Module 11: Valuing Magnolia Oil & Gas
MGMT 675: Generative AI for Finance
Kerry Back, Rice University
Materials & Setup
Download these files to the folder in which you use Claude Code:
What We’re Doing Today
We will value Magnolia Oil & Gas (MGY) as a class, with AI as our analyst.
Each step will be assigned to a student or group. You will:
- Prompt Claude with the data files
- Share your screen
- Walk us through what you found
The slides pose questions — you and Claude supply the answers.
What Does Magnolia Do?
Using the MD&A and risk factors, answer:
- What does Magnolia produce, and where?
- What is the company’s stated strategy?
- How does it make money — what drives revenue?
Prompt idea
“Read the MD&A file. Summarize Magnolia’s business model, geography, and key revenue drivers in 3–5 bullets.”
What Are the Key Risks?
Still using the narrative file:
- What commodity price risks does Magnolia face?
- What operational or regulatory risks stand out?
- Have any risks materialized over the 2019–2025 period?
Ask Claude to compare risk factor sections across years — what changed, what stayed the same?
Revenue and Profitability
Using the financials workbook, ask Claude to extract and analyze:
- Revenue trend (2019–2025)
- Gross margin and operating margin trends
- Net income trajectory
Prompt idea
“From the financial statements workbook, extract annual revenue, operating income, and net income for 2019–2025. Show a table and describe the trend.”
Production and Pricing
Magnolia is an E&P company, so production volumes and realized prices matter as much as dollar revenue.
- How has production (BOE/day) grown?
- What are realized prices per barrel?
- How much of the revenue growth is volume vs. price?
The earnings press releases in the news file and the MD&A sections have production data. Ask Claude to pull the numbers.
Cash Flow and Capital Discipline
- What is the trend in free cash flow?
- How much does Magnolia spend on capex vs. what it earns?
- What does it do with excess cash — dividends, buybacks, debt paydown?
Prompt idea
“From the cash flow statements, calculate free cash flow (operating cash flow minus capex) for each year. Also summarize dividends paid and shares repurchased.”
Balance Sheet Health
- How much debt does Magnolia carry?
- What is the debt-to-equity ratio over time?
- Does the company have significant lease or other off-balance-sheet obligations?
A clean balance sheet matters for the discount rate we’ll choose later.
The DCF Framework
What We Need
- Projected free cash flows (5–10 years)
- A terminal value (perpetuity growth or exit multiple)
- A discount rate (WACC)
Where AI Helps
- Extracting historical base rates from the data
- Identifying what analysts and news say about growth
- Sanity-checking our assumptions against peers
Revenue Growth Assumptions
What revenue growth rate should we project?
- What has historical revenue growth been?
- What do the news articles say about analyst expectations?
- What does recent production growth imply about future revenue?
Prompt idea
“Calculate Magnolia’s year-over-year revenue growth for 2019–2025. Then check the news articles for any analyst revenue or production forecasts. Suggest a reasonable revenue growth assumption for the next 5 years and explain your reasoning.”
Margin Assumptions
- Are margins stable, expanding, or compressing?
- What operating margin should we project?
- Does the MD&A discuss anything that would change the cost structure?
Capex and Working Capital
- What is capex as a percentage of revenue historically?
- Is Magnolia in a growth phase (high capex) or maintenance mode?
- How should we project capex going forward?
Free cash flow = Operating income × (1 − tax rate) + depreciation − capex − change in working capital.
Discount Rate
- What is an appropriate WACC for a mid-cap E&P company?
- What beta would you use? What equity risk premium?
- Does Magnolia’s capital structure (low debt) simplify or complicate this?
Prompt idea
“Suggest a WACC for Magnolia Oil & Gas. Consider its capital structure, industry betas for E&P companies, and current risk-free rates. Show your calculation.”
Terminal Value
- Should we use a perpetuity growth model or an exit multiple?
- What terminal growth rate makes sense for an oil & gas company?
- What EV/EBITDA multiples do E&P peers trade at?
The terminal value typically accounts for 60–80% of total DCF value. It deserves careful thought.
Build the DCF
Now put it together:
- Project free cash flows for 5 years using our assumptions
- Calculate the terminal value
- Discount everything back to the present
- Subtract net debt, divide by shares outstanding
Prompt idea
“Build a DCF valuation for Magnolia Oil & Gas using these assumptions: [insert the assumptions we agreed on]. Show projected free cash flows, terminal value, enterprise value, and per-share equity value.”
Sensitivity Analysis
A single point estimate is never enough. Test:
- What if revenue growth is 2% higher or lower?
- What if the discount rate is 1% higher or lower?
- What if the terminal multiple changes by 1–2x?
Ask Claude to build a sensitivity table showing value per share under different assumption combinations.
Market Check
Magnolia’s current stock price reflects the market’s collective view. How does our estimate compare?
- If our value is above the market price — what might we be missing?
- If our value is below — what does the market see that we don’t?
- What would have to be true for the market price to be “right”?
This is the most important slide. Valuation is not about getting a number — it is about understanding what drives the number.
Multiples Cross-Check
As a sanity check, compare Magnolia to peers on:
- EV / EBITDA
- P / E
- Price / Free Cash Flow
Prompt idea
“What are typical EV/EBITDA, P/E, and Price/FCF multiples for mid-cap E&P companies? How does Magnolia compare based on our financial data?”
What We Learned
About Magnolia
- Business model and value drivers
- Historical financial performance
- Key risks and opportunities
About Using AI for Valuation
- AI extracts and organizes data quickly
- Humans choose the assumptions and judge reasonableness
- The conversation with AI is the analysis
The AI did not “do the valuation” — it helped us think through it systematically, with evidence at every step.