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Magnolia Oil & Gas (NYSE:MGY) continued its streak of impressive results in Q3 2022. It reported production above the high-end of its guidance range for Q2 2022 and then followed it up by exceeding the high-end of its production guidance range for Q3 2022 by 7%.
Magnolia is now expecting to deliver approximately 15% to 16% production growth in 2022 while generating another 10% production growth in 2023. It is accomplishing this with a low reinvestment rate too, as it is projected to have a reinvestment rate near 40% in 2023 while generating over $600 million in positive cash flow at current strip prices.
At the end of September I noted that Magnolia looked to be a good value at under $20 per share and had taken a long position in it around that time. I believed it to be worth in the mid-$20s per share based on long-term $70 to $75 WTI oil. Magnolia’s share price is around my prior estimates, although its strong production results boost its estimated value. I now believe that Magnolia is worth around $27 with long-term $70 WTI oil and has a bit more upside (to around $29 to $30 per share) in a long-term $75 WTI oil scenario.
Excellent Performance In Q3 2022
Magnolia’s Q3 2022 results were outstanding as it delivered average production approximately 81,500 BOEPD, over 7% more than the high-end of its guidance range for 74,000 BOEPD to 76,000 BOEPD in average production. As well, Magnolia’s D&C capex of $114.5 million for Q3 2022 was within its guidance range of $105 million to $115 million.
Magnolia noted that production was above the high end of its guidance mainly due to better than expected well performance (both at Karnes and Giddings), while ongoing operating efficiencies and slightly higher non-operated activity also made some contribution to the production beat.
Magnolia’s production growth was not just driven by lower value (compared to oil) commodities such as NGLs and natural gas. Compared to Q2 2022, Magnolia’s oil production increased by 12%, slightly more than its total production growth of 11%.
Magnolia now expects its full-year production growth to be around 15% to 16% above 2021 levels, up from its previous guidance for 12% to 14% production growth.
Updated 2023 Outlook
Magnolia is now also expecting roughly 10% production growth in 2023, which would result in it averaging around 84,000 BOEPD. This is approximately 4% higher than what I previously modeled for it in 2023. Magnolia’s capital expenditure budget for 2023 may end up around $500 million, compared to the $450 million I had put down for it before.
At current 2023 strip of $82 to $83 WTI oil, Magnolia is projected to generate $1.608 billion in revenues.
| Type | Barrels/Mcf | $ Per Barrel/Mcf | $ Million |
| Oil | 13,797,000 | $82.00 | $1,131 |
| NGLs | 7,665,000 | $28.00 | $215 |
| Gas | 55,188,000 | $4.75 | $262 |
| Total Revenues | $1,608 |
This leads to a projection of $623 million in positive cash flow at the current strip (low-$80s) WTI oil. Magnolia’s reinvestment rate is projected at 41% in this scenario.
| $ Million | |
| Lease Operating | $143 |
| Gathering, Transportation and Processing | $78 |
| Taxes Other Than Income | $90 |
| Cash G&A | $65 |
| Cash Interest | $24 |
| Capex | $500 |
| Cash Income Taxes | $75 |
| Total | $975 |
Magnolia is likely to increase its dividend in early 2023 (aiming for at least 10% annual dividend growth), but would still leave over $500 million to put towards share repurchases.
Notes On Valuation
I previously estimated (in September) Magnolia’s value at around $24 per share with long-term $70 WTI oil and a bit over $26 per share with long-term $75 WTI oil.
Magnolia’s excellent production performance in Q3 2022 and its increased production expectations for 2023 help boost its estimated value to around $27 per share at long-term $70 WTI oil and around $29 to $30 per share with long-term $75 WTI oil.
Conclusion
Magnolia Oil & Gas has performed well since I looked at it in September, with its share price increasing over 30% during that period. Magnolia delivered outstanding results in Q3 2022, with production 7% above the high-end of its guidance. It now looks capable of growing production 10% from 2022 levels to around 84,000 BOEPD in 2023 and generating over $600 million in positive cash flow at current strip.
Based on its production outperformance, I have raised Magnolia’s estimated value to $27 at long-term $70 WTI oil and $29 to $30 at long-term $75 WTI oil.
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