PORTLAND, Maine, Oct. 21, 2011 /PRNewswire/ --
Dear Shareholders,
I would like to take this opportunity to introduce myself as
Magellan's new President and CEO and to discuss some recent
developments and new priorities at Magellan (NASDAQ: MPET) (ASX:
MGN).
As you know, we have recently changed management and approved
the transition of our Portland
headquarters to Denver. By
moving to the oil and gas hub of the Rocky Mountains, we will be
able to better access the industry network and professional talent
pool that were out of reach in Maine. In addition, the consolidation of
two of our offices provides a favorable context to focus on cost
cutting, which I promise to be a priority. Finally, this move
positions the Company leadership closer to Poplar Field and the
development activities we are pursuing there.
Magellan recently announced that Deloitte & Touche elected
not to stand for re-appointment as the Company's auditing firm for
fiscal year 2012. Independently, Magellan has been actively
considering a transition to new auditors in recent months as a
means of reducing our public company costs. Thus, Deloitte's
decision, though more sudden than expected, allows us to accelerate
our plans and coincides nicely with our move to Denver. And so it is with great pleasure
that I can now confirm we have appointed EKS&H as our new
auditors. As the largest accounting firm in Colorado with extensive experience in oil and
gas, EKS&H is a perfect fit for Magellan, and we look forward
to a productive relationship.
Our biggest challenge of 2011 is refocusing the Company after
the disappointment of not closing the Evans Shoal transaction.
Completing this deal and developing a multi-billion dollar
project would have been a "home run" for a company our size, but it
also consumed significant time, money, and management attention
while detracting from the Company's other priorities.
It is with this experience in mind that we have decided to pass
on deploying capital and resources in certain Russian investment
opportunities recently brought to our attention by Nikolay
Bogachev, our largest shareholder and a Board member. Mr.
Bogachev has been very successful in Russia and has brought experience and good
ideas to Magellan. I also worked in Russia extensively and have had some success
there (but not on the scale of Mr. Bogachev). Our Board has
carefully reviewed the alternative paths and determined that
Magellan has higher priorities to tend to within our current asset
base, but we will always consider growth opportunities at the right
time.
As we move forward, my focus will be on realizing the value of
our existing assets and operations, since I believe very strongly
that they offer the surest path to generating outsized shareholder
returns in the near term. Today our shares trade at a
valuation approximately equal to our cash balance (including the
Santos asset swap proceeds). This is nonsensical and implies
our extensive asset portfolio has little to no value. Based
on our acreage, our proven reserves, our existing production
(including the soon to be completed Markwells Wood well in the UK),
and our long-term GSA at Palm Valley (greater than $100 million over 17 years), we should enjoy a
significantly higher share price than we do currently. In
addition, there is considerable option value embedded in our
assets, such as from the CO2-EOR program or the undeveloped
formations at Poplar, or our vast UK shale acreage. Any of
these alone could change the order of magnitude of our valuation.
I discuss these assets and activities in more detail
below:
Australia
Through our Australian subsidiary, MPAL, Magellan is one of the
oldest oil companies in Australia,
with an established operating platform going back more than 30
years. I had the pleasure of being in Australia two weeks ago when our CFO of MPAL
celebrated his 25th anniversary with the Company, a testament to
the experience, capability, and motivation of our Australian staff.
We have spent the last three months completing the
rationalization of our Amadeus Basin assets. By swapping our
ownership interests with Santos, we will for the first time in our
history own and operate 100% of our Australian productive base (the
Palm Valley and Dingo Fields) and enjoy the flexibility to develop
these assets according to our own needs. At the same time,
our gas sales agreement with Santos, who will now own 100% of the
Mereenie Field, will provide Magellan with over $100 million in future revenue while preserving a
key strategic relationship. For over 30 years Santos has been
a valued corporate partner of Magellan. As one of
Australia's leading companies,
they have a strong management team and excellent resources.
Although we will no longer be joint venture partners, we will
continue to foster a close relationship with them, and we look
forward to our continued success together.
The Rocky Mountains Region
Poplar Field in eastern Montana
is an old and proven producer. Discovered and developed by
Murphy, it has produced over 50 million barrels to date from the
Charles formation. I visited the field for the first time
years ago as a young geologist at Shell. One of my bosses at
the time used to say, "Big fields get bigger, and small fields get
smaller." Poplar is a big field, and we hope we can grow it
in a major way.
Two major plays are converging on Poplar Field: the Bakken play
advancing from the east, and a deep Paleozoic play developing to
our north. VAALCO, our new partner, is already active to the
north, and the farm-in we have just executed will give us access to
both plays.
Under the terms of the VAALCO farm-out, we received $5 million in cash (roughly $227 per acre) and a commitment to drill three
deep wells, at least one of which will be horizontal. These
wells will be expensive, a consideration in our decision, but, more
importantly, VAALCO is skilled and experienced in these deeper
plays and brings significant operational capability. They
have moved quickly with their drilling plans and hope to drill
their first well this quarter.
As we progressed this transaction, we committed to delivering a
100% ownership structure to VAALCO, a common requirement of larger
companies. For this reason, and for other funding and
reporting complexities created by our former Poplar Field holding
structure, we executed the Nautilus restructuring immediately prior
to the VAALCO farm-out.
We continue to retain a 100% interest in the Charles formation
and other shallow formations. The Charles and equivalent
structures north of the border in Canada have proven to be excellent candidates
for CO2-enhanced oil recovery. We have been pursuing this
concept for the last two years, and I hope soon to report on a new
program to test its potential. We are also drilling our own
new infill well at Poplar and will use this to advance our CO2
pilot and to add to our production base. Our history in the
Charles shows there to be less production risk, but we like the
deep play that VAALCO is making and wish them good luck and clear
sailing.
UK
The UK is an exciting and developing play for Magellan.
Our acreage is equivalent to the Paris Basin, which stretches across the
English Channel from France and
holds fractured shales with tremendous potential. The French
have helped the case for UK shale by prohibiting the use of
fracking technology. Cuadrilla, the UK energy independent,
has recently estimated that they may have found up to 200 Tcf of
shale gas in their license area in northwest England.
Several companies have expressed interest in our gas
developments, and we and our partner Celtique are developing the
play. Celtique is a very capable operator and a leader in
European fractured gas plays. Magellan and its partners will
also focus on the oil play in southern England. We have mapped over 20
prospects and have drilled our first well at Markwells Wood, which
is currently waiting on production testing. Markwells Wood
has been in our inventory for several years, but if it works, we
will certainly try to find a way to take some credit for it.
Conclusion
As I embark on this new job with Magellan, I am encouraged by
the opportunities and resources at our fingertips. We have
overcome the obstacles of recent months and are now a wiser company
on sound footing. We have high quality assets with strong
development potential, a robust cash balance to fund these
developments, and an improving team to execute our vision. We
will be focused on increasing production from, and unlocking the
value of, our existing asset base. To do this, we will first
and foremost enhance our in-house technical know-how by hiring
experienced professionals. For those assets that pose
technical challenges beyond our skill set, such as Bakken or UK
shale, we have and will continue to utilize farm-outs. In
general, we will be opportunistic and open minded about selling
some of our assets if attractive offers are made.
As we progress, I will remain committed to open and honest
communication with our shareholders and will continue to provide
periodic updates. In the meantime, I welcome any thoughts and
comments you may have.
Sincerely,
John Thomas Wilson
President and CEO
FORWARD LOOKING STATEMENTS
Statements in this release which are not historical in nature
are intended to be, and are hereby identified as, forward-looking
statements for purposes of the Private Securities Litigation Reform
Act of 1995. These statements about Magellan and MPAL may relate to
their businesses and prospects, revenues, expenses, operating cash
flows, and other matters that involve a number of uncertainties
that may cause actual results to differ materially from
expectations. Among these risks and uncertainties are:
(i) whether the Company's management can successfully
implement the Company's business plan and cut costs; (ii)
whether the Company can successfully take advantage of Denver's industry network and professional
talent pool; (iii) whether the Company can successfully develop its
assets directly or through farm-out opportunities resulting in
favorable returns for shareholders and an increase in the stock
price; (iv) the pricing and production levels from the properties
in which Magellan and MPAL have interests and the recoverable
reserves at those properties; (v) the ability of Magellan and
Santos to complete and implement the terms of the asset swap in the
Amadeus Basin; and (vi) the ability of Magellan to successfully
implement a CO2–enhanced oil recovery program at Poplar.
SOURCE Magellan Petroleum Corporation