Magnolia Oil & Gas Corporation Class A

Good morning, everyone, and thank you for participating in Magnolia Oil and Gas Corporation's second quarter 2024 earnings conference call. My name is Megan and I will be your moderator for today's call. At this time, all participants will be placed in a listen-only mode as our call is being recorded. I will now turn the call over to Magnolia's management for their prepared remarks, which will be followed by a brief question and answer session.

Thank you, Megan, and good morning, everyone. Welcome to Magnolia Oil & Gas's second quarter earnings conference call. Participating on the call today are Chris Stavros, Magnolia's President and Chief Executive Officer, and Brian Corrales, Senior Vice President and Chief Financial Officer. As a reminder, today's conference call contains certain projections and other forward-looking statements within the meaning of the federal securities laws. These statements are subject to risks and uncertainties that may cause actual results to differ materially from those expressed or implied in these statements. Additional information on risk factors that could cause results to differ is available in the company's annual report on Form 10-K filed with the SEC. A full safe harbor can be found on slide two of the conference call slide presentation with the supplemental data on our website. You can download Magnolia's second quarter 2024 earnings press release, as well as the I will now turn the call over to Mr. Christofros.

Thanks, Tom, and good morning, everyone. We appreciate you joining us today for a discussion of our second quarter 2024 financial and operating results. I will provide some comments on our quarterly results, which demonstrate the continued execution of our full year 2024 plan and consistency of our business model. I'll also briefly discuss a smooth integration of our recent bolt on acquisition and giddings and provide an update on the progress of our field level some positive early results. Brian will then review our second quarter financial results in greater detail and provide some additional guidance before we take your questions. As a reminder, Magnolia's primary goals and objectives are to be the most efficient operator of best-in-class oil and gas assets, generate the highest returns on those assets while employing the least amount of capital for drilling and completing wells. We also strive to return a substantial portion of our free and growing dividend. Finally, we plan to utilize some of the excess cash generated by the business to pursue attractive bolt-on oil and gas property acquisitions where we have a competitive advantage in leveraging both our technical knowledge and experience in Basin. Acquisitions are targeted not to simply replace the oil and gas that has already been produced, but importantly, to improve the opportunity set of our overall business, enhance the ongoing sustainability of our high returns, and increase our dividend per share payout capacity. We look for acquisition opportunities to provide upside optionality with a lower cost of entry that are both financially accretive and also accretive to our stock. Looking at slide three of the investor presentation, Magnolia continues to execute on our business model delivering strong quarterly results Total company production for the second quarter of approximately 90,000 barrels of oil equivalent per day, a company record, came in a little better than our guidance in growing by 10% compared to the year-ago quarter and by 6% sequentially. Total company oil production during the quarter was nearly 38,000 barrels per day, which represented growth of 11% from year-ago levels, and we anticipate our oil production should remain resilient through the remainder of the year. Production in Giddings was 69.6 thousand barrels of oil equivalent per day in the second quarter, representing approximately 77% of Magnolia's total volumes. Overall production at Giddings grew 21% compared to last year's second quarter, with Giddings oil production growing 28% year over year. This year's production results have continued to benefit from strong overall well performance. We were able to achieve this growth by spending approximately half of our $246 million of adjusted EBITDAX generated during the second quarter on drilling and completing wells. Our free cash flow for the second quarter was $97 million, and we returned approximately $130 million to our shareholders during the period, including $103 million for the repurchase of 4 million shares of Magnolia, representing 2% of our total outstanding shares. With a focused business model that allows us to consistently generate free cash flow, our plan is to continue to return a significant portion of this to our shareholders through our ongoing share purchases and our growing base dividend. As we had previously disclosed, we completed a bolt-on asset acquisition for $125 million during the quarter, which is adjacent to our development area in Giddings. This transaction added 27,000 net acres, which includes both working interest in existing acreage as well as new acreage and a small amount of production. These assets are next door to our current Giddings activity and in an area where we have a lot of experience and strong subsurface technical knowledge. We expect this acquisition to provide us with significant high return development opportunities that will be folded into our ongoing Giddings development plans. Over the past year, Magnolia has continued to dedicate some of its capital towards its appraisal program in an effort to delineate additional opportunities within our sizable acreage position. As a result of this additional appraisal activity in our legacy Giddings acreage and the recent bolt-on acquisition that I mentioned, our Giddings development area has now grown to over 200,000 net acres compared to 150,000 net acres during last year's fourth quarter. This expanded development area represents a large portion of our total Giddings acreage footprint that offers high return multi-well pad drilling opportunities. We have been regularly and systematically appraising our Giddings acreage each year, and those efforts will continue. This gradual and measured process can often take years from when we first drill a well or two in a new area, move to evaluate the results, Look for other opportunities to bolt on additional acreage or minerals if there is potential and before finally developing multi-well paths. Our approach has been a successful strategy for Magnolia and we continue appraising additional areas over time, which should lead to further prospects for resource capture, improving the future opportunity set for the business. As discussed last quarter, our operations and supply chain teams initiated a field level optimization and cost reduction program earlier this year. Our expectations were that these efforts would lower our cash costs, reducing our LOE per BOE by 5% to 10% during the second half of 2024 compared to the first quarter. Magnolia's field team successfully captured improvements well ahead of schedule, some low-hanging fruit, as part of these efforts, which included the implementation of digital field management software in addition to the optimization of maintenance, workovers, and the utilization of field equipment. These actions have already resulted in a meaningful reduction to our field-level operating costs, lowering LOE to $5.40 per BOE, representing a 10% sequential quarterly decline. While further actions will continue, we expect to maintain a similarly low level of field-level costs through the second half of the year, which should continue to support our operating margins and free cash flow. As shown on slide four, our high-quality and efficient assets together with our focus on containing both our cash operating expenses and P&C costs, as well as our ongoing share of purchases, has led to a top-tier five-year average return on capital employed of 18% and an annualized ROCE of 23% for the first half of 2024, and both well ahead of our cost of capital. I'm going to turn the call over to Brian for further details on our second quarter. financial and operating results.

Thanks, Chris, and good morning, everyone. I will review some items from our second quarter results and refer to the presentation slides found on our website. I'll also provide some additional guidance for the third quarter of 2024 and the remainder of the year before turning it over for questions. Beginning on slide five, and as Chris discussed, Magnolia had a strong second quarter. During the quarter, we generated total gap net income attributed to Class A common stock of $96 million. with total adjusted net income of $104 million, or $0.52 per diluted share. Our adjusted EBITDAX for the quarter was $246 million, with total capex associated with drilling completions and associated facilities of $123 million, or 50% of our adjusted EBITDAX. Second quarter total production volumes grew 10% year-over-year to 90.2 thousand barrels of oil equivalent per day, driven by our Giddings asset. And our diluted share count fell by 5% year-over-year to 201.2 million shares. Looking at the quarterly cash flow waterfall chart on slide 6, we started the quarter with $399 million of cash. Cash flow from operations before changes in working capital for the second quarter was $233 million, with working capital changes and other small items increasing cash by $27 million. We paid dividends of $27 million and allocated $106 million towards share repurchases, in addition to $124 million of bolt-on acquisitions. Total capital incurred, including leasehold, was $126 million, ending the quarter with $276 million of cash. Looking at slide seven, this chart illustrates the progress in reducing our total outstanding shares since we began our repurchase program in the second half of 2019. Since that time, we have repurchased 68.3 million shares, leading to a decrease in diluted shares outstanding of approximately 22%. Magnolia's weighted average fully diluted share count declined by more than 3 million shares sequentially, averaging 201.2 million shares during the second quarter. We have 5.9 million shares remaining under our current share repurchase authorization, which are specifically directed toward repurchasing Class A shares in the open market. Turning to slide eight, our dividend has grown substantially over the past few years, including a 13% increase announced early in 2024 to 13 cents per share on a quarterly basis. Our next quarterly dividend is payable on September 3rd and provides an annualized dividend payout rate of 52 cents per share. Our plan for annualized dividend growth is an important part of Magnolia's investment proposition and supported by our overall strategy of achieving moderate annual production growth reducing our outstanding shares, and increasing the dividend payout capacity of the company. Magnolia has the benefit of a very strong balance sheet, and we ended the quarter at $276 million of cash and $400 million of senior notes, which mature in 2026. Including our second quarter ending cash balance of $276 million and our undrawn $450 million revolving credit facility, our total liquidity is approximately $726 million. Our condensed balance sheet as of June 30th is shown on slide 9. Turning to slide 10 and looking at our per-unit cash costs and operating income margins. Total revenue per BOE increased year over year due to increase in oil prices when compared to the second quarter of 23. Our total adjusted cash operating costs, including G&A, was $11.10 per BOE in the second quarter of the year, an increase of $0.77 per BOE, or 7% compared to year-ago levels. The year-over-year increase was primarily due to higher LOE from oil-weighted acquisition late last year and higher production taxes. Our operating income margin for the second quarter was $16.37 per BOE of 40% of our total revenue. Turn to the guidance on slide 11. We are reiterating our expected 2024 GNC capital spending to be in the range of $450 to $480 million, and total production and oil and oil production are still expected to grow high single digits on an annual basis. For the third quarter, our DNC and associated facilities capital expenditures are expected to be approximately $120 million, with total production for the third quarter estimated to be approximately 91,000 VOEs a day. Oil price differentials are anticipated to be approximately a $3 per barrel discount to Magellan East Houston, and Magnolia remains completely unhedged. for all its oil and natural gas production. The fully diluted share count for the third quarter of 2024 is expected to be approximately 199 million shares, which is 5 percent lower than the second quarter 2023 levels. We expect our effective tax rate to be approximately 21 percent and our cash tax rate to be approximately 9 to 10 percent for the year. We are now ready to take your questions.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. Our first question comes from Neil Dingman with SunTrust. Please go ahead.

Hey, guys. Nice results. Guys, my first question is on the Giddings development. Specifically, you sounded more confident now talking about over 200,000 net development acres. I'm just wondering, if you talk about, you know, what you see as far as, you know, is there much variability among this acreage and Chris wondered if there's much white space in that area that you could still add.

Yeah, thanks, Neil. The answer is that Giddings, generally, there is always some variability. Giddings North is different from Giddings South. Giddings East is different from Giddings West. But within our core development area, if you will, which this is a part of, the variability tends to be far less, and I wouldn't expect to see much of that here. And yes, I think there are more things to add with time. And I think, you know, it's fair probably for me to give you or maybe expand a little bit on what I said in my remarks, but give you maybe a real-life example of sort of how this has come about and how other things come about within the expanded development area. So half of the increase in the development acreage that we cited came from the bolt-on acquisition, while the other half came from success out of the appraisal program. As I mentioned in my remarks, I mean, simply adding to our assessment and view of the development acreage, It's a long journey, and it doesn't simply happen overnight. So I'll try to give you this real-life example of sort of how it works, at least for us. So in late 2021, maybe early 2022, we drilled one or two appraisal wells outside of our then development area in Giddings. Our evaluation confirmed positive results. Later in 2022, We closed on an acquisition in this area, accumulating a reasonable position where we drilled a very successful pad earlier this year. And so our efforts around this are ongoing. We've accumulated a significant acreage position with plenty to work on, and we continue to do appraisal activity each year as part of that drilling program. But the process can take a couple years to play out, and it continues to be gradual and measured for us. So it can often lead to things that we see through appraisal, and we may acquire additional acreage to expand on that. We've done that with some success, and I would expect that we'll continue to follow a similar process with time.

Great details. And my second question, just on the reinvestment rate, I guess going forward, do you anticipate, it looks like that continues to be quite low. Do you anticipate the capital return changing?

Yeah, so it's interesting. I mean, so we just passed our six-year anniversary, and over the six years, our reinvestment rate has been 47%. Our ceiling is sort of 55%. This is really the crux of the business model. This discipline is really the foundation of the business model for Magnolia, which delivers, you know, moderate growth and a lot of free cash flow. So I would expect to see nothing really very different as part of the plan, you know, the remainder of this year and into next year.

Love the stability. Thank you.

Our next question comes from Phillips Johnson with Capital One. Please go ahead.

Hey, thanks for the question. I think you guys get asked about oil mix every quarter, so I thought I'd keep the streak alive. Chris, you mentioned that your oil volume should remain pretty resilient throughout the year, and I think in the past you've said that oil mix should, you know, should continue to be a bit lumpy just from quarter to quarter, but I just wanted to check in to see if we should be aware of any trends or nuances over the next few quarters.

Not necessarily. I'm pleased that, you know, the mix has been fairly steady and the overall oil production has been pretty steady and resilient. Some acquisitions that we've done and, you know, our activity program, certainly for this year, has been a little bit oilier. and so that's allowed things to hold up, I think, pretty well. As you can see, our Giddings activity is a high proportion of our overall activity, and so Giddings generally is a little less oily than the rest of the company, but it sort of depends how we drill. I wouldn't necessarily steer you in one direction, but I think for now, oil should hold up, you know, the production on oil should hold up pretty well for the remainder of the year, and I think into next year as well.

Okay, that's really helpful. You know, it's early, obviously, on 2025, but for now, should we just assume a pretty steady program at sort of that two-rig, one-frack spread pace? And I guess, is there anything to keep in mind in terms of you know, geographic next shift or working interest or anything that sort of might affect the pace of growth either, you know, faster or slower?

No, I think it's pretty steady just in terms of the two operated rigs and the one frack spread. So that, I would expect that that wouldn't change. You know, our cycle times continue to improve. We're getting more in the way of drilling efficiencies. You know, as I said in the earlier question or response, you know, we'll continue to look at some appraisal opportunities later this year and into next to see where that takes us. But I don't anticipate any significant or major changes or differences.

Sounds good. Thanks, McCullough.

Our next question comes from Zach Parham with JP Morgan. Please go ahead.

good morning um i just wanted to ask on cash return first uh intervest sold down some some stock this past quarter and now don't have a lot left you know once they're completely out of the stock does that change your cash return methodology at all you know do you consider buying more stock in the open market just curious on on how you think about that yeah i'll have to think about that a little bit you know just in terms of you know

pivoting one way or another. And, you know, on the share repurchases, I mean, to be quite frank, you know, we certainly are a little sensitive to the share price to some degree. We sort of have to be prudent to dictate that. But, you know, just in terms of giving you a little sense of how I think about it, maybe I think about it a little differently. I do believe that having a consistent and ongoing share purchase program for Magnolia is important, certainly at least for Magnolia. I have a lot of personal confidence in buying the shares because I know exactly what I'm buying. In addition, there's been a tremendous cumulative benefit to repurchasing our shares over the past five years. So as an example, the 60 million plus shares that we repurchased since 2019 has improved our per share earnings by 30% or about 50 cents a share. So if we trade at roughly 12 times earnings, that represents $6 a share of value in the stock. And that's sort of how I think about it, you know, to some extent, or I can't ignore that. So as we continue to buy in the shares, the program, It's also creating greater value for all the remaining shareholders. This repurchase has created some scarcity in the shares, if you will. So when we were added to the S&P small cap 600 index this year, and when that happened, the folks that run those indexes, they probably weren't distinguishing between the stock at 25 or 26. they just added the shares and they created more demand for what's relatively a scarce share. So I've got to think about all these things in how we approach the share purchase program. And I think these are a couple of the reasons why I think doing this on an ongoing basis can add value to the stock over time. But the dividend, the consistent growing base dividend grows out of the the business model, the execution on the business model. So as we continue to grow our production, which we call sort of mid-single digits over time, and we continue to buy in the shares, call it 1% every quarter, thereabouts, that provides the greater ability to grow the dividend on a per-share basis over time, the payout capacity, if you will. So that's sort of how I think about it.

Thanks, Chris. And then my follow-up just on the 24 CapEx guidance, you've got 3Q out there now. And to hit the midpoint of the guidance range, you'd have to have a decent step down in spending in 4Q. Is that the plan? Is there a frack holiday or some slowdown in activity plan? Just curious on how you're thinking about activity going into – the back half of the year?

Yeah, I wouldn't describe it as any frack holiday, not that I can see. I mean, the spending each quarter can be a little bit lumpy depending on timing completions, as well as the timing of non-op activity. But I think, you know, it's fair to say that we expect to be in the upper half of the full year guidance range for capital this year. You know, most recently we had some additional non-op activity come into the program, and some of that's early into 2025. We also continue to experience efficiencies in drilling and completion. So as I said earlier, that's improved our cycle times. And so we're essentially going faster, all of which has created a little bit of an upward bias to our capital, but not necessarily in a bad way. It's still inside the guidance range, but I think just at the higher end.

Thanks. Really appreciate the call. Sure.

Our next question comes from Carlos. Escalante with Wolf Research. Please go ahead.

Hey, good morning, gentlemen. Thank you for taking my call. Chris, I know it's not in your DNA to talk about specific locations or inventory theft, but I'd like to take a stab at it because you've provided some remarks in the past that, in light of the recent expansion of getting to 200,000 net acres is worth revisiting. So if I use your comments as a proxy where you've outlined that the 27,000 net acres that you acquire recently are equivalent to roughly a couple of years in inventory, if I reverse engineer that number to 2,000 net acres, that's directionally, and again, I know you're reticent to provide specific locations, would it be fair to assume or think that your Giddings program has north of 700 locations?

Yeah, I like the way you think, Carlos, but I mean, you're certainly right about one thing. This whole conversation is sort of not in my bones. directionally you're moving in the right direction but extrapolating that necessarily in the exact same manner I don't know if I would do that in the precise same way but because in different basins I would tell you probably similarly every acre is not necessarily created equal and a lot can depend on a variety of variables and attributes. So directionally you're right. Um, but I, I'm not gonna, I'm not gonna start, you know, arm wrestling you over precise numbers or anything like that.

No, that, that, uh, I wasn't expecting you to do that either way, but I had to take my shot at it. Um, and then my followup would be on, you mentioned the non-off, obviously it's the, towards the end of the year, you have a tilt there and on capital that, you will see production from that non-op allocation come back, come online in 2025, early 2025. Can we have a sense of what a rateable amount, if any, on non-op magnolia plans to have point forward?

Yeah, this one is a hard call because we don't get a lot of forward information on a a very timely basis. I mean, sometimes we get these things 30 to 60 days out. So it's hard to say. It feels like there is a little bit of an uptick, like I suggested, for the back half of the year and for the latter part of the year that should influence the capital and volumes later. But Right now, to give you a full sense of what 2025 might look like, it's just too early. I just don't know. If I had to guess, it doesn't feel dramatically different than what we're seeing broadly for, you know, full year 23 or 24, which was on the lower side. That could change, but we, you know, we haven't gotten any strong indication that it's changing for a longer term or into next year just yet.

Okay. Thank you, Chris. Okay. Thanks.

Our next question comes from Oliver Wong with Tudor Pickering Halt. Please go ahead.

Good morning, Chris and Brian, and thanks for taking my questions. Just wanted to start up with a follow up to Neal's initial question on Giddings. Just with the additional acreage you all have gained enough confidence to add into your core development area, just kind of given how these acres previously sat in the appraisal bucket, should we expect it to now drive a slightly higher allocation when thinking about how the drilling schedule might look going forward?

If you're asking Are we going to increasingly be shifting more to Giddings? I wouldn't necessarily go there as a result of what's happening, you know, because of the appraisal program. This is all just part of how we think about the overall pool of assets and the allocation of the money. And we'll continue to, you know, sort of occasionally flip back to Carnes and drill some pads through a year. But no, I think, you know, when you're talking about allocating about roughly 80% of the money and activity towards Giddings, that feels for right now about what it'll look like.

Okay, and just kind of to clarify for within Giddings, just kind of given how this, I guess, incremental 25,000 net acres that that's getting added to the core development bucket, could we see a higher allocation when you're kind of looking at it from a getting standalone basis?

I mean, maybe. You know, we haven't laid out the exact program yet for 2025, but perhaps. I mean, it's a large, you know, a couple hundred thousand acres plus is a large area. And so... There's a lot of things that we take into consideration when we look at planning and scheduling wells and where we'll drill exactly, but I would say we consider this all now a part of Giddings, and we can tend to hop to different areas from time to time, and that's typically what a program does look like during the year. We hop to different areas around the 200,000 acres. We don't sort of you know, proceed in any overly logical fashion that you might imagine. It just goes sort of back and forth for different reasons. And, you know, we'll continue to have some additional appraisal drilling as well that will likely bear out some additional opportunities.

Okay. That makes sense. And for my second question, just wanted to kind of touch on cost reductions. I know you all have done a solid job across the board on that front, tackling the completion side last year, drilling side this year, and even the LOE reduction program this past quarter. And I know the team's always very focused on managing costs. Don't want to get too far ahead of ourselves, but just kind of wondering what you all might be looking at next to squeeze more out of the system when we're kind of looking ahead.

Sure. Yeah. Look, the – you know, the – The quick wins, if you will, that I think we achieved, remember some of the increases in LOE that we saw late last year and very early this year did come out as a result of some of the acquisitions that we had done that were a bit oilier, and so that led to a little bit of higher LOE. So some of the gains that we realized now here recently came from this work over optimization, improving the utilization of some field equipment that included compressors and cooling units. In my remarks, I also mentioned this implementation of a field-level data management platform. And this, you know, I can't really say enough about this, but this tool can help us reduce spending and increase performance actual control over field services such as contract labor, trucking as examples, and it really digitizes this procure-to-pay process. And so we've also implemented this platform now over water hauling and getting. So going forward, we plan to expand this to things like roustabout crews, oil hauling, and for most of the other field services that we use. So the whole initiative around cost reduction, that will continue, and other areas that we'll push on include pursuing bids for processes for certain materials and equipment. You know, like you said, we've made some strong early progress. I don't want to get too much ahead of ourselves on forecasting further large significant gains as, you know, there's always items that can pop up and arise in the field. So I want to be mindful, you know, continually mindful on safety. This is always a first priority for us. While we're always looking to improve, I would say that at least maintaining these levels is probably fair for forecasting going forward right now. But, you know, I'm proud of the guys and progress that the field teams have made. And they've really done a terrific job embracing the whole initiative. So it's going well.

Thanks for the color. Appreciate the time, Chris. Sure.

Our next question comes from Noah Hongness with Bank of America. Please go ahead.

Morning, all. I just wanted to first ask about your guys' appraisal programs. Earlier this year, you all mentioned that you were planning to drill an appraisal well in northern Giddings that was targeting an oilier formation. Could you give us any update there?

Yeah, I don't know if we can't recall actually pointing out an appraisal well in northern Giddings. I mean, Giddings in the north or part of Giddings in the northern area was part of an acquisition that we had done later last year. There's, you know, as part of our plan, we do have a modest amount of activity on some of these earlier acquired assets. and they've been integrated into our overall development plan and broader Giddings position. But, you know, I can't tell you that there's specifically a lot of appraisal work going on there right now. There may be over time, but there's nothing that I have to say exactly about that area in terms of appraisal right now.

Okay, good. And then for my second question, I just wanted to ask on cash taxes. You all mentioned 9% to 10% for this year. Is that a good assumption moving forward as well into 25 and beyond?

Yeah, for this year, it's fine. It's so dependent, Noah, on product prices. It's very sensitive to that. So In this sort of range, if this is what you're looking at, you know, just in terms of strip prices, it's probably fair for next year. Going out beyond that, I don't want to get too ahead of ourselves, but for next year, I think it's about right.

Great. Thank you.

Our next question comes from Paul Diamond with Citi. Please go ahead.

Good morning. Thanks for taking the time. Just a quick one on the kind of portending off the bullpen acquisition. I think across Fayette, Washington, and Lee, where do you see the biggest opportunity set? More blocking out down in Fayette like this recent deal did, or is it more disparate and kind of all over the place?

It could be in a variety of different places. I'd rather not you know, get overly specific by county or area. But, you know, again, I kind of described the process that we go through when we do some appraisal work. And oftentimes some things that we see on the land side or the acquisition opportunity side can come out of that. I'd rather not get, you know, too specific on a call just in terms of what we're focusing on or looking at. You know, it is competitive out there, but fair to say that the areas you mentioned are all fair game for opportunities and others.

Understood. Had to try. Yeah, thanks for the lead there.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.