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 great 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 more than 500,000 net acres, driving further efficiencies of scale, the company said.
Cash outlay at closing is estimated to be approximately $260 million, adjusted for free cash flow generated by assets between the effective date of July 1 and the early fourth quarter closing date . The consideration will be funded by cash on hand, which was $677 million as of June 30. The seller may also receive up to $40 million in contingent consideration in additional cash through December 2025 based on future commodity prices, the statement said.
Magnolia expects production of approximately 5,000 barrels of oil equivalent per day, which is greater than 70 percent oil, upon closing of the transaction. Similar to Magnolia’s current position in Giddings, the acquired assets provide high cash operating margins through access to premium Gulf Coast pricing and low operating costs per unit, the company said.
Magnolia said it expects the development locations in both the Eagle Ford and Austin Chalk formations to fit seamlessly into Magnolia’s ongoing Giddings development program beginning in 2024, allowing the asset to maintain its high-margin production and the generation of free cash flow.
“We continue to leverage our accumulated knowledge and advanced understanding of Giddings by adding 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 at Magnolia and meets the financial and operational characteristics we seek in a consolidated acquisition that can be easily integrated into our Giddings development program.The Magnolia at Giddings acreage now totals more than half a million net acres, with an area of development of over 150,000 net acres Our business model is strengthened by capital discipline and provides significant free cash flow generation throughout the cycle This acquisition allows us to opportunistically deploy some of our additional cash in assets that generate high financial returns, increase our ability to pay dividends per share and enhance value for our shareholders,” said Chris Stavros, Magnolia’s president and CEO.
Magnolia expects immediate accretion to key financial metrics per share, such as cash flow, free cash flow and earnings, as well as improving corporate margins and reinvestment rates. “The acquired assets are attractively valued at 2.9 times estimated 2024 EBITDA and are expected to generate a free cash flow yield of more than 20 percent during 2024 at current sale prices “, the company said.
Meanwhile, Magnolia reported net income of $104.6 million for the second quarter, down 65 percent from $299.9 million in 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 second quarter of the previous year and three percent sequentially to 81,900 barrels of oil equivalent per day. Magnolia said production beat its guidance due to the better performance of its Giddings asset.
“The strength of our financial and operating results in the second quarter was supported by our efforts initiated earlier this year to address increased capital and operating costs that did not reflect the decline in product prices in 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 and maintain activity levels. This work is evident in our lower capital spending during the quarter, which was approximately 15 percent below our previous guidance, in addition to our cash operating costs which decreased 18 percent sequentially. At current product prices, our stock should see improved pre-tax operating margins and more free cash flow to potentially redeploy to the business in 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 in the quarter it enabled a considerable amount of free cash flow generation and speaks to both our asset quality and our capital efficiency,” Stavros added.
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