Magnolia Oil & Gas Corp 10-Q

Item 1. Financial Statements Magnolia Oil & Gas Corporation Consolidated Balance Sheets (In thousands) June 30, 2023 December 31, 2022 ASSETS (Unaudited) (Audited) CURRENT ASSETS Cash and cash equivalents $ 676,568 $ 675,441 Accounts receivable 137,379 170,770 Drilling advances 12 3,484 Other current assets 881 1,052 Total current assets 814,840 850,747 PROPERTY, PLANT AND EQUIPMENT Oil and natural gas properties 3,114,361 2,940,011 Other 9,350 8,991 Accumulated depreciation, depletion and amortization ( 1,524,207 ) ( 1,415,973 ) Total property, plant and equipment, net 1,599,504 1,533,029 OTHER ASSETS Deferred financing costs, net 4,744 5,636 Deferred tax assets 131,404 162,792 Other long-term assets 16,229 20,381 Total other assets 152,377 188,809 TOTAL ASSETS $ 2,566,721 $ 2,572,585 LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES Accounts payable $ 166,234 $ 202,846 Other current liabilities ( Note 5) 96,766 137,427 Total current liabilities 263,000 340,273 LONG-TERM LIABILITIES Long-term debt, net 391,590 390,383 Asset retirement obligations, net of current 92,820 95,129 Other long-term liabilities 9,453 6,609 Total long-term liabilities 493,863 492,121 COMMITMENTS AND CONTINGENCIES ( Note 7) STOCKHOLDERS’ EQUITY Class A Common Stock, $ 0.0001 par value, 1,300,000 shares authorized, 214,400 shares issued and 188,066 shares outstanding in 2023 and 213,727 shares issued and 192,043 shares outstanding in 2022 21 21 Class B Common Stock, $ 0.0001 par value, 225,000 shares authorized, 21,827 shares issued and outstanding in 2023 and 2022 2 2 Additional paid-in capital 1,731,059 1,719,875 Treasury Stock, at cost, 26,334 shares and 21,684 shares in 2023 and 2022, respectively ( 425,604 ) ( 329,512 ) Retained earnings 329,011 185,669 Noncontrolling interest 175,369 164,136 Total equity 1,809,858 1,740,191 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 2,566,721 $ 2,572,585 The accompanying notes are an integral part of these consolidated financial statements. 1 Magnolia Oil & Gas Corporation Consolidated Statements of Operations (Unaudited) (In thousands, except per share data) Three Months Ended Six Months Ended June 30, 2023 June 30, 2022 June 30, 2023 June 30, 2022 REVENUES Oil revenues $ 223,147 $ 332,791 $ 462,269 $ 595,459 Natural gas revenues 20,847 85,345 48,619 141,925 Natural gas liquids revenues 36,297 66,513 77,786 125,105 Total revenues 280,291 484,649 588,674 862,489 OPERATING EXPENSES Lease operating expenses 36,796 32,604 79,167 61,348 Gathering, transportation and processing 10,389 16,381 23,121 32,221 Taxes other than income 15,216 27,411 34,508 48,293 Exploration expenses — 3,408 11 8,946 Asset retirement obligations accretion 823 802 1,664 1,590 Depreciation, depletion and amortization 77,008 57,254 147,710 110,360 Impairment of oil and natural gas properties — — 15,735 — General and administrative expenses 18,726 18,530 38,492 35,601 Total operating expenses 158,958 156,390 340,408 298,359 OPERATING INCOME 121,333 328,259 248,266 564,130 OTHER INCOME (EXPENSE) Interest expense, net ( 1,149 ) ( 7,017 ) ( 662 ) ( 16,374 ) Other income, net 9,259 6,538 8,120 6,744 Total other income (expense), net 8,110 ( 479 ) 7,458 ( 9,630 ) INCOME BEFORE INCOME TAXES 129,443 327,780 255,724 554,500 Income tax expense 24,847 27,875 44,452 45,975 NET INCOME 104,596 299,905 211,272 508,525 LESS: Net income attributable to noncontrolling interest 13,104 49,322 23,446 91,903 NET INCOME ATTRIBUTABLE TO CLASS A COMMON STOCK $ 91,492 $ 250,583 $ 187,826 $ 416,622 NET INCOME PER SHARE OF CLASS A COMMON STOCK Basic $ 0.48 $ 1.32 $ 0.97 $ 2.23 Diluted $ 0.48 $ 1.32 $ 0.97 $ 2.22 WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING Basic 189,402 188,146 190,584 185,377 Diluted 189,567 188,589 190,875 185,894 The accompanying notes are an integral part of these consolidated financial statements. 2 Magnolia Oil & Gas Corporation Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) (In thousands) Class A Common Stock Class B Common Stock Additional Paid In Capital Treasury Stock Retained Earnings/ (Accumulated Deficit) Total Stockholders’ Equity Noncontrolling Interest Total Equity For the Three Months Ended June 30, 2022 Shares Value Shares Value Shares Value Balance, March 31, 2022 203,762 $ 20 35,594 $ 4 $ 1,649,111 16,218 $ ( 209,418 ) $ ( 542,129 ) $ 897,588 $ 174,780 $ 1,072,368 Stock based compensation expense, net of forfeitures — — — — 2,990 — — — 2,990 527 3,517 Changes in ownership interest adjustment — — — — ( 4,305 ) — — — ( 4,305 ) 4,305 — Common stock issued related to stock based compensation and other, net 83 — — — ( 159 ) — — — ( 159 ) ( 29 ) ( 188 ) Class A Common Stock repurchases — — — — — 2,065 ( 48,419 ) — ( 48,419 ) — ( 48,419 ) Class B Common Stock purchase and cancellation — — ( 2,000 ) — — — — — — ( 54,020 ) ( 54,020 ) Conversion of Class B Common Stock to Class A Common Stock 4,884 1 ( 4,884 ) ( 1 ) — — — — — — — Distributions to noncontrolling interest owners — — — — — — — — — ( 4,606 ) ( 4,606 ) Net income — — — — — — — 250,583 250,583 49,322 299,905 Balance, June 30, 2022 208,729 $ 21 28,710 $ 3 $ 1,647,637 18,283 $ ( 257,837 ) $ ( 291,546 ) $ 1,098,278 $ 170,279 $ 1,268,557 For the Three Months Ended June 30, 2023 Balance, March 31, 2023 214,355 $ 21 21,827 $ 2 $ 1,720,487 24,084 $ ( 380,783 ) $ 259,636 $ 1,599,363 $ 167,714 $ 1,767,077 Stock based compensation expense, net of forfeitures — — — — 3,668 — — — 3,668 424 4,092 Changes in ownership interest adjustment — — — — 2,936 — — — 2,936 ( 2,769 ) 167 Common stock issued related to stock based compensation and other, net 45 — — — ( 137 ) — — — ( 137 ) ( 15 ) ( 152 ) Class A Common Stock repurchases — — — — — 2,250 ( 44,821 ) — ( 44,821 ) — ( 44,821 ) Dividends declared ($ 0.115 per share) — — — — — — — ( 22,117 ) ( 22,117 ) — ( 22,117 ) Distributions to noncontrolling interest owners — — — — — — — — — ( 3,089 ) ( 3,089 ) Adjustment to deferred taxes — — — — 4,543 — — — 4,543 — 4,543 Tax impact of equity transactions — — — — ( 438 ) — — — ( 438 ) — ( 438 ) Net income — — — — — — — 91,492 91,492 13,104 104,596 Balance, June 30, 2023 214,400 $ 21 21,827 $ 2 $ 1,731,059 26,334 $ ( 425,604 ) $ 329,011 $ 1,634,489 $ 175,369 $ 1,809,858 The accompanying notes are an integral part of these consolidated financial statements. 3 Magnolia Oil & Gas Corporation Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) (In thousands) Class A Common Stock Class B Common Stock Additional Paid In Capital Treasury Stock Retained Earnings/ (Accumulated Deficit) Total Stockholders’ Equity Noncontrolling Interest Total Equity For the Six Months Ended June 30, 2022 Shares Value Shares Value Shares Value Balance, December 31, 2021 193,437 $ 19 49,293 $ 5 $ 1,689,500 14,168 $ ( 164,599 ) $ ( 708,168 ) $ 816,757 $ 228,492 $ 1,045,249 Stock based compensation expense, net of forfeitures — — — — 5,349 — — — 5,349 1,053 6,402 Changes in ownership interest adjustment — — — — ( 4,900 ) — — — ( 4,900 ) 4,900 — Common stock issued related to stock based compensation and other, net 659 — — — ( 5,029 ) — — — ( 5,029 ) ( 1,073 ) ( 6,102 ) Class A Common Stock repurchases — — — — — 4,115 ( 93,238 ) — ( 93,238 ) — ( 93,238 ) Class B Common Stock purchase and cancellation — — ( 5,950 ) — — — — — — ( 138,753 ) ( 138,753 ) Conversion of Class B Common Stock to Class A Common Stock 14,633 2 ( 14,633 ) ( 2 ) — — — — — — — Dividends declared ($ 0.20 per share) — — — — ( 37,283 ) — — — ( 37,283 ) — ( 37,283 ) Distributions to noncontrolling interest owners — — — — — — — — — ( 16,243 ) ( 16,243 ) Net income — — — — — — — 416,622 416,622 91,903 508,525 Balance, June 30, 2022 208,729 $ 21 28,710 $ 3 $ 1,647,637 18,283 $ ( 257,837 ) $ ( 291,546 ) $ 1,098,278 $ 170,279 $ 1,268,557 For the Six Months Ended June 30, 2023 Balance, December 31, 2022 213,727 $ 21 21,827 $ 2 $ 1,719,875 21,684 $ ( 329,512 ) $ 185,669 $ 1,576,055 $ 164,136 $ 1,740,191 Stock based compensation expense, net of forfeitures — — — — 7,053 — — — 7,053 810 7,863 Changes in ownership interest adjustment — — — — 6,875 — — — 6,875 ( 6,708 ) 167 Common stock issued related to stock based compensation and other, net 673 — — — ( 6,262 ) — — — ( 6,262 ) ( 716 ) ( 6,978 ) Class A Common Stock repurchases — — — — — 4,650 ( 96,092 ) — ( 96,092 ) — ( 96,092 ) Dividends declared ($ 0.23 per share) — — — — — — ( 44,484 ) ( 44,484 ) — ( 44,484 ) Distributions to noncontrolling interest owners — — — — — — — — — ( 5,599 ) ( 5,599 ) Adjustment to deferred taxes — — — — 4,327 — — — 4,327 — 4,327 Tax impact of equity transactions — — — — ( 809 ) — — — ( 809 ) — ( 809 ) Net income — — — — — — — 187,826 187,826 23,446 211,272 Balance, June 30, 2023 214,400 $ 21 21,827 $ 2 $ 1,731,059 26,334 $ ( 425,604 ) $ 329,011 $ 1,634,489 $ 175,369 $ 1,809,858 The accompanying notes are an integral part of these consolidated financial statements. 4 Magnolia Oil & Gas Corporation Consolidated Statements of Cash Flows (Unaudited) ( In thousands) Six Months Ended June 30, 2023 June 30, 2022 CASH FLOWS FROM OPERATING ACTIVITIES NET INCOME $ 211,272 $ 508,525 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and amortization 147,710 110,360 Exploration expenses, non-cash 9 — Impairment of oil and natural gas properties 15,735 — Asset retirement obligations accretion 1,664 1,590 Amortization of deferred financing costs 2,100 3,779 (Gain) on sale of assets ( 3,946 ) — Deferred income tax expense 36,264 — Stock based compensation 7,863 6,402 Changes in operating assets and liabilities: Accounts receivable 32,922 ( 97,633 ) Accounts payable ( 36,189 ) 58,935 Accrued liabilities ( 4,836 ) 27,675 Drilling advances 3,472 578 Other assets and liabilities, net 7,556 ( 2,207 ) Net cash provided by operating activities 421,596 618,004 CASH FLOWS FROM INVESTING ACTIVITIES Acquisitions ( 3,357 ) ( 4,347 ) Additions to oil and natural gas properties ( 225,388 ) ( 207,461 ) Changes in working capital associated with additions to oil and natural gas properties ( 39,424 ) 25,494 Other investing ( 88 ) ( 1,018 ) Net cash used in investing activities ( 268,257 ) ( 187,332 ) CASH FLOW FROM FINANCING ACTIVITIES Class A Common Stock repurchases ( 94,942 ) ( 92,155 ) Class B Common Stock purchases and cancellations — ( 138,753 ) Dividends paid ( 44,684 ) ( 37,176 ) Cash paid for debt modification — ( 5,272 ) Distributions to noncontrolling interest owners ( 5,599 ) ( 16,243 ) Other financing activities ( 6,987 ) ( 6,164 ) Net cash used in financing activities ( 152,212 ) ( 295,763 ) NET CHANGE IN CASH AND CASH EQUIVALENTS 1,127 134,909 Cash and cash equivalents – Beginning of period 675,441 366,982 Cash and cash equivalents – End of period $ 676,568 $ 501,891 SUPPLEMENTAL CASH FLOW INFORMATION: Supplemental cash items: Cash paid for income taxes $ 7,828 $ 37,138 Cash paid for interest 13,175 12,733 Supplemental non-cash investing and financing activity: Accruals or liabilities for capital expenditures $ 28,500 $ 55,430 Supplemental non-cash lease operating activity: Right-of-use assets obtained in exchange for operating lease obligations $ 7,673 $ 2,462 The accompanying notes are an integral part of these consolidated financial statements. 5 Magnolia Oil & Gas Corporation Notes to Consolidated Financial Statements 1. Description of Business and Basis of Presentation Organization and Nature of Operations Magnolia Oil & Gas Corporation (the “Company” or “Magnolia”) is an independent oil and natural gas company engaged in the acquisition, development, exploration, and production of oil, natural gas, and natural gas liquid (“NGL”) reserves. The Company’s oil and natural gas properties are located primarily in Karnes County and the Giddings area in South Texas where the Company targets the Eagle Ford Shale and Austin Chalk formations. Magnolia’s objective is to generate stock market value over the long-term through consistent organic production growth, high full cycle operating margins, an efficient capital program with short economic paybacks, significant free cash flow after capital expenditures, and effective reinvestment of free cash flow. Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial reporting. Accordingly, certain disclosures normally included in an Annual Report on Form 10-K have been omitted. The consolidated financial statements and related notes included in this Quarterly Report should be read in conjunction with the Company’s consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the period ended December 31, 2022 (the “2022 Form 10-K”). Except as disclosed herein, there have been no material changes to the information disclosed in the Notes to the consolidated financial statements included in the Company’s 2022 Form 10-K. In the opinion of management, all normal, recurring adjustments and accruals considered necessary to present fairly, in all material respects, the Company’s interim financial results have been included. Operating results for the periods presented are not necessarily indicative of expected results for the full year. Certain reclassifications of prior period financial statements have been made to conform to current reporting practices. The consolidated financial statements include the accounts of the Company and its subsidiaries after elimination of intercompany transactions and balances. The Company’s interests in oil and natural gas exploration and production ventures and partnerships are proportionately consolidated. The Company reflects a noncontrolling interest representing primarily the interest owned by the Magnolia LLC Unit Holders through their ownership of Magnolia LLC Units in the consolidated financial statements. The noncontrolling interest is presented as a component of equity. See Note 9—Stockholders’ Equity for further discussion of the noncontrolling interest. 2. Summary of Significant Accounting Policies As of June 30, 2023, the Company’s significant accounting policies are consistent with those discussed in Note 1—Organization and Summary of Significant Accounting Policies of its consolidated financial statements contained in the Company’s 2022 Form 10-K. 3. Revenue Recognition Magnolia’s revenues include the sale of crude oil, natural gas, and NGLs. The Company has concluded that disaggregating revenue by product type appropriately depicts how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors and has reflected this disaggregation of revenue on the Company’s consolidated statements of operations for all periods presented. The Company’s receivables consist mainly of trade receivables from commodity sales and joint interest billings due from owners on properties the Company operates. Receivables from contracts with customers totaled $ 96.4 million as of June 30, 2023 and $ 138.6 million as of December 31, 2022. For further detail regarding the Company’s revenue recognition policies, please refer to Note 1—Organization and Summary of Significant Accounting Policies of the consolidated financial statements contained in the Company’s 2022 Form 10-K. 6 4. Fair Value Measurements Certain of the Company’s assets and liabilities are carried at fair value and measured either on a recurring or nonrecurring basis. The Company’s fair value measurements are based either on actual market data or assumptions that other market participants would use in pricing an asset or liability in an orderly transaction, using the valuation hierarchy prescribed by GAAP under Accounting Standards Codification (“ASC”) 820. The three levels of the fair value hierarchy under ASC 820 are as follows: Level 1 - Quoted prices (unadjusted) in active markets for identical investments at the measurement date are used. Level 2 - Pricing inputs are other than quoted prices included within Level 1 that are observable for the investment, either directly or indirectly. Level 2 pricing inputs include quoted prices for similar investments in active markets, quoted prices for identical or similar investments in markets that are not active, inputs other than quoted prices that are observable for the investment, and inputs that are derived principally from or corroborated by observable market data by correlation or other means. Level 3 - Pricing inputs are unobservable and include situations where there is little, if any, market activity for the investment. The inputs used in determination of fair value require significant judgment and estimation. Recurring Fair Value Measurements The carrying value and fair value of the financial instrument that is not carried at fair value in the Company’s consolidated balance sheets at June 30, 2023 and December 31, 2022 are as follows: June 30, 2023 December 31, 2022 (In thousands) Carrying Value Fair Value Carrying Value Fair Value Long-term debt $ 391,590 $ 388,800 $ 390,383 $ 382,704 The fair value of the 2026 Senior Notes at June 30, 2023 and December 31, 2022 is based on unadjusted quoted prices in an active market, which is considered a Level 1 input in the fair value hierarchy. The Company has other financial instruments consisting primarily of receivables, payables, and other current assets and liabilities that approximate fair value due to the nature of the instruments and their relatively short maturities. Non-financial assets and liabilities initially measured at fair value include assets acquired and liabilities assumed in business combinations and asset retirement obligations. Nonrecurring Fair Value Measurements Certain of the Company’s assets and liabilities are measured at fair value on a nonrecurring basis. Specifically, stock based compensation is not measured at fair value on an ongoing basis but is subject to fair value calculations in certain circumstances. For further detail, see Note 10—Stock Based Compensation in the Notes to the consolidated financial statements. There were no other material nonrecurring fair value measurements as of June 30, 2023 or December 31, 2022. 5. Other Current Liabilities The following table provides detail of the Company’s other current liabilities for the periods presented: (In thousands) June 30, 2023 December 31, 2022 Accrued capital expenditures $ 28,500 $ 67,923 Other 68,266 69,504 Total other current liabilities $ 96,766 $ 137,427 7 6. Long-term Debt The Company’s long-term debt is comprised of the following: (In thousands) June 30, 2023 December 31, 2022 Revolving credit facility $ — $ — Senior Notes due 2026 400,000 400,000 Total long-term debt 400,000 400,000 Less: Unamortized deferred financing cost ( 8,410 ) ( 9,617 ) Long-term debt, net $ 391,590 $ 390,383 Credit Facility The original RBL Facility was entered into by and among Magnolia Operating, as borrower, Magnolia Intermediate, as its holding company, the banks, financial institutions, and other lending institutions from time to time party thereto, as lenders, the other parties from time to time party thereto, and Citibank, N.A., as administrative agent, collateral agent, issuing bank, and swingline lender. On February 16, 2022, Magnolia Operating, as borrower, amended and restated the RBL Facility in its entirety, providing for maximum commitments in an aggregate principal amount of $ 1.0 billion with a letter of credit facility with a $ 50.0 million sublimit, with a borrowing base of $ 450.0 million. The RBL Facility, maturing in February 2026, is guaranteed by certain parent companies and subsidiaries of Magnolia LLC and is collateralized by certain of Magnolia Operating’s oil and natural gas properties. Borrowings under the RBL Facility bear interest, at Magnolia Operating’s option, at a rate per annum equal to either the term SOFR rate or the alternative base rate plus the applicable margin. Additionally, Magnolia Operating is required to pay a commitment fee quarterly in arrears in respect of unused commitments under the RBL Facility. The applicable margin and the commitment fee rate are calculated based upon the utilization levels of the RBL Facility as a percentage of unused lender commitments then in effect. The RBL Facility contains certain affirmative and negative covenants customary for financings of this type, including compliance with a leverage ratio of less than 3.50 to 1.00 and a current ratio of greater than 1.00 to 1.00. As of June 30, 2023, the Company was in compliance with all covenants under the RBL Facility. The Company incurred approximately $ 5.5 million of lender and transaction fees related to the modification of which $ 5.1 million were recorded as deferred financing costs and will be amortized prospectively over the remaining term of the RBL Facility and $ 0.4 million of which were expensed and are reflected in “Interest expense, net” on the Company’s consolidated statements of operations for the six months ended June 30, 2022. Deferred financing costs in connection with the RBL Facility are amortized on a straight-line basis over a period of four years from February 2022 to February 2026 and included in “Interest expense, net” in the Company’s consolidated statements of operations. The Company recognized interest expense related to the RBL Facility of $ 1.0 million for each of the three months ended June 30, 2023 and 2022, and $ 2.1 million and $ 3.7 million for the six months ended June 30, 2023 and 2022, respectively. The unamortized portion of the deferred financing costs is included in “Deferred financing costs, net” on the Company’s consolidated balance sheets as of June 30, 2023 and December 31, 2022. The Company did no t have any outstanding borrowings under the RBL Facility as of June 30, 2023. 2026 Senior Notes On July 31, 2018, the Issuers issued and sold $ 400.0 million aggregate principal amount of 2026 Senior Notes in a private placement under Rule 144A and Regulation S under the Securities Act of 1933, as amended. The 2026 Senior Notes were issued under the Indenture, dated as of July 31, 2018 (the “Indenture”), by and among the Issuers and Deutsche Bank Trust Company Americas, as trustee. On April 5, 2021, the terms of the Indenture were amended to modify, among other things, the criteria used by the Company to make Restricted Payments (as defined in the Indenture). The 2026 Senior Notes are guaranteed on a senior unsecured basis by the Company, Magnolia Operating, and Magnolia Intermediate and may be guaranteed by certain future subsidiaries of the Company. The 2026 Senior Notes will mature on August 1, 2026 and bear interest at the rate of 6.0 % per annum. Deferred financing costs related to the issuance of, and the amendment to the Indenture governing, the 2026 Senior Notes are amortized using the effective interest method over the term of the 2026 Senior Notes and are included in “Interest expense, net” in the Company’s consolidated statements of operations. The unamortized portion of the deferred financing costs is included as a reduction to the carrying value of the 2026 Senior Notes, which has been recorded as “Long-term debt, net” on the Company’s consolidated balance sheets as of June 30, 2023 and December 31, 2022. The Company recognized interest expense related to the 2026 Senior 8 Notes of $ 6.6 million for each of the three months ended June 30, 2023 and 2022, and $ 13.2 million and $ 13.1 million for the six months ended June 30, 2023 and 2022, respectively. At any time, the Issuers may redeem all or a part of the 2026 Senior Notes based on principal plus a set premium, as set forth in the Indenture, including any accrued and unpaid interest. 7. Commitments and Contingencies Legal Matters From time to time, the Company is or may become involved in litigation in the ordinary course of business. Certain of the Magnolia LLC Unit Holders and EnerVest Energy Institutional Fund XIV-C, L.P. (collectively the “Co-Defendants”) and the Company have been named as defendants in a lawsuit where the plaintiffs claim to be entitled to a minority working interest in certain Karnes County Assets. The litigation is in the pre-trial stage. The exposure related to this litigation is currently not reasonably estimable. The Co-Defendants retain all such liability. A mineral owner in a Magnolia operated well in Karnes County, Texas filed a complaint with the Texas Railroad Commission (the “Commission”) challenging the validity of the permit to drill such well by questioning the long-standing process by which the Commission granted the permit. After the Commission affirmed the granting of the permit, and after judicial review of the Commission’s order by the 53rd Judicial District Court Travis County, Texas (the “District Court”), the District Court reversed and remanded the Commission’s order. Upon appeal to the Third Court of Appeals in Austin, Texas (the“Court of Appeals”), the Court of Appeals reversed in part and affirmed in part the District Court’s ruling and remanded the matter to the Commission. The plaintiffs have filed a motion for rehearing with the Court of Appeals, and the parties are waiting for the Court’s decision. At June 30, 2023, the Company does not believe the outcome of any such disputes or legal actions will have a material effect on its consolidated statements of operations, balance sheet, or cash flows. No amounts were accrued with respect to outstanding litigation at June 30, 2023 or June 30, 2022. Environmental Matters The Company, as an owner or lessee and operator of oil and natural gas properties, is subject to various federal, state, and local laws and regulations relating to discharge of materials into, and the protection of, the environment. These laws and regulations may, among other things, impose liability on a lessee under an oil and natural gas lease for the cost of pollution clean-up resulting from operations and subject the lessee to liability for pollution damages. In some instances, the Company may be directed to suspend or cease operations in an affected area. The Company maintains insurance coverage, which it believes is customary in the industry, although the Company is not fully insured against all environmental risks. Risks and Uncertainties The Company’s revenue, profitability, and future growth are substantially dependent upon the prevailing and future prices for oil and natural gas, which depend on numerous factors beyond the Company’s control such as overall oil and natural gas production and inventories in relevant markets, economic conditions, the global and domestic political environments, regulatory developments, and competition from other energy sources. Oil and natural gas prices historically have been volatile and may be subject to significant fluctuations in the future. Additionally, the economy is experiencing elevated inflation levels as a result of global supply and demand imbalances. Inflationary pressures and labor shortages could result in further increases to our operating and capital costs. Russia’s invasion of Ukraine in the first quarter of 2022, and global sanctions placed on Russia in response, have had and may continue to have a global impact on supply and demand for oil and natural gas. Magnolia continues to monitor any impacts from the Russia-Ukraine war on the global markets for its commodities. 9 8. Income Taxes The Company’s income tax provision consists of the following components: Three Months Ended Six Months Ended (In thousands) June 30, 2023 June 30, 2022 June 30, 2023 June 30, 2022 Current: Federal $ 3,405 $ 25,902 $ 7,055 $ 42,687 State 581 1,973 1,133 3,288 Total current 3,986 27,875 8,188 45,975 Deferred: Federal 20,025 — 34,845 — State 836 — 1,419 — Total deferred 20,861 — 36,264 — Income tax expense $ 24,847 $ 27,875 $ 44,452 $ 45,975 The Company is subject to U.S. federal income tax and margin tax in the state of Texas. The Company estimates its annual effective tax rate in recording its quarterly provision for income taxes in the various jurisdictions in which it operates. The Company’s effective tax rate for the three months ended June 30, 2023 and 2022 was 19.2 % and 8.5 %, respectively, and 17.4 % and 8.3 % for the six months ended June 30, 2023 and 2022, respectively. As a result of impairments in the first quarter of 2020, the Company established full valuation allowances on the federal and state deferred tax assets, which resulted in additional differences between the effective tax rate and the statutory rate as of June 30, 2022. As of December 31, 2022, the Company released the valuation allowance against net deferred tax assets. The primary differences between the annual effective tax rate and the statutory rate of 21.0% are income attributable to noncontrolling interest, state taxes, and valuation allowances. As of June 30, 2023, the Company does not anticipate recognition of any significant liabilities for uncertain tax positions during the next 12 months. For the six months ended June 30, 2023, no significant amounts were incurred for interest and penalties. Currently, the Company is not aware of any issues under review that could result in significant payments, accruals, or a material deviation from its position. The Company’s tax years since its formation remain subject to possible income tax examinations by its major taxing authorities. As of June 30, 2023, the Company’s total deferred tax assets were $ 134.5 million. Management assessed whether it is more-likely-than-not that it will generate sufficient taxable income to realize its deferred income tax assets, including the investment in partnership and net operating loss carryforwards. In making this determination, the Company considered all available positive and negative evidence and made certain assumptions. The Company considered, among other things, the overall business environment, its historical earnings and losses, current industry trends, and its outlook for future years. As of June 30, 2023, the Company recorded a valuation allowance of $ 3.1 million to offset the deferred tax asset created by the capital loss attributable to the Highlander sale. On August 16, 2022, the U.S. enacted legislation referred to as the Inflation Reduction Act (“IRA”), which significantly changes U.S. corporate income tax laws and is effective for tax years beginning after December 31, 2022. These changes include, among others, a new 15% corporate alternative minimum tax on adjusted financial statement income of corporations with profits over $1 billion, a 1% excise tax on stock buybacks, and various tax incentives for energy and climate initiatives. The Company evaluated the provisions of the IRA and determined that none of the provisions have a material impact on the Company’s reported results, cash flows or financial position for the current year. The Company will continue to evaluate the impacts of the IRA in future tax years. 9. Stockholders’ Equity Class A Common Stock At June 30, 2023, there were 214.4 million shares of Class A Common Stock issued and 188.1 million shares of Class A Common Stock outstanding. The holders of Class A Common Stock and Class B Common Stock vote together as a single class on all matters and are entitled one vote for each share held. There is no cumulative voting with respect to the election of directors, which results in the holders of more than 50% of the Company’s outstanding common shares being able to elect all of the directors, subject to voting obligations under the Stockholder Agreement. In the event of a liquidation, dissolution, or winding up of the Company, the holders of the Class A Common Stock are entitled to share ratably in all assets remaining available for distribution to them after payment of liabilities and after provision is made for each class of stock, if any, having preference over the common stock. The 10 holders of the Class A Common Stock have no preemptive or other subscription rights, and there are no sinking fund provisions applicable to such shares. Class B Common Stock At June 30, 2023, there were 21.8 million shares of Class B Common Stock issued and outstanding. Holders of Class B Common Stock vote together as a single class with holders of Class A Common Stock on all matters properly submitted to a vote of the stockholders. The holders of Class B Common Stock generally have the right to exchange all or a portion of their shares of Class B Common Stock, together with an equal number of Magnolia LLC Units, for the same number of shares of Class A Common Stock or, at Magnolia LLC’s option, an equivalent amount of cash. Upon the future redemption or exchange of Magnolia LLC Units held by any holder of Class B Common Stock, a corresponding number of shares of Class B Common Stock held by such holder of Class B Common Stock will be canceled. In the event of a liquidation, dissolution, or winding up of Magnolia LLC, the holders of the Class B Common Stock, through their ownership of Magnolia LLC Units, are entitled to share ratably in all assets remaining available for distribution to them after payment of liabilities and after provision is made for each class of units of Magnolia LLC, if any, having preference over the common units. The holders of the Class B Common Stock have no preemptive or other subscription rights, and there are no sinking fund provisions applicable to such shares. Share Repurchases As of June 30, 2023, the Company’s board of directors had authorized a share repurchase program of up to 30.0 million shares of Class A Common Stock. The program does not require purchases to be made within a particular time frame. The Company had repurchased 25.8 million shares under the program at a cost of $ 414.0 million and had 4.2 million shares of Class A Common Stock remaining under its share repurchase authorization as of June 30, 2023. On July 31, 2023, the Company’s board of directors increased the share repurchase authorization by an additional 10.0 million shares of Class A Common Stock, which increases total share repurchase authorization to 40.0 million shares. During the six months ended June 30, 2022, the Company repurchased 0.6 million shares of Class A Common Stock for $ 11.6 million from EnerVest Energy Institutional Fund XIV-C, L.P. outside of the share repurchase program. During the six months ended June 30, 2022 Magnolia LLC repurchased and subsequently canceled 5.9 million Magnolia LLC Units with an equal number of shares of corresponding Class B Common Stock for $ 138.8 million of cash consideration (the “Class B Common Stock Repurchases”). During the same period, the Magnolia LLC Unit Holders redeemed 14.6 million Magnolia LLC Units (and a corresponding number of shares of Class B Common Stock) for an equivalent number of shares of Class A Common Stock and subsequently sold these shares to the public. Magnolia did not receive any proceeds from the sale of shares of Class A Common Stock by the Magnolia LLC Unit Holders. Magnolia funded the Class B Common Stock Repurchases with cash on hand. Dividends and Distributions The Company’s board of directors periodically declares dividends payable on issued and outstanding shares of Class A Common Stock, and a corresponding distribution from Magnolia LLC to Magnolia LLC Unit Holders. Dividends in excess of retained earnings are recorded as a reduction of additional paid-in capital and distributions to the Magnolia LLC Unit Holders are recorded as a reduction of noncontrolling interest. 11 The following table sets forth information with respect to cash dividends and distributions declared by the Company’s board of directors during the six months ended June 30, 2023 and the year ended December 31, 2022, on its own behalf and in its capacity as the managing member of Magnolia LLC, on issued and outstanding shares of Class A Common Stock and Magnolia LLC Units: Record Date Payment Date Dividend/ Distribution Amount per share (1) Distributions by Magnolia LLC (2) Dividends Declared by the Company Distributions to Magnolia LLC Unit Holders (In thousands, except per share amounts) May 11, 2023 June 1, 2023 $ 0.115 $ 24,627 $ 22,117 $ 2,510 February 10, 2023 March 1, 2023 $ 0.115 $ 24,878 $ 22,368 $ 2,510 November 7, 2022 December 1, 2022 $ 0.100 $ 21,867 $ 18,996 $ 2,871 August 12, 2022 September 1, 2022 $ 0.100 $ 21,983 $ 19,112 $ 2,871 February 14, 2022 March 1, 2022 $ 0.200 $ 45,851 $ 37,283 $ 8,568 (1) Per share of Class A Common Stock and per Magnolia LLC Unit. (2) Reflects total cash dividend and distribution payments made, or to be made, to holders of Class A Common Stock and Magnolia LLC Unit Holders (other than the Company) as of the applicable record date. Noncontrolling Interest Noncontrolling interest in Magnolia’s consolidated subsidiaries includes amounts attributable to Magnolia LLC Units that were issued to the Magnolia LLC Unit Holders. The noncontrolling interest percentage is affected by various equity transactions such as issuances and repurchases of Class A Common Stock, the exchange of Class B Common Stock (and corresponding Magnolia LLC Units) for Class A Common Stock, or the cancellation of Class B Common Stock (and corresponding Magnolia LLC Units). As of June 30, 2023, Magnolia owned approximately 89.6 % of the interest in Magnolia LLC and the noncontrolling interest was approximately 10.4 %. Highlander was a joint venture whereby MGY Louisiana LLC, a wholly owned subsidiary of Magnolia Operating, held approximately 84.7 % of the units of Highlander, with the remaining 15.3 % attributable to noncontrolling interest. On May 30, 2023, the Company sold its interest in Highlander and recognized a gain on sale of $ 3.9 million included within “Other income, net” on the Company’s consolidated statements of operations. 10. Stock Based Compensation On October 8, 2018, the Company’s board of directors adopted the “Magnolia Oil & Gas Corporation Long Term Incentive Plan” (as amended, the “Plan”), effective as of July 17, 2018. A total of 16.8 million shares of Class A Common Stock have been authorized for issuance under the Plan as of June 30, 2023. The Company grants stock based compensation awards in the form of restricted stock units (“RSU”), performance restricted stock units (“PRSU”), and performance stock units (“PSU”) to eligible employees and directors to enhance the Company and its affiliates’ ability to attract, retain, and motivate persons who make important contributions to the Company and its affiliates by providing these individuals with equity ownership opportunities. Shares issued as a result of awards granted under the Plan are generally new shares of Class A Common Stock. Stock based compensation expense is recognized net of forfeitures within “General and administrative expenses” and “Lease operating expenses” on the consolidated statements of operations and was $ 4.1 million and $ 3.5 million for the three months ended June 30, 2023 and 2022, and $ 7.9 million and $ 6.4 million for the six months ended June 30, 2023 and 2022, respectively. The Company has elected to account for forfeitures of awards granted under the Plan as they occur in determining compensation expense. 12 The following table presents a summary of Magnolia’s unvested RSU, PRSU, and PSU activity for the three months ended June 30, 2023. Restricted Stock Units Performance Restricted Stock Units Performance Stock Units Units Weighted Average Grant Date Fair Value Units Weighted Average Grant Date Fair Value Units Weighted Average Grant Date Fair Value Unvested at March 31, 2023 1,186,712 $ 18.79 946,229 $ 13.65 232,700 $ 24.69 Granted 63,728 20.31 9,772 21.88 — — Vested ( 52,409 ) 19.13 — — — — Forfeited ( 24,624 ) 17.47 ( 5,146 ) 14.14 — — Unvested at June 30, 2023 1,173,407 $ 18.89 950,855 $ 13.73 232,700 $ 24.69 The following table presents a summary of Magnolia’s unvested RSU, PRSU, and PSU activity for the six months ended June 30, 2023. Restricted Stock Units Performance Restricted Stock Units Performance Stock Units Units Weighted Average Grant Date Fair Value Units Weighted Average Grant Date Fair Value Units Weighted Average Grant Date Fair Value Unvested at December 31, 2022 911,286 $ 12.89 1,257,583 $ 13.36 278,486 $ 6.14 Granted 679,405 22.81 15,524 22.28 232,700 24.69 Granted for performance multiple (1) — — — — 12,981 6.14 Vested ( 376,625 ) 11.62 ( 314,963 ) 12.62 ( 291,467 ) 6.14 Forfeited ( 40,659 ) 17.22 ( 7,289 ) 15.16 — — Unvested at June 30, 2023 1,173,407 $ 18.89 950,855 $ 13.73 232,700 $ 24.69 (1) Upon completion of the performance period for the PSUs granted in 2020, a performance multiple of 105 % was applied to each of the grants resulting in additional grants of PSUs in 2023. Restricted Stock Units The Company grants service-based RSU awards to employees, which generally vest ratably over a three-year or four-year service period, and to non-employee directors, which vest in full after one year . Non-employee directors may elect to defer the RSU settlement date. RSUs represent the right to receive shares of Class A Common Stock at the end of the vesting period equal to the number of RSUs that vest. RSUs are subject to restrictions on transfer and are generally subject to a risk of forfeiture if the award recipient ceases to be an employee or director of the Company prior to vesting of the award. Compensation expense for the service-based RSU awards is based upon the grant date market value of the award and such costs are recorded on a straight-line basis over the requisite service period for each separately vesting portion of the award, as if the award was, in-substance, multiple awards. The aggregate fair value of RSUs that vested during the six months ended June 30, 2023 and 2022 were $ 8.3 million and $ 10.2 million, respectively. Unrecognized compensation expense related to unvested RSUs as of June 30, 2023 was $ 18.1 million, which the Company expects to recognize over a weighted average period of 2.6 years. Performance Restricted Stock Units and Performance Stock Units The Company grants PRSUs to certain employees. Each PRSU represents the contingent right to receive one share of Class A Common Stock once the PRSU is both vested and earned. PRSUs generally vest either ratably over a three-year service period or at the end of a three-year service period, in each case, subject to the recipient’s continued employment or service through each applicable vesting date. Each PRSU is earned based on whether Magnolia’s stock price achieves a target average stock price for any 20 consecutive trading days during the five-year performance period. If PRSUs are not earned by the end of the five-year performance period (“Performance Condition”), the PRSUs will be forfeited and no shares of Class A Common Stock will be issued, even if the vesting conditions have been met. Compensation expense for the PRSU awards is based upon grant date fair market value of the award, calculated using a Monte Carlo simulation, as presented below, and such costs are recorded on a straight-line basis over the requisite service period for each separately vesting portion of the award, as if the award was, in-substance, multiple awards, as applicable. The aggregate fair value of PRSU awards that vested during the six months ended June 30, 2023 and 2022 were $ 7.0 million and $ 4.8 million. Unrecognized compensation expense related to unvested PRSUs as of June 30, 2023 was $ 6.1 million, which the Company expects to recognize over a weighted average period of 1.5 years. 13 The Company grants PSUs to certain employees. Each PSU, to the extent earned, represents the contingent right to receive one share of Class A Common Stock and the awardee may earn between zero and 150 % of the target number of PSUs granted based on the total shareholder return (“TSR”) of the Class A Common Stock relative to the TSR achieved by a specific industry peer group over a three-year performance period, the last day of which is also the vesting date. In addition to the TSR conditions, vesting of the PSUs is subject to the awardee’s continued employment through the date of settlement of the PSUs, which will occur within 60 days following the end of the performance period. The aggregate fair value of PSU awards that vested during the six months ended June 30, 2023 and 2022 were $ 6.7 million and $ 5.5 million, respectively. Unrecognized compensation expense related to unvested PSUs as of June 30, 2023 was $ 5.0 million, which the Company expects to recognize over a weighted average period of 2.6 years. The Performance Condition for the PRSUs granted in 2022 were met on March 28, 2022, therefore the fair value of the PRSUs granted after the Performance Condition were met were based upon the grant date market value of the award. The fair values of the awards granted prior to the date the Performance Condition was met were determined using a Monte Carlo simulation. The following table summarizes the Monte Carlo simulation assumptions used to calculate the grant date fair value of the PSUs in 2023 and PRSUs in 2022. Six Months Ended PSU and PRSU Grant Date Fair Value Assumptions June 30, 2023 June 30, 2022 Expected term (in years) 2.88 3.55 Expected volatility 60.80 % 59.58 % Risk-free interest rate 4.15 % 1.89 % Dividend yield 1.93 % 1.97 % . 14 11. Earnings Per Share The Company’s unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are deemed participating securities, and therefore dividends and net income allocated to such awards have been deducted from earnings in computing basic and diluted net income per share under the two-class method. Diluted net income per share attributable to Class A Common Stock is calculated under both the two-class method and the treasury stock method and the more dilutive of the two calculations is presented. The components of basic and diluted net income per share attributable to Class A Common Stock are as follows: Three Months Ended Six Months Ended (In thousands, except per share data) June 30, 2023 June 30, 2022 June 30, 2023 June 30, 2022 Basic: Net income attributable to Class A Common Stock $ 91,492 $ 250,583 $ 187,826 $ 416,622 Less: Dividends and net income allocated to participating securities 1,038 2,373 2,036 3,756 Net income, net of participating securities $ 90,454 $ 248,210 $ 185,790 $ 412,866 Weighted average number of common shares outstanding during the period - basic 189,402 188,146 190,584 185,377 Net income per share of Class A Common Stock - basic $ 0.48 $ 1.32 $ 0.97 $ 2.23 Diluted: Net income attributable to Class A Common Stock $ 91,492 $ 250,583 $ 187,826 $ 416,622 Less: Dividends and net income allocated to participating securities 1,037 2,367 2,034 3,747 Net income, net of participating securities $ 90,455 $ 248,216 $ 185,792 $ 412,875 Weighted average number of common shares outstanding during the period - basic 189,402 188,146 190,584 185,377 Add: Dilutive effect of stock based compensation and other 165 443 291 517 Weighted average number of common shares outstanding during the period - diluted 189,567 188,589 190,875 185,894 Net income per share of Class A Common Stock - diluted $ 0.48 $ 1.32 $ 0.97 $ 2.22 For the three months ended June 30, 2023 and 2022, the Company excluded 21.8 million and 33.8 million, respectively, of weighted average shares of Class A Common Stock issuable upon the exchange of Class B Common Stock (and corresponding Magnolia LLC Units) as the effect was anti-dilutive. For the six months ended June 30, 2023 and 2022, the Company excluded 21.8 million and 39.0 million, respectively, of weighted average shares of Class A Common Stock issuable upon the exchange of Class B Common Stock (and corresponding Magnolia LLC Units) as the effect was anti-dilutive. 12. Related Party Transactions As of June 30, 2023, no entity held more than 10% of the Company’s common stock or qualified as a principal owner of the Company, as defined in ASC 850, “Related Party Disclosures.” 13. Subsequent Events On July 31, 2023, the Company’s board of directors declared a quarterly cash dividend of $ 0.115 per share of Class A Common Stock, and a cash distribution of $ 0.115 per Magnolia LLC Unit, payable on September 1, 2023 to shareholders or members of record, as applicable, as of August 10, 2023. On July 31, 2023, the Company’s board of directors increased the share repurchase authorization by an additional 10.0 million shares of Class A Common Stock, which increases total share repurchase authorization to 40.0 million shares. 15 On July 31, 2023, Magnolia closed an acquisition in the Giddings area, outside of the Company’s core development area, for a total cash consideration of approximately $ 40.0 million, subject to customary closing adjustments.