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; • 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 17 and Exchange Commission, including the Company’s Annual Report on Form 10-K for the period ended December 31, 2024 (the “2024 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 primarily targets the Eagle Ford Shale and the Austin Chalk formations. Magnolia’s objective is to generate stock market value over the long term through steady 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 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 recent years, impacted by the Russia-Ukraine war, actions taken by OPEC, and the continued instability and conflict in the Middle East. In 2024, despite the price volatility, lower well costs combined with improved operating efficiencies allowed 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. In 2025, the macroeconomic and geopolitical outlook remains complex and continues to evolve amid persistent inflationary pressures, high interest rates, and escalating trade tensions, including recently imposed tariffs. Magnolia will continue to monitor changes in international trade relations and trade policy, including those related to tariffs, which could adversely impact results. Business Overview As of June 30, 2025, Magnolia’s assets in South Texas included 79,363 gross (55,381 net) acres in the Karnes area, and 741,858 gross (551,610 net) acres in the Giddings area. As of June 30, 2025, Magnolia held an interest in approximately 2,745 gross (1,829 net) wells, with total production of 98.2 thousand and 97.4 thousand barrels of oil equivalent per day for the three and six months ended June 30, 2025, respectively. Magnolia recognized net income attributable to Class A Common Stock of $78.1 million and $181.0 million, or $0.41 and $0.95 per diluted common share, for the three and six months ended June 30, 2025, respectively. Magnolia recognized net income of $81.0 million and $187.7 million, which includes noncontrolling interest of $2.9 million and $6.6 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, 2025, respectively. During the six months ended June 30, 2025, the Company declared cash dividends to holders of its Class A Common Stock totaling $57.3 million. As of June 30, 2025, the Company’s board of directors had authorized a share repurchase program of up to 50.0 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 42.6 million shares under the program at a cost of $808.5 million and had 7.4 million shares of Class A Common Stock remaining under its share repurchase authorization as of June 30, 2025. As of June 30, 2025, Magnolia owned approximately 97.1% of the interest in Magnolia LLC and the noncontrolling interest was approximately 2.9%. Results of Operations Factors Affecting the Comparability of the Historical Financial Results 18 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 redemption of its 2026 Senior Notes that bore interest at 6.0% per annum and its issuance of the 2032 Senior Notes that bear interest at 6.875% per annum, both of which occurred in November 2024. Three and Six Months Ended June 30, 2025 Compared to the Three and Six Months Ended June 30, 2024 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, 2025 June 30, 2024 June 30, 2025 June 30, 2024 Production: Oil (MBbls) 3,639 3,453 7,156 6,868 Natural gas (MMcf) 16,820 14,982 33,313 28,731 NGLs (MBbls) 2,496 2,259 4,920 4,268 Total (Mboe) 8,939 8,209 17,628 15,924 Average daily production: Oil (Bbls/d) 39,990 37,943 39,536 37,737 Natural gas (Mcf/d) 184,840 164,641 184,048 157,863 NGLs (Bbls/d) 27,432 24,824 27,182 23,448 Total (boe/d) 98,229 90,207 97,394 87,496 Production (% of total): Oil 41 % 42 % 41 % 43 % Natural gas 31 % 30 % 31 % 30 % NGLs 28 % 28 % 28 % 27 % Revenues: Oil revenues $ 226,345 $ 275,331 $ 471,879 $ 534,514 Natural gas revenues 42,850 18,569 94,218 39,664 Natural gas liquids revenues 49,786 42,825 103,185 81,964 Total revenues $ 318,981 $ 336,725 $ 669,282 $ 656,142 Revenues (% of total): Oil 71 % 81 % 71 % 82 % Natural gas 13 % 6 % 14 % 6 % NGLs 16 % 13 % 15 % 12 % Average Price: Oil (per barrel) $ 62.20 $ 79.74 $ 65.94 $ 77.83 Natural gas (per Mcf) 2.55 1.24 2.83 1.38 NGLs (per barrel) 19.94 18.96 20.97 19.21 Oil revenues for the three months ended June 30, 2025 were $49.0 million lower than the three months ended June 30, 2024. A 22% decrease in average prices decreased second quarter 2025 revenues by $60.6 million compared to the same period in the prior year, partially offset by a 5% increase in oil production that increased revenues by $11.6 million. Oil revenues for the six months ended June 30, 2025 were $62.6 million lower than for the six months ended June 30, 2024. A 15% decrease in average prices 19 decreased revenues for the six months ended June 30, 2025 by $81.6 million compared to the same period in the prior year, partially offset by a 4% increase in oil production that increased revenues by $19.0 million. Natural gas revenues for the three months ended June 30, 2025 were $24.3 million higher than the three months ended June 30, 2024. A 106% increase in average prices increased second quarter 2025 revenues by $19.6 million compared to the same period in the prior year, and a 12% increase in natural gas production increased revenues by $4.7 million. Natural gas revenues for the six months ended June 30, 2025 were $54.6 million higher than the six months ended June 30, 2024. A 105% increase in average prices increased revenues for the six months ended June 30, 2025 by $41.6 million compared to the same period in the prior year, and a 16% increase in natural gas production increased revenues by $13.0 million. NGL revenues for the three months ended June 30, 2025 were $7.0 million higher than the three months ended June 30, 2024. A 5% increase in average prices increased second quarter 2025 revenues by $2.3 million compared to the same period in the prior year, and a 10% increase in NGL production increased revenues by $4.7 million. NGL revenues for the six months ended June 30, 2025 were $21.2 million higher than the six months ended June 30, 2024. A 9% increase in average prices increased revenues for the six months ended June 30, 2024 by $7.5 million compared to the same period in the prior year, and a 15% increase in NGL production increased revenues by $13.7 million. Operating Expenses and Other Expense The following table summarizes the Company’s operating expenses and other expense for the periods indicated. Three Months Ended Six Months Ended (In thousands, except per unit data) June 30, 2025 June 30, 2024 June 30, 2025 June 30, 2024 Operating Expenses: Lease operating expenses $ 43,590 $ 44,350 $ 90,665 $ 90,500 Gathering, transportation and processing 16,489 8,455 31,442 16,992 Taxes other than income 18,802 19,844 38,907 37,742 Exploration expenses 363 402 711 427 Asset retirement obligations accretion 1,563 1,745 3,119 3,363 Depreciation, depletion and amortization 107,082 104,743 212,935 201,819 General and administrative expenses 23,278 22,835 47,867 46,390 Total operating expenses $ 211,167 $ 202,374 $ 425,646 $ 397,233 Other Expense: Interest expense, net $ (5,604) $ (3,516) $ (10,856) $ (5,828) Other income (expense), net (244) 1,047 971 (3,267) Total other expense, net $ (5,848) $ (2,469) $ (9,885) $ (9,095) Average Operating Costs per boe: Lease operating expenses $ 4.88 $ 5.40 $ 5.14 $ 5.68 Gathering, transportation and processing 1.84 1.03 1.78 1.07 Taxes other than income 2.10 2.42 2.21 2.37 Exploration expenses 0.04 0.05 0.04 0.03 Asset retirement obligations accretion 0.17 0.21 0.18 0.21 Depreciation, depletion and amortization 11.98 12.76 12.08 12.67 General and administrative expenses 2.60 2.78 2.72 2.91 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, 2025 were $0.8 million lower, and $0.52 per boe lower, than the three months ended June 30, 2024. Lease operating expenses for the six months ended June 30, 2025 were $0.2 million higher, and $0.54 per boe lower, than the six months ended June 30, 2024. Higher production and broad cost reduction initiatives resulted in a per boe decrease and cost improvements in most expense categories including surface repair and maintenance, contract labor, equipment rentals, fluid hauling, and workover activities. 20 Gathering, transportation and processing (“GTP”) 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 GTP costs for the three months ended June 30, 2025 were $8.0 million, or $0.81 per boe, higher, than the three months ended June 30, 2024. The GTP costs for the six months ended June 30, 2025 were $14.5 million, or $0.71 per boe, higher, than the six months ended June 30, 2024. The increase in GTP costs in both periods was driven by higher natural gas and NGL prices as well as changes to certain gathering and processing contracts between periods, which resulted in a higher portion of Magnolia’s GTP costs to be recognized as expense versus a reduction to Magnolia’s natural gas and NGL revenues. 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, 2025 were $1.0 million, or $0.32 per boe, lower, than the three months ended June 30, 2024, primarily due to a decrease in oil revenues. Taxes other than income for the six months ended June 30, 2025 were $1.2 million higher, and $0.16 per boe lower, than the six months ended June 30, 2024, primarily due to an increase in ad valorem taxes as a result of higher market value of new wells brought online. The per boe decrease was due to higher production. Depreciation, depletion and amortization (“DD&A”) during the three months ended June 30, 2025 was $2.3 million higher, and $0.78 per boe lower, than the three months ended June 30, 2024. DD&A for the six months ended June 30, 2025 was $11.1 million higher, and $0.59 per boe lower, than the six months ended June 30, 2024. In both periods, higher production increased overall DD&A, and an increase in oil and natural gas reserves decreased DD&A per boe. General and administrative expenses (“G&A”) during the three months ended June 30, 2025 were $0.4 million higher, and $0.18 per boe lower, than the three months ended June 30, 2024. G&A expenses during the six months ended June 30, 2025 were $1.5 million higher, and $0.19 per boe lower, than the six months ended June 30, 2024. G&A increased in both periods due to an increase in overall labor costs, including changes from the modification of stock based compensation awards in 2025, partially offset by lower professional services and certain one-time costs incurred in 2024. G&A per boe decreased due to higher production. Interest expense, net, during the three months ended June 30, 2025 was $2.1 million higher than the three months ended June 30, 2024. Interest expense, net, during the six months ended June 30, 2025 was $5.0 million higher than the six months ended June 30, 2024. The increase in both periods was primarily driven by lower interest income realized during 2025 as a result of lower interest rates and cash balances. Other expense, net, during the three months ended June 30, 2025 was $0.2 million compared to other income, net of $1.0 million during the three months ended June 30, 2024. Other income, net, during the six months ended June 30, 2025 was $1.0 million compared to other expense, net of $3.3 million during the six months ended June 30, 2024. The change year-over-year is primarily comprised of the revaluation of the contingent consideration liability associated with the prior acquisition of certain oil and gas producing properties in the Giddings area, offset by a loss on sale of other assets in 2025. 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, 2025 June 30, 2024 June 30, 2025 June 30, 2024 Current income tax expense $ 4,126 $ 10,528 $ 16,922 $ 22,156 Deferred income tax expense 16,812 16,241 29,153 24,948 Income tax expense $ 20,938 $ 26,769 $ 46,075 $ 47,104 For the three months ended June 30, 2025, income tax expense was $5.8 million lower than the three months ended June 30, 2024 driven by a $6.4 million decrease in current income tax expense and offset by a $0.6 million increase in deferred income tax expense. Income tax expense during the six months ended June 30, 2025 was $1.0 million lower compared to the six months ended June 30, 2024, driven by a $5.2 million decrease in current income tax expense and offset by a $4.2 million increase in deferred income tax expense. The decrease in tax expense was primarily due to a decrease in income before income taxes and additional tax credits, partially offset by an increased 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. 21 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 Magnolia, including the 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 and 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, 2025, the Company had $400.0 million of principal debt related to the 2032 Senior Notes outstanding and no outstanding borrowings related to the RBL Facility. As of June 30, 2025, the Company had $701.8 million of liquidity comprised of the $450.0 million of borrowing capacity under the RBL Facility, and $251.8 million of cash and cash equivalents. Cash and Cash Equivalents At June 30, 2025, Magnolia had $251.8 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 its 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, 2025 June 30, 2024 SOURCES OF CASH AND CASH EQUIVALENTS Net cash provided by operating activities $ 423,188 $ 480,329 USES OF CASH AND CASH EQUIVALENTS Acquisitions $ (39,653) $ (150,172) Additions to oil and natural gas properties (231,455) (247,063) Changes in working capital associated with additions to oil and natural gas properties 2,770 10,287 Class A Common Stock repurchases (100,932) (80,018) Class B Common Stock purchases and cancellations — (76,740) Dividends paid (57,261) (47,830) Distributions to noncontrolling interest owners (1,842) (6,206) Other (3,103) (8,025) Net uses of cash and cash equivalents (431,476) (605,767) NET CHANGE IN CASH AND CASH EQUIVALENTS $ (8,288) $ (125,438) 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. 22 Net cash provided by operating activities totaled $423.2 million and $480.3 million for the six months ended June 30, 2025 and 2024, respectively. During the six months ended June 30, 2025, cash provided by operating activities was negatively impacted by the timing of receipts and payments and a decrease in realized oil prices, partially offset by increased production and an increase in realized natural gas and NGL prices. Uses of Cash and Cash Equivalents Acquisitions The Company made individually insignificant bolt-on acquisitions during each of the six months ended June 30, 2025 and 2024. 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, 2025 June 30, 2024 June 30, 2025 June 30, 2024 Drilling and completion $ 95,247 $ 123,370 $ 225,686 $ 242,349 Leasehold acquisition costs 5,040 2,707 5,769 4,714 Total capital expenditures $ 100,287 $ 126,077 $ 231,455 $ 247,063 During the second quarter of 2025, Magnolia operated two rigs. The activity during the second quarter of 2025 was largely driven by the number of operated and non-operated drilling rigs. 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, 2025, the Company’s board of directors had authorized a share repurchase program of up to 50.0 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 six months ended June 30, 2025 and 2024, the Company repurchased 4.4 million and 3.4 million shares for a total cost of approximately $100.7 million and $78.3 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, 2025, Magnolia owned approximately 97.1% of the interest in Magnolia LLC and the noncontrolling interest was approximately 2.9%. During the six months ended June 30, 2025, the Company declared and paid cash dividends to holders of its Class A Common Stock totaling $57.3 million. Additionally, $1.7 million was distributed to the Magnolia LLC Unit Holders. 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. 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.