Magnolia Oil & Gas: Share Repurchases May Not Add Value At Current Share Price

Summary

Magnolia may generate close to $500 million in positive cash flow in 2022 at $65 WTI oil.

It also had $245 million in cash on hand at the end of Q3 2021.

It spent $78.7 million on share repurchases in Q3 2021, but its current share price looks less favorable for share repurchases.

Magnolia is able to call its unsecured notes due 2026 starting in August 2022.

That (and dividends) would appear to be a better use of its money than share repurchases in the high-teens.

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mysticenergy/E+ via Getty Images Magnolia Oil & Gas ( MGY ) may still be able to generate close to $500 million in positive cash flow in 2022 despite WTI oil strip prices declining to around $65. It also had $245 million in cash on hand (and $400 million in notes due 2026) at the end of Q3 2021, so it should have plenty of cash to decide what to do with.

That being said, share repurchases may not be a good use of its money with its share price averaging close to $20 during Q4 2021 so far. That is a share price that I estimate would require long-term $70+ WTI oil to support.

Magnolia is able to call its unsecured notes starting in August 2022 though, and that (and dividends) would probably be a better use of its money if it didn’t want to increase its growth capex plans. Potential 2022 Outlook

I am assuming that Magnolia can average approximately 70,500 BOEPD (47% oil) in 2022, which would be around a 7% increase in production from 2021 levels. This is consistent with its expectations for mid-to-high single digits production growth.

This is a scenario where Magnolia could generate $1.09 billion in revenues at current 2022 strip prices. Magnolia is currently unhedged for 2022. Type Barrels/Mcf $ Per Barrel/Mcf $ Million Oil 12,094,275 $63.00 $762 NGLs 5,864,437 $26.50 $155 Gas 46,629,730 $3.70 $173 Total $1,090 Source: Author’s Work

Magnolia would thus be projected to generate $481 million in positive cash flow in 2022 before any dividends or share repurchases. This assumes that it continues with a two-rig development program. $ Million Lease Operating $98 Gathering, Transportation and Processing $41 Taxes Other Than Income $56 Cash G&A $50 Cash Interest $24 Capex $340 Total $609 Source: Author’s Work

Magnolia has plenty of room to invest in more growth if it chooses to, since its capex in this scenario is only 40% of EBITDAX. Magnolia has been conservative about its growth plans, focusing on production growth that can be sustainable at lower oil prices. Share Repurchases

Magnolia has continued with its share repurchases, spending another $78.7 million in Q3 2021 to repurchase approximately 5 million shares at an average price of around $15.75. This brings its share repurchase total to 22.6 million shares during the first three quarters of 2021.

While Magnolia’s past share repurchases have been generally beneficial to the value of its remaining shares, I believe that further share repurchases at its recent share price would not be positive for its estimated value, at least in a scenario that envisions long-term NYMEX oil and gas price at around $65 oil and $3.25 gas respectively.

At that long-term price, I estimate Magnolia’s value to be approximately $17.30 per share. If Magnolia repurchased 8.5 million shares at $20 per share, that would actually reduce its estimated value slightly (by around $0.10 per share) in that long-term commodity pricing scenario. However if it repurchased 8.5 million shares at $15 per share instead, that would increase its estimated value slightly (by around nine cents per share) in that same long-term commodity pricing scenario.

At long-term $70 WTI oil and $3.50 NYMEX gas, Magnolia’s estimated value improves to around $18.85 per share. At that estimated value, share repurchases at its current price would add a very slight amount of positive value. Bond Repurchases

Another thing Magnolia can do with its cash is to repurchase its $400 million in 6% unsecured bonds due 2026 . These bonds are callable at a price of 102% of par starting in August 2022 and would save Magnolia $24 million per year in interest costs.With Magnolia having $245 million in cash on hand at the end of Q3 2021 and potentially generating close to $500 million in positive cash flow in 2022, it should be easily able to repurchase its 2026 bonds and have plenty of funds for other items (such […]

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