Magnolia Oil & Gas: Over $300 Million In 2021 Positive Cash Flow To Fund Share Repurchases And Dividend

Summary

• Magnolia may be able to generate over $300 million in positive cash flow in 2021 at current strip prices while growing production by around 6%.
• This could fund the repurchase of 12 million shares plus a $0.50 per share dividend.
• Magnolia's enterprise value is around $3 billion though, which is a bit over 5.0x EBITDAX using $55 longer-term WTI oil.
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Magnolia Oil & Gas (NYSE:MGY) may be able to generate over $300 million in positive cash flow in 2021 at current strip prices, while growing production by approximately 6%. This positive cash flow may allow it to repurchase around 12 million shares during the year as well as pay a $0.50 per share dividend.

That being said, its stock doesn't appear all that cheap. Magnolia's enterprise value is close to $3 billion now, and I am neutral about its stock at its current price.

Secondary Public Offering

Magnolia announced a secondary public offering where some of EnerVest's affiliates are selling shares at approximately $10.50 each. Magnolia is also planning on repurchasing 5 million Class B shares from EnerVest's affiliates at the same price. Magnolia does not receive proceeds from the secondary public offering, and will pay approximately $52.5 million to repurchase the 5 million shares. This will reduce Magnolia's outstanding share count (combined Class A and Class B shares) from 248.6 million to 243.6 million.

EnerVest's stake in Magnolia will be reduced to 96.1 million common shares if the underwriters exercise their option to purchase additional shares in full.

2021 Outlook At $60 Oil

Magnolia may grow its production to around 65,500 BOEPD (48% oil) in 2021. This represents around 6% growth compared to 2021 levels. Magnolia expects to realize approximately $3 less than Magellan East Houston prices for its oil, which translates into around a $58.50 realized price when WTI is at $60.

This leads to a projection that Magnolia will generate approximately $899 million in revenues at current strip prices.

Type	Barrels/Mcf	$ Per Barrel/Mcf	$ Million
Oil	11,475,600	$58.50	$671
NGLs	5,221,398	$23.00	$120
Gas	43,263,012	$2.50	$108
Total			$899

Click to enlarge

Magnolia is aiming for its capital expenditures to end up around 50% to 60% of its EBITDAX. Given the rise in commodity prices, its capital expenditures may end up at the low end of that range or even slightly below that range.

	$ Million
Lease Operating	$84
Gathering, Transportation and Processing	$33
Taxes Other Than Income	$52
Cash G&A	$60
Cash Interest	$24
Capex	$320
Total	$573

Click to enlarge

This results in a projection that Magnolia could generate $326 million in positive cash flow at current strip prices. This does not include the effect of share repurchases or dividends.

Use Of Cash

Magnolia had $207 million in net debt at the end of 2020, with $193 million in cash on hand and $400 million in unsecured notes due 2026. It intends on keeping close to $200 million on cash on hand, which leaves the $326 million in positive cash flow to use for acquisitions, share repurchases and dividends.

Magnolia is aiming to repurchase roughly 1% of its outstanding shares each quarter. If it ends up repurchasing 7 million shares during 2021 in addition to the 5 million shares it is repurchasing from EnerVest, that would reduce its share count by approximately 4.8% in total. That would use up approximately $136 million of its positive cash flow.

If Magnolia spends another $70 million on acquisitions during 2021, that would leave around $120 million for dividends (or close to $0.50 per share based on its average share count during 2021).

Valuation

With Magnolia at around $11.68 per share, I have a neutral outlook for its share price now. It is well-positioned with its modest amount of net debt and ability to generate substantial positive cash flow at current strip prices.

Magnolia's Karnes assets may be able to deliver very quick (Magnolia previously mentioned six months) paybacks at current oil strip prices. The strength in prices for natural gas and NGLs bodes well for its Giddings Field economics as well.

At $11.68 per share, Magnolia isn't particularly cheap though. That puts its enterprise value at around $3 billion and values it at around 4.5x 2021 EBITDAX with $60 WTI oil. This would increase to around 5.1x EBITDAX (based on its current share price) with $55 WTI longer-term oil.

Conclusion

Magnolia Oil & Gas may be able to generate over $300 million in positive cash flow in 2021, while also growing production by around 6% compared to 2020 levels. This would allow it to continue repurchasing shares, make small acquisitions and pay out a roughly $0.50 per share dividend based on its 2021 results.

While Magnolia appears attractively positioned, its share price isn't particularly cheap right now, even assuming $50s longer-term oil prices. Magnolia is trading for a 5.1x EBITDAX multiple based on $55 WTI longer-term oil, and I'd like to see it closer to 4.5x EBITDAX to consider it a decent value.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[lookuphere]

significant inventory issues, they will be forced to buy and prices have certainly gone up now

[Small Cap And Special Situations]

$0.50 sounds like a much more substantial dividend than Chazen has previously indicated they might pay. Have they said something that makes you think it might be that large, or are you simply observing that the mathematics would theoretically allow it? Thanks!

[creekview]

@Small Cap And Special Situations It'll likely be closer to $0.20 a share all-in, but they'll probably buy back a lot shares too.

[Small Cap And Special Situations]

@creekview $0.20 was the number in my mind too, but apart from the verbiage in previous calls it's just a WAG.

[Pete Palmer]

MGY is a well run company and will capitalize on rising oil prices.