What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-10-31 compared with 2024-08-01 · 68 added, 68 removed, 154 unchanged (47% of the section changed)

35 unchanged sentences

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.

Commodity prices experienced significant volatility in recent years, impacted by the Russia-Ukraine war, actions taken by OPEC, and the continued instability and conflict in the Middle East.

Global conflict and supply chain disruptions drove high oil and natural gas prices in 2022.

Beginning in 2023, due to the easing of global geopolitically driven supply fears along with record high US production, natural gas and NGL prices significantly declined and oil prices weakened.

While material and labor costs have flattened, this decline in prices has resulted in lower operating margins.

In 2024, despite continued commodity price volatility, 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

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.

As of September 30, 2024, Magnolia’s assets in South Texas included 77,278 gross (55,286 net) acres in the Karnes area, and 748,547 gross (554,871 net) acres in the Giddings area.

As of September 30, 2024, Magnolia held an interest in approximately 2,647 gross (1,798 net) wells, with total production of 90.7 thousand and 88.6 thousand barrels of oil equivalent per day for the three and nine months ended September 30, 2024, respectively.

Magnolia recognized net income attributable to Class A Common Stock of $99.8 million and $280.4 million, or $0.52 and $1.50 per diluted common share, for the three and nine months ended September 30, 2024, respectively.

Magnolia recognized net income of $105.9 million and $308.6 million, which includes a noncontrolling interest of $6.1 million and $28.2 million related to the Magnolia LLC Units (and corresponding shares of Class B Common Stock) held by certain affiliates of EnerVest, for the three and nine months ended September 30, 2024, respectively.

During the nine months ended September 30, 2024, the Company declared cash dividends to holders of its Class A Common Stock totaling $72.5 million.

As of September 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%.

The Company had repurchased 36.1 million shares under the program at a cost of $652.0 million and had 3.9 million shares of Class A Common Stock remaining under its share repurchase authorization as of September 30, 2024.

As of September 30, 2024, Magnolia owned approximately 97.2% of the interest in Magnolia LLC and the noncontrolling interest was approximately 2.8%.

Results of Operations

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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

Three and Nine Months Ended September 30, 2024 Compared to the Three and Nine Months Ended September 30, 2023

Oil, Natural Gas and NGL Sales Revenues

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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

Three Months Ended Nine Months Ended

(In thousands, except per unit data) September 30, 2024 September 30, 2023 September 30, 2024 September 30, 2023

Oil (MBbls) 3,579 3,024 10,447 9,345

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NGLs (per barrel) 19.46 20.66 19.30 20.32

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.

Oil revenues for the three months ended September 30, 2024 were $22.1 million higher than for the three months ended September 30, 2023 caused by an 18% increase in oil production that increased revenues by $41.2 million, partially offset by an 8% decrease in average prices that decreased revenues by $19.1 million.

Oil revenues for the nine months ended September 30, 2024 were $94.3 million higher than for the nine months ended September 30, 2023 caused by a 12% increase in oil production that increased revenues by $84.4 million and a 1% increase in average prices that increased revenues by $9.9 million.

Natural gas revenues for the three months ended September 30, 2024 were $4.9 million lower than the three months ended September 30, 2023 caused by a 19% decrease in average prices that decreased revenues by $5.3 million, partially offset by a 2% increase in natural gas production which increased revenues by $0.4 million.

Natural gas revenues for the nine months ended September 30, 2024 were $13.8 million lower than the nine months ended September 30, 2023 caused by a 23% decrease in average prices that decreased revenues by $17.4 million, partially offset by a 6% increase in natural gas production which increased revenues by $3.6 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.

NGL revenues for the three months ended September 30, 2024 were $0.2 million higher than the three months ended September 30, 2023 caused by a 7% increase in NGL production that increased revenues by $2.8 million, partially offset by a 6% decrease in average prices that decreased revenues by $2.6 million.

NGL revenues for the nine months ended September 30, 2024 were $4.4 million higher than the nine months ended September 30, 2023 caused by a 9% increase in NGL production which increased revenues by $10.6 million, partially offset by a 5% decrease in average prices that decreased revenues by $6.2 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

Three Months Ended Nine Months Ended

(In thousands, except per unit data) September 30, 2024 September 30, 2023 September 30, 2024 September 30, 2023

Operating Expenses:

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Other Income (Expense):

Interest expense, net $ (3,516) $ (1,149) $ (5,828) $ (662)

Interest income (expense), net $ (3,856) $ 1,034 $ (9,683) $ 372

Other income (expense), net 7,286 (479) 4,018 7,643

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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.

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.

Lease operating expenses for the three months ended September 30, 2024 were $8.6 million, or $0.61 per boe, higher compared to the corresponding 2023 period.

Lease operating expenses for the nine months ended September 30, 2024 were $19.9 million, or $0.38 per boe, higher compared to the corresponding 2023

The increases in both periods were due to an increase in chemicals, compression, operating and maintenance costs and payroll expense associated with higher well count and higher workover activity.

Gathering, transportation and processing costs are costs incurred to deliver oil, natural gas, and NGLs to the market.

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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.

The gathering, transportation and processing costs for the three months ended September 30, 2024 were $0.4 million higher, but $0.07 per boe lower, than the three months ended September 30, 2023.

Gathering, transportation and processing costs for the nine months ended September 30, 2024 were $5.8 million, or $0.37 per boe, lower than the nine months ended September 30, 2023.

The changes in both periods were primarily due to a change in volumes sold under a percent-of-proceeds arrangement, lower natural gas and NGL pricing, and other contractual changes.

Costs decreased on a per boe basis due to increased production.

Taxes other than income include production, ad valorem, and franchise taxes.

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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.

Taxes other than income for the three months ended September 30, 2024 were $3.4 million, or $0.24 per boe, higher compared to the three months ended September 30, 2023.

Taxes other than income for the nine months ended September 30, 2024 were $6.7 million, or $0.09 per boe, higher compared to the nine months ended September 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.

Depreciation, depletion and amortization (“DD&A”) during the three months ended September 30, 2024 was $26.2 million, or $2.19 per boe, higher compared to the three months ended September 30, 2023.

DD&A for the nine months ended September 30, 2024 was $80.3 million, or $2.43 per boe, higher compared to the nine months ended September 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.

General and administrative expenses during the three months ended September 30, 2024 were $1.8 million higher, but $0.01 per boe lower, compared to the three months ended September 30, 2023.

General and administrative expenses during the nine months ended September 30, 2024 were $9.7 million, or $0.17 per boe, higher when compared to the nine months ended September 30, 2023.

The increase in both periods was primarily driven by increased corporate payroll expenses and other non-recurring costs.

The Company recognized interest expense, net, during the three and nine months ended September 30, 2024 as compared to interest income, net during the three and nine months ended September 30, 2023.

The change from interest income, net to 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 September 30, 2024 was $7.3 million compared to other expense, net, of $0.5 million during the three months ended September 30, 2023.

The other income in 2024 was due to a gain on revaluation of the contingent consideration liability associated with the acquisition of certain oil and gas properties in the Giddings area acquired during 2023.

Other income, net, during the nine months ended September 30, 2024 was $3.6 million lower than the nine months ended September 30, 2023, primarily driven by the gain on sale of the Company’s 84.7% interest in Highlander and an earnout payment associated with the sale of the Company’s 35% membership interest in Ironwood Eagle Ford Midstream LLC in the prior year.

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

Three Months Ended Nine Months Ended

(In thousands) September 30, 2024 September 30, 2023 September 30, 2024 September 30, 2023

Current income tax expense (benefit) $ (480) $ 19,262 $ 21,676 $ 27,450

Deferred income tax expense 27,010 11,949 51,958 48,213

Income tax expense $ 26,530 $ 31,211 $ 73,634 $ 75,663

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.

Income tax expense during the three and nine months ended September 30, 2024 was $4.7 million and $2.0 million lower than the three and nine months ended September 30, 2023, respectively.

The decrease in tax expense was primarily a result of a decrease in income before income taxes, and additional tax credits, partially offset by an increase in controlling interest.

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.

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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.

As of September 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 September 30, 2024, the Company had $726.1 million of liquidity comprised of the $450.0 million of borrowing base capacity of the RBL Facility, and $276.1 million of cash and cash equivalents.

Cash and Cash Equivalents

At June 30, 2024, Magnolia had $275.7 million of cash and cash equivalents.

At September 30, 2024, Magnolia had $276.1 million of cash and cash equivalents.

The Company’s cash and cash equivalents are maintained with various financial institutions in the United States.

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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

Nine Months Ended

(In thousands) September 30, 2024 September 30, 2023

SOURCES OF CASH AND CASH EQUIVALENTS

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Acquisitions $ (164,995) $ (53,812)

Deposits for acquisitions of oil and natural gas properties $ — $ (22,503)

Additions to oil and natural gas properties (351,935) (332,055)

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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.

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.

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 $698.2 million and $608.9 million for the nine months ended September 30, 2024 and 2023, respectively.

During the nine months ended September 30, 2024, cash provided by operating activities was positively impacted by the timing of collections and an increase in production and realized oil prices, partially offset by a decrease in realized natural gas and NGL prices.

Uses of Cash and Cash Equivalents

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.

During the nine months ended September 30, 2024, the Company paid $165.0 million for acquisitions, primarily comprised of a $125.0 million acquisition in the Giddings area.

The acquisitions were funded with cash on hand.

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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

Three Months Ended Nine Months Ended

(In thousands) September 30, 2024 September 30, 2023 September 30, 2024 September 30, 2023

Drilling and completion $ 103,057 $ 104,310 $ 345,406 $ 330,147

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Total capital expenditures $ 104,872 $ 106,668 $ 351,935 $ 332,055

During the second quarter of 2024, Magnolia was running a two-rig program.

During the third 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.

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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.

As of September 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.

During the nine months ended September 30, 2024 and 2023, the Company repurchased 5.3 million and 7.1 million shares for a total cost of approximately $127.0 million and $152.9 million, respectively.

During the nine months ended September 30, 2024, Magnolia LLC repurchased and subsequently canceled 3.5 million Magnolia LLC Units with an equal number of shares of corresponding Class B Common Stock for $89.7 million of cash consideration.

As of September 30, 2024, Magnolia owned approximately 97.2% of the interest in Magnolia LLC and the noncontrolling interest was approximately 2.8%.

During the nine months ended September 30, 2024, the Company declared and paid cash dividends to holders of its Class A Common Stock totaling $72.5 million.

Additionally, $7.1 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 nine months ended September 30, 2023, the Company declared cash dividends to holders of its Class A Common Stock totaling $66.3 million.

During the same time period, cash paid for dividends was $66.5 million, inclusive of dividends on vested non-participating securities.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis