Magnolia Oil & Gas (MGY) Valuation Update - Nov 5
Posted: Sat Nov 05, 2022 3:13 pm
Magnolia's Q3 results beat my forecast, primarily due to production coming in well above the Company's guidance.
MGY closed at $26.58 on Nov 4.
TipRanks shows that three analysts have increased their price targets to $30, $32 and $39 since MGY announced Q3 results on Nov. 2.
I have updated my forecast/valuation model. My valuation increases by $2.50 to $34.50. My valuation is 5.5X 2022+2023 annualized operating cash flow per share. Magnolia's high percentage of free cash flow should justify a higher trading multiple, but I will hold off on that until they provide more detailed guidance for 2023.
What I like the most:
> Magnolia has a VERY STRONG balance sheet
> They are on pace to increase production ~16% YOY in 2022 with the growth fully funded by ~30% of operating cash flow.
> They have a lot of "running room" in South Texas.
> None of their production is hedged.
> They will be completing some high rate wells in December, which should push their exit rate over 82,000 Boepd.
> At current oil and gas prices, Magnolia's free cash flow is close to $200 million per quarter.
> They pay a small dividend and they are aggressively buying back their stock.
Note below from Neal Dingmann at Truist Financial dated 11-3-2022
Magnolia Oil & Gas Corporation (MGY)
Magnolia Once Again Demonstrates Why They Have the Best Overhang Playbook
Magnolia announced its largest shareholder Enervest (private) was selling another 7.5mm
of Class A shares along with MGY participating by buying an additional 2.0mm of Class B
shares from Enervest. Following the transactions, Enervest would own only ~14% (30.1mm
shares) of the company, putting the overhang at a much more manageable level. Importantly,
it would only take three similarly sized offerings for Enervest to fully exit its position, clearing
the issue from investors’ minds.
Updating Estimates, Price Target Unchanged at $39
After the deal was announced the shares have traded down, currently to ~$24.75/share.
However, we expect the shares to recover as we view these events as largely expected
and minimally impacting total dilution. After adjusting our 2022/2023 forecasts for the share
repurchases, which increases our EPS due to the lower share count, our price target
remains unchanged at $39. Our $39 price target is derived from two equally weighted
methodologies, with the first being our ’23 EV/EBITDAX multiple of 5.5x applied to our 2023E
EBITDAX estimate of $1,371 (consensus of $1,227mm) and the second being a FCF/EV
Yield assumption of 9.0%.
MGY closed at $26.58 on Nov 4.
TipRanks shows that three analysts have increased their price targets to $30, $32 and $39 since MGY announced Q3 results on Nov. 2.
I have updated my forecast/valuation model. My valuation increases by $2.50 to $34.50. My valuation is 5.5X 2022+2023 annualized operating cash flow per share. Magnolia's high percentage of free cash flow should justify a higher trading multiple, but I will hold off on that until they provide more detailed guidance for 2023.
What I like the most:
> Magnolia has a VERY STRONG balance sheet
> They are on pace to increase production ~16% YOY in 2022 with the growth fully funded by ~30% of operating cash flow.
> They have a lot of "running room" in South Texas.
> None of their production is hedged.
> They will be completing some high rate wells in December, which should push their exit rate over 82,000 Boepd.
> At current oil and gas prices, Magnolia's free cash flow is close to $200 million per quarter.
> They pay a small dividend and they are aggressively buying back their stock.
Note below from Neal Dingmann at Truist Financial dated 11-3-2022
Magnolia Oil & Gas Corporation (MGY)
Magnolia Once Again Demonstrates Why They Have the Best Overhang Playbook
Magnolia announced its largest shareholder Enervest (private) was selling another 7.5mm
of Class A shares along with MGY participating by buying an additional 2.0mm of Class B
shares from Enervest. Following the transactions, Enervest would own only ~14% (30.1mm
shares) of the company, putting the overhang at a much more manageable level. Importantly,
it would only take three similarly sized offerings for Enervest to fully exit its position, clearing
the issue from investors’ minds.
Updating Estimates, Price Target Unchanged at $39
After the deal was announced the shares have traded down, currently to ~$24.75/share.
However, we expect the shares to recover as we view these events as largely expected
and minimally impacting total dilution. After adjusting our 2022/2023 forecasts for the share
repurchases, which increases our EPS due to the lower share count, our price target
remains unchanged at $39. Our $39 price target is derived from two equally weighted
methodologies, with the first being our ’23 EV/EBITDAX multiple of 5.5x applied to our 2023E
EBITDAX estimate of $1,371 (consensus of $1,227mm) and the second being a FCF/EV
Yield assumption of 9.0%.