ougourhan
Mach Natural Resources LP (NYSE:MRN) is an upstream oil and gas company (although it has a significant amount of midstream infrastructure to support its operations) that was the second MLP to the IPO since 2019. The company issues a Form K-1 to investors.
Mach currently expects production close to 84,000 BOEPD in 2024, but with a mix composed of only 25% oil (with 23% NGLs and 52% natural gas). Although it announced a distribution of $0.95 per unit payable in March 2024, I expect subsequent quarterly distributions to be less.
Mach is expected to generate just over $3 per unit of free cash flow in 2024, but it is doing so with a capital budget that is expected to result in a notable decline in its non-oil production (with oil production remaining relatively stable).
I am neutral on Mach at its current unit price, which essentially values it at 0.9x PD PV-10 at my long-term commodity prices of $75 for WTI oil and $3.75 for Henry Hub natural gas.
Major acquisitions
Among Mach’s major acquisitions are its 2020 acquisition of the Alta Mesa assets (including Kingfisher Midstream) and its late 2023 acquisition of Paloma’s Anadarko Basin assets.
The Alta Mesa agreement involved a low price of $220 million due to the impact of the pandemic. Alta Mesa is said to have produced approximately 30,000 BOEPJ at the time.
Acquisition of Paloma by Mach gave it an additional 32,000 BOEPD in production (23% oil, 34% NGL, and 43% natural gas) for $815 million in cash. Mach financed the purchase with a new $825 million secured term loan.
Development plans
Mach recently mentioned that it was manage two platforms. One of these is an Oswego rig in Kingfisher County, which has been mentioned as Mach’s preferred drilling area (following its acquisition of Alta Mesa). The other platform is now operating on the Canadian Paloma County assets, which are part of what Mach identifies as the core development area of the SCOOP/STACK area.
Although the Anadarko/Oklahoma Basin assets are not considered prime, Mach has managed to perform quite well out of them, delivering solid oil production results with D&C costs of $3 million per well from its Oswego wells in Kingfisher County.
Mach Oswego Wells (machnr.com (initial presentation))
Alta Mesa eventually filed for bankruptcy, largely due to a combination of debt and poor capital efficiency. It had widely spaced and expensive wells, with average D&C costs of $4.5 million. Tight spacing contributed to the rapid decline in oil production from new wells, and Alta Mesa’s breakneck pace of development also led to very high base decline rates. Alta Mesa’s breakeven point was nearing $100 in WTI oil due to its poor 2018 results.
With lower D&C costs and better performance than Alta Mesa’s closely spaced wells, Mach’s capital efficiency has been much better.
Mach’s unhedged corporate breakeven appears to be around $50 WTI oil and $2.50 NYMEX gas, although that’s with a 2024 capital budget that results in a substantial drop in non-production production. oil production (while keeping oil production relatively stable throughout the year). A true maintenance capital budget would likely result in its uncovered corporate breakeven point being closer to $60 for WTI oil and $3.00 for NYMEX gas.
Production trajectory
Mach is targeting approximately $263 million in investments in 2024, including $238 million in D&C and workover investments. It expects to keep oil production relatively stable during the year, with oil production in the fourth quarter of 2024 down 1% compared to oil production in the first quarter of 2024.
Mach Production Guide for 2024 (machnr.com)
NGL and natural gas production is expected to decline more substantially. Mach’s fourth-quarter 2024 NGL production is expected to be down -7% from the first quarter of 2024. Mach’s fourth-quarter 2024 natural gas production is expected to be down -10% from the first quarter 2024.
Outlook 2024
Mach is expected to generate $1.01 billion in oil and gas revenue at current strip prices for 2024. This includes approximately $82 worth of WTI oil and $2.40 worth of NYMEX gas.
Mach expects approximately $17 million in interim operating profits in 2024, while its 2024 hedges have an estimated value of negative $7 million.
| Type | Barrels/Mcf | $ per barrel/Mcf | Millions of dollars |
| Oil | 7,610,250 | $81.00 | $616 |
| NGL | 7,026,250 | $27.00 | $190 |
| Gas | 95,995,000 | $2.12 | $204 |
| Interim operating profit | $17 | ||
| Coverage value | -7$ | ||
| Total revenue | $1,020 |
Mach’s capital budget is approximately $263 million for 2024. As noted above, this capital budget is not enough to keep Mach’s production stable, even if oil production remains relatively stable .
Mach Term Loan (machnr.com (2023 10-K))
Mach’s $825 million secured term loan had an effective interest rate of 13.1% at the end of 2023 (with interest based on SOFR +6.5%) plus an adjustment spread of the credit spread of 0.15%. Mach must make repayments of $61.9 million in 2024, $82.5 million in 2025 and $680.6 million in 2026.
| Millions of dollars | |
| Rental Operation | $188 |
| Collection and processing | $101 |
| Taxes other than income | $56 |
| Cash G&A | $32 |
| Cash interest | $90 |
| Investments | $263 |
| Total | $730 |
This gives rise to a projection that Mach will generate $290 million in free cash flow in 2024 at current tape prices.
Mach has 95 million common units outstanding, which equates to $3.05 per unit in free cash flow. After accounting for mandatory capital repayments in 2024, Mach would have $228 million ($2.40 per unit) to devote to distributions or optional prepayments of its term loan without reducing its liquidity.
Mach started 2024 with $153 million ($1.61 per unit) in cash, so it could choose to use some of that cash to make its 2024 distribution higher than free cash flow.
Assessment Notes
Mach proven reserves developed declared with a PV-10 of $2.09 billion at the end of 2023 at SEC prices. I estimate that Mach’s proven PV-10 could cost around $2.45 billion by the end of 2024 using $75 worth of WTI oil and $3.75 worth of Henry Hub natural gas instead. These prices are more favorable for Mach due to its significant amount of natural gas (approximately 56% of its proven reserves developed) and the low Henry Hub price of $2.637 used for the 2023 SEC prices.
A multiple of 0.8x would value Mach’s upstream business at $1.96 billion. Valuing its midstream business (based on unoperated throughput) at $200 million would represent approximately 12 times its estimated midstream operating profit in 2024.
Mach is expected to end 2024 with net debt of $472 million, less distributions paid beyond the $0.95 per unit paid in March 2024.
So I value Mach at about $17.75 per unit in the long term (after 2024) at $75 WTI oil and $3.75 Henry Hub natural gas. This also assumes a 0.8x multiple to PD PV-10 at these commodity prices. A multiple of 0.9x would improve its value to around $20.35 per unit.
Conclusion
Mach Natural Resources LP stock currently values approximately 0.9x PD PV-10 at $75 WTI oil and $3.75 Henry Hub natural gas. I am currently neutral on this stock at the current share price.
Mach managed to be much more capital efficient than Alta Mesa, which itself went bankrupt in 2019, with the result that Mach was able to buy back its assets at a cheap price at the start of the 2020 pandemic.
Mach is expected to generate just over $3 per unit in free cash flow in 2024, despite low natural gas prices. Mach’s investment budget, however, is not at maintenance level and is leading to a notable drop in its non-oil production.
I expect Mach’s subsequent quarterly distributions to be lower than its recent distribution of $0.95 per unit, based on full-year free cash flow projections and Mach’s need to make certain repayments of term loans from in June 2024. Mach has cash that it could use to increase distributions in the short term, although this would not be sustainable.
