Former Oxy CEO gives update on new shale E&P venture

By Luke Geiver | November 14, 2018

When Steve Chazen and his team at Magnolia Oil and Gas set out to build a new exploration and production company the goal was to build an E&P that was attractive to general investors. The goal, Chazen reminded investors during Magnolia’s first-ever quarterly call since the company formed earlier this year through the acquisition of EnerVest’s South Texas Eagle Ford assets, “includes generating real earnings from the start, achieving high full-cycle and pretax operating margins, spending within 60 percent of our gross cash flow drilling wells in order to achieve moderate growth of 10 to 15 percent per year,” and finally, he said, “maintaining a strong balance sheet with low leverage.”

At the end of the third quarter, Magnolia reported $36.7 million in cash, $388.3 million of long-term debt and an undrawn revolving credit facility of $550 million of capacity. According to Chazen, the 2018 development plan of Magnolia’s oil and gas assets are exceeding expectations. Prior to the same period last year, the assets are producing 59 percent more. And, at only 50 percent spent of total cash flow used for drilling and completing new wells, Magnolia is running at a ten percent less rate than the 60 percent cash flow spend the company had originally planned for.  

For its first full quarter operating its assets, Magnolia produced 55.2 Mboe/d. Of its two main operating areas in the Eagle Ford—Karnes County and Giddings Field—the Karnes County assets produced 41.4 Mboe/d (a 69 percent production increase from the previous quarter a year ago).

Although the company operated two drilling rigs across the Karnes acres and one in the Giddings Field, Magnolia intends to add another rig in the Giddings area to drill wells necessary for delineation results and to better prove out more the acreage.

Chazen, the longtime oil industry veteran and former head of unconventional oil giant Occidental Petroleum, was clear with investors that he believes the formula for Magnolia is working and that a 10 to 15 percent in production growth in the coming months and years is the goal. Magnolia will not be looking for major bolt-on acquisitions, but it will look to add smaller chunks to bolster is position. When asked about the well completion results across some of the company’s acreage, Chazen said that although his team was pleasantly surprised, they would not be disclosing any information until they were required to do so as much of the acreage in their operating regions were still open for development.

The company will use free cash flow for those potential acquisitions, along with use for debt reduction and share repurchases. Chazen prefers dividends to investors over share repurchase, he said.

And, citing his experience in the industry leading through low and high oil price swings, Chazen reminded investors that his team would not be frightened if the oil markets lower. In the case of volatile conditions, the team would look to acquire assets, and if markets remain stable, dividends or share repurchase options are better options. “When everyone is frightened we become greedy,” he said citing what believed to be an old industry saying. “When everyone is complacent, we dose off.”