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Magnolia Oil & Gas (NYSE:MGY) is now projected to generate a bit over $300 million in free cash flow in 2023 with current strip at $70 WTI oil. Magnolia has also reduced its capex budget and production growth plans with service costs not coming down as much as commodity prices.
Magnolia is still in strong shape with a net cash position and the ability to continue repurchasing a large amount of shares. Due to its reduced production growth and free cash flow expectations compared to when I looked at it in February though, I am trimming MGY stock's estimated value to $24 per share.
Reduced Capex Budget
Due to weaker oil and gas prices (without a commensurate decline in service costs), Magnolia has reduced its D&C capex budget to a range of $440 million to $460 million. At guidance midpoint this is an 11% reduction in capex from Magnolia's original capex budget.
Magnolia now expects approximately 5% to 7% full-year production growth in 2023, down from 10% production growth with its original budget. It is still maintaining a two-rig operated drilling program, but is deferring some of its operated activity. One rig is drilling multi-well development pads at its Giddings asset, while the second rig will be active drilling at both its Karnes and Giddings areas.
Magnolia may now end up at around 80,000 BOEPD in average production during 2023. With Q1 2023 production at approximately 79,300 BOEPD, Magnolia appears to expect slightly higher production during the remaining three quarters of 2023.
Revised 2023 Outlook
I have updated my model based on 80,000 BOEPD in average production during 2023, with a production split of 45% oil, 25% NGLs and 30% natural gas.
At current strip of $70 WTI oil, Magnolia is projected to generate $1.161 billion in oil and gas revenues. Magnolia's production has a fairly significant gas component and it may realize less than $2 per Mcf for its natural gas in 2023.
| Type | Barrels/Mcf | $ Per Barrel/Mcf | $ Million |
| Oil | 13,140,000 | $68.50 | $900 |
| NGLs | 7,300,000 | $22.50 | $164 |
| Gas | 52,560,000 | $1.85 | $97 |
| Total Revenues | $1,161 |
With the weaker commodity prices, Magnolia is now projected to generate $311 million in free cash flow in 2023 at $70 WTI oil and $2.55 NYMEX gas. I have assumed that Magnolia's net interest cost is zero as interest income on its large cash balance offsets the $24 million in annual interest on its unsecured notes.
| $ Million | |
| Lease Operating | $175 |
| Gathering, Transportation and Processing | $55 |
| Taxes Other Than Income | $70 |
| Cash G&A | $65 |
| Cash Interest | $0 |
| Capex | $450 |
| Cash Income Taxes | $35 |
| Total | $850 |
Magnolia's current quarterly dividend ($0.115 per share) adds up to approximately $98 million per year. That leaves $213 million (from its free cash flow) to put towards share repurchases.
Magnolia spent $51 million to repurchase 2.4 million shares in Q1 2023. At $19 per share it would be able to repurchase another 8.5 million shares by using its remaining cash flow.
Magnolia also had $675 million in cash on hand at the end of 2022, while its $400 million in 6.00% unsecured notes aren't due until 2026. Thus Magnolia could easily draw down some of its cash on hand to repurchase shares if it decides the price is attractive for accelerated repurchases.
Valuation Notes
I am now using a long-term price of $75 WTI oil and $3.75 NYMEX gas to value companies. Although oil and gas prices have been shaky recently, I am more optimistic about those commodity prices in the long-term.
At those long-term prices, Magnolia may be able to generate approximately $550 million in free cash flow with a maintenance capex budget, before the impact of cash income taxes. This should support a value of approximately $24 per share.
Magnolia has also talked about increasing its dividend by 10% per year and repurchasing 1+% of outstanding shares per quarter. It should be able to continue doing that at current strip without drawing down its large cash pile.
Conclusion
Magnolia is now projected to generate a bit over $300 million in free cash flow in 2023 with current strip declining to $70 WTI oil. It is unhedged and should optimally continue with that strategy to be consistent. Magnolia's balance sheet is in excellent shape as it has $667 million in cash on hand still and its $400 million in unsecured notes doesn't mature until 2026.
Magnolia's 2023 production growth has been trimmed to 5% to 7% as it reduces spending with service costs remaining high compared to commodity prices. With its updated guidance I estimate Magnolia's value at approximately $24 per share in a long-term $75 WTI oil environment.
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May 05, 2023 at 09:18AM
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Magnolia Oil & Gas: Expected To Generate Over $300M FCF (MGY) - Seeking Alpha
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