Analysts High On Magnolia Debut

Several E&P analysts recently initiated favorable coverage of a new guy in town, Magnolia Oil & Gas Corp. (NYSE: MGY), the South Texas vehicle run by chairman, president and CEO Steve Chazen.

The newly public company recently reported its first quarterly results after its formation through the merger in July of TPG Pace Energy Holdings with EnerVest Ltd.’s South Texas assets.

Meanwhile, Magnolia also made its first acquisition with the purchase on Aug. 21 of Harvest Oil & Gas Corp.’s South Texas assets for roughly $191 million in cash and stock. Harvest is a successor company of EV Energy Partners LP, a former affiliate of EnerVest. The company emerged from bankruptcy in early June.

The acquisition is expected to close on Aug. 31 and will have an effective date of July 1. The $135 million cash consideration of the transaction will be funded using cash on the balance sheet and borrowings under Magnolia’s revolving credit facility, according to a company press release.

“We are very pleased to announce our agreement to acquire Harvest’s South Texas assets. Harvest represented our largest nonoperated working interest owner and the assets are a natural fit for Magnolia,” Chazen said in a statement. “We believe this accretive transaction is highly complementary to our business objectives of maximizing shareholder returns by generating steady production growth, strong pre-tax margins and significant free cash flow.”

Among the highlights of the deal are:

• Immediately accretive transaction that adds an undivided working interest across a portion of our existing Karnes County assets and all of our existing Giddings Field assets;
• Acquisition adds some 15 net locations to our core Karnes County inventory and about 114,000 net acres to our Giddings Field position;
• Harvest South Texas Assets produced approximately 4,800 barrels of oil equivalent per day (boe/d) in the first half of 2018, with 1,400 boe/d in Karnes County (69% oil, 83% liquids) and 3,400 boe/d in Giddings Field (27% oil/53% liquids); and
• In the first half of 2018, Harvest South Texas assets generated revenues less direct operating expenses of about $25 million and incurred roughly $13 million capex, which resulted in about $12 million of revenues less direct operating expenses after capex.

Analysts Weigh In On Magnolia

Prior to the acquisition announcement, Fitch Ratings assigned first-time long-term Issuer Default Ratings (IDRs) of 'B' to Magnolia, a 'BB'/'RR1' rating to the company's first-lien senior secured revolver, and a 'BB-'/'RR2' rating to its senior unsecured notes. The outlook is stable, Fitch said, citing the strong asset base and low breakeven price of $28-$32/bbl. It noted the company was unhedged.

The company’s second-quarter production of 49.6 Mboe/d (61% oil) exceeded consensus expectations of 47.7 Mboe/d, and was up 7% over the first quarter. Chazen increased guidance to average at least 50 Mboe/d this year, based on what he called better than expected well performance so far.

Magnolia is operating two rigs in the Eagle Ford in Karnes County, Texas, and one rig in the Giddings Field (which produces from Austin Chalk). It expects to use one completion crew through 2018, Chazen said when reporting on the quarter.

Northland Capital Markets analyst Jeff Grampp initiated coverage in mid-July before Magnolia technically even existed. At that time, it was known as TPG Pace Energy Holdings. The special purpose acquisition company (SPAC) had announced it would acquire South Texas assets from EnerVes for stock and $1.2 billion cash. It closed that deal on July 31. On Aug. 1, it began trading on the New York Stock Exchange under the new name, Magnolia, and with a market cap of about $2.5 billion. The stock traded at $12.53 per share at that time.

Grampp called the new company “a rare E&P entity that doesn’t grow on trees.” He ranked Magnolia Outperform with a price target of $20 per share. Magnolia announced via an 8-K filing that EnerVest will be given 115.7 million shares of stock (31.8 million Class A and 83.9 million Class B) and $1.2 billion in cash. “This is a lower share count to EnerVest than the approximate 121 million the company initially estimated,” he noted.

“Our $20 price target is based on our NAV model, which allocates $9.84/share to proved reserves, adjusted for balance sheet items, $5.52/share to unbooked Karnes County development and $5.06/share to Giddings Field development.”

“We believe core Eagle Ford/Austin Chalk assets and an attractive valuation (3.9x 2019 EV/EBITDA) make this is a must-own E&P,” he wrote in a mid-July research note.

Later, on Aug. 2 after trading under the new symbol began, he wrote, “Magnolia is a top pick for us, namely for its core Eagle Ford assets, [free cash flow] generation, discounted valuation and quality management team. Furthermore, we see near-term catalytic potential from a favorable guidance revision and potential acquisitions.”

Other analysts also viewed the new company favorably. “Magnolia Oil and Gas should generate free cash flow in year one,” said Imperial Capital managing director Irene Haas when she initiated coverage.

"Our one-year price target of $16 is based on our net asset value (NAV) calculation. In addition, Magnolia/TPG Pace Energy currently trades at 4.1x consensus 2018E P/CFPS, compared to the Eagle Ford peer group, which is trading at an average of 5.2x consensus 2018E P/CFPS," she wrote.

She noted that TPG Pace Energy had raised about $650 million from its IPO in May 2017, and $355 million from a group of PIPE investors in March 2018. It also issued $400 million of 6% senior unsecured notes due 2026 in July and has an undrawn revolver of about $500 million.

Leslie Haines can be reached at lhaines@hartenergy.com.