Magnolia - financially great, not cheap and reserves are an enigma

[Petroleum economist]

Magnolia is the type of share that you hope your daughter will one day introduce as her new boyfriend: good looking and financially sound. You will however remain uncertain on what the future will bring. Magnolia reserves are an enigma.

Reserves
• Late 2023 Magnolia had proven reserves of 169.8 M BoE.
• These reserves are equivalent to only 5.1 years of 2024 production. This ratio is one of the lowest of all the oil and gas companies that I track. Industry average is 9.5-10 years.
• To compensate, the RRR over the period 2019-2023 was a high 1.32.
• The RRR in 2023 was 1.01, replacing production with new reserves.
• The RRR’s are dominated by extensions, developing new well locations at Karnes and Giddings near proved areas.
• Rather unusual, Magnolia seems to book the proven reserves just before they produce them.
• From the SEC filings it is unclear how long Magnolia can keep up extending the proved areas.

Production
• Production in Q1 (84.8 K BoE/d) was -1% lower than in Q4 2023 (85.4 K BoE/d).
• Magnolia provided an outlook for Q2 of 89 K BoE/d.
• Magnolia expects high single digit production growth in 2024 compared to 2023 (82.1 K BoE/d).
• Based on the guidance, assuming an 7-9% increase, 2024 production should be 88.1-89.7 K BoE/d. This suggests that production in Q3/Q4 will be flat compared to Q2.
• It is difficult to predict what will happen with production after 2024.
• If Magnolia can maintain the RRR close to 1.0, then production can remain flat at 88-90 K BoE/d.
• If the RRR cannot be maintained, then production after 2024 will start to drop with 2-4% per year. Fluids are liquid dominated (44.3% oil, 26.3% NGL, 29.7% gas).
• Fluids (44/26/30) are aligned with reserves (43/27/30), meaning that the fluid composition over time should not change significantly.

Balance sheet
• Magnolia has a very solid balance sheet.
• Solvency in Q1 2024 (67.8%) is high. Solvency has been consistently high.
• Magnolia has a debt of only $ 393 M.
• Combined with the 2023 EBITDA of $ 899 M, the debt/EBITDA ratio is a low 0.44.
• The balance sheet allows generous shareholder returns.

Profitability
• Magnolia is very profitable.
• Unit cost in 2024 are very low at $ 24.75/BoE. This makes Magnolia very robust under low oil prices.
• Even with WTI as low as $ 35/bbl, Magnolia would still be reporting a net profit.
• Magnolia does not have any oil and gas hedging. Revenues and profits will vary with oil and gas price variations.
• Magnolia reported a Q1 net profit available to common A-share shareholders of $ 85.1 M (eps $ 0.52).
• For 2024 with WTI at $ 80-85/bbl I expect a net profit of $ 418-455 M (eps=$ 2.30-2.50, PE = 10.4-11.3)
• The PE of 10.4-11.3 is higher than most other oil and gas shares that I track.
• In 2025/2026, with higher gas prices, the eps can go up to $ 2.50-2.76 (PE=9.4-10.4).

Shareholder returns
• Magnolia pays a fixed quarterly dividend of $ 0.13. There is no variable dividend.
• Magnolia buys back shares.
• In 2023 Magnia bought back 9.6 M shares (5.4%).
• In Q1 2024 Magnolia bought back 3.4 M shares.
• Assuming a total share back in 2024 of 9.6-10.6 M A-shares, shareholder yield can be a high 7.3-7.8%.

Conclusions
Magnolia reserves are an enigma. Reserves seem to be lacking but Magnolia manages to book every year more reserves than it produces. How long this can be maintained is unclear.

Financially Magnolia is a dream – the balance sheet is rock solid. With low unit costs, profitability is great. Shareholder returns are high. This clearly attracts investors who look at finances only. The PE of 10.4-11.3 is very high.

With the high PE and the reserves uncertainty Magnolia only ranks 46th out of 72 oil and gas companies.

If anybody can shed any light on the Magnolia reserves, then I would appreciate it.

If you want to see details of the oil and gas companies ranking, then drop me a private message with your email address.

[ChuckGeb]

I think most of their reserves are off the books in the form of undeveloped acreage. The Giddings Field is very prolific and as I recall they have only focused so far on a fraction of their acreage. Very fiscally conservative company with very competent management.

[Petroleum economist]

Chuck, I think you are right.

I checked, but formally Magnolia is completely silent on its probable reserves.

However, if I gobble the following data together from their website and their SEC filings, then I get:
• From the Magnolia website - operations section: Giddings Field ……….at least 1,000 locations based on conservative spacing assumptions.
• From the SEC 2023 annual report filing: Developments wells – 45 wells in 2023, 50 wells in 2022 and 42 wells in 2021.
• From the Q1 2024 press release: Magnolia continues to operate two drilling rigs and one completion crew and expects to maintain this level of activity throughout the year.

Above combines to that Magnolia can continue drilling with two rigs for another 1,000/45 = 22 years! Magnolia probable reserves could add 100-150% to their proven reserves.

I think I will have to boost my future production profile for Magnolia with quite some extra probable reserves.

Do you have a clue what a typical EOR per well could be?