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; 15 • capital expenditures and other contractual obligations; • 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 Commodity prices experienced significant volatility in 2022 after the Russia-Ukraine conflict began and this has continued into 2024. Global conflict and supply chain disruptions drove high oil prices in 2022, which then moderated throughout 2023 and 2024. Natural gas and NGL prices significantly declined beginning in 2023, 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 June 30, 2024, Magnolia’s assets in South Texas included 77,278 gross (55,286 net) acres in the Karnes area, and 743,069 gross (553,835 net) acres in the Giddings area. As of June 30, 2024, Magnolia held an interest in approximately 2,615 gross (1,786 net) wells, with total production of 90.2 thousand and 87.5 thousand barrels of oil equivalent per day for the three and six months ended June 30, 2024, respectively. Magnolia recognized net income attributable to Class A Common Stock of $95.6 million and $180.6 million, or $0.51 and $0.97 per diluted common share, for the three and six months ended June 30, 2024. Magnolia recognized net income of $105.1 million and $202.7 million, which includes a noncontrolling interest of $9.6 million and $22.1 million related to the Magnolia LLC Units (and 16 corresponding shares of Class B Common Stock) held by certain affiliates of EnerVest, for the three and six months ended June 30, 2024, respectively. During the six months ended June 30, 2024, the Company declared cash dividends to holders of its Class A Common Stock totaling $47.8 million. As of June 30, 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 34.1 million shares under the program at a cost of $603.3 million and had 5.9 million shares of Class A Common Stock remaining under its share repurchase authorization as of June 30, 2024. As of June 30, 2024, Magnolia owned approximately 94.5% of the interest in Magnolia LLC and the noncontrolling interest was approximately 5.5%. 17 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 and Six Months Ended June 30, 2024 Compared to the Three and Six Months Ended June 30, 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 Six Months Ended (In thousands, except per unit data) June 30, 2024 June 30, 2023 June 30, 2024 June 30, 2023 Production: Oil (MBbls) 3,453 3,100 6,868 6,321 Natural gas (MMcf) 14,982 13,784 28,731 26,433 NGLs (MBbls) 2,259 2,054 4,268 3,866 Total (Mboe) 8,209 7,451 15,924 14,592 Average daily production: Oil (Bbls/d) 37,943 34,065 37,737 34,922 Natural gas (Mcf/d) 164,641 151,469 157,863 146,041 NGLs (Bbls/d) 24,824 22,571 23,448 21,356 Total (boe/d) 90,207 81,881 87,496 80,618 Production (% of total): Oil 42 % 42 % 43 % 43 % Natural gas 30 % 31 % 30 % 30 % NGLs 28 % 27 % 27 % 27 % Revenues: Oil revenues $ 275,331 $ 223,147 $ 534,514 $ 462,269 Natural gas revenues 18,569 20,847 39,664 48,619 Natural gas liquids revenues 42,825 36,297 81,964 77,786 Total revenues $ 336,725 $ 280,291 $ 656,142 $ 588,674 Revenues (% of total): Oil 81 % 80 % 82 % 79 % Natural gas 6 % 7 % 6 % 8 % NGLs 13 % 13 % 12 % 13 % Average Price: Oil (per barrel) $ 79.74 $ 71.98 $ 77.83 $ 73.13 Natural gas (per Mcf) 1.24 1.51 1.38 1.84 NGLs (per barrel) 18.96 17.67 19.21 20.12 18 Oil revenues for the three months ended June 30, 2024 were $52.2 million higher than for the three months ended June 30, 2023 caused by an 11% increase in average prices that increased revenues by $24.0 million while an 11% increase in oil production increased revenues by $28.2 million. Oil revenues for the six months ended June 30, 2024 were $72.2 million higher than for the six months ended June 30, 2023 caused by a 6% increase in average prices that increased revenues by $29.6 million while a 9% increase in oil production increased revenues by $42.6 million. Natural gas revenues for the three months ended June 30, 2024 were $2.3 million lower than the three months ended June 30, 2023 caused by an 18% decrease in average prices that decreased revenues by $3.8 million, partially offset by a 9% increase in natural gas production which increased revenues by $1.5 million. Natural gas revenues for the six months ended June 30, 2024 were $9.0 million lower than the six months ended June 30, 2023 caused by a 25% decrease in average prices that decreased revenues by $12.1 million, partially offset by a 9% increase in natural gas production which increased revenues by $3.1 million. The realized revenue pricing included the impact of gas plant fees that were netted from revenue. NGL revenues for the three months ended June 30, 2024 were $6.5 million higher than the three months ended June 30, 2023 caused by a 7% increase in average prices that increased revenues by $2.6 million, while a 10% increase in NGL production increased revenues by $3.9 million. NGL revenues for the six months ended June 30, 2024 were $4.2 million higher than the six months ended June 30, 2023 caused by a 10% increase in NGL production which increased revenues by $7.7 million, partially offset by a 5% decrease in average prices that decreased revenues by $3.5 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 Six Months Ended (In thousands, except per unit data) June 30, 2024 June 30, 2023 June 30, 2024 June 30, 2023 Operating Expenses: Lease operating expenses $ 44,350 $ 36,796 $ 90,500 $ 79,167 Gathering, transportation and processing 8,455 10,389 16,992 23,121 Taxes other than income 19,844 15,216 37,742 34,508 Exploration expenses 402 — 427 11 Asset retirement obligations accretion 1,745 823 3,363 1,664 Depreciation, depletion and amortization 104,743 77,008 201,819 147,710 Impairment of oil and natural gas properties — — — 15,735 General and administrative expenses 22,835 18,726 46,390 38,492 Total operating expenses $ 202,374 $ 158,958 $ 397,233 $ 340,408 Other Income (Expense): Interest expense, net $ (3,516) $ (1,149) $ (5,828) $ (662) Other income (expense), net 1,047 9,259 (3,267) 8,120 Total other income (expense), net $ (2,469) $ 8,110 $ (9,095) $ 7,458 Average Operating Costs per boe: Lease operating expenses $ 5.40 $ 4.94 $ 5.68 $ 5.43 Gathering, transportation and processing 1.03 1.39 1.07 1.58 Taxes other than income 2.42 2.04 2.37 2.36 Exploration expenses 0.05 — 0.03 — Asset retirement obligations accretion 0.21 0.11 0.21 0.11 Depreciation, depletion and amortization 12.76 10.34 12.67 10.12 Impairment of oil and natural gas properties — — — 1.08 General and administrative expenses 2.78 2.51 2.91 2.64 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 June 30, 2024 were $7.6 million, or $0.46 per boe, higher compared to the corresponding 2023 period. Lease operating expenses for the six months ended June 30, 2024 were $11.3 million, or $0.25 per boe, higher compared to the corresponding 2023 period. The 19 increases in both periods were due to an increase in costs associated with a higher well count, including workover activity, chemicals, compression, and operating and maintenance costs. 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 Company is also party to a number of percent-of-proceeds arrangements that track closely to natural gas and NGL pricing and affect the cost of commodity processing. The gathering, transportation and processing costs for the three months ended June 30, 2024 were $1.9 million, or $0.36 per boe, lower than the three months ended June 30, 2023. Gathering, transportation and processing costs for the six months ended June 30, 2024 were $6.1 million, or $0.51 per boe, lower than the six months ended June 30, 2023. The decrease in both periods is primarily due to a change in volumes sold under a percent-of-proceeds arrangement and lower natural gas and NGL pricing. 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 June 30, 2024 were $4.6 million, or $0.38 per boe, higher compared to the three months ended June 30, 2023. Taxes other than income for the six months ended June 30, 2024 were $3.2 million, or $0.01 per boe, higher compared to the six months ended June 30, 2023. The increase in both periods was primarily due to an increase in production taxes as a result of the increase in oil and NGL revenues, which was partially offset by the decrease in natural gas revenues. Depreciation, depletion and amortization (“DD&A”) during the three months ended June 30, 2024 was $27.7 million, or $2.42 per boe, higher compared to the three months ended June 30, 2023. DD&A for the six months ended June 30, 2024 was $54.1 million, or $2.55 per boe, higher compared to the six months ended June 30, 2023. The increase in both periods was due to increased production and a higher depreciable cost basis. General and administrative expenses during the three months ended June 30, 2024 were $4.1 million, or $0.27 per boe, higher compared to the three months ended June 30, 2023. General and administrative expenses during the six months ended June 30, 2024 were $7.9 million, or $0.27 per boe, higher when compared to the six months ended June 30, 2023. The increase in both periods was primarily driven by increased corporate payroll expenses, legal expenses, professional services, and other non-recurring costs. Interest expense, net, during the three months ended June 30, 2024 was $2.4 million higher compared to the three months ended June 30, 2023. Interest expense, net during the six months ended June 30, 2024 was $5.2 million higher compared to the six months ended June 30, 2023. The increase in interest expense, net, for both periods was driven by lower interest income realized during 2024 as a result of lower cash balances. Other income, net, during the three months ended June 30, 2024 was $8.2 million lower than the three months ended June 30, 2023, primarily driven by the gain on sale of the Company’s 84.7% interest in Highlander (“Highlander sale”) and an earnout payment associated with the sale of the Company’s 35% membership interest in Ironwood Eagle Ford Midstream LLC (the “2023 earnout”) in the prior year. During the six months ended June 30, 2024 the Company recognized $3.3 million of other expense compared to $8.1 million of other income during the six months ended June 30, 2023, primarily driven by a loss on revaluation of the contingent consideration liability associated with the acquisition of certain oil and gas properties in the Giddings area acquired during 2023, as compared to the six months ended June 30, 2023, which includes the Highlander sale and 2023 earnout. Income tax expense. The following table summarizes the Company’s income tax expense for the periods indicated. Three Months Ended Six Months Ended (In thousands) June 30, 2024 June 30, 2023 June 30, 2024 June 30, 2023 Current income tax expense $ 10,528 $ 3,986 $ 22,156 $ 8,188 Deferred income tax expense 16,241 20,861 24,948 36,264 Income tax expense $ 26,769 $ 24,847 $ 47,104 $ 44,452 Income tax expense during the three months ended June 30, 2024 was $1.9 million higher compared to the three months ended June 30, 2023, driven by a $6.5 million increase in current income tax expense and offset by a $4.6 million decrease in deferred income tax expense. Income tax expense during the six months ended June 30, 2024 was $2.7 million higher compared to the six months ended June 30, 2023, driven by a $14.0 million increase in current income tax expense and offset by an $11.3 million decrease in deferred income tax expense. The increase in current tax expense and decrease in deferred tax expense was primarily a result of an increase in income before income taxes and an increase in controlling interest. 20 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. As of June 30, 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 June 30, 2024, the Company had $725.7 million of liquidity comprised of the $450.0 million of borrowing base capacity of the RBL Facility, and $275.7 million of cash and cash equivalents. Cash and Cash Equivalents At June 30, 2024, Magnolia had $275.7 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: Six Months Ended (In thousands) June 30, 2024 June 30, 2023 SOURCES OF CASH AND CASH EQUIVALENTS Net cash provided by operating activities $ 480,329 $ 421,596 USES OF CASH AND CASH EQUIVALENTS Acquisitions $ (150,172) $ (3,357) Additions to oil and natural gas properties (247,063) (225,388) Changes in working capital associated with additions to oil and natural gas properties 10,287 (39,424) Class A Common Stock repurchases (80,018) (94,942) Class B Common Stock purchases and cancellations (76,740) — Dividends paid (47,830) (44,684) Distributions to noncontrolling interest owners (6,206) (5,599) Other (8,025) (7,075) Net uses of cash and cash equivalents (605,767) (420,469) NET CHANGE IN CASH AND CASH EQUIVALENTS $ (125,438) $ 1,127 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, 21 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 $480.3 million and $421.6 million for the six months ended June 30, 2024 and 2023, respectively. During the six months ended June 30, 2024, cash provided by operating activities was positively impacted by the timing of collections and payments and an increase in realized oil prices, partially offset by a decrease in realized natural gas and NGL prices. Uses of Cash and Cash Equivalents Acquisitions During the six months ended June 30, 2024, the Company paid $150.2 million for acquisitions, primarily comprised of a $125.0 million acquisition in the Giddings area. The acquisitions were funded with cash on hand. Additions to Oil and Natural Gas Properties The following table sets forth the Company’s capital expenditures for the periods presented: Three Months Ended Six Months Ended (In thousands) June 30, 2024 June 30, 2023 June 30, 2024 June 30, 2023 Drilling and completion $ 123,370 $ 86,106 $ 242,349 $ 225,837 Leasehold acquisition costs 2,707 637 4,714 (449) Total capital expenditures $ 126,077 $ 86,743 $ 247,063 $ 225,388 During the second 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 June 30, 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 the six months ended June 30, 2024 and 2023, the Company repurchased 3.4 million and 4.7 million shares for a total cost of approximately $78.3 million and $96.1 million, respectively. During the six months ended June 30, 2024, Magnolia LLC repurchased and subsequently canceled 3.0 million Magnolia LLC Units with an equal number of shares of corresponding Class B Common Stock for $76.7 million of cash consideration. As of June 30, 2024, Magnolia owned approximately 94.5% of the interest in Magnolia LLC and the noncontrolling interest was approximately 5.5%. During the six months ended June 30, 2024, the Company declared and paid cash dividends to holders of its Class A Common Stock totaling $47.8 million. Additionally, $5.7 million was distributed to the Magnolia LLC Unit Holders. During the six months ended June 30, 2023, the Company declared cash dividends to holders of its Class A Common Stock totaling $44.5 million. During the same time period, cash paid for dividends was $44.7 million, inclusive of dividends on vested non-participating securities. Additionally, $5.0 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. 22