Mach Natural Resources Makes Progress With Cost Reductions (NYSE:MNR)

Mach Natural Resources (NYSE:MNR) reported Q1 2024 results that were generally in-line with expectations. Mach’s oil production was slightly below the midpoint of its guidance, with winter weather reducing oil production by close to 650 barrels per day. Mach’s natural gas production exceeded expectations, and it also has seen some positive results around reducing its D&C costs and operating costs.

I am now modeling Mach’s 2024 free cash flow at approximately $3.19 per unit, with a mid-to-high single digits decline in production from Q1 2024 to Q4 2024.

Stronger natural gas prices in 2025 should benefit Mach and allow it to generate a similar amount of free cash flow despite lower production levels.

The progress Mach has made with operating costs and D&C costs improves its estimated value by $1 per unit compared to when I looked at it in April and I now estimate its value at $18.75 to $21.35 per unit.

Q1 2024 Production

Mach reported approximately 89,000 BOEPD in production during Q1 2024. This was within its guidance range of 85,100 to 90,200 BOEPD for the quarter, and around 1.5% above the midpoint of that guidance range.

This was driven by strong natural gas production, as its natural gas production averaged around 291.8 MMcf per day in Q1 2024, above its guidance range of 271 to 287 MMcf per day. Mach’s production of oil and NGLs was within their respective guidance ranges, but towards the lower end.

Mach indicated that its oil production was affected by downtime related to a January winter storm. This reduced its oil production by close to 60,000 barrels, and without that impact its oil production would have been modestly above its guidance midpoint for the quarter.

Mach’s production is expected to decline throughout 2024, with its Q4 2024 production guidance around -7% compared to its initial Q1 2024 production guidance.

Operating Cost Performance

Mach’s Q1 2024 lease operating expense of $5.03 per BOE was relatively low compared to its full-year guidance for $6.00 to $6.30 per BOE.

Due to declining production levels, I’d expect Mach’s per BOE operating expense to increase a bit as time goes on. However, in terms of total dollars its lease operating expense still looks better than expected. The $41 million in lease operating expense it reported in Q1 2024 is less than the $47 million quarterly average in its guidance.

Mach indicated that its Paloma acquisition (which closed near the end of 2023 and accounts for around one-third of its current production) helped drive down its lease operating expenses, which were at $6.90 per BOE in Q3 2023.

On the other hand, Mach’s gathering and processing costs were relatively high at $3.94 per BOE compared to its full-year guidance for $3.20 to $3.40 per BOE, so that offsets much of the benefit of its low lease operating expenses.

Reduced D&C Costs

Mach noted that it has also been able to reduce its D&C costs. It mentioned that its Oswego wells cost under $2.63 million per well on average for Q1 2024. This is down from a bit over $3 million per well in Q1 2023 and Mach’s modeling around a $2.70 million to $2.75 million current well cost.

Mach also believes that it can do better than expectations with drilling on its Paloma assets too, bringing down well costs $0.75 million to $1 million lower than its model.

Mach’s capex was slightly higher than expected for Q1 2024 as it drilled more higher working interest Oswego wells, but its lower cost per well should allow it to keep within budget for the full year.

Updated 2024 Outlook

Mach reaffirmed its full-year 2024 guidance. Based on its Q1 2024 results, it should be on track to meet its guidance for oil and NGLs, especially if there are no further weather related disruptions.

I am now modeling Mach’s natural gas production near the high-end of its full-year guidance, though, due to its Q1 2024 natural gas production exceeding guidance and the potential for more ethane rejection.

The current strip is around $81 WTI oil and $2.40 Henry Hub natural gas, and I project Mach’s revenues at $1.031 billion in this scenario.

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I am now modeling Mach’s lease operating expense at $5.50 per BOE in 2024, with the expectation that it will be lower than its initial guidance. On the other hand, gathering and processing is modeled at $3.75 per BOE, higher than initial guidance.

Mach’s capex was a bit higher than expected in Q1 2024 due to those higher working interest Oswego wells. With the progress it has made in reducing D&C costs, though, Mach’s full-year capex should be in-line with its initial guidance.

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Mach is now projected to generate $303 million in 2024 free cash flow at current strip, or $3.19 per unit.

Notes On Valuation

I previously estimated Mach’s value at $17.75 to $20.35 per unit based on long-term $75 WTI oil and $3.75 Henry Hub natural gas.

Mach’s projected 2024 free cash flow has increased slightly (by $0.14 per unit) since I last looked at it. Mach has also made some strides in reducing its D&C costs, while its lease operating expense looks to be lower than previously expected. On the other hand, Mach’s gathering and processing costs appear to be trending higher than previously expected.

Overall, I believe these items add approximately $1 per unit to Mach’s value and I now estimate its value at $18.75 to $21.35 per unit. With over 50% of Mach’s production being natural gas, it should also benefit from improved 2025 strip prices (with 2025 natural gas strip over $1 higher than 2024 strip).

Conclusion

Mach Natural Resources has made progress in reducing its D&C costs, with its Oswego well costs coming in a few percent lower than its model. It also believes that it can do better than expected with the development of its acquired Paloma assets.

Mach’s lease operating costs also appear to be trending better than expected, helped by lower costs with the Paloma assets. The reduced costs (both D&C and operating costs) increase my estimate of Mach’s value to $18.75 to $21.35 per unit, which is a $1 increase from before.