What happened
Shares of U.S. energy exploration and production company Magnolia Oil & Gas (MGY -0.69%) rose nearly 14% at one point during the trading day on June 29. The gains were slow and steady throughout the day, with the company still trading near its highs at 3:30 p.m. Wall Street time.
So what
There was no particular news out of the oil and gas company, so the gains were more likely tied to the solid rise in the price of West Texas Intermediate (WTI) crude. WTI, the benchmark for U.S. oil, was up about 3% on the day. However, the bigger takeaway is probably one step deeper.
Image source: Getty Images.
Magnolia reports that its two core operating regions in south Texas have break-even points of $28 and $32. WTI is currently trading in the high $30 range. That means that Magnolia's existing wells are cash flow positive. It wasn't too long ago that oil had fallen below zero, effectively meaning that drillers were paying customers to take their oil. There were technical issues behind that frightening decline, but suffice it to say that every dollar that WTI rises above Magnolia's break-even points is another dollar of cash flow to help it survive this very difficult energy market. All in, rising WTI prices are very good news for Magnolia, especially given that, unlike many of its peers, it has a very modest leverage profile. To put a number on that, Magnolia's financial debt-to-equity ratio was just 0.30 times at the end of the first quarter.
Now what
Oil is a very volatile commodity, so nobody should be surprised if today's gain is given up tomorrow. And that means that Magnolia could just as easily see its price fall along with the commodities for which it drills. In other words, today's pop was nice, but expect volatility to continue until there's a prolonged upturn in the energy space. Unfortunately, this doesn't look like it's in the cards today. That said, if oil prices remain around where they currently are, modestly leveraged Magnolia may be able to muddle through this rough patch more easily than some of its more heavily leveraged peers.
