Final Results

MAGNOLIA PETROLEUM PLC - Final Results

PR Newswire

London, May 28

Magnolia Petroleum Plc / Index: AIM / Epic: MAGP / Sector: Oil & Gas

29 May 2015

Magnolia Petroleum Plc (‘Magnolia’ or ‘the Company’)

Final Results for the year to 31 December 2014

Magnolia Petroleum Plc, the AIM quoted US focused oil and gas exploration and production company, announces its final results for the year ended 31 December 2014.

The Company will be holding a conference call for analysts and investors later today at 11:00 BST. To participate, please dial 0808 109 0701, or +44 (0) 20 3003 2701 if calling from outside of the UK, using access code 3174395#. To view a copy of the presentation online, please go to www.meetingzone.com/presenter using 3174395# as the participant pin. Questions can be submitted during the call via the computer screen. The online presenter programme is not compatible with iPads and iPhones, those using these devices can submit questions by email to [email protected] referencing ‘Magnolia call’. Please note, the call and webpage will be made live at 10:50 BST.

Highlights

Magnolia CEO, Steven Snead said, “As at year end, Magnolia Petroleum had interests in 176 producing wells in US onshore formations; net proven reserves of approximately 1 million barrels of oil and 3 MMCF of gas; and production of 281 boepd which generated revenues of US$3,851,905. In the three years since AIM admission, we have successfully built a low cost, highly revenue generative US onshore focused oil and gas company. We believe there is a lot more to come. Thanks to having a diverse portfolio of leases with multiple drilling opportunities that are profitable below current oil prices, we have a strong platform for growth in the years ahead.

“Above all, Magnolia has significant asset backing in the form of net proven reserves. These have been independently valued, using oil prices close to today’s levels, at US$26.65 million, far higher than our market valuation. We have more drilling planned for the year ahead, including two 94% owned Magnolia operated wells. As the recent director share purchases show, the Board is committed to working hard to ensure Magnolia’s market cap fully reflects the value generated to date, let alone the excellent growth potential within our portfolio.”

Chief Executive’s Statement

From the outset, our strategy has been to generate value for our shareholders by acquiring US onshore leases in historic low cost hydrocarbon formations and prove up the reserves through drilling. With this in mind, I am pleased to report the year under review saw excellent progress made with all our key performance indicators showing strong growth. The number of wells in which Magnolia has an interest is up 25% on the year; our proven oil reserves have jumped 37% to 985 Mbbls; while proven gas reserves have increased 39% to 2,905 MMcf of gas.

Thanks to 48 new wells coming on stream over the course of the year, the upward trajectory of our production has also been maintained. Daily production stood at 150 boepd as at 1 April 2014, 257 boepd as at 1 July and 281 boepd by the end of the year. The higher production has translated into another strong financial performance with revenues up 58% to US$3,851,905 and adjusted EBITDA of US$2,596,658 (defined as EBITDA, plus impairment of mineral leases and less differences on foreign exchange), a 212% increase on the previous year. Total income for the year, including gains on disposal of mineral leases and consultancy fees, increased to US$5,187,129 compared to US$2,687,617 in 2013.

Aside from another record performance for Magnolia, 2014 was notable for the sharp reverse in the oil price which abruptly put an end to an extended period of subdued oil price volatility. The numbers speak for themselves. In January 2014, a barrel of West Texas Intermediate exchanged hands for US$90. A year later, the price had fallen to US$54 with the majority of the decline experienced in the last few months of 2014. Such a swift and sharp fall has inevitably led to operators realigning their budgets to the lower oil price environment, resulting in both capex and new drilling activity being reduced. As we drill alongside established operators, it is therefore not surprising that we have seen a reduction in new well proposals, particularly for the more expensive horizontal wells targeting unconventional formations such as the Bakken and Three Forks Sanish in North Dakota, which have higher costs and require higher oil prices to breakeven.

While Magnolia’s overall drilling activity is expected to be lower during the current year this does not mean 2015 will see an end to our unbroken sequence of consecutive years of reserves growth. Thanks to the quality and diversity of Magnolia’s portfolio of leases, there is considerable scope to significantly prove up reserves this year, even in the current low oil price environment. This is largely due to our focus on acquiring leases in Oklahoma where the presence of multiple payzones is proven, each with their own breakeven oil price. These include the deeper formations such as the Woodford and Mississippi Lime and the shallower Redfork Sand and the Lower Skinner Sands. When oil prices are high we can look to drill the deeper more costly formations such as the Woodford, and when oil prices are low we can switch our focus to the shallower reservoirs, such as the conventional Lower Skinner Sands, which remain profitable at current oil prices.

We are doing precisely this. On those leases where Magnolia is the operator and has 50% plus interests, we have identified a number of potentially high impact low cost drilling locations and we intend to drill two of these, the Roger Swartz #2 and the Shimanek #2. Both will be vertical, at an estimated cost of US$575,000 per well, are considerably cheaper than horizontal wells. Following the farm-out of a 6% working interest to an industry partner, Magnolia retains a 94% working interest and a 76.375% net revenue interest in each well. Thanks to these substantial interests, the two wells have the potential to materially add to Magnolia’s production and reserves. The Roger Swartz #1 vertical well, which we successfully drilled in 2013 and contributed recoverable reserves of up to 56,500 boe, provides a readymade example of how these low cost wells can significantly add to proven reserves. We are currently advancing plans to drill these two wells.

While drilling activity among US onshore operators is lower, we are still receiving proposals to drill new wells on our leases. So far in 2015 we have elected to participate in the drilling of nine wells in Oklahoma within formations such as the Woodford and Mississippi. Needless to say we are only electing to participate in those wells where the economics remain attractive at current oil prices. It is worth noting that with drilling activity lower, rig availability is on the rise. This in turn reduces drilling costs, which helps soften the impact of lower oil prices and clearly has positive implications for payback. We are looking to take advantage of this for our own operated wells.

Financial Review

During the year, net production generated revenues of US$3,851,905, a 58% increase on last year’s US$2,443,244. Adjusted EBITDA (defined above) totalled US$2,596,658 (2013: US$833,223). In addition, during the year under review the Company received US$1,002,091 for providing consulting services to an international company acquiring an oil and gas project in Oklahoma. A further US$329,850 was generated as a result of the sale of 24 smaller interests in non-core wells. All funds generated during the year were reinvested into drilling new wells. The profit for the year was US$1,693,012 (2013: loss of US$281,817).

Tangible assets as at end December 2014 stood at US$11,294,373, a 35% increase over the year (2013: US$8,352,385) while intangible assets (new leases and wells that are drilling but not yet completed) were US$6,481,872 from US$6,400,258 in 2013. In line with our policy to invest as much of our revenues into drilling new wells and acquiring additional leases, administrative costs continue to be tightly managed.

In addition the Company secured a two year US$6m revolving credit facility. An initial borrowing base of US$4,596,944 was agreed which has subsequently been decreased due to the recent downturn of the oil price since the year end to US$3,284,210. This still gives us sufficient funds to acquire leases and participate in the drilling of new wells.

Outlook

Like all oil and gas companies around the world we would prefer to see higher prices for our end product. Like all markets, forecasting the future direction of prices is a thankless task, particularly over the short term. What is more certain is that where there has been a rapid turnaround in sentiment as we have seen in global oil markets, there is no shortage of opportunities for companies with strong balance sheets to capitalise on. Magnolia with its low corporate overheads, growing revenues and strong asset backing which our proven reserves provide, is one such company. We have already been taking advantage of the current market dynamics to acquire highly prospective acreage at attractive rates and we continue to evaluate a number of other potential acquisitions that match our criteria. While maintaining strict control over costs and overheads, we view the fall in oil prices more as an opportunity rather than a threat; one in which we can look to accelerate our stated strategy to build Magnolia into a significant oil and gas company focused on proven US onshore formations.

Finally, I would like to thank the Board, management team and all our advisers for their hard work over the course of the year and also to our shareholders for their continued support.

Steven Snead

Chief Executive Officer

Chief Operations Officer’s Report

The Bakken / Three Forks Sanish Formations, North Dakota

In 2014, a total of four wells targeting the Bakken and Three Forks Sanish formations in North Dakota commenced production, bringing the total number of producing wells in these formations in which Magnolia has an interest to 37. Of the wells reported during the year, two are producing from the Bakken, a reservoir which is estimated to hold 3.65 billion barrels of undiscovered, technically recoverable oil (2013 US Geological Survey). Initial production rates for these two wells were:

Initial production rates for the two wells which commenced production from the Three Forks Sanish formation, a separate reservoir lying directly below the Bakken which is estimated to hold as much as 3.73 billion barrels of recoverable oil (2013 US Geological Survey), were as follows:

Boepd: Barrels of oil equivalent per day

Bopd: Barrels of oil per day

Magnolia holds leases in respect of 11,520 gross acres across 28 sections, equating to 421 net mineral acres within the boundaries of the Bakken / TFS formations. In their latest report dated 1 January 2015, Moyes & Co. (‘Moyes’) estimate Magnolia’s Bakken 1P reserves at 68,000 barrels of oil and condensate and 31 MMcf of natural gas to which Moyes has assigned a value of US$1.63 million. Meanwhile, Magnolia’s 1P reserves in the Three Forks Sanish formation are estimated at 20,000 barrels of oil and condensate and 10 MMcf of natural gas which Moyes has assigned a value of US$0.526 million.

Mississippi Lime Formation, Oklahoma

The Mississippi Lime is an historic oil and gas system that has been producing at depths ranging from 4,500 to 7,000 feet from several thousand vertical wells for over 50 years. Initial production rates for 18 producing wells targeting the Mississippi Lime were reported during 2014:

Magnolia holds leases covering approximately 5,500 net mineral acres in the Mississippi Lime. The acreage includes leases with working interests of up to 100%. In the latest Reserves Report dated 1 January 2015, Moyes estimated the Company’s Mississippi Lime 1P reserves at 583,000 barrels of oil and condensate and 1,612MMcf with a value of US$18.323 million.

Woodford Formation, Oklahoma

The Woodford lies below and is the source rock to the Mississippi Lime formation in Oklahoma. As a result much of Magnolia’s leases in Oklahoma are prospective for both the Woodford and the Mississippi Lime. In 2014, Magnolia reported initial production rates for the following 21 wells:

In the updated Reserves Report dated 1 January 2015, Moyes estimated the Company’s Woodford 1P reserves at 79,000 barrels of oil and condensate and 1,094 MMcf natural gas with a value of US$3.19 million. As the Woodford is at an earlier stage of development compared to the Mississippi Lime, the Reserves Report does not fully reflect the potential of the formation. This is expected to change as more wells are drilled to the Woodford.

Like the Bakken, the Woodford formation in Oklahoma is an established reservoir that has been reopened following the introduction of horizontal drilling and stimulation technology.

Hunton and Other Formations in Oklahoma

During the year, five wells in which Magnolia has an interest commenced production from the Hunton and other formations in Oklahoma, the details of which are as follows:

Robert Jo 1-8H (0.3%): 815 boepd (Springer)

Lamdin (0.6%): 138 boepd (Cleveland)

Theilen (.0013%): 88 boepd (Cleveland)

Yani (3.75%): 275 mcf/d (Hunton)

Calypso 0.7%): 23.63 boepd (Hunton)

Summary

During the year, initial production rates were reported for 48 new wells in proven US onshore formations in which Magnolia has an interest. Since the year end a further fifteen wells have come on stream, bringing the total number of producing wells within our portfolio to 192. In line with our strategy, revenues generated from production are reinvested into new drilling activity, as we look to prove up the reserves on our leases and generate value for our shareholders. I look forward to providing further updates on our progress over the course of the year.

Rita Whittington

Chief Operations Officer

For further information on Magnolia Petroleum Plc visit http://www.magnoliapetroleum.com/ or contact the following:

Notes

Magnolia Petroleum Plc is an AIM quoted, US focused, oil and gas exploration and production company. Its portfolio includes interests in 192 producing and non-producing assets, primarily located in the highly productive Bakken/Three Forks Sanish hydrocarbon formations in North Dakota as well as the oil rich Mississippi Lime and the substantial and proven Woodford and Hunton formations in Oklahoma.

Summary of Wells

* * ENDS * *

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

As at 31 December 2014

consolidated Statement of Comprehensive Income

Year ended 31 December 2014

CONSOLIDATED Statement of Changes in Equity

Year ended 31 December 2014

CONSOLIDATED Statement of Cash Flows

Year ended 31 December 2014

NOTES TO THE FINANCIAL STATEMENTS

Year ended 31 December 2014

1. GENERAL INFORMATION

The Consolidated Financial Statements of Magnolia Petroleum plc (“the Company”) consists of the following companies; Magnolia Petroleum plc and Magnolia Petroleum Inc. (together “the Group”).

The Company is a public limited company which is listed on the AIM of the London Stock Exchange and incorporated and domiciled in England and Wales. Its registered office address is Suite 321, 19-21 Crawford Street, London, W1H 1PJ.

2. Summary of significant accounting policies

The principal accounting policies applied in the preparation of these Consolidated Financial Statements are set out below.These policies have been consistently applied to all the years presented, unless otherwise stated.

2.1 Basis of preparation of Financial Statements

The consolidated Financial Statements of Magnolia Petroleum plc have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union, IFRIC Interpretations and those parts of the Companies Act 2006 applicable to companies reporting under IFRS.

The Financial Statements have been prepared under the historical cost convention.

The preparation of Financial Statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group’s accounting policies.The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated Financial Statements, are disclosed in Note 4.

2.2 Basis of consolidation

The consolidated Financial Statements consolidate the Financial Statements of Magnolia Petroleum plc and the audited Financial Statements of its subsidiary undertaking made up to 31 December 2014.

Subsidiaries are all entities over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases.

The Company acquired Magnolia Petroleum Inc. on 23 October 2009 through a share exchange. As the shareholders of Magnolia Petroleum Inc. had control of the legal parent, Magnolia Petroleum plc, the transaction was accounted for as a reverse acquisition in accordance with IFRS 3 “Business Combinations”. The following accounting treatment has been applied in respect of the reverse acquisition:

The cost of acquisition was measured as the fair value of the assets acquired, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus certain costs directly attributable to the acquisition.

In accounting for the acquisition of Magnolia Petroleum Inc., the Company has taken advantage of Section 612 of the Companies Act 2006 and accounted for the transaction using merger relief.

Investments in subsidiaries are accounted for at cost less impairment. Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies used into line with those used by other members of the Group. All inter-company transactions and balances between Group entities are eliminated on consolidation.

2.3 Going concern

The Group secured a two year $6 million revolving credit facility during the year, with a current borrowing base limit of $3,284,210. The loan maturity date is 7 September 2016. With the exception of the Current Ratio covenant, which has been temporarily waived by the provider of the revolving credit facility, all covenants were satisfied. Funding future growth will however be via the Group’s own generated cash-flow, wherever possible. The Group’s cash flow forecasts and projections prepared up to 30 June 2016 show that the Group has sufficient funds and facilities to fund its ongoing operating costs. The Directors have a reasonable expectation that the Company and Group has adequate resources to continue in operational existence for the foreseeable future. For this reason, the Directors continue to adopt the going concern basis of accounting in preparing the Financial Statements.

3. Related Party Transactions

Transactions with Group undertakings

During the year ended 31 December 2014 the Company charged management fees of $123,780 (2013: $118,899) to Magnolia Petroleum Inc, the Company’s wholly owned subsidiary for the provision of administrative and management services. $123,780 (2013: $118,899) in relation to these fees was outstanding at the balance sheet date and is included within Trade and other receivables. As at 31 December 2014, the amount due to the Company from Magnolia Petroleum Inc was $12,076,229 (2013: $13,005,975).

All Group transactions were eliminated on consolidation.

Transactions with Enerlex Inc

Steven Snead and his wife have a 100% interest in the issued share capital of Enerlex Inc. (“Enerlex”). The rental agreement between Enerlex and Magnolia Petroleum Inc was revised on 30 September 2014 whereby Enerlex agreed to provide Magnolia Petroleum Inc on a month to month basis with office premises and services for $3,500 per month. A charge of $33,000 (2013: $30,000) was recognised during the year under the former and revised agreement.

Enerlex gave an undertaking to Magnolia Petroleum Inc dated 15 November 2011 whereby Enerlex undertakes that if any of the mineral leases granted to Magnolia Petroleum Inc on any of the mineral interests in the Woodford/Hunton play in Oklahoma expires at the end of the primary period because of non-drilling, Enerlex will at Magnolia Petroleum Inc’s request grant a further three year lease on the same terms as the expired lease.

4. Events after the reporting period

On 2 April 2015, as a result of the volatile oil price movements during the year to 31 December 2014, the borrowing base limit of the Group’s credit facility was decreased from $4,596,944 to $3,284,210.

5. NOTICE OF AGM AND POSTING OF ANNUAL REPORT

Notice is given that the Annual General Meeting of Magnolia Petroleum plc will be held at 10.00am on 25 June 2015 at 18452 E 111th, Broken Arrow, Oklahoma, OK 74011. The Company’s Annual Report, together with a Notice of Annual General Meeting will be sent to shareholders shortly which will also be available on the Company’s website http://www.magnoliapetroleum.com/.