Mach Natural Resources (NYSE:MNR) delivered Q2 2024 oil production that was around expectations, while its production of natural gas and NGLs exceeded expectations.
With its Q2 2024 earnings release, Mach also announced that it trimmed its full-year capex budget by $35 million. This boosts near-term cash flow projections but also resulted in a 7% reduction in 2H 2024 oil production expectations compared to its initial guidance.
A few weeks after its quarterly report, Mach announced an equity offering to help pay for a couple pending acquisitions. These acquisitions look like they will boost Mach’s 2025 free cash flow per unit, but beyond 2025 the impact appears more uncertain.
I now estimate Mach’s value at around $17.50 to $20.00 per unit. This is approximately a 6% to 7% reduction from when I looked at Mach a few months ago, largely due to the near-term impact of weaker commodity prices.
Q2 2024 Results
Mach’s Q2 2024 results were solid, with oil production of approximately 20,900 barrels per day. This was within its guidance range for the quarter, but 1% above the midpoint of its guidance.
Production of natural gas and NGLs was quite strong, with production of both commodities exceeding the high end of Mach’s guidance ranges. Mach’s production of NGLs was also approximately 11% above guidance midpoint, while its production of natural gas was around 6% above guidance midpoint.
Thus, its total production averaged approximately 89,300 BOEPD, also above the high end of guidance and about 6% above guidance midpoint for the quarter. Natural gas prices were pretty weak though and Mach realized $1.33 per Mcf for its natural gas in Q2 2024 before hedges. This limited Mach’s cash available for distribution to around $0.71 per unit for the quarter, despite close to $80 oil. Mach declared a higher quarterly distribution of $0.90 per unit for Q2 2024, boosted by the sale of non-producing Western Anadarko acreage for $38 million ($0.40 per unit).
Mach’s lease operating expense increased to $5.72 per BOE in Q2 2024 from $5.03 per BOE in Q1 2024, but that is still below its guidance range. Meanwhile, Mach’s gathering and processing costs went from $3.94 per BOE in Q1 2024 to $2.93 per BOE in Q2 2024, so it now looks on track to meet its $3.20 to $3.40 per BOE full-year guidance there.
Guidance Changes
In Q2 2024, Mach reduced its Oswego operated rig count from two rigs down to one rig. This reduced its full-year capital expenditure budget by approximately $35 million (or 15%).
As a result of the reduction in development activity, Mach reduced its 2024 oil production guidance by 4% at guidance midpoint. Mach’s 2H 2024 oil production expectations were lowered by 7% compared to its original expectations.
Due to the strong performance trends with non-oil production, Mach has kept its 2H 2024 production expectations for NGLs and natural gas unchanged. This has resulted in its full-year guidance for NGLs and natural gas being increased by 2% and 3% respectively after factoring in the outperformance versus guidance in the first half of the year.
Total production expectations have been increased by 1% for the full year, while Mach’s guidance for lease operating expenses per BOE was reduced by 3% with the increased total volumes and operational efficiencies.
Based on the guidance changes, Mach’s 2024 free cash flow should improve by approximately $25 million with the capex and operating cost savings being partially offset by lower oil revenues.
Public Offering
Several weeks after its Q2 2024 earnings release, Mach announced a public offering of 7,272,728 common units at a price of $16.50 per common unit. This offering is expected to raise $120 million in gross proceeds of approximately $112.9 million in net proceeds for Mach (after associated commissions, expenses and underwriting discounts). There is also a standard underwriters’ option to purchase up to another 15% (1,090,909 common units) at $16.50 per common unit.
The proceeds should mostly cover the cost of a couple of pending acquisitions. These acquisitions have a combined price of $136 million in cash, before purchase price adjustments.
The Acquisitions
Mach has agreed to purchase Ardmore Basin (Oklahoma) and Anadarko Basin (Oklahoma and mostly Western Kansas) assets, with those two deals expected to close during Q3 2024.
It is paying $98 million in cash for the Ardmore Basin assets, which include 3,590 net acres and 19 operated wells. It is paying $38 million in cash for the Anadarko Basin assets, which include 128,788 net acres and 270 operated wells.
The combined production from these assets was 4,347 BOEPD (45% oil, 30% NGLs and 25% natural gas) during the six-month period ending February 2024. Mach expects December 2024 production from these assets to average around 5,220 BOEPD (47% oil, 25% NGLs and 28% natural gas).
The proved developed reserves from these assets were estimated to have a PV-10 of $153.8 million at the end of July 2024 using SEC prices of $80.06 WTI oil and $2.314 Henry Hub natural gas. The reserves are 45% oil, 26% NGLs and 29% natural gas. Mach paid roughly 0.9x proved developed PV-10 for the acquisitions.
My long-term commodity prices of $75 WTI oil and $3.75 Henry Hub natural gas would result in a relatively similar PV-10, although near-term commodity prices are lower.
Even at mid-$60s oil, I believe that the acquisitions could boost Mach’s 2025 free cash flow by around $0.25 per unit, after factoring in the additional units from the offering.
However, the longer-term impact is more uncertain due to the relatively high decline rate for the acquired assets (at least the Ardmore Basin assets). The acquired assets have a reserve life of approximately 5.6 years based on expected December 2024 production. This compares to the roughly 8.3 year reserve life for Mach based on its proved developed reserves at the end of 2023 and its Q1 2024 production (the first full quarter after the Paloma deal closed).
While Mach did not break out expected production separately for the two acquisitions, I suspect that the Ardmore Basin assets may account for close to 80% of the December 2024 combined production and also have a much lower reserve life than the Anadarko Basin assets.
2H 2024 Outlook
I have modeled Mach’s 2H 2024 production at approximately 80,350 BOEPD, based on the midpoint of its updated guidance. This includes 19,250 barrels per day of oil production. This also does not include the impact of the pending acquisitions.
At current 2H 2024 strip of around $70 to $71 WTI oil and $2.30 to $2.35 Henry Hub natural gas, I estimate that Mach can generate $458 million in revenues after hedges now.
Type | Barrels/Mcf | $ Per Barrel/Mcf | $ Million |
Oil | 3,542,000 | $69.75 | $247 |
NGLs | 3,459,200 | $24.00 | $83 |
Gas | 46,690,000 | $2.05 | $96 |
Midstream Operating Profit | $8 | ||
Hedge Value | $24 | ||
Total Revenues | $458 |
Mach’s lease operating expense may end up around $6 per BOE in the second half of the year. With its reduced capex budget, Mach is now projected to generate $131 million in 2H 2024 free cash flow.
$ Million | |
Lease Operating | $89 |
Gathering and Processing | $49 |
Taxes Other Than Income | $23 |
Cash G&A | $16 |
Cash Interest | $50 |
Capex | $100 |
Total | $327 |
Notes On Valuation
I had previously estimated Mach’s value at $18.75 to $21.35 per unit at long-term $75 WTI oil and $3.75 Henry Hub natural gas. This was based on a 0.8x to 0.9x multiple to estimated PD PV-10 (plus midstream value) and adjusted for Mach’s operational improvements.
Mach’s pending acquisitions may boost its near-term free cash flow per unit, but are roughly fair value at 0.9x PD PV-10.
I’ve reduced Mach’s estimated value to approximately $17.50 to $20.00 per unit, though, based on the assumption that oil and gas prices follow current strip until the end of 2025, and then those long-term prices after that. As well, the reduction in Oswego rigs will mean that fewer reserves will be converted to prove developed by the end of 2024.
Mach’s $680.6 million in term loan repayments due in 2026 is also something to watch out for. Mach may decide to reduce its distribution (compared to cash available for distribution) to help make those repayments.
Conclusion
Mach Natural Resources has been meeting expectations around oil production, while producing more NGLs and natural gas than expected. Mach’s oil production is expected to dip in the first part of 2H 2024 as it reduces development, although its pending acquisitions will boost oil production for Q4 2024.
The acquisitions appear to be at a roughly fair price and are also expected to help Mach’s 2025 free cash flow per unit. The Ardmore Basin assets appear to have a high decline rate, though, making the impact to free cash flow per unit beyond 2025 more uncertain.
I now estimate Mach’s value at $17.50 to $20.00 per unit based on long-term (after 2025) $75 WTI oil and $3.75 NYMEX gas. Mach is trading slightly below that range currently, but isn’t quite far enough below that range to be considered a buy yet.
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