Magnolia Oil & Gas Corp 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations FORWARD-LOOKING STATEMENTS This report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical facts included or incorporated by reference in this report, including, without limitation, statements regarding the Company’s future financial position, business strategy, budgets, projected revenues, projected costs, and plans and objectives of management for future operations, are forward-looking statements. Such forward-looking statements are based on the beliefs of management, as well as assumptions made by, and information currently available to, the Company’s management. In addition, forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “could,” “expect,” “intend,” “project,” “estimate,” “anticipate,” “plan,” “believe,” or “continue” or similar terminology. Although Magnolia believes that the expectations reflected in such forward-looking statements are reasonable, the Company can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from the Company’s expectations include, but are not limited to, Magnolia’s assumptions about: • legislative, regulatory, or policy changes, including those following the change in presidential administrations; • the market prices of oil, natural gas, natural gas liquids (“NGLs”), and other products or services; • the supply and demand for oil, natural gas, NGLs, and other products or services, including impacts of actions taken by OPEC and other state-controlled oil companies; • production and reserve levels; • the timing and extent of the Company’s success in discovering, developing, producing and estimating reserves; • geopolitical and business conditions in key regions of the world; • drilling risks; • economic and competitive conditions; • the availability of capital resources; • capital expenditures and other contractual obligations; 14 • weather conditions; • inflation rates; • the availability of goods and services; • cyber attacks; • the occurrence of property acquisitions or divestitures; • the integration of acquisitions; and • the securities or capital markets and related risks such as general credit, liquidity, market, and interest-rate risks. All of Magnolia’s forward-looking information is subject to risks and uncertainties that could cause actual results to differ materially from the results expected. Although it is not possible to identify all factors, these risks and uncertainties include the risk factors and the timing of any of those risk factors identified in the reports that the Company has filed and may file with the Securities and Exchange Commission, including the Company’s Annual Report on Form 10-K for the period ended December 31, 2023 (the “2023 Form 10-K”). Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Company’s unaudited consolidated financial statements and the related notes thereto. Overview 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 NGL reserves that operates in one reportable segment located in the United States. The Company’s oil and natural gas properties are located primarily in the Karnes and Giddings areas in South Texas, where the Company targets the Eagle Ford Shale and the 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. The Company’s allocation of capital prioritizes reinvesting in its business to achieve moderate and predictable annual volume growth, and remains balanced with returning capital to its shareholders through dividends and share repurchases. Magnolia’s business model prioritizes prudent and disciplined capital allocation, free cash flow, and financial stability. The Company’s ongoing plan is to spend within cash flow on drilling and completing wells while maintaining low financial leverage. The Company’s gradual and measured approach toward the development of the Giddings area has created operating efficiencies leading to higher production. Market Conditions Update Natural gas and NGL prices have significantly declined, while material and labor costs have flattened, resulting in lower operating margins. In 2024, lower well costs combined with improved operating efficiencies are allowing for more wells to be drilled, completed and turned in line helping to support Magnolia’s overall high-margin growth from a disciplined capital program. Business Overview As of March 31, 2024, Magnolia’s assets in South Texas included 72,503 gross (50,681 net) acres in the Karnes area, and 718,400 gross (527,754 net) acres in the Giddings area. As of March 31, 2024, Magnolia held an interest in approximately 2,496 gross (1,687 net) wells, with total production of 84.8 thousand barrels of oil equivalent per day for the three months ended March 31, 2024. Magnolia recognized net income attributable to Class A Common Stock of $85.1 million, or $0.46 per diluted common share, for the three months ended March 31, 2024. Magnolia recognized net income of $97.6 million, which includes noncontrolling interest of $12.5 million, for the three months ended March 31, 2024. 15 As of March 31, 2024, the Company’s board of directors had authorized a share repurchase program of up to 40.0 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 33.1 million shares under the program at a cost of $577.3 million and had 6.9 million shares of Class A Common Stock remaining under its share repurchase authorization as of March 31, 2024. As of March 31, 2024, Magnolia owned approximately 89.3% of the interest in Magnolia LLC and the noncontrolling interest was 10.7%. Results of Operations Factors Affecting the Comparability of the Historical Financial Results Magnolia’s historical financial condition and results of operations for the periods presented may not be comparable, either from period to period or going forward, as a result of the Company’s acquisition in November 2023 of certain oil and gas producing properties including leasehold and mineral interests in the Giddings area for approximately $264.1 million, subject to customary purchase price adjustments, and an additional contingent cash consideration of up to $40.0 million through January 2026 based on future commodity prices. As a result of the factors listed above, the historical results of operations and period-to-period comparisons of these results and certain financial data may not be comparable or indicative of future results. Three Months Ended March 31, 2024 Compared to the Three Months Ended March 31, 2023 Oil, Natural Gas and NGL Sales Revenues. The following table provides the components of Magnolia’s revenues for the periods indicated, as well as each period’s respective average prices and production volumes. This table shows production on a boe basis in which natural gas is converted to an equivalent barrel of oil based on a ratio of six Mcf to one barrel. This ratio may not be reflective of the current price ratio between the two products. Three Months Ended (In thousands, except per unit data) March 31, 2024 March 31, 2023 Production: Oil (MBbls) 3,415 3,221 Natural gas (MMcf) 13,749 12,650 NGLs (MBbls) 2,009 1,812 Total (Mboe) 7,715 7,141 Average daily production: Oil (Bbls/d) 37,531 35,788 Natural gas (Mcf/d) 151,086 140,552 NGLs (Bbls/d) 22,072 20,129 Total (boe/d) 84,784 79,342 Revenues: Oil revenues $ 259,182 $ 239,122 Natural gas revenues 21,095 27,771 Natural gas liquids revenues 39,140 41,489 Total revenues $ 319,417 $ 308,382 Average Price: Oil (per barrel) $ 75.89 $ 74.24 Natural gas (per Mcf) 1.53 2.20 NGLs (per barrel) 19.49 22.90 Oil revenues were 81% and 78% of the Company’s total revenues for the three months ended March 31, 2024 and 2023, respectively. Oil production was 44% and 45% of total production volume for the three months ended March 31, 2024 and 2023, 16 respectively. Oil revenues for the three months ended March 31, 2024 were $20.1 million higher than for the three months ended March 31, 2023. A 2% increase in average price increased first quarter 2024 revenues by $5.3 million compared to the same period in the prior year while a 6% increase in oil production increased revenues by $14.8 million. Natural gas revenues were 7% and 9% of the Company’s total revenues for the three months ended March 31, 2024 and 2023, respectively. Natural gas production was 30% of total production volume for each of the three months ended March 31, 2024 and 2023. Natural gas revenues for the three months ended March 31, 2024 were $6.7 million lower than the three months ended March 31, 2023. A 30% decrease in average price decreased first quarter 2024 revenues by $8.4 million compared to the same period in the prior year, partially offset by a 9% increase in natural gas production which increased revenues by $1.7 million. The realized revenue pricing included the impact of gas plant fees that were netted from revenue. NGL revenues were 12% and 13% of the Company’s total revenues for the three months ended March 31, 2024 and 2023, respectively. NGL production was 26% and 25% of total production volume for the three months ended March 31, 2024 and 2023, respectively. NGL revenues for the three months ended March 31, 2024 were $2.3 million lower than the three months ended March 31, 2023. A 15% decrease in average price decreased first quarter 2024 revenues by $6.2 million compared to the same period in the prior year, partially offset by an 11% increase in NGL production which increased revenues by $3.9 million. Operating Expenses and Other Income (Expense) . The following table summarizes the Company’s operating expenses and other income (expense) for the periods indicated. Three Months Ended (In thousands, except per unit data) March 31, 2024 March 31, 2023 Operating Expenses: Lease operating expenses $ 46,150 $ 42,371 Gathering, transportation and processing 8,537 12,732 Taxes other than income 17,898 19,292 Exploration expenses 25 11 Asset retirement obligations accretion 1,618 841 Depreciation, depletion and amortization 97,076 70,701 Impairment of oil and natural gas properties — 15,735 General and administrative expenses 23,555 19,766 Total operating expenses $ 194,859 $ 181,449 Other Income (Expense): Interest income (expense), net $ (2,312) $ 487 Other expense, net (4,313) (1,138) Total other expense, net $ (6,625) $ (651) Average Operating Costs per boe: Lease operating expenses $ 5.98 $ 5.93 Gathering, transportation and processing 1.11 1.78 Taxes other than income 2.32 2.70 Exploration expenses — — Asset retirement obligations accretion 0.21 0.12 Depreciation, depletion and amortization 12.58 9.90 Impairment of oil and natural gas properties — 2.20 General and administrative expenses 3.05 2.77 Lease operating expenses are costs incurred in the operation of producing properties, including expenses for utilities, direct labor, water disposal, workover rigs, workover expenses, materials, and supplies. Lease operating expenses for the three months ended March 31, 2024 were $3.8 million, or $0.05 per boe, higher compared to the three months ended March 31, 2023, due to an increase in costs associated with a higher well count. Gathering, transportation and processing costs are costs incurred to deliver oil, natural gas, and NGLs to the market. These expenses can vary based on the volume of oil, natural gas, and NGLs produced as well as the cost of commodity processing. The 17 gathering, transportation and processing costs for the three months ended March 31, 2024 were $4.2 million, or $0.67 per boe, lower than the three months ended March 31, 2023, primarily due to lower natural gas and NGL prices which resulted in lower processing costs. The Company is party to a number of contracts that are recorded gross within natural gas and NGL revenues, which track with natural gas and NGL pricing, and thereby have contributed to a decrease in gathering, transportation, and processing expense. Taxes other than income include production, ad valorem, and franchise taxes. These taxes are based on rates primarily established by state and local taxing authorities. Production taxes are based on the market value of production. Ad valorem taxes are based on the fair market value of the mineral interests or business assets. Taxes other than income for the three months ended March 31, 2024 were $1.4 million, or $0.38 per boe, lower compared to the three months ended March 31, 2023, primarily due to a decrease in production taxes as a result of the decrease in natural gas and NGL revenues and tax incentives realized. Depreciation, depletion and amortization (“DD&A”) during the three months ended March 31, 2024 was $26.4 million, or $2.68 per boe, higher than the three months ended March 31, 2023, due to increased production and a higher depreciable cost basis. During the three months ended March 31, 2023, the Company recognized a $15.7 million proved property impairment related to the Highlander property. General and administrative expenses during the three months ended March 31, 2024 were $3.8 million, or $0.28 per boe, higher than the three months ended March 31, 2023, primarily driven by increased legal expenses, professional services, and other non-recurring costs. The Company recognized interest expense, net, during the three months ended March 31, 2024 as compared to interest income, net during the three months ended March 31, 2023. This $2.8 million change was driven by lower interest income realized during 2024 as a result of lower cash balances. Other expense, net, during the three months ended March 31, 2024 was $3.2 million higher than the three months ended March 31, 2023. This is primarily comprised of the loss on revaluation of the contingent consideration liability associated with the acquisition of certain oil and gas producing properties in the Giddings area in the fourth quarter of 2023. Income tax expense. The following table summarizes the Company’s income tax expense for the periods indicated. Three Months Ended (In thousands) March 31, 2024 March 31, 2023 Current income tax expense $ 11,628 $ 4,202 Deferred income tax expense 8,708 15,403 Income tax expense $ 20,336 $ 19,605 For the three months ended March 31, 2024, income tax expense was $0.7 million higher than the three months ended March 31, 2023, comprised of movements in both current and deferred income taxes. This was driven by a $7.4 million increase in current income tax expense partially offset by a $6.7 million decrease in deferred income tax expense, primarily due to the statutory reduction in accelerated depreciation of capital expenditures. See Note 9— Income Taxes in the notes to the Company’s consolidated financial statements included in this Quarterly Report on Form 10-Q for further detail. Liquidity and Capital Resources Magnolia’s primary source of liquidity and capital has been its cash flows from operations. The Company’s primary uses of cash have been for development of the Company’s oil and natural gas properties, returning capital to shareholders, bolt-on acquisitions of oil and natural gas properties, and general working capital needs. The Company may also utilize borrowings under other various financing sources available to it, including its RBL Facility and the issuance of equity or debt securities through public offerings or private placements, to fund Magnolia’s acquisitions and long-term liquidity needs. Magnolia’s ability to complete future offerings of equity or debt securities and the timing of these offerings will depend upon various factors, including prevailing market conditions and the Company’s financial condition. The Company anticipates its current cash balance, cash flows from operations, and its available sources of liquidity to be sufficient to meet the Company’s cash requirements. 18 As of March 31, 2024, the Company had $400.0 million of principal debt related to the 2026 Senior Notes outstanding and no outstanding borrowings related to the RBL Facility. As of March 31, 2024, the Company had $849.3 million of liquidity comprised of the $450.0 million of borrowing base capacity of the RBL Facility, and $399.3 million of cash and cash equivalents. Cash and Cash Equivalents At March 31, 2024, Magnolia had $399.3 million of cash and cash equivalents. The Company’s cash and cash equivalents are maintained with various financial institutions in the United States. Deposits with these institutions may exceed the amount of insurance provided on such deposits. However, the Company regularly monitors the financial stability of such financial institutions and believes that the Company is not exposed to any significant default risk. Sources and Uses of Cash and Cash Equivalents The following table presents the sources and uses of the Company’s cash and cash equivalents for the periods presented: Three Months Ended (In thousands) March 31, 2024 March 31, 2023 SOURCES OF CASH AND CASH EQUIVALENTS Net cash provided by operating activities $ 210,932 $ 219,823 USES OF CASH AND CASH EQUIVALENTS Acquisitions $ (13,359) $ 3,691 Deposits for acquisitions of oil and natural gas properties (13,150) — Additions to oil and natural gas properties (120,986) (138,645) Changes in working capital associated with additions to oil and natural gas properties 20,244 (14,977) Class A Common Stock repurchases (51,201) (45,844) Dividends paid (24,010) (22,578) Distributions to noncontrolling interest owners (2,837) (2,510) Other (7,437) (7,117) Net uses of cash and cash equivalents (212,736) (227,980) NET CHANGE IN CASH AND CASH EQUIVALENTS $ (1,804) $ (8,157) Sources of Cash and Cash Equivalents Net Cash Provided by Operating Activities Operating cash flows are the Company’s primary source of liquidity and are impacted, in the short-term and long-term, by oil and natural gas prices. The factors that determine operating cash flows are largely the same as those that affect net earnings, with the exception of certain non-cash expenses such as DD&A, stock based compensation, amortization of deferred financing costs, revaluation of contingent consideration, impairment of oil and natural gas properties, asset retirement obligations accretion, and deferred taxes. Net cash provided by operating activities totaled $210.9 million and $219.8 million for the three months ended March 31, 2024 and 2023, respectively. During the three months ended March 31, 2024, cash provided by operating activities was negatively impacted by the timing of collections and a decrease in realized natural gas and NGL prices, partially offset by the timing of payments and an increase in realized oil prices. Uses of Cash and Cash Equivalents Acquisitions The Company made individually insignificant bolt-on acquisitions and purchase price adjustments during each of the three months ended March 31, 2024 and 2023. In addition, Magnolia paid $13.2 million in deposits for acquisitions that closed in the second quarter of 2024. 19 Additions to Oil and Natural Gas Properties The following table sets forth the Company’s capital expenditures for the periods presented: Three Months Ended (In thousands) March 31, 2024 March 31, 2023 Drilling and completion $ 118,979 $ 139,730 Leasehold acquisition costs 2,007 (1,085) Total capital expenditures $ 120,986 $ 138,645 During the first quarter of 2024, Magnolia was running a two-rig program. The number of operated drilling rigs is largely dependent on commodity prices and the Company’s strategy of maintaining spending to accommodate the Company’s business model. The Company’s ongoing plan is to continue to spend within cash flow on drilling and completing wells while maintaining low financial leverage. Capital Requirements As of March 31, 2024 the Company’s board of directors had authorized a share repurchase program of up to 40.0 million shares of Class A Common Stock. The program does not require purchases to be made within a particular time frame and whether the Company undertakes these additional repurchases is ultimately subject to numerous considerations, market conditions, and other factors. During each of the three months ended March 31, 2024 and 2023, the Company repurchased 2.4 million shares under this authorization, for a total cost of approximately $52.4 million and $51.3 million, respectively. As of March 31, 2024, Magnolia owned approximately 89.3% of the interest in Magnolia LLC and the noncontrolling interest was 10.7%. During the three months ended March 31, 2024, the Company declared cash dividends to holders of its Class A Common Stock totaling $24.0 million. During the same time period, cash paid for dividends was $24.0 million, inclusive of dividends on vested non-participating securities. Additionally, $2.8 million was distributed to the Magnolia LLC Unit Holders. During the three months ended March 31, 2023, the Company declared cash dividends to holders of its Class A Common Stock totaling $22.4 million, of which $22.6 million was paid as of March 31, 2023, inclusive of dividends on vested non-participating securities. Additionally, $2.5 million was distributed to the Magnolia LLC Unit Holders. The amount and frequency of future dividends is subject to the discretion of the Company’s board of directors and primarily depends on earnings, capital expenditures, debt covenants, and various other factors.