2 weeks Ago
mysticenergy Magnolia Oil & Gas ( NYSE: MGY ) reported solid Q2 2024 results that were slightly above expectations for total production. It has also made progress with its cost reduction efforts, bringing its lease operating expense down ahead of schedule. On the other hand, Magnolia's 2024 free cash flow is now estimated at $427 million, reduced slightly from when I looked at the company in May .
This is due to weaker commodity prices (with Magnolia remaining unhedged). I am maintaining Magnolia's estimated value at $26 to $27 per share. The weaker near-term commodity prices are largely offsetting it's slightly better than expected operational performance.
Magnolia should be able to reduce its share count to around 180 million by the end of 2025 if it continues focusing on share repurchases. Solid Production Results Magnolia reported approximately 90,200 BOEPD (42% oil) in production in Q2 2024, slightly above its expectations for 89,000 BOEPD in production during the quarter. Magnolia's total production also increased by 6% compared to Q1 2024, although its oil production only went up 1% as its oil cut was higher at 44% in Q1 2024.
Magnolia's production growth has been driven by its Giddings assets, which accounted for 77% of its total production in Q2 2024, up from 72% in Q1 2024. Magnolia's Giddings production also increased 13% quarter-over-quarter, while its non-Giddings (Karnes County) production decreased by 12% over the same period. Magnolia is primarily focusing on Giddings development in 2024 and that focus seems likely to continue in future years as well.
Magnolia has noted that its Giddings development area is now over 200,000 net acres , up from approximately 150,000 net acres in Q4 2023. This expansion has been due to a combination (with relatively equal contributions) of its recent bolt-on acquisition and appraisal activity. Cost Reductions Magnolia's lease operating expenses had spiked up to $5.
98 per BOE in Q1 2024, compared to $5.17 per BOE in 2023. In response, Magnolia's operations and supply chain teams initiated a program to reduce costs, with the expectation that its lease operating expenses per BOE would go down by 5% to 10% in 2H 2024.
I had thus modeled Magnolia's lease operating expense at $5.70 per BOE for the full year. However, Magnolia indicated that its teams had reduced its costs well ahead of schedule, resulting in its Q2 2024 lease operating expenses coming in at $5.
40 per BOE, 10% lower than Q1 2024. Magnolia is continuing to implement cost reduction efforts and expects its 2H 2024 to remain around a similar level. I am now modeling Magnolia's lease operating expense at $5.
50 per BOE for 2024, which translates into roughly $7 million less than before. Updated 2024 Outlook The full-year production expectations for Magnolia remain at around 89,600 BOEPD, but I have bumped up my oil production expectations by around 1% to 38,000 barrels per day. To get to that full-year amount, Magnolia would need to average roughly 91,700 BOEPD (and 38,300 barrels of oil production per day) in 2H 2024.
This is 2% higher total production and 1% higher oil production compared to Q2 2024 levels. The current strip for 2024 is now a bit under $78 for WTI oil and $2.20 for Henry Hub gas.
At those commodity prices, Magnolia is projected to generate $1.321 billion in oil and gas revenue. Magnolia continues to be unhedged on its oil and gas production.
Type Barrels/Mcf $ Per Barrel/Mcf $ Million Oil 13,870,000 $76.25 $1,058 NGLs 8,847,600 $19.50 $173 Gas 59,918,400 $1.
50 $90 Total Revenues $1,321 Click to enlarge As noted above, Magnolia's modeled lease operating expense has been reduced by $0.20 per BOE. Magnolia also mentioned that its D&C capex is likely to end up in the upper half of its full-year guidance range of $450 million to $480 million.
This is due to an increase in non-operated activity in late 2024 that is expected to mainly benefit 2025 production. $ Million Lease Operating $180 Gathering, Transportation, and Processing $36 Taxes Other Than Income $76 Cash G&A $72 Net Cash Interest $5 Capex $475 Cash Income Taxes $50 Total $894 Click to enlarge Thus Magnolia is now expected to generate $427 million in 2024 free cash flow. Magnolia spent approximately $155 million on share repurchases in 1H 2024, which were the majority of its free cash flow is going to.
It expects to have approximately 199 million shares (fully diluted) in Q3 2024, which is 5% lower than Q3 2023. Estimated Valuation I have also modeled a scenario where Magnolia's 2025 production increases by 7% to 9% (both for oil and total production) from 2024 levels. At my long-term commodity prices of $75 WTI oil and $3.
75 Henry Hub natural gas, this would result in Magnolia generating approximately $1.07 billion to $1.1 billion in 2025 EBITDAX.
This also assumes that Magnolia maintains its lease operating expense at around $5.40 per BOE. A 4.
5x EV/EBITDAX multiple would thus value Magnolia at around $26 to $27 per share. This multiple reflects Magnolia's production growth and its depth of inventory. This also assumes that Magnolia's net debt remains around $125 million and that it continues to focus on repurchasing shares.
In this scenario, Magnolia's share count would be reduced to around 180 million by the end of 2025. Conclusion Magnolia made good progress with its cost reduction efforts, reducing its lease operating expense by 10% (compared to Q1 2024) in Q2 2024. It previously expected to achieve a 5% to 10% reduction by 2H 2024.
Despite that achievement, Magnolia's projected free cash flow for 2024 has been reduced a bit since I looked at it in May. Magnolia is unhedged on its oil and natural gas production, and both commodities have seen their prices come down since then. I expect continued production growth and share repurchases for Magnolia in 2025 and this should support an estimated value of $26 to $27 per share in a long-term $75 WTI oil and $3.
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