Magnolia Oil & Gas: Projected To Generate Over $400 Million In 2024 FCF (NYSE:MGY)

Magnolia Oil & Gas Corporation (NYSE:MGY) recently reported Q4 2023 results along with its 2024 guidance. Magnolia mentioned that its Q1 2024 production took a hit due to severe winter weather, but the overall effect on the full-year should be relatively minor. I now estimate that Magnolia can generate $437 million in free cash flow in 2024 at current strip prices despite weak natural gas prices (and no hedges).

Magnolia increased its quarterly dividend by 13% to $0.13 per share and is also continuing with share repurchases. I believe Magnolia can end 2024 with around 197 million outstanding shares now while also adding to its cash balance to fund potential acquisitions.

Magnolia’s oil cut went up a couple percent in Q4 2023 compared to Q3 2023, helped by the 70+% oil cut for its Giddings acquisition that closed during the quarter. I am now modeling Magnolia’s oil cut for 2024 at 42% compared to the 41% I had modeled for it back in November. This slightly higher oil cut helps my estimate for Magnolia’s value remain unchanged at $26 to $27, despite weak near-term natural gas prices and a Q1 2024 production hit from severe winter weather.

Projected 2024 Outlook For Magnolia

Magnolia is expecting high single-digit production growth (both for total production and oil production) in 2024, with high single-digit growth defined as +7% to +9%.

It should be noted that Magnolia’s year-over-year production growth is boosted by its Giddings acquisition, which closed in November 2023. Organic production growth expectations for 2024 look closer to +3% for total production and flat growth for oil production.

I am now modeling Magnolia’s 2024 production at approximately 89,000 BOEPD (42% oil). Magnolia’s Q1 2024 production is expected to be a bit lower at 84,000 to 85,000 BOEPD, as severe winter weather negatively affected production for a period of a few days in January.

The current strip for 2024 includes $76 to $77 WTI oil and roughly $2.20 NYMEX gas. Magnolia provided guidance for a negative $3 per barrel differential to Magellan East Houston, and MEH is approximately $1.75 above WTI. Thus I am modeling Magnolia’s 2024 realized oil price at a $1.25 discount to WTI.

Magnolia remains unhedged and is projected to generate $1.304 billion in oil and gas revenues at current 2024 strip.

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Magnolia expects $450 million to $480 million in D&C capex for 2024, so I’ve assumed $470 million in total capex including leasehold acquisitions (but not including any larger acquisitions).

Magnolia also expects its cash tax rate to be approximately 6% to 9% in 2024.

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Thus I am now projecting Magnolia to generate $437 million in free cash flow in 2024 at current strip prices.

Dividends

Magnolia increased its quarterly dividend to $0.13 per share starting in Q1 2024. At its current share count, this translates into roughly $107 million per year in dividend payments, although its share repurchases may reduce this amount slightly. If Magnolia puts $200 million towards share repurchases in 2024 (as outlined below), it would reduce its dividend payments to around $105 million for 2024.

Magnolia noted that its new $0.13 per share quarterly dividend is 13% higher than its prior $0.115 per share quarterly dividend. Magnolia also mentioned that it has increased its dividend for three straight years after first starting to pay dividends in 2021.

Share Repurchases And Debt

Magnolia ended 2023 with approximately 205 million outstanding shares. It spent $205 million on share repurchases during 2023, repurchasing approximately 9.6 million shares.

If Magnolia spends $200 million on share repurchases during 2024, it could repurchase a bit over 9 million shares based on its current share price. This would leave it with approximately 197 million shares at the end of 2024, including the effect of stock-based compensation.

This would leave $132 million (of the $437 million in projected 2024 free cash flow) to put towards Magnolia’s cash balance and/or pay for acquisitions.

Magnolia ended 2023 with essentially zero net debt, with $401 million in cash on hand and $400 million in outstanding 6.0% unsecured notes due 2026.

Thus, if it doesn’t make any acquisitions, Magnolia could end 2024 with $533 million in cash on hand in this scenario, not including the effect of contingent payments.

Magnolia does have some contingent payments related to its recent Giddings acquisition. These payments may reach up to $40 million based on the average WTI prices for 2H 2023, 2024 and 2025. At the end of 2023, Magnolia estimated the fair value of these contingent payments at approximately $22 million, including an approximately $7 million payment that is expected to be made in 2024.

Valuation

I am maintaining my estimate of Magnolia’s value at $26 to $27 per share at long-term (after 2024) $75 WTI oil (CL1:COM) and $3.75 NYMEX gas. Magnolia’s 2024 production is slightly lower than my prior expectations, but that is from the one-time impact of severe winter weather on its January production.

Natural gas prices (NG1:COM) are also quite weak currently, and Magnolia’s production is approximately 30% natural gas (with no hedges). However, I also expect natural gas prices to rebound after 2024, and the near-term impact of low natural gas prices on Magnolia’s free cash flow isn’t that great. For Magnolia’s free cash flow, a $1 decrease in natural gas prices can be offset by a $4.35 increase in oil prices, which have been relatively strong recently.

Magnolia’s oil cut for 2024 may end up being slightly higher than I had previously modeled, and this helps (along with modestly improved oil prices) keep the projections for 2024 free cash flow largely unchanged from when I looked at it in November.

Conclusion

Magnolia is projected to generate $437 million in free cash flow in 2024 at current strip prices. It may only realize $1.50 per Mcf for its natural gas at current strip prices, but the rest of its results look solid and mid-$70s oil works well for it.

This free cash flow will support Magnolia’s increased dividend as well as continued share repurchases. Magnolia’s estimated value remains at $26 to $27 per share. A marginally increased oil cut (versus my previous model) helps offset the impact of weak near-term natural gas prices and the Q1 2024 impact of severe winter weather on Magnolia’s production.