Magnolia to focus on Eagle Ford with big-funding, big-name CEO

By Luke Geiver | March 26, 2018

By mid-2018, former Occidental Petroleum CEO Steve Chazen will be leading a newly formed publicly traded exploration and production firm. With $2.6 billion in investment backing from TPG Pace Energy Holdings and EnerVest, Chazen will re-enter the oilfield with Magnolia Oil & Gas Corp. The new company will take-over EnerVest’s South Texas assets that target the Eagle Ford shale formation.

“We were trying to find assets that are oily, have strong margins and low differentials with good organic growth and substantial free cash flow while providing an attractive valuation,” Chazen told investors during the company’s first conversation with analysts and investors. “These assets fit exactly with the search criteria that we stated during our IPO.”

Chazen and TPG were part of a special purpose acquisition entity formed specifically to take-over or target unconventional oil assets. Through the deal with EnerVest, which will leave EnerVest as a major partner in the newly formed company, Magnolia will now hold 360,000 acres. Roughly 14,000 of the acres are located in Karnes County, Texas, an area Chazen said offers properties as good as any acreage in the U.S.

“They have five- to six-month paybacks” he said, “which are about one-third of a typical Delaware Basin Wolfcamp well.”

Magnolia will now have a ten-year inventory of locations. Roughly two-thirds of production from the greater set of assets comes from Karnes County.

According to Chazen, Magnolia’s plan is to operate with no or low-leverage levels. For the next few years, he said, free cash flow generation for the company will arrive at $200 to $250 million per year. “These funds could be used for debt reduction, acquisitions or share repurchases,” he said.

Michael MacDougall, director and managing partner at TPG, said the transaction is attractively priced, “especially when you consider the relatively scarce number of opportunities for investors to invest in low leverage, growing companies that are free cash flow positive from day one.”

Chazen and the EnerVest team have been in discussions regarding the South Texas assets for roughly one year.

Chazen believes Magnolia can breakeven within its Karnes County assets at oil prices in the $30/b range.

Wells in the area can achieve oil production type curves that produce 216,000 barrels of oil in their first 12 months of production which supports paybacks in less than 6 months. This year, the company could complete up to 78 gross wells. The assets included in the acquisition also include 1,200 producing wells.