Today Pat McKeough answers a question from a Member of his Inner Circle on a Canadian penny stock whose main focus is one foreign nation. Madalena Energy has most of its operations in Argentina, a country that has undergone a good deal of financial and political turmoil in recent years. The nation’s reputation with foreign investors suffered when it expropriated Spanish oil producer YPF in 2012. Still, Madalena made a major acquisition in Argentina in 2014 that increased its year-over-year oil production by more than 150%. And the regulatory and tax burden on foreign oil companies has been easing since a 2014 settlement with YPF. Pat balances the risks and potential rewards for this ambitious Canadian junior.

Q: Pat: I am an Inner Circle member and am wondering about the “Canadian” junior oil company Madalena Energy. I put quotes around Canadian because Madalena seems to be active in Argentina only. However, its holdings there look very interesting. I’m looking forward to your evaluation and have profited from your advice for several years. Thanks.

A: MADALENA ENERGY (symbol MVN on Toronto; www.madalenaenergy.com) is a Canadian oil and gas producer that mainly operates in Argentina, though it also has a presence in Alberta.

Prior to June 2014, the company’s Argentine operations consisted of about 450 barrels of oil equivalent per day of production from one concession at Coiron Amargo.

In June 2014, Madalena acquired all of the outstanding shares of Gran Tierra Energy’s Argentine business unit for $59.2 million. The company is now focused on four areas: the Loma Montosa oilfield, the Vaca Muerta shale, the Lower Agrio shale and the Mulichinco field, which is rich in natural gas liquids.

In the three months ended June 30, 2015, Madalena produced 3,996 barrels of oil equivalent a day, up 154.7% from 1,569 a year earlier (before the Gran Tierra purchase). Argentina supplied about 95% of its output. Cash flow rose to $4.3 million, or $0.01 a share, from $1.0 million, or nil per share.

The company holds cash of $15.3 million, or $0.03 a share, and has low debt. The stock trades at 4.6 times Madalena’s forecast 2015 cash flow of $0.07 a share.

 Penny stocks: Much depends on willingness of next president to keep easing regulations and taxes on foreign oil companies

Argentina fell out of favour with some foreign investors after it expropriated Spanish oil producer YPF SA in 2012. However, the country’s government did reach a $5.4-billion settlement with YPF in May 2014. In the wake of the expropriation, the government also brought in measures to make it easier and potentially less risky for foreign oil and gas companies to invest in, and profit from, exploration and development.

The country’s current president, Cristina Kirchner, was re-elected in December 2011. The Argentine constitution only allows two consecutive presidential terms, so Kirchner will not be able to run in the next elections, to be held at the end of this year.

A new president will likely keep easing the regulatory and tax burden on foreign oil companies to encourage investment in a time of low oil and gas prices—but that’s not guaranteed.

Madalena Energy is okay to hold, but only for highly aggressive investors who can accept the risk that things will get worse before they get better, in the oil market and/or Argentina’s business climate.

Inner Circle recommendation: HOLD for highly aggressive investors.

For our profile of a gold mining penny stock that has also fuelled its growth with a major deal—although with less political risk—read Ambitious Newmarket Gold aims to outgrow penny stock status. 

For a recent report on a penny stock in diamond mining that also has ambitious growth plans—with the help of an agreement with DeBeers—read Mountain Province no diamond in the rough thanks to new mine.