Tuesday, BofA Securities initiated coverage on shares of Magnolia Oil & Gas Corp. (NYSE:MGY), assigning a Buy rating and setting a price target of $25.00. The firm highlighted Magnolia's strategy of prioritizing capital discipline and cash returns as a differentiator in the industry.
BofA Securities noted that the company stands out amidst a trend of sector consolidation, which is largely driven by the accumulation of inventory.
The outlook for Magnolia Oil & Gas is seen as dependent on resource delineation, which could potentially more than double the 10-year base case that the firm considers reasonable. The analyst's valuation is based on free cash flow and regards Magnolia's business model as one of the most capital efficient in the industry. This model limits spending to 55% of EBITDAx.
According to BofA, the $25.00 price target reflects a 17% total shareholder return (TSR) and is justified on a discounted cash flow (DCF) basis. This valuation assumes long-term West Texas Intermediate (WTI) crude oil prices at $70 per barrel and Henry Hub (HH) natural gas prices at $4.00. The assessment suggests that the current fair value has significant upside potential as the company improves its resource visibility.
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