Magnolia Stock: Great Balance Sheet; Attractively Valued (MGY)

Magnolia Oil & Gas’s (NYSE:MGY) founder Stephen Chazen unfortunately passed away recently, two days after being replaced as CEO and President by CFO Christopher Stavros due to serious health issues.

Chazen has left Magnolia in excellent shape though, with a net cash position and the ability to grow production substantially with a low reinvestment rate. Despite weaker commodity prices, Magnolia still looks capable of generating over $900 million in positive cash flow over the next year and a half (from Q3 2022 to the end of 2023). It should also be able to keep its reinvestment rate around 40% while growing production by the high-single digits on an annualized basis.

I previously had a neutral outlook on Magnolia due to my belief that it was fully valued. At sub-$20 per share though, it appears to be a good value now, with the ability to generate free cash flow over the next year and a half equal to over 22% of its market capitalization while also growing production.

2H 2022 Outlook

Magnolia expects to average approximately 76,000 BOEPD in production during the second half of 2022. This would result in its production for the full year averaging approximately 74,500 BOEPD, a 13% increase compared to 2021.

Magnolia also noted that its oil differential is anticipated to be a $2 to $3 discount to Magellan East Houston, which translates to very close to WTI pricing.

At current strip of approximately $87 WTI oil, Magnolia is thus projected to generate $822 million in revenues during the second half of 2022.

Type	Barrels/Mcf	$ Per Barrel/Mcf	$ Million
Oil	6,222,880	$86.50	$538
NGLs	3,426,080	$32.00	$110
Gas	26,010,240	$6.70	$174
Total Revenues			$822

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Magnolia’s capital expenditures in the second half of 2022 may end up around $210 million. It previously increased its guidance for D&C capital to $400 million for 2022 (up from $350 million) due to a combination of longer laterals, additional net wells in Giddings (due to faster drilling times) and service cost inflation.

	$ Million
Lease Operating	$67
Gathering, Transportation and Processing	$33
Taxes Other Than Income	$46
Cash G&A	$30
Cash Interest	$12
Capex	$210
Cash Income Taxes	$38
Total Expenses	$436

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Magnolia is thus projected to generate $386 million in positive cash flow during the second half of 2022 at current strip prices. This does not include spending on dividends or share repurchases.

Potential 2023 Outlook

For 2023, I am currently modeling 8% production growth from Magnolia with a capital expenditure budget of $450 million. This would result in it averaging approximately 80,500 BOEPD in 2023.

At current strip for 2023 (including approximately $74 WTI oil), Magnolia is thus projected to generate $1.436 billion in revenues. It remains unhedged on its production at last report.

Type	Barrels/Mcf	$ Per Barrel/Mcf	$ Million
Oil	13,075,213	$73.50	$961
NGLs	7,198,712	$28.00	$202
Gas	54,651,450	$5.00	$273
Total Revenues			$1,436

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A $450 million capital expenditure budget results in an approximately 41% reinvestment rate, which is pretty good given the expected high-single digits production growth along with lower (mid-$70s) oil prices.

	$ Million
Lease Operating	$140
Gathering, Transportation and Processing	$70
Taxes Other Than Income	$80
Cash G&A	$60
Cash Interest	$24
Capex	$450
Cash Income Taxes	$60
Total	$884

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In this scenario, Magnolia is projected to generate $552 million in positive cash flow in 2023 at mid-$70s WTI oil. This is also before spending on dividends and share repurchases.

Dividend And Share Repurchases

Magnolia has moved from a semi-annual dividend payment to a quarterly dividend payment. It is currently paying out $0.10 per quarter and will revisit the dividend payment rate in February 2023. This adds up to $22 million per quarter in dividend payments based Magnolia’s 217.6 million outstanding shares as of late July.

Magnolia could now theoretically finish its current repurchase authorization and end up with around 207.5 million shares outstanding at the end of 2022. It would also have around $570 million in cash on hand (assuming an average repurchase price of $22 per share in the second half of 2022), or $170 million in net cash after factoring in its $400 million in outstanding 2026 notes.

Estimated Value

I now estimate Magnolia’s value at approximately $24 per share in a long-term $70 WTI oil and $4 NYMEX gas scenario. This increases to a bit over $26 in a long-term $75 WTI oil and $4.50 NYMEX gas scenario.

I was previously neutral on Magnolia, but now that its shares are sub-$20, it appears to be a pretty good value.

Conclusion

Magnolia Oil & Gas already has a net cash position and also appears capable of generating over $900 million in positive cash flow over the next year and a half while also growing production at an annualized rate in the high-single digits. I previously felt that Magnolia’s strong position was already factored into its share price, but now that it is under $20 per share, it appears to be a pretty good value.