MGY - Magnolia Oil & Gas: Over $500 Million In Projected FCF In 2023

Summary

• Magnolia appears capable of generating over $500 million in free cash flow in 2023 at current strip prices.
• It also intends to grow production by 10% in 2023 with a reinvestment rate that could be under 50%.
• This gives it plenty of funds for further share repurchases, and it should be able to reduce its share count below 200 million in 2023.
• Q4 2022 production was below expectations due to temporary issues that should not affect longer-term results.
• Production had rebounded to over 80,000 BOEPD in early 2023.

Magnolia Oil & Gas ( MGY ) still looks capable of generating over $500 million in free cash flow in 2023 at current strip prices. Magnolia's Q4 2022 production took a bit of a hit due to weather issues and delays in getting one of its large pads on-line though. However, those were temporary issues that should not affect Magnolia's ability to grow production to approximately 84,000 BOEPD in 2023.

Magnolia also recently increased its dividend by 15% , but it still has room to continue increasing its dividend and repurchase shares over time. Magnolia's dividend still adds up to less than $100 million per year, leaving it with a lot of remaining funds for share repurchases. While its projected free cash flow for 2023 is not as strong as it was a few months ago , Magnolia should still be able to reduce its share count below 200 million during 2023 through its share repurchases.

Boosted Dividend

Magnolia increased its quarterly dividend to $0.115 per share for Q1 2023. This was a 15% increase from its previous $0.10 per share quarterly dividend that it announced for Q3 2022 and Q4 2022. Prior to that, Magnolia offered a $0.20 per share semiannual dividend for 1H 2022.

Magnolia mentioned that it is aiming for approximately 10% annual dividend growth over the long-term. It is also quite active in repurchasing shares, with the goal of reducing outstanding shares by 1+% per quarter.

Production Levels

Magnolia announced that its Q4 2022 production would end up at 73,000 to 74,000 BOEPD, down from its earlier guidance for 77,000 to 79,000 BOEPD in production for the quarter. It noted that freezing temperatures in late December resulted in some well shut-ins and facility downtime. Magnolia also mentioned that one of its large pads was brought on-line later than expected in Q4 2022, resulting in less production from that pad getting recorded during the quarter.

Magnolia indicated those issues had only a temporary impact on production and that its production (as of early January 2023) was averaging over 80,000 BOEPD. It also maintained its 2023 guidance for 10% production growth.

Since 2022's production is now expected to end up at an average of approximately 75,300 BOEPD instead of 76,400 BOEPD, maintaining an expectation of 10% production growth would actually result in 2023 production ending up around 1,200 BOEPD lower than previously expected. However, this makes it easier for Magnolia to meet (or exceed) its production guidance.

Updated 2023 Outlook

I am continuing to model Magnolia's 2023 production at around 84,000 BOEPD. This is approximately 11% to 12% production growth compared to 2022, which is a bit higher than its guidance, but in-line with earlier expectations for 10% production growth on 76,400 BOEPD.

The current strip for 2023 is near $80 WTI oil, resulting in a projection that Magnolia can generate $1.465 billion in revenues. Magnolia had no hedges at last report, which is largely consistent with its hedging strategy since its formation in 2018. Magnolia entered into some natural gas hedges in 2020 (leading to an eventual $3 million hedging loss), but other than that it hasn't hedged its production.

Magnolia is now projected to generate $508 million in positive cash flow in 2023 at current strip prices, with a reinvestment rate of 46%.

Magnolia had around 214 million outstanding shares (combined Class A and Class B) in November 2022, which would translate into about $98 million in annual dividend payments with a $0.115 per share quarterly dividend.

Notes On Valuation

While Magnolia's projected 2023 cash flow has been reduced a bit due to weaker natural gas prices, it should still be able generate over $500 million in free cash flow at current strip. Magnolia's share repurchase strategy should allow it to reduce its share count below 200 million by the end of 2023.

Magnolia's estimated value is now approximately $26 to $27 per share at long-term $70 WTI oil, increasing to approximately $29 per share at long-term $75 WTI oil.

Conclusion

Magnolia has a strong balance sheet and is capable of generating over $500 million in free cash flow in 2023 at current strip prices. This projected cash flow generation comes despite it also spending on production growth, as it expects to grow production by 10% in 2023.

Magnolia's reinvestment rate appears to be under 50%, giving it plenty of funds for further share repurchases. Magnolia intends to repurchase at least 1% of its outstanding shares each quarter and should be able to reduce its share count below 200 million by the end of 2023.

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