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; 17 • 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, 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 September 30, 2025, Magnolia’s assets in South Texas included 79,363 gross (55,381 net) acres in the Karnes area, and 752,536 gross (569,217 net) acres in the Giddings area. As of September 30, 2025, Magnolia held an interest in approximately 2,852 gross (1,934 net) wells, with total production of 100.5 thousand and 98.4 thousand barrels of oil equivalent per day for the three and nine months ended September 30, 2025, respectively. Magnolia recognized net income attributable to Class A Common Stock of $75.5 million and $256.5 million, or $0.40 and $1.36 per diluted common share, for the three and nine months ended September 30, 2025, respectively. Magnolia recognized net 18 income of $78.2 million and $265.9 million, which includes noncontrolling interest of $2.8 million and $9.4 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, 2025, respectively. During the nine months ended September 30, 2025, the Company declared cash dividends to holders of its Class A Common Stock totaling $85.3 million. As of September 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 44.8 million shares under the program at a cost of $859.9 million and had 5.2 million shares of Class A Common Stock remaining under its share repurchase authorization as of September 30, 2025. As of September 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 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. 19 Three and Nine Months Ended September 30, 2025 Compared to the Three and Nine Months Ended September 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 Nine Months Ended (In thousands, except per unit data) September 30, 2025 September 30, 2024 September 30, 2025 September 30, 2024 Production: Oil (MBbls) 3,628 3,579 10,784 10,447 Natural gas (MMcf) 17,515 14,644 50,828 43,375 NGLs (MBbls) 2,700 2,325 7,620 6,592 Total (Mboe) 9,247 8,345 26,875 24,269 Average daily production: Oil (Bbls/d) 39,430 38,902 39,500 38,128 Natural gas (Mcf/d) 190,384 159,170 186,183 158,302 NGLs (Bbls/d) 29,347 25,271 27,912 24,060 Total (boe/d) 100,507 90,702 98,443 88,572 Production (% of total): Oil 39 % 43 % 40 % 43 % Natural gas 32 % 29 % 32 % 30 % NGLs 29 % 28 % 28 % 27 % Revenues: Oil revenues $ 230,530 $ 265,682 $ 702,409 $ 800,195 Natural gas revenues 43,169 22,207 137,386 61,871 Natural gas liquids revenues 51,236 45,246 154,422 127,211 Total revenues $ 324,935 $ 333,135 $ 994,217 $ 989,277 Revenues (% of total): Oil 71 % 80 % 70 % 81 % Natural gas 13 % 7 % 14 % 6 % NGLs 16 % 13 % 16 % 13 % Average Price: Oil (per barrel) $ 63.55 $ 74.23 $ 65.14 $ 76.59 Natural gas (per Mcf) 2.46 1.52 2.70 1.43 NGLs (per barrel) 18.98 19.46 20.27 19.30 Oil revenues for the three months ended September 30, 2025 were $35.2 million lower than the three months ended September 30, 2024. A 14% decrease in average prices decreased third quarter 2025 revenues by $38.3 million compared to the same period in the prior year, partially offset by a 1% increase in oil production that increased revenues by $3.1 million. Oil revenues for the nine months ended September 30, 2025 were $97.8 million lower than for the nine months ended September 30, 2024. A 15% decrease in average prices decreased revenues for the nine months ended September 30, 2025 by $119.7 million compared to the same period in the prior year, partially offset by a 3% increase in oil production that increased revenues by $21.9 million. 20 Natural gas revenues for the three months ended September 30, 2025 were $21.0 million higher than the three months ended September 30, 2024. A 63% increase in average prices increased third quarter 2025 revenues by $13.9 million compared to the same period in the prior year, and a 20% increase in natural gas production increased revenues by $7.1 million. Natural gas revenues for the nine months ended September 30, 2025 were $75.5 million higher than the nine months ended September 30, 2024. An 89% increase in average prices increased revenues for the nine months ended September 30, 2025 by $55.4 million compared to the same period in the prior year, and a 17% increase in natural gas production increased revenues by $20.1 million. NGL revenues for the three months ended September 30, 2025 were $6.0 million higher than the three months ended September 30, 2024. A 16% increase in NGL production increased third quarter 2025 revenues by $7.1 million compared to the same period in the prior year, partially offset by a 2% decrease in average prices that decreased revenues by $1.1 million. NGL revenues for the nine months ended September 30, 2025 were $27.2 million higher than the nine months ended September 30, 2024. A 16% increase in NGL production increased revenues for the nine months ended September 30, 2025 by $20.8 million compared to the same period in the prior year, and a 5% increase in average prices increased revenues by $6.4 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 Nine Months Ended (In thousands, except per unit data) September 30, 2025 September 30, 2024 September 30, 2025 September 30, 2024 Operating Expenses: Lease operating expenses $ 48,553 $ 44,444 $ 139,218 $ 134,945 Gathering, transportation and processing 17,744 10,676 49,186 27,668 Taxes other than income 20,383 18,269 59,291 56,011 Exploration expenses 131 491 841 918 Asset retirement obligations accretion 1,838 1,749 4,957 5,112 Depreciation, depletion and amortization 110,618 107,336 323,552 309,155 General and administrative expenses 24,204 21,158 72,072 67,547 Total operating expenses $ 223,471 $ 204,123 $ 649,117 $ 601,356 Other Expense: Interest expense, net $ (5,362) $ (3,856) $ (16,218) $ (9,683) Other income (expense), net (661) 7,286 309 4,018 Total other income (expense), net $ (6,023) $ 3,430 $ (15,909) $ (5,665) Average Operating Costs per boe: Lease operating expenses $ 5.25 $ 5.33 $ 5.18 $ 5.56 Gathering, transportation and processing 1.92 1.28 1.83 1.14 Taxes other than income 2.20 2.19 2.21 2.31 Exploration expenses 0.01 0.06 0.03 0.04 Asset retirement obligations accretion 0.20 0.21 0.18 0.21 Depreciation, depletion and amortization 11.96 12.86 12.04 12.74 General and administrative expenses 2.62 2.54 2.68 2.78 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 September 30, 2025 were $4.1 million higher, and $0.08 per boe lower, than the three months ended September 30, 2024. Lease operating expenses for the nine months ended September 30, 2025 were $4.3 million higher, and $0.38 per boe lower, than the nine months ended September 30, 2024. The increases in both periods were due to higher workover activity and an increase in surface repair and maintenance, contract labor, and equipment rentals associated with higher well count, offset by broad cost reduction initiatives. The decrease in lease operating expenses per boe was due to higher production. 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. 21 The GTP costs for the three months ended September 30, 2025 were $7.1 million, or $0.64 per boe, higher, than the three months ended September 30, 2024. The GTP costs for the nine months ended September 30, 2025 were $21.5 million, or $0.69 per boe, higher, than the nine months ended September 30, 2024. The increase in GTP costs in both periods was driven by changes to certain gathering and processing contracts, which resulted in a higher portion of Magnolia’s GTP costs to be recognized as expense versus a reduction to Magnolia’s natural gas revenues, as well as higher production and natural gas prices. 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 September 30, 2025 were $2.1 million higher than the three months ended September 30, 2024. Taxes other than income for the nine months ended September 30, 2025 were $3.3 million higher than the nine months ended September 30, 2024. The increase in taxes other than income in both periods was primarily due to an increase in ad valorem taxes as a result of higher market value of new wells brought online. Depreciation, depletion and amortization (“DD&A”) during the three months ended September 30, 2025 was $3.3 million higher, and $0.90 per boe lower, than the three months ended September 30, 2024. DD&A for the nine months ended September 30, 2025 was $14.4 million higher, and $0.70 per boe lower, than the nine months ended September 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 September 30, 2025 were $3.0 million, and $0.08 per boe, higher, than the three months ended September 30, 2024. G&A expenses during the nine months ended September 30, 2025 were $4.5 million higher, and $0.10 per boe lower, than the nine months ended September 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 and higher subscription and license fees, partially offset by certain one-time costs incurred in 2024. Interest expense, net, during the three months ended September 30, 2025 was $1.5 million higher than the three months ended September 30, 2024. Interest expense, net, during the nine months ended September 30, 2025 was $6.5 million higher than the nine months ended September 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 income (expense), net, during the three months ended September 30, 2025 was $(0.7) million compared to $7.3 million during the three months ended September 30, 2024. The decrease in other income (expense) for the three months ended September 30, 2025 as compared to the same period in the prior year was primarily due to the revaluation of the contingent consideration and loss on asset retirement obligation settlements. Other income (expense), net, during the nine months ended September 30, 2025 was $0.3 million compared to $4.0 million during the nine months ended September 30, 2024. The decrease in other income (expense) for the nine months ended September 30, 2025 as compared to the same period in the prior year was primarily comprised of the loss on sale of other assets in 2025 and loss on asset retirement obligation settlements, partially offset by the revaluation of the contingent consideration. Income Tax Expense The following table summarizes the Company’s income tax expense for the periods indicated. Three Months Ended Nine Months Ended (In thousands) September 30, 2025 September 30, 2024 September 30, 2025 September 30, 2024 Current income tax expense (benefit) $ (32,288) $ (480) $ (15,367) $ 21,676 Deferred income tax expense 49,496 27,010 78,650 51,958 Income tax expense $ 17,208 $ 26,530 $ 63,283 $ 73,634 For the three months ended September 30, 2025, income tax expense was $9.3 million lower than the three months ended September 30, 2024 driven by a $31.8 million decrease in current income tax expense and offset by a $22.5 million increase in deferred income tax expense. Income tax expense during the nine months ended September 30, 2025 was $10.4 million lower compared to the nine months ended September 30, 2024, driven by a $37.0 million decrease in current income tax expense and offset by a $26.7 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. The decrease in current tax expense and increase in deferred tax expense were primarily due to the acceleration of tax deductions from the passage of the One Big Beautiful Bill Act. 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. 22 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 September 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 September 30, 2025, the Company had $730.5 million of liquidity comprised of the $450.0 million of borrowing capacity under the RBL Facility, and $280.5 million of cash and cash equivalents. Cash and Cash Equivalents At September 30, 2025, Magnolia had $280.5 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: Nine Months Ended (In thousands) September 30, 2025 September 30, 2024 SOURCES OF CASH AND CASH EQUIVALENTS Net cash provided by operating activities $ 670,243 $ 698,223 USES OF CASH AND CASH EQUIVALENTS Acquisitions $ (64,359) $ (164,995) Additions to oil and natural gas properties (350,503) (351,935) Changes in working capital associated with additions to oil and natural gas properties 8,437 455 Class A Common Stock repurchases (152,181) (128,133) Class B Common Stock purchases and cancellations — (89,670) Dividends paid (85,341) (72,524) Distributions to noncontrolling interest owners (2,671) (8,190) Other (3,189) (8,213) Net uses of cash and cash equivalents (649,807) (823,205) NET CHANGE IN CASH AND CASH EQUIVALENTS $ 20,436 $ (124,982) 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. 23 Net cash provided by operating activities totaled $670.2 million and $698.2 million for the nine months ended September 30, 2025 and 2024, respectively. During the nine months ended September 30, 2025, cash provided by operating activities was negatively impacted by the timing of receipts and a decrease in realized oil prices, partially offset by the timing of payments, increased production, and an increase in realized natural gas prices. Uses of Cash and Cash Equivalents Acquisitions The Company made individually insignificant bolt-on acquisitions during each of the nine months ended September 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 Nine Months Ended (In thousands) September 30, 2025 September 30, 2024 September 30, 2025 September 30, 2024 Drilling and completion $ 118,441 $ 103,057 $ 344,128 $ 345,406 Leasehold acquisition costs 607 1,815 6,375 6,529 Total capital expenditures $ 119,048 $ 104,872 $ 350,503 $ 351,935 During the third quarter of 2025, Magnolia operated two rigs. The activity during the third 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 September 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 nine months ended September 30, 2025 and 2024, the Company repurchased 6.5 million and 5.3 million shares for a total cost of approximately $152.1 million and $127.0 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, 2025, Magnolia owned approximately 97.1% of the interest in Magnolia LLC and the noncontrolling interest was approximately 2.9%. During the nine months ended September 30, 2025, the Company declared and paid cash dividends to holders of its Class A Common Stock totaling $85.3 million. Additionally, $2.5 million was distributed to the Magnolia LLC Unit Holders. 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. 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.