Magnolia Oil & Gas: Increased Value After Positive Guidance Revisions (NYSE:MGY)

Magnolia Oil & Gas (NYSE:MGY) made some positive revisions to its 2023 guidance, indicating stronger production growth expectations along with reduced capex expectations. As well, Magnolia’s lease operating expenses dropped below $5 per BOE in Q2 2023.

These positive revisions may allow Magnolia to generate over $250 million in free cash flow in the second half of 2023 at current strip. It may also be able to achieve over $500 million in free cash flow in 2024 while growing production in the mid-single digits.

I have thus increased my estimate of Magnolia’s value by $2 to $3 compared to when I looked at it in May, and now estimate its value at $26 to $27 per share at long-term $75 oil and $3.75 gas.

Positive Guidance Revisions

With its Q2 2023 report, Magnolia made some positive revisions to its 2023 guidance (from its Q1 2023 guidance update). It lowered its D&C capex guidance by $15 million to $20 million, while simultaneously increasing its full-year production guidance by 1% to 2%, due to strong Giddings well performance.

Magnolia now expects D&C capex to end up between $425 million to $440 million in 2023, along with production growth of 7% to 8% compared to 2022.

Magnolia had previously made revisions to its original guidance, which called for 10% production growth with a $490 million to $520 million capex budget.

Thus it now expects to deliver 2% to 3% less production growth than its original expectations with $65 million to $80 million less D&C capex, which is a pretty good outcome to me.

Due to Magnolia’s strong results from its gassier Giddings wells though, its oil cut may decrease compared to 2022, resulting in oil production growth potentially ending up at 3% to 4%.

2H 2023 Outlook

Magnolia may now average approximately 81,500 BOEPD in 2H 2023 production, which would be roughly the same (within 1%) as its Q2 2023 production and 1% higher than its 1H 2023 production.

Magnolia’s oil cut has fluctuated a bit, going from 45% in Q1 2023 to 42% in Q2 2023. To be a bit conservative, I will assume a 42% oil cut for the second half of the year.

Oil prices have improved significantly so that 2H 2023 WTI strip is now around $83. Magnolia expects to realize around $3 less than Magellan East Houston for its oil, and MEH is around $1.50 higher than WTI.

Magnolia is thus now projected to generate $663 million in revenues during 2H 2023.

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This could allow Magnolia to generate around $254 million in free cash flow during the second half of the year. Magnolia expects 2H 2023 capex to average approximately $100 million per quarter.

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Magnolia may pay out $48 million in dividends in 2H 2023 if it keeps its quarterly dividend at $0.115 per share. It also spent $40 million on a bolt-on acquisition for its Giddings asset that added 20,000 net acres outside of its core development area and several hundred BOEPD in current production.

This would leave it with $166 million for share repurchases and/or building up its cash position. At the end of Q2 2023, Magnolia had $677 million in cash on hand and $400 million in 6.0% unsecured notes due 2026.

Notes On Valuation

Magnolia also indicated that it may be able to generate mid-single digit production growth in 2024 with a $400 million to $425 million capital expenditure budget.

At current strip prices for 2024 (including $80 WTI oil), Magnolia may be able to generate $600 million in free cash flow before cash income taxes. This is better than what I previously projected for Magnolia, as its latest update shows improved capital efficiency and lowered operating costs. Magnolia’s lease operating expense dropped below $5 per BOE in Q2 2023.

I have increased my estimate of Magnolia’s value due to the improvements in its cost structure and the improved outlook in near-term commodity prices. In a situation where long-term prices (after 2024) are $75 WTI oil and $3.75 NYMEX gas, I now estimate Magnolia’s value at $26 to $27 per share.

Conclusion

Magnolia made some positive revisions to both its production growth guidance and its capex guidance for 2023. It now expects to generate 7% to 8% production growth in 2023 with a $425 million to $440 million capex budget. Magnolia also thought (although not part of formal guidance) that it may be able to achieve mid-single digits production growth in 2024 with a $400 million to $425 million capex budget.

This leads to projections that Magnolia can generate $254 million in free cash flow in 2H 2023, including the impact of cash income taxes. It also appears capable of generating $600 million in free cash flow in 2024 at current strip before cash income taxes. The impact of 2024 cash income taxes is uncertain, but it can probably generate $500 million to $550 million in free cash flow after taxes.

I now believe Magnolia is worth $26 to $27 at long-term $75 WTI oil and $3.75 NYMEX gas after its positive guidance revisions, solid production growth outlook and other cost reductions.