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; 14 • the availability of capital resources; • capital expenditures and other contractual obligations; • weather conditions; • inflation rates; • the availability of goods and services; • cybersecurity threats, including increased use of artificial intelligence technologies; • 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, 2025 (the “2025 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 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 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 continue to experience volatility driven by geopolitical conflict, evolving global supply-demand dynamics, and macroeconomic uncertainty. Most notably, the escalation of military conflict involving Iran has materially disrupted global energy markets, including significantly constraining the movement of global crude oil and refined product exports through the Strait of Hormuz. These developments, together with the ongoing Russia-Ukraine conflict, OPEC and OPEC+ production decisions, and changes in sanctions and trade restrictions affecting major oil-producing countries such as Russia, Iran, and Venezuela, have increased the risk of supply interruptions and contributed to substantial price volatility and uncertainty in global energy markets. The macroeconomic and geopolitical environment remains uncertain and continues to evolve. In combination with geopolitical risks — including sanctions regimes, trade restrictions, tariff policies that remain subject to legal, regulatory, and policy uncertainty, and the potential for prolonged or expanded disruptions to global energy supply chains — these conditions continue to increase uncertainty with respect to commodity prices, operating costs, and capital availability. The Company continues to closely monitor developments in geopolitical conditions, international trade relations, tariff policies, and energy market dynamics, any of which could adversely affect operating results, financial condition, and future cash flows. 15 Business Overview As of March 31, 2026, Magnolia’s assets in South Texas included 60,187 gross (39,935 net) acres in the Karnes area, and 741,586 gross (561,950 net) acres in the Giddings area. As of March 31, 2026, Magnolia held an interest in approximately 2,890 gross (1,960 net) wells, with total production of 102.6 thousand barrels of oil equivalent per day for the three months ended March 31, 2026. Magnolia recognized net income attributable to Class A Common Stock of $99.8 million, or $0.54 per diluted common share, for the three months ended March 31, 2026. Magnolia recognized net income of $100.8 million, which includes noncontrolling interest of $1.0 million related to the Magnolia LLC Units (and corresponding shares of Class B Common Stock) held by certain affiliates of EnerVest, for the three months ended March 31, 2026. During the three months ended March 31, 2026, the Company declared and paid cash dividends and distributions totaling $31.4 million. As of March 31, 2026, the Company’s board of directors had authorized a share repurchase program of up to 60.0 million shares of Class A Common Stock. The program does not require purchases to be made within a particular timeframe. The Company had repurchased 48.4 million shares under the program at a cost of $945.4 million and had 11.6 million shares of Class A Common Stock remaining under its share repurchase authorization as of March 31, 2026. As of March 31, 2026, Magnolia owned 100.0% of the interest in Magnolia LLC. 16 Results of Operations Three Months Ended March 31, 2026 Compared to the Three Months Ended March 31, 2025 Oil, Natural Gas and NGL Sales Revenues The following table provides the components of Magnolia’s revenues for the periods indicated, as well as each period’s respective average prices and production volumes. This table shows production on a boe basis in which natural gas is converted to an equivalent barrel of oil based on a ratio of six Mcf to one barrel. This ratio may not be reflective of the current price ratio between the two products. Three Months Ended (In thousands, except per unit data) March 31, 2026 March 31, 2025 Production: Oil (MBbls) 3,661 3,517 Natural gas (MMcf) 17,383 16,492 NGLs (MBbls) 2,673 2,424 Total (Mboe) 9,231 8,689 Average daily production: Oil (Bbls/d) 40,678 39,078 Natural gas (Mcf/d) 193,143 183,248 NGLs (Bbls/d) 29,696 26,930 Total (boe/d) 102,564 96,549 Production (% of total): Oil 40 % 40 % Natural gas 31 % 32 % NGLs 29 % 28 % Revenues: Oil revenues $ 257,329 $ 245,534 Natural gas revenues 51,800 51,367 Natural gas liquids revenues 49,382 53,399 Total revenues $ 358,511 $ 350,300 Revenues (% of total): Oil 72 % 70 % Natural gas 14 % 15 % NGLs 14 % 15 % Average Price: Oil (per barrel) $ 70.29 $ 69.81 Natural gas (per Mcf) 2.98 3.11 NGLs (per barrel) 18.48 22.03 Oil revenues for the three months ended March 31, 2026 were $11.8 million higher than the three months ended March 31, 2025. A 4% increase in oil production increased first quarter 2026 revenues by $10.1 million compared to the same period in the prior year, and a 1% increase in average prices increased revenues by $1.7 million. Natural gas revenues for the three months ended March 31, 2026 were $0.4 million higher than the three months ended March 31, 2025. A 5% increase in natural gas production increased first quarter 2026 revenues by $2.7 million compared to the same period in the prior year, partially offset by a 4% decrease in average prices that decreased revenues by $2.3 million. 17 NGL revenues for the three months ended March 31, 2026 were $4.0 million lower than the three months ended March 31, 2025. A 16% decrease in average prices decreased first quarter 2026 revenues by $8.6 million compared to the same period in the prior year, partially offset by a 10% increase in NGL production that increased revenues by $4.6 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 (In thousands, except per unit data) March 31, 2026 March 31, 2025 Operating Expenses: Lease operating expenses $ 47,751 $ 47,075 Gathering, transportation and processing 18,207 14,953 Taxes other than income 16,387 20,105 Exploration expenses 1,742 348 Asset retirement obligations accretion 1,857 1,556 Depreciation, depletion and amortization 113,359 105,853 General and administrative expenses 31,444 24,588 Total operating expenses $ 230,747 $ 214,478 Other Expense: Interest expense, net $ (6,004) $ (5,252) Other income (expense), net (36) 1,215 Total other expense, net $ (6,040) $ (4,037) Average Operating Costs per boe: Lease operating expenses $ 5.17 $ 5.42 Gathering, transportation and processing 1.97 1.72 Taxes other than income 1.78 2.31 Exploration expenses 0.19 0.04 Asset retirement obligations accretion 0.20 0.18 Depreciation, depletion and amortization 12.28 12.18 General and administrative expenses 3.41 2.83 Lease operating expenses are costs incurred in the operation of producing properties, including expenses for utilities, direct labor, water disposal, workover rigs, workover expenses, materials, and supplies. Lease operating expenses for the three months ended March 31, 2026 were $0.7 million higher, and $0.25 per boe lower, than the three months ended March 31, 2025. The increase was due to an increase in surface repair and maintenance and compression associated with higher well count. 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. The GTP costs for the three months ended March 31, 2026 were $3.3 million, or $0.25 per boe, higher, than the three months ended March 31, 2025 driven by higher production and changes to certain gathering and processing contracts, which resulted in a higher portion of Magnolia’s GTP costs being recognized as expense versus a reduction to Magnolia’s natural gas 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 March 31, 2026 were $3.7 million, or $0.53 per boe, lower than the three months ended March 31, 2025. The decrease in taxes other than income was primarily due to a decrease in ad valorem taxes as a result of lower market valuations and a decrease in production taxes as a result of severance tax refunds. 18 Depreciation, depletion and amortization (“DD&A”) during the three months ended March 31, 2026 was $7.5 million, or $0.10 per boe, higher than the three months ended March 31, 2025. The increase in DD&A was primarily due to higher production. The slight increase in the DD&A rate period over period was primarily due to acquisitions made during 2026. General and administrative expenses (“G&A”) consists primarily of salaries and related benefits, stock based compensation, office rent, legal and consulting fees, system costs and other administrative costs incurred. The table below reflects the Company’s G&A for the periods indicated: Three Months Ended (In thousands) March 31, 2026 March 31, 2025 General and administrative expenses $ 20,160 $ 18,696 Stock based compensation 11,284 5,892 Total general and administrative expenses $ 31,444 $ 24,588 G&A during the three months ended March 31, 2026 were $6.9 million, or $0.58 per boe, higher, than the three months ended March 31, 2025. The increase in G&A was primarily due to increased stock based compensation expense as a result of higher grant date fair values, accelerated vesting of certain awards, and changes in expected payouts for the Company’s performance share unit awards. Income Tax Expense The following table summarizes the Company’s income tax expense for the periods indicated. Three Months Ended (In thousands) March 31, 2026 March 31, 2025 Current income tax expense $ 3,998 $ 12,795 Deferred income tax expense 16,890 12,342 Income tax expense $ 20,888 $ 25,137 For the three months ended March 31, 2026, income tax expense was $4.2 million lower than the three months ended March 31, 2025 driven by an $8.8 million decrease in current income tax expense and offset by a $4.6 million increase in deferred income tax expense. The decrease in total tax expense was primarily due to a decrease in income before income taxes and an increase in the discrete impact from stock based compensation that vested during the three months ended March 31, 2026 compared to March 31, 2025. Accelerated deductions as a result of the passage of the One Big Beautiful Bill Act resulted in lower current tax expense and higher deferred tax expense. See Note 9— Income Taxes in the notes to the 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 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 March 31, 2026, the Company had $400.0 million of principal debt related to the Senior Notes outstanding and no outstanding borrowings related to the RBL Facility. As of March 31, 2026, the Company had $574.4 million of liquidity comprised of the $450.0 million of borrowing capacity under the RBL Facility, and $124.4 million of cash and cash equivalents. 19 Cash and Cash Equivalents At March 31, 2026, Magnolia had $124.4 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: Three Months Ended (In thousands) March 31, 2026 March 31, 2025 SOURCES OF CASH AND CASH EQUIVALENTS Net cash provided by operating activities $ 197,616 $ 224,490 USES OF CASH AND CASH EQUIVALENTS Acquisitions $ (154,990) $ (24,144) Additions to oil and natural gas properties (128,427) (131,168) Changes in working capital associated with additions to oil and natural gas properties 27,447 9,210 Class A Common Stock repurchases (33,277) (52,393) Class B Common Stock purchases and cancellations (19,793) — Dividends paid (30,473) (28,911) Distributions to noncontrolling interest owners (911) (829) Other 395 (8,746) Net uses of cash and cash equivalents (340,029) (236,981) NET CHANGE IN CASH AND CASH EQUIVALENTS $ (142,413) $ (12,491) 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, asset retirement obligations accretion, and deferred taxes. Net cash provided by operating activities totaled $197.6 million and $224.5 million for the three months ended March 31, 2026 and 2025, respectively. During the three months ended March 31, 2026, cash provided by operating activities decreased due to lower realized NGL prices and the timing of receipts and payments, partially offset by increased production and the receipt of tax refunds. Uses of Cash and Cash Equivalents Acquisitions The Company made individually insignificant bolt-on acquisitions totaling $155.0 million and $24.1 million during the three months ended March 31, 2026 and 2025, respectively. 20 Additions to Oil and Natural Gas Properties The following table sets forth the Company’s capital expenditures for the periods presented: Three Months Ended (In thousands) March 31, 2026 March 31, 2025 Drilling and completion $ 128,687 $ 130,439 Leasehold acquisition costs (260) 729 Total capital expenditures $ 128,427 $ 131,168 During the first quarter of 2026, Magnolia operated two rigs. The activity during the first quarter of 2026 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 March 31, 2026, the Company’s board of directors had authorized a share repurchase program of up to 60.0 million shares of Class A Common Stock. The program does not require purchases to be made within a particular time frame and whether the Company undertakes these additional repurchases is ultimately subject to numerous considerations, market conditions, and other factors. During each of the three months ended March 31, 2026 and 2025, the Company repurchased 1.2 million and 2.2 million shares for a total cost of approximately $32.1 million and $52.0 million, respectively. During the three months ended March 31, 2025, Magnolia LLC repurchased and subsequently canceled 0.7 million Magnolia LLC Units with an equal number of shares of corresponding Class B Common Stock for $19.8 million of cash consideration. As of March 31, 2026, Magnolia owned 100.0% of the interest in Magnolia LLC. During the three months ended March 31, 2026, the Company declared and paid cash dividends to holders of its Class A Common Stock totaling $30.5 million. Additionally, $0.9 million was distributed to the Magnolia LLC Unit Holders. During the three months ended March 31, 2025, the Company declared and paid cash dividends to holders of its Class A Common Stock totaling $28.9 million. Additionally, $0.8 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.