I just read a newspaper clipping talking about the various shale plays in the USA. In July BHP Billiton placed a big bet on this becoming a massive new supply of oil and gas when it bought Petrohawk for $17bn. In November it announced plans to spend $4.5bn on developing it. And from the sublime to…well, to the smaller. Our new client Magnolia Petroleum (MAGP.L)

Magnolia was hot to take up its rights to participate in the wave of new intense horizontal drilling that was overtaking the various shale plays. The action is happening right now, so it either raised funds to participate (in tiny percentages of many wells, blanket approach) or lose the opportunity. It benefits from an early warning system because the principal shareholder owns the ‘mineral rights’ which means before the trend starts, he starts getting applications from oil companies for the rights to drill on his acreage, automatically offering him participation rights. These rights flow through to Magnolia. This happened before on the Bakken formation (North Dakota), and now on the Three Forks Sanish (separate rights, below the Bakken formation).

Continental Resources has been finding up to 4 separate benches of dolomite , all containing oil, below the Bakken. The Three Forks Sanish is 180-270ft thick in their experience so far. Continental has announced plans to spend $1.75bn drilling into it in 2012. Their rate of return is averaging 40 – 50% on a typical $8m horizontal multi-frack well, that will yield just over 600,000 boe over its life.

Magnolia had spent just over £300k participating in wells since reversing into a PLUS shell, all of which were successful and one of which paid off its costs in full before the invoices for drilling had come in! It did not want to miss out on this wave of new development that it had the rights to piggy back on to. It came to AIM as a tiny micro-cap because it not only wanted some funds immediately, but wanted access to more as it proved that what it was doing was profitable. A small amount of money was raised at 0.55p and that money is already producing drilling results, which are immediately producing cash flow. There are many more wells being drilled in the coming year.

I expect this company is going to be worth two…

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