading at a cheap $33,000/boe based on current production of 2,900 boepd (55% oil). But there’s no point in discussing valuations and target prices as the market is simply not there for junior producers. The market may still push the stock lower in the coming months courtesy of Europe and the US. However, in my opinion, those who will take advantage of fire-sale prices will be handsomely rewarded. I believe it is only a matter of when not if the market comes back.
What do you think of MQL?