MGY - Magnolia Oil & Gas Announces Rare Producing Acreage Bolt On In Giddings

2023-09-05 19:09:02 ET

Summary

• Magnolia Oil & Gas Corporation acquired 48,000 net acres in the Giddings area, expanding their holdings.
• The acquisition is estimated to have a net cost of $260 million and is expected to be immediately accretive to Magnolia.
• The deal bolsters their position and should work to alleviate analyst and investor concerns regarding news flow from Giddings.
• Magnolia Oil & Gas Corporation continues to trade at a discount in light of their strong balance sheet, marked underspend of cash flow, and commitment to return of capital.

The Asset:

Magnolia Oil & Gas Corporation (MGY) is adding 48,000 net acres (96% operated, 91% working interest) expanding their Giddings "development area" carveout from the over half million acres they now hold in the region. It's a producing acreage add with expected production at close of approximately 5,000 BOEpd (70% oil). This is oilier than the company as a whole and especially oily relative to Giddings. It's rare for MGY to participate in the A&D market place and this is the second deal of size in the last few months.

The price tag :

$300 mm in cash less cash flow from effective date of July 1 to expected close in 4Q23 for an estimated net price of $260 mm. This is 2.9x their estimate of EBITDA, well below where MGY currently trades on our Base ($80 oil and $4 natural gas 2024) and nearly a full turn below even our $90 Stretch case for MGY prior to adding in these barrels.

Favorite Quote Watch:

"Today’s transaction is a natural strategic fit for Magnolia and meets both the financial and operational characteristics we look for in a bolt-on acquisition that can be easily integrated into our Giddings development program. Magnolia’s acreage in Giddings now totals more than half a million net acres, with a development area of more than 150,000 net acres."

We agree and note that the deal should also work to address some recent post quarter comments from some sell-side analysts regarding a lack of news flow from management regarding further delineation of Giddings. We thought those views were a bit "missing the forest for the tree" in August when we read them and see them as well addressed now.

Nutshell:

We view this as an extremely good deal and verification of their Giddings acreage. They're paying an estimated 2.9x for the asset while trading at 4.3x our non pro forma 2024 Base Case ($80 oil and $4 natural gas) number, as they note making the deal immediately accretive. Our view is that the deal allows MGY to use learnings from their delineation of more oil rich windows within Giddings to make targeted, highly accretive acquisitions to exploit in the same way they have for the past several years. Pro forma the deal and 3Q cash flow they will still be net cash positive on the balance sheet while addressing promises to not simply build cash for cash's sake. Deals like this one will help MGY continue to buyback shares at a rapid clip followed by a period of more substantial base dividend increase. On our new 2024 Base Case EBITDA our upside target increases from $27.50 to $28.25 with no increase to the target multiple of 5.0x. We view a forward 5.0x multiple here as conservative given their wide underspend of cash flow (EBITDA is set to be more than double capex this year), strong balance sheet, repeated volume outperformance, and strong commitment to return of capital. We continue to own MGY as the second largest holding in our portfolio with a $12.32 basis.

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