Madalena Energy (CVE:MVN) has a solid foundation for growth with its high impact horizontal plays, according to analysts at Industrial Alliance Securities, which initiated coverage on the junior oil and gas producer with a buy rating and C$1.35 price target.
The company has exposure to both domestic and international exploration and development plays, with approximately 100,000 net acres in Western Canada, and 1.0 million net acres in Argentina, including in the famous Vaca Muerta shale.
"Leave the elephant hunting to Africa; this is dinosaur territory with dino size prize potential. Madalena offers investors a low cost entry into development plays in Alberta while providing significant near and medium term international upside in Argentina," wrote analyst Michael Charlton in the research note released to clients early Thursday.
"The company has a solid mix of high impact horizontal resource plays, prime unconventional shale acreage in the Vaca Muerta and Agrio Shales, and a large portfolio of conventional development & exploration assets.
"Optionality on success is high, with even a small percentage of the company’s land base potentially yielding net asset value additions that are multiples above current share prices."
Argentina has become an oil and gas destination, with the country estimated to hold 27 billion barrels of technically recoverable oil and 802 trillion feet of technically recoverable shale gas, much of it attributed to the prized Vaca Muerta shale formation in the Neuquen basin, the fourth largest shale oil deposit in the world.
Madalena’s acreage is positioned in some of the key areas of the basin where the highest activity levels in terms of dollars spent offset its blocks.
Charlton writes that Madalena has a solid Argentina production base, along with multi-billion barrel international upside.
"The shale formations that Madalena is targeting are simply massive in both the Vaca Muerta and Agrio shales. They are exponentially larger than some of the most highly explored and developed shale resources found to-date, such as the Bakken and Eagle Ford shale plays."
"Madalena also has a large land position and big upside in the Mulichinco tight sand play which is similar to the Canadian Montney," the analyst added.
Madalena, following its acquisition of Gran Tierra’s Argentinean assets in June, now has 14 concessions across Argentina over 1 million net acres of land, compared with three blocks over 132,000 acres previously. It now has a major foothold in an area dominated by industry majors like YPF, Chevron, Total, Exxon and several others.
It also has a land base with more than 150 net sections in Western Canada, with a large inventory of horizontal development locations.
The Industrial Alliance analyst believes the horizontal development plays in Canada maintain a significant inventory of drill ready horizontal locations across three key resource plays in the Western Canadian Sedimentary Basin that could "exponentially grow both production and cash flow."
Additional opportunities for potential Viking oil, Rock Creek oil and the Duvernay shale also exist, he said.
And the company has near-term production in sights. Earlier this summer, it announced an active drilling program to take place in Argentina and Canada in the remainder of 2014, setting itself up for a busy 2015.
"With very favorable results from the area to-date, 2014 could be a monumental year for Madalena investors," Charlton wrote.
Over the next 17 months, the company is planning to invest its cash flow and financial resources on a combination of lower risk, conventional development drilling and on unconventional shale and tight sand delineation in the Vaca Muerta and Lower Agrio shales of Argentina.
It will also continue to seek potential partners on its multiple blocks to deliver on its farm-out strategy.
The Industrial Alliance analyst said that while both its Argentinean and Canadian plays provide attractive economics, Madalena's resource potential and overall asset portfolio in Argentina dwarfs its Canadian development potential.
He highlighted the company's recent acquisition of assets from Gran Tierra as "highly accretive", adding significantly daily production volumes and cash flow, with a large inventory of drilling locations, soldifying "Madalena as a sizeable, emerging player within the Argentina energy sector."
Shares of Madalena were up at 49 Canadian cents on Friday, up almost 8 percent in the last five days.