Half-yearly Results

MAGNOLIA PETROLEUM PLC - Half-yearly Results

PR Newswire

London, September 25

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

28 September 2015

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

Half-yearly Results

Magnolia Petroleum Plc, the AIM quoted US focused oil and gas exploration and production company, announces its half-yearly results for the six month period ended 30 June 2015.

Operational Overview

Financial Overview

Magnolia CEO, Steven Snead said, “With net production up 10% to 309 boepd as at 1 August 2015, and our producing well count 9% higher at 195 as at 30 June 2015, the first half of 2015 has seen further excellent progress made on the ground in delivering on our strategy to prove up the reserves on our US onshore leases through drilling. Together with our own operations and continued participation in drilling activity alongside leading operators, we expect the momentum behind the business to be maintained going forward despite low oil prices, and I look forward to providing further updates on our progress.”

Chief Executive’s Statement

Over the last six months, 19 wells commenced production on our US onshore leases, while we elected to participate in a further 28. In all, Magnolia’s well count stood at 203 as at 30 June 2015, a 9% increase since 31 December 2014. Post period end, we saw the positive effect this activity has had on our net production, which increased by 10% to 309 boepd between 1 January 2015 and 1 August 2015. Set against the backdrop of a sharply lower oil price compared to the US$90-US$100 per barrel of oil of recent years, our strong operational performance over the first half of 2015 is testament to the quality of our US onshore leases in North Dakota and Oklahoma, particularly in terms of their low costs and prospectivity.

We believe the long term equilibrium in the oil market, the point at which prices more accurately reflect global demand and supply dynamics, lies above current price levels. While calling the tops and bottoms of markets is a thankless task, we are actively taking advantage of today’s market conditions to acquire, at competitive rates, leases in favourable locations with exposure to multiple proven hydrocarbon formations. As a result, Magnolia will be well placed for when both oil prices and drilling activity embark on a sustained recovery. In addition, we will continue to reinvest revenues generated from our production to fund further drilling activity, as we look to deliver on our objective to prove up the reserves on our leases and generate significant value for our shareholders.

In the meantime, the US onshore oil and gas industry has not been standing still but is quickly adapting to the US$40-US$50 per barrel of oil price: rig rates have fallen significantly while cost effective techniques such as drilling multiple wells on single pads are increasingly being employed. The net effect is that the cost of drilling wells onshore US has come down dramatically compared to twelve months ago. As a result, we expect to see a sustained pick-up in non-operated well proposals on our leases from operators. We believe we are already seeing the first signs of this: in Q2 we elected to participate in 16 new wells, a 33% increase on the 12 new wells we signed up for in Q1.

We are also taking advantage of lower rig rates by stepping up our vertical well drilling programme on Magnolia-operated leases. We recently commenced this with the drilling of the Shimanek #2 well. High salt water levels lay behind our decision not to complete the well, thereby limiting the cost of drilling operations to just US$175,000 and freeing up funds for investment into other wells in our diversified portfolio of leases, which holds over 600 potential drilling locations.

The lower oil price has inevitably led to what we believe is a temporary reduction in the value of our proven reserves. In the latest reserves report as at 1 August 2015, our P1 reserves stood at 873 Mbbl of oil and 2,454 MMcf of natural gas and have been assigned an NPV9 of US$20.888 million. Even at this lower level, our proven reserves still far outstrip our current market valuation and therefore provide Magnolia with significant asset backing. We are confident that as oil prices recover, the value of our proven reserves will resume their upwards trajectory, and indeed surpass their previous peaks as new wells come on stream.

Financial Review (extracted from the Strategic Report)

During the six months to 30 June 2015, net production generated revenues of US$1,083,998, compared to US$1,755,459 the previous year. The sharp fall in the price of oil, which has effectively halved over the last twelve months, is responsible for the drop in revenues, both directly by lowering sale prices achieved and indirectly through operators shutting in wells to curtail production. In view of this, the Company has quickly taken steps to reduce overheads to help accommodate the revenue decline: administrative costs totalled US$518,425 as at 30 June 2015 compared to US$578,045 for the six months to 30 June 2014. EBITDA (after removing loss on foreign exchange) totalled US($560,919) compared to US$699,397 in H1 2014.

Tangible assets as at end June 2015 stood at US$11,511,266, a 2% increase on the US$11,294,373 reported as at end December 2014 while intangible assets (new leases and wells that are drilling but not yet completed) stood at US$6,187,408 compared to US$6,481,872 in H2 2014.

Operating Expenses during the period totalled US$1,389,578. US$695,000 of this total is a non-cash item covering depreciation costs. A further US$431,000 was due to Lease Operating Expenses. Labour costs associated with existing wells totalled US$136k, while production tax and marketing fees came in at US$117k.

During the year, £1 million was raised via a placing to fund new drilling operated by a number of leading operators including Chesapeake Energy, Continental Resources and BP America. As a result, 142,857,143 new ordinary shares in the Company were issued.

In June 2015, we appointed Mr Thomas Wagenhofer to the Board as a non-executive director. Mr Wagenhofer, who is a highly respected petroleum engineer and oil and gas investment specialist with over 20 years’ experience in the global E&P sector, has elected to receive the majority of his annual fee in new ordinary shares of the Company. Accordingly a further 428,571 new ordinary shares were issued during the period to Mr. Wagenhofer.

Outlook

Our operational and financial performance over the last six months ought to provide shareholders with considerable confidence in Magnolia’s prospects going forward. To have maintained strong well count and production growth during a period when the prevailing oil price averaged approximately 50% below last year’s level and operators are shutting in wells, clearly demonstrates our strategy to acquire and develop low cost US onshore leases works well at US$40 - US$50 oil. In addition, we are looking to use low oil prices to our advantage. We continue to evaluate potential acquisition opportunities that, at the right price, have the potential to scale up our operations and in the process fast track Magnolia’s development into a leading US onshore oil and gas company.

Finally, I would like to thank the Board, management team and all our advisers for their hard work over the last six months 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

During the six months to 30 June 2015, a total of four wells targeting the Bakken and Three Forks Sanish (‘TFS’) formations in North Dakota commenced production, bringing the total number of producing wells in these formations in which Magnolia has an interest to 41. Of the wells reported during the period, 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). Gross initial production rates for these two wells were:

Gross initial production rates for the two wells which commenced production from the TFS, 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

In their latest report dated 1 August 2015, Moyes & Co. (‘Moyes’) estimate Magnolia’s Bakken 1P reserves at 68,820 barrels of oil and condensate and 37.56MMcf of natural gas to which Moyes has assigned a value of US$1.488 million. Meanwhile, Magnolia’s 1P reserves in the TTFS formation are estimated at 22,550 barrels of oil and condensate and 13.93MMcf of natural gas which Moyes has assigned a value of US$0. 531million.

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. Gross initial production rates for 8 producing wells targeting the Mississippi Lime were reported during the six months ending 30 June 2015:

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 August 2015, Moyes estimated the Company’s Mississippi Lime 1P reserves at 565,000 barrels of oil and condensate and 1,456MMcf of natural gas with a value of US$14.11million.

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 the first half of 2015, Magnolia reported gross initial production rates for the following 8 wells:

In the updated Reserves Report dated 1 August 2015, Moyes estimated the Company’s Woodford 1P reserves at 52,530 barrels of oil and condensate and 786.59MMcf of natural gas with a value of US$2.288million. 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.

Other Formations in Oklahoma

During the period, 2 wells in which Magnolia has an interest commenced production from other formations in Oklahoma, the details of which are as follows:

Summary

During the period, initial production rates were reported for 22 new wells in proven US onshore formations in which Magnolia has an interest. Post period end a further 7 wells have come on stream, bringing the total number of producing wells within our portfolio to 202. 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 second half of the year.

Rita Whittington

Chief Operations Officer

Condensed Consolidated Statement of Comprehensive Income

6 months ended 30 June 2015

Condensed Consolidated Balance Sheet

As at 30 June 2015

Condensed Consolidated Statement of Changes in Equity

Condensed Consolidated Cash Flow Statement

6 months ended 30 June 2015

Notes to the unaudited financial statements

The principal activity of the Group is the acquisition, exploration and development of oil and gas properties primarily located onshore in the United States.

The address of its registered office is Suite 321, 19-21 Crawford Street, London, W1H 1PJ.

These condensed consolidated half-yearly financial statements have been prepared in accordance with the requirements of the AIM Rules for Issuers. As permitted, the Company has chosen not to adopt IAS 34 “Interim Financial Statements” in preparing this half-yearly financial information. The condensed half-yearly financial statements should be read in conjunction with the annual financial statements for the year ended 31 December 2014, which have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union.

The half-yearly financial information set out above does not constitute statutory accounts within the meaning of the Companies Act 2006. It has been prepared on a going concern basis in accordance with the recognition and measurement criteria of International Financial Reporting Standards (IFRS) as adopted by the European Union. Statutory financial statements for the year ended 31 December 2014 were approved by the Board of Directors on 28 May 2015 and delivered to the Registrar of Companies. The report of the auditors on those financial statements was unqualified.

The preparation of consolidated half-yearly financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the end of the reporting period. Significant items subject to such estimates are set out in the Group’s 2014 Annual Report and Financial Statements. The nature and amounts of such estimates have not changed significantly during the interim period.

The same accounting policies, presentation and methods of computation are followed in this condensed consolidated financial information as were applied in the preparation of the Company’s annual audited financial statements for the year ended 31 December 2014.

The presentational currency of the Group is US dollars.

The calculation of earnings per share is based on a loss of $1,403,599 for the 6 months ended 30 June 2015 (6 months ended 30 June 2014: loss $381,520) and the weighted average number of shares in issue in the period to 30 June 2015 of 1,056,815,707 (30 June 2014: 910,672,851).

The basic and diluted loss per share in the period ended 30 June 2015 is the same, as the effect of the exercise of share options and warrants would be to decrease the loss per share.

The basic and diluted loss per share in the period ended 30 June 2014 is the same, as the effect of the exercise of share options and warrants would be to decrease the loss per share.

Impairment review

Drilling costs and mineral leases represent acquired intangible assets with an indefinite useful life and are tested annually for impairment. Expenditure incurred on the acquisition of mineral leases is capitalised within intangible assets until such time as the exploration phase is complete or commercial reserves have been discovered. Exploration expenditure including drilling costs are capitalised on a well by well basis if the results indicate the existence of a commercially viable level of reserves.

The directors have undertaken a review to assess whether circumstances exist which could indicate the existence of impairment as follows:

Following their assessment the directors recognised an impairment charge to the cost of mineral leases of $379,354 (2014 - $229,385) in respect of expired mineral leases.

The Directors believe that no impairment is necessary on the carrying value of goodwill.

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 195 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

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