Magnolia Petroleum agrees USD18.5m Oklahoma investment deal

Magnolia Petroleum has stuck a deal whereby it will invest$18.5m on behalf of a US regional investment body in exchange for taking a 29% stake in the company via a new share issue.

AIM-listed Magnolia has been given exclusive rights to earn fees and equity in new leases and wells in the state of Oklahoma through the investment and management of up to US$18.5m of capital supplied by Western Energy Development LLC.

WED is an affiliate of Western Energy Regional Center, one of several designated Regional Center organisations that can accept investment in job-creating projects from foreign nationals through the Immigrant Investor Program.

Magnolia, which will be responsible for acquiring oil and gas working interests with third party costs paid by WED, will receive an acquisition fee of $500 per acre secured and 25% carried working interest in first well of spacing unit but must fund all its share of costs for each subsequent increased density well.

Magnolia will also get a maintenance fee of $5,000 per $0.5m capital deployed on behalf of each Western Energy Regional Center client, plus a sliding scale of a portion of the net revenue minus production tax and transportation up to a ceiling of $200,000 per year.

The AIM company's directors believe the agreement with WED "will generate significant value for all its shareholders in the near and long-term", with a confidential pilot agreement with WED since last Novemeber having generated a rate of return of 100% and a return on investment of 3.26 times.

In exchange for granting Magnolia exclusive rights, WED is to be issued with 763.7m new shares at 0.1p per share - this represents 29% of Magnolia after the share issue.

Chief executive Rita Whittington said, “For Western Energy to entrust us with the management of up to US$18.5m of their clients’ funds, together with their agreement to receive shares in lieu of a cash fee for the deal, represents a major endorsement of the current Board and management team.

She added: "In an extremely challenging oil and gas market, the board believes this deal will deliver significant near-term growth in Magnolia’s revenues, profits and shareholder value and at the same time raises our profile in key US States and with potential operating partners."

Using the pilot project as a benchmark, to equal the new well inventory that Magnolia could secure under the minimum capital contribution in the agreement, the board calculate Magnolia would have had to raise approximately US$2.5m in new equity and on top of this will receive cash fees along the way.