It’s a $40-million, 20,000-acre acquisition. It’s $2,000 per acre that’s producing a few hundred boe/d.
While an areally meaningful add, its price and size are a relatively small bolt-on for an E&P that has nearly $700 million of cash on hand and already holds nearly 500,000 net acres.
But securities analysts took Magnolia Oil & Gas Corp. management nearly to the mat in an earnings call Aug. 2 in a line of questioning that evoked a comment that it was coming off like the courtroom scene in Jack Nicholson’s “You can’t handle the truth” moment in “A Few Good Men.”
That comment was from Chris Stavros, Magnolia president and CEO, himself.
How it started: First, the “bolt-on” is acreage outside of Magnolia’s core development area and not adjacent, the analysts pointed out.
Where it went: Secondly, “to be frank, you haven't talked a lot about your ‘old’ development areas and your ‘current’ development areas,” said Tim Rezvan, an analyst with KeyBanc Capital Markets.
Stavros explained the deal further and added that the questioning “is nothing near anything many other companies have done in terms of larger-scale acquisitions, while at the same time having been very upfront or more upfront in terms of pulling back the curtain on what they have talked about having in terms of ‘runway’ or ‘economic inventory’ or whatever you want to say.
“And so, you know, this is sort of—,” he paused. “Look, no one's really pushed other folks as far as ‘Why would you have done billions of dollars of deals when you claim you have a pathway [of inventory] to the next decade or whatever.'”
Stavros declined to share the location of the acres, tight-holing it for now.
He would say it’s a normal bolt-on “in and around areas we understand well.” In this case, the property is in the Austin Chalk/Eagle Ford combo-play area of Giddings Field east of Austin, Texas.
Magnolia holds some 460,000 net acres in the Giddings area. Its other leasehold is 22,800 net Eagle Ford acres in Karnes County, Texas, that are fully delineated.
Stavros said, “We'll continue to pursue similar type transactions that add to and complement our asset base and improve the business.”
Neal Dingman, an analyst with Truist Securities, asked what to read into the deal’s purpose “or how you're thinking about the existing 300,000-plus [Giddings] acres you need to delineate.”
Stavros said the acquisition was based on what the Magnolia team has learned about the rock in the area over the years. “For competitive reasons, I wouldn't want to say too much, but we may have stumbled on a potentially new area for development,” he said.
“I think it's a little too early for us to say for sure. But we like what we see so far. So that's about all I can say about this and hopefully more [news will] come.”
Leo Mariano, an analyst with Roth MKM, said, “I know you don't want to give away specific well locations, which totally makes sense.”
But have there been appraisal wells drilled? “I know you've been appraising outside of the core area for the last couple years.”
Stavros said Magnolia has drilled some appraisal wells. “We're not just sort of wandering around the field. These are very well studied and there's a lot of subsurface work and other work that goes into it prior to that.”
A $90-million acquisition that was also outside the Giddings core in the fourth quarter is another area Magnolia finds promising “and will turn out to be, I think, very good,” Stavros said. The leasehold came with a small amount of production.
“This [newer] area is also very interesting and this may be the start of something. So we'll see. And I think there could be other things.”
Magnolia’s 460,000 net acres in the Giddings area “is kind of pretty vast,” Stavros said. “And as you trot around, you may find other things on the fringes that you'd like to fill in over time and that's sort of what we've been doing.”
The Giddings-area portfolio is largely in Austin, Brazos, Burleson, Fayette, Lee, Grimes, Montgomery and Washington counties. A new Bossier/Haynesville play in Robertson and Leon counties is just beyond the northeastern tip of Magnolia’s leasehold.
What happened next
It was KeyBanc’s Rezvan’s turn in the queue. He said that, while Magnolia didn’t “want to talk a lot about this potential new development area, to be frank, you haven't talked a lot about your ‘old’ development areas and your ‘current’ development areas.”
He said Magnolia’s stock has been an underperformer as “short interest has been creeping up and valuations are now starting to look rich relative to [Magnolia’s] peers. And this is at a time when it is hard for the energy sector to get ‘mind share’ with investors.”
So when will Magnolia “pull back the curtain a little bit?” he asked.
“Because there are a lot of questions from investors on the depth and quality of your acreage in Giddings and what your true development area looks like.”
Stavros paused and said he appreciated the question, but “I don't feel the need to pull back the curtain. I feel like this kind of direction is almost inducing us to say something weird like, you know, ‘You can't handle the truth’ or something.”
Rather “the truth is, and the facts are, that it's borne out or manifested in the outcome of the growth that we've seen, the returns that we've seen, the free cash flow.”
Within Magnolia’s main property-hold, “we have a large corral of highly economic wells that we can continue to drill and we will.”
Meanwhile, “a $40-million acquisition,” he sighed, “sort of barely moves the needle in terms of the money.”
He added that he hopes Magnolia can make more property adds, as “we're always looking for opportunities to further enhance the footprint in Giddings and improve the quality and sustainability of the asset base.”
After describing how other companies aren’t being challenged on billion-dollar deals when they already have ample future-well inventory, he said, “I'm perfectly comfortable with what we've done and how we've said it and how we've framed it.
“I think I'd be giving away too much competitive information if I said much more on the acquisition.
“I don't know if that helps you, but my job really is to improve the value of the business every day and with everything we do. So if the [stock] valuation is better [than peers’] that means we're doing the right thing and the outcome is borne out in that premium.”
At year-end 2022, Magnolia had 31.4 MMboe, about 86% oil and NGLs, of PUDs in both its Eagle Ford and Giddings (Austin Chalk/Eagle Ford) acreage, net of converting some 22 MMboe of PUDs in 2022 to proved via drilling. To replace that inventory, 25.5 MMboe of new PUDS were added during the year via extensions, according to the company’s 10-K filing with the Securities and Exchange Commission.
Magnolia’s year-end well count was 2,131 gross; 1,366 net.
Undeveloped acres that will expire by year-end 2025 are fewer than 2,700 acres per year. “There are no expirations after 2025,” Magnolia reported in the 10-K.
The company’s $677 million of cash on hand, as of June 30, is up 35% from a year earlier, Magnolia reported before markets reopened Wednesday morning.
Second-quarter production averaged 82,000 boe/d, up 10% from a year earlier, primarily due to better well performance in Giddings Field area.
Magnolia repurchased 2.3 million shares during the second quarter for $44.8 million. Net income declined 65%, however, to $105 million.
The dry powder
Rezvan at KeyBanc asked if Magnolia will do more bolt-on deals of, say, $20 million to $100 million “as you can shake off acreage from peers or privates.”
Stavros noted Rezvan’s point that Magnolia’s stock has been underperforming “and I look at this too. I understand the valuation and I ‘get’ that.”
While “we have quite a bit of cash on the balance sheet, I don't say that to say, ‘Well, we're going to use the cash tomorrow to do something large or out of place.’ You won't find us doing that. It’s just not in our DNA.”
The cash, instead, was derived from a higher commodity-price cycle “and you don't want to squander [these] winnings. You want to allocate it appropriately to generate higher returns.”
To have nearly $700 million of cash on the balance sheet “doesn't do anything much for you unless you start to deploy it in a way that can generate better returns. … My goal would be to try to find something that we could do with it that's better than just polishing it on the balance sheet.
“That’s the plan: I'd like to find some other opportunities that make sense for us and fit within our skillset and that we can manage and operate and that improve the business. That’s the plan.”
Dingmann at Truist wrote after the call, “Magnolia continues to own more acres than not only any small-cap E&P but most large-cap operators. While the company still works to delineate its Giddings asset, we continue to believe a large amount of the acres will have positive prospective wells.”
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