By: Rocky Teodoro – RigZone – Magnolia Oil & Gas Corp. has entered into a definitive agreement to acquire certain oil- and gas-producing properties, including leasehold and mineral interests in Giddings, Texas, for $300 million, subject to customary purchase price adjustments. The seller of the assets was not disclosed.
The acquisition adds approximately 48,000 net acres to Magnolia’s portfolio in Giddings, enhancing Magnolia’s significant depth of development opportunities, the company said in a news release Tuesday. Combined with a smaller acquisition that closed in July, Magnolia’s position in Giddings now totals over 500,000 net acres, driving further efficiencies of scale, the company said.
The cash outlay at closing is estimated to be approximately $260 million, adjusted for the free cash flow generated by the assets between the effective date of July 1 and the anticipated closing date in the fourth quarter. The consideration will be funded with cash on hand, which was $677 million as of June 30. The seller may also receive up to a maximum of $40 million in additional contingent cash consideration through December 2025 based on future commodity prices, according to the release.
Magnolia expects production of approximately 5,000 barrels of oil equivalent per day, which is greater than 70 percent oil, at the close of the transaction. Similar to Magnolia’s current Giddings position, the acquired assets provide high cash operating margins through access to premium Gulf Coast pricing and low per-unit operating costs, the company said.
Magnolia said it expects the development locations in both the Eagle Ford and Austin Chalk formations to be seamlessly folded into Magnolia’s ongoing Giddings development program beginning in 2024, allowing the asset to sustain its high-margin production and free cash flow generation.
“We continue to leverage our accumulated knowledge and advanced understanding of Giddings by adding bolt-on oil and gas properties to expand our portfolio of high-quality opportunities and improve the overall business. Today’s transaction is a natural strategic fit for Magnolia and meets both the financial and operational characteristics we look for in a bolt-on acquisition that can be easily integrated into our Giddings development program. Magnolia’s acreage in Giddings now totals more than half a million net acres, with a development area of more than 150,000 net acres. Our business model is reinforced by capital discipline and provides for significant free cash flow generation through the cycle. This acquisition allows us to opportunistically deploy some of our additional cash into assets that generate high financial returns, increase our dividend per share payout capacity, and enhance value for our shareholders”, Magnolia President and CEO Chris Stavros said.
Magnolia expects immediate accretion to key per-share financial metrics including cash flow, free cash flow, and earnings, in addition to enhancing corporate margins and reinvestment rates. “The acquired assets are attractively valued at 2.9x estimated 2024 EBITDA and are expected to generate a free cash flow yield of more than 20 percent during 2024 at current strip prices”, the company said.
Meanwhile, Magnolia reported a net income of $104.6 million for the second quarter, a 65 percent decrease compared to $299.9 million for the same period in 2022, according to an earlier earnings release.
The company’s total production in the second quarter grew 10 percent compared to the prior-year second quarter and three percent sequentially to 81,900 barrels of oil equivalent per day. Magnolia said the production exceeded its guidance due to better well performance from its Giddings asset.
“The strength of our second quarter financial and operating results were supported by our efforts initiated earlier this year to tackle higher capital and operating costs which did not reflect the decline in product prices compared to last year. Our teams were proactive in engaging early and working cooperatively with our oilfield service partners and material suppliers to reduce costs while sustaining activity levels. That work is evident in our lower capital spending for the quarter, which was approximately 15 percent below our earlier guidance, in addition to our cash operating costs which declined 18 percent sequentially. At current product prices, our actions should provide improved pre-tax operating margins and more free cash flow to potentially redeploy in the business during the back half of the year”, Stavros said.
“Our total production in the second quarter was higher than expected and led by the strong performance of our Giddings asset. The ability to achieve moderate production growth while spending 42 percent of our adjusted EBITDAX during the quarter allowed for a sizable amount of free cash flow generation and speaks to both the quality of our assets and our capital efficiency”, Stavros added.