Magnolia Oil & Gas Downgraded: Analyst Highlights Need For Transparency Amid Rich Valuations And Asset Visibility Concerns

KeyBanc Capital Markets analyst Tim Rezvan downgrades Magnolia Oil & Gas Corporation MGY to Sector Weight from Overweight.

The analyst notes that rich valuations and poor visibility into core assets lead to the downgrade.

Rezvan is particularly weary of management's unwillingness to provide meaningful details on the company's Giddings asset. 

As Karnes depletes, the analyst has no idea if Giddings has ten years of core inventory. 

The analyst thinks that transparency matters in an industry struggling to maintain credibility with investors. MGY's credibility factor is missing as the analyst sees opacity, not transparency.

Compared to peers, Magnolia is a negative outlier with disclosures, with its management is strategically boxed in, the analyst adds.

Rezvan notes that Magnolia deftly used its 2018 de-SPAC transaction to helicopter into a measured growth and income strategy with a low leverage profile. The analyst thinks the strategy is no longer differentiated, as similar cash return frameworks are seen from mid-cap peers at far less expensive multiples.

MGY shares at trade at a 5.3x 2024E EV/EBITDA multiple, vs. mid-cap peers at 3.9x and large-cap peers at 5.9x, the analyst adds.

Rezvan also cautions about MGY's suboptimal capital structure amid an uptick in acquisitions. After its Q2 results, Magnolia has $676 million of cash (vs. debt of $392 million). The analyst views this capital structure as inefficient and questions whether cash will fund bolt-ons ($118 million since 4Q22) to add inventory. 

Price Action: MGY shares are trading lower by 2.03% to $22.73 on the last check Thursday.