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Here's Why Magnolia's $191M Acquisition is a Significant One

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Magnolia Oil & Gas Corporation (MGY - Free Report) recently announced that the company will buy most of the South Texas properties of Harvest Oil & Gas Corp. in a stock and cash deal. The acquisition is expected to cost Magnolia roughly $191 million.

Financial Details

The acquisition requires the exploration and production company to pay $135 million in cash along with 4.2 million newly issued shares of its Class A common stock. The shares are valued at around $56 million as of Aug 20. Magnolia plans to fund the cash part of the deal using its cash on the balance sheet coupled with borrowings under its revolving credit facility. As of Jul 31, 2018, the company had around $100 million in its balance sheet and $550 million in its revolving credit facility.

The company expects the deal, which has an effective date of Jul 1, to close on Aug 31.

Details of Acquired Assets

The deal is expected to add around 15 net locations in the company’s core Karnes County inventory. In the first half of 2018, these properties produced 1,400 barrels of oil equivalent per day (Boe/d), of which 69% was oil. Moreover, about 114,000 net acres will be added to Magnolia’s Giddings Field location, which produced 3,400 Boe/d during the first half of 2018, with 27% oil. In the first six months of this year, the acquiree generated $25 million in operating profit from the properties.  

Acquisition Rationale

The acquisition is expected to add tremendous value to Magnolia’s South Texas operations while increasing its presence and complementing its position in the region. The deal provides Magnolia with an undivided position in the Eagle Ford shale, wherein majority of its operations take place.

Magnolia expects the acquisition to provide steady growth in its production and strengthen its free cash flow generating ability. It will, in turn, enable the company to maximize shareholder returns. 

Price Performance

Houston, TX-based Magnolia has gained 41% in the past six months compared with 0.9% growth of its industry.

 

 

Zacks Rank & Stocks to Consider

Currently, Magnolia has a Zacks Rank #3 (Hold). Investors interested in the energy sector can opt for some better-ranked stocks like McDermott International, Inc. , Subsea 7 S.A. (SUBCY - Free Report) and Canadian Natural Resources Limited (CNQ - Free Report) . While McDermott and Subsea sport a Zacks Rank #1 (Strong Buy), Canadian Natural carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Houston, TX-based McDermott is an equipment provider for energy companies. The company’s top line for 2018 is likely to improve 145% year over year. In the last four reported quarters, the company delivered an average positive earnings surprise of 101.7%.

Luxembourg-based Subsea is an oilfield service providing company. In the trailing four quarters, the company delivered an average positive earnings surprise of 318.6%.

Calgary, Canada-based Canadian Natural Resources is an upstream energy company. The company’s top line for 2018 is anticipated to improve 41.3% year over year, while its bottom line is expected to increase more than 200%.

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