Magnolia Oil & Gas Corp Q4 FY2025 Earnings Call

Good morning, everyone, and thank you for participating in Magnolia Oil & Gas Corporation's Fourth Quarter 2025 Earnings Conference Call. My name is Chloe and I will be your moderator for today's call. 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, Chloe, and good morning, everyone. Welcome to Magnolia Oil & Gas' Fourth Quarter Earnings Conference Call. Participating on the call today are Chris Stavros, Magnolia's Chairman, President and Chief Executive Officer; and Brian Corales, 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 2 of the conference call slide presentation with the supplemental data on our website. You can download Magnolia's fourth quarter 2025 earnings press release as well as the conference call slides from the Investors section of the company's website at www.magnoliaoilgas.com. I will now turn the call over to Mr. Chris Stavros.

Thank you, Tom, and good morning, everyone. We appreciate you joining us today for a discussion of our fourth quarter and full year 2025 financial and operating results. I plan to briefly speak to last year's results, which closed out another year of strong, consistent performance and execution showing the beneficial characteristics and merits of our differentiated business model and during a year of elevated product price volatility. Our model has allowed us to deliver strong free cash flow and cash returns to our shareholders resulting from superior asset performance and our continued focus on capital discipline, cost containment, and visible efficiency improvements. I'll conclude by providing an outlook of Magnolia's 2026 capital and operating plan which is expected to deliver moderate growth with a similar level of capital spending that provides us with further opportunities to capture low-cost resources across our acreage position. Brian will then review our financial results in greater detail and provide some additional guidance before we take your questions. Beginning on Slide 3 of our quarterly investor presentation and looking at the highlights, Magnolia delivered another solid quarter and year of performance marked by steady execution of our capital-efficient business model and our high-quality assets. I'm particularly proud of our ongoing dedication and focus shown by both our operating teams in the field and our Houston staff. Their continued hard work and diligence is a significant factor behind Magnolia's success. Our business performed exceptionally well throughout the year, driven by stronger-than-expected well results, improved efficiencies, lower unit costs, and our commitment to capital discipline, as I mentioned. For the full year 2025, total company production grew by 11% to approximately 100,000 barrels of oil equivalent per day with oil production growing by 4% and averaging nearly 40,000 barrels per day. Operationally, we continue to make strides in reducing our field-level cash operating expenses, which declined by 7% to $5.12 per BOE during 2025. The better-than-expected well productivity we experienced during the first half of last year not only provided us with higher production growth in 2025 but also allowed us to save capital by deferring some well completions into this year. Our teams were also able to drive a more efficient drilling and completion program last year in Giddings with our average drilled feet per day increasing by 8% and with completed feet per day improving by 6%. Turning specifically to the fourth quarter, we achieved a new company record for our production, averaging nearly 104,000 barrels of oil equivalent per day and 40,700 barrels of oil per day. These both marked a sequential increase of 3% and reflected the continued strong performance from our wells. Financially, the quarter and year were equally strong and aligned with our goal of generating consistent and sustainable free cash flow through disciplined capital allocation. Our fourth quarter adjusted net income was approximately $71 million or $0.38 per diluted share with adjusted EBITDAX coming in at $216 million. Our drilling and completion capital for the period was roughly $117 million, representing 54% of our adjusted EBITDAX. Pretax operating margins averaged 33% for the year despite a more than 15% annual decline in our oil price realizations. Our low reinvestment rate enabled us to generate free cash flow of more than $425 million for the full year. We stood by our commitment to return a significant portion of that free cash flow to our shareholders, distributing approximately 75% through a combination of our base dividend and share repurchases. In total, we repurchased approximately 8.9 million shares throughout the course of 2025, reducing our diluted share count by roughly 4.5%. This not only accretes value on a per-share basis, but also reinforces our business model that leads to a serial compounding of value. Our balance sheet ended the year in a position of strength, allowing us to navigate product price uncertainty and provides us with ample liquidity and a cash balance giving us flexibility to selectively pursue opportunistic bolt-on additions to our portfolio. As shown on Slide 4, our strategy is designed to produce steady mid-single-digit total production growth, high pretax margins, and reliable free cash flow while maintaining a low reinvestment rate and a strong balance sheet. The strength of this model and the strategy is clear when looking at Magnolia's longer-term performance across these key financial metrics. Looking at Slide 5, Magnolia has maintained one of the lowest capital reinvestment rates among the U.S. oil and gas producers over the past 5 years, while delivering one of the highest rates of production growth per share. As shown on Slide 6, Magnolia continues to achieve strong pretax operating margins, driven primarily by our low-cost, high-quality asset base, which is also in close proximity to large consuming markets on the U.S. Gulf Coast. Slide 7 highlights the continued strength of our balance sheet, which remains best-in-class in the industry. Maintaining low leverage is a critical part of our strategy as it reduces financial risk while preserving substantial flexibility and strategic optionality. While many oil and gas operators often excel in 1 or 2 of these areas, we believe that our combination of our low capital reinvestment rate, above-average per-share growth, high operating margins, and minimal debt is unique, especially for a small to midsized operator. This powerful recipe allows us to generate high corporate returns, maximize our free cash flow generation, and sustain our strong and consistent capital return program for shareholders. Slide 8 illustrates our corporate-level returns showing 2025 as another strong year with return on capital employed (ROCE) of 18% and well above our cost of capital despite year-over-year lower oil prices. Over the last 5 years, Magnolia has generated an average ROCE of 34% and more than 3x our weighted average cost of capital. These exceptional returns stem from our prudent capital allocation, consistent low debt levels, ongoing share repurchase program, and perhaps most importantly, our low-cost, high-quality assets. Case in point, Magnolia added approximately 50 million BOE of proved developed reserves during the year. When accounting for all expenditures to add these reserves, this resulted in organic proved developed finding and development costs or F&D of $9.25 per BOE. During the 3-year period from 2023 to 2025, Magnolia's organic proved developed F&D cost averaged $9.85 per BOE. This demonstrates our high-quality and low-cost supply asset base. Looking ahead into 2026, we're committed to the principles that have guided us from the start and have proven to be successful thus far. We plan to remain fiscally prudent and disciplined with our capital spending, expected to be approximately flat year-over-year while delivering total production growth of approximately 5%. As I've often said, Magnolia's primary goals and objectives are to be the most prudent and efficient with our best-in-class oil and gas assets to generate the highest return on those assets while spending the least amount of capital on drilling and completing wells, no matter what the product price. Last year was another example of our successful delivery on these goals. We achieved double-digit production growth with less capital than originally planned, repurchased more than 4% of our outstanding shares, recently announced a 10% increase in our dividend, our fifth consecutive annual increase, and completed approximately $67 million of bolt-on acquisitions, furthering our resource opportunity set. To summarize, Magnolia is well positioned and consistently guided by the principles of our business model. Our high-quality assets and strategy of continued capital spending discipline, proactive cost management, and pursuit of further operational efficiencies should serve us well during periods of product price volatility. Our consistent policy of low leverage and the lack of commodity hedges is central to our strategy, providing us with downside protection while also allowing for upside to product prices and the ability to generate value through commodity cycles. I'll now turn the call over to Brian for a review of our financials and provide some additional guidance.

Thanks, Chris, and good morning, everyone. I will review some items from our fourth quarter and full year results and refer to the presentation slides found on our website. I'll also provide some additional guidance for the first quarter of 2026 and the remainder of the year before turning it over for questions. Magnolia ended 2025 with a strong performance across our operations. Starting on Slide 10, during the fourth quarter, we generated total adjusted net income of $71 million or $0.38 per diluted share. Our adjusted EBITDAX for the quarter was $216 million with total capital associated with drilling completions and associated facilities of $117 million, representing 54% of our adjusted EBITDAX. For the full year, adjusted EBITDAX was $906 million with D&C capital representing 51% of EBITDAX. Fourth quarter production volumes grew 11% year-over-year to 103,800 barrels of oil equivalent per day. For the full year, production volumes grew 11% to 99,800 barrels of oil equivalent per day, with oil growth of 4%. During the year, we repurchased a total of 8.9 million shares, and our diluted share count fell by 4% year-over-year. Looking at the quarterly cash flow waterfall chart on Slide 11, we started the year with $260 million of cash. Cash flow from operations before changes in working capital was $906 million, with working capital changes and other small items impacting cash by $41 million. Throughout the year, we added $67 million of bolt-on acquisitions. We paid dividends of $117 million and allocated $205 million towards share repurchases. We incurred $469 million on drilling completions and associated facilities and leasehold and ended the year with $267 million of cash. Looking at Slide 12, 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 81.8 million shares leading to a change in weighted average diluted shares outstanding of approximately 27% net of issuances. Magnolia's weighted average diluted share count declined by more than 2 million shares sequentially, averaging 188 million shares during the fourth quarter. As Chris discussed, the Board recently approved a 10 million share increase to our share repurchase authorization leaving 12.9 million shares remaining under our current repurchase authorization, which are specifically directed towards repurchasing Class A shares in the open market. Turning to Slide 13, our dividend has grown substantially over the past few years, including a 10% increase we recently announced to $0.165 per share on a quarterly basis. Our next quarterly dividend is payable on March 2 and provides an annualized dividend payout rate of $0.66 per share. Our plan for annualized dividend growth is an important part of Magnolia's investment proposition and is 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 continues to have a very strong balance sheet, and we ended the quarter with $267 million of cash. Our $400 million of senior notes does not mature until 2032. Including our fourth quarter ending cash balance of $267 million and our undrawn $450 million revolving credit facility, our total liquidity is approximately $717 million. Our condensed balance sheet as of December 31 is shown on Slide 14. Turning to Slide 15 and looking at our per-unit cash costs and operating income margins, total revenue per BOE declined 13% quarter-over-quarter due to the decline in oil prices. Our total adjusted cash operating costs, including G&A, were $10.64 per BOE in the fourth quarter of 2025. Our operating income margin for the fourth quarter was $9.85 per BOE or 30% of our total revenue. The decrease in our quarter-over-quarter pretax operating margin was entirely driven by the decrease in commodity prices and were further benefited from lower DD&A expense. On Slide 16, Magnolia continues to have a very successful organic drilling program. The total proved developed reserves at year-end 2025 were 167 million barrels of oil equivalent. Excluding acquisitions and price-related revisions, the company added 50 million barrels of oil equivalent of proved developed reserves during the year. Total drilling and completions capital was $461 million in 2025, resulting in organic proved developed F&D cost of $9.25 per BOE and reflective of our current drilling program. The 3-year average organic proved developed F&D cost was $9.85 per BOE. Turning to guidance, we expect our 2026 drilling completions and facility capital to be in the range of $440 million to $480 million, which includes an estimate of nonoperated capital that is similar to that of 2025. At the midpoint, this is similar to prior year's capital cost, despite planning more wells in 2026. We expect first-quarter D&C capital expenditures to be approximately $125 million and anticipate this to be the highest quarterly rate of spending for the year. Total production for the first quarter is estimated to be approximately 102,000 barrels of oil equivalent per day, which includes approximately 1,500 barrels of oil equivalent per day of winter weather impacts experienced in January. Total full-year 2026 production growth is expected to be approximately 5%. Oil price differentials are anticipated to be approximately $3 per barrel discount to Magellan East Houston, and Magnolia remains completely unhedged for all of its oil and natural gas production. The fully diluted share count for the first quarter of 2026 is expected to be approximately 187 million shares, which is 4% lower than first quarter 2025 levels. We expect our effective tax rate to be approximately 21%, with all of this being deferred. We are now ready to take your questions.

Nice to see another strong quarter, Chris and team. Chris, my first question is to jump right to the Giddings play. Specifically, looking at our well data, it suggests that a number of your recent wells not only continue to outperform the type curves, but they certainly appear to be some of the best drilled to date. I'm just wondering, with that said, has there been notable operational changes? Is it more because you're in pure development for a lot of that now? What do you attribute most of this continued upside to?

Neal, thank you for the question and for bringing that up. We did notice it as well. The wells are performing strongly and producing significantly. I'm not sure which specific wells you're referencing, but many have shown excellent performance. I can't point to any specific changes in completion design if that's what you're asking. It seems to be a result of drilling in some very good rock. With the effort we put into locating and placing the wells, there’s a reasonable chance you’ll see more of this. There's nothing specific that we've altered; we’ve simply improved over time.

No, that's obvious to see. Moving on to mergers and acquisitions, could you discuss what you're considering? I know you assess various options. We've observed record prices paid for Delaware properties and significant amounts for PDP heavy assets. Specifically, what are you focusing on overall? Additionally, regarding the Giddings area, are we noticing price increases there similar to many other regions?

Yes. Brian put some numbers around the bolt-on transactions, acquisitions, some of the ground game that has led to some of the bolt-ons that we've done over the last couple of years. And what I'd say is that it's not predictable. But we've done a good job, I think, with that ground game in Giddings, western Eagle Ford, Karnes area, I really do expect it to continue. Like I said, it's just tough to predict in terms of the timing. The competition, I would tell you it has risen over the last year, the larger the opportunity or maybe deal size or item that you might be looking for, the tougher it is and maybe the more expensive it is. But we've done a good job of better understanding the things that we're looking for in terms of the subsurface and in and around where we currently operate. I'm not and never really have been a big proponent of very large PDP-heavy deals as you're more likely to pay full value for these or even higher. I think part of that is within your question in terms of what you might be seeing in the Permian and the Delaware. I really much prefer to focus on opportunities where we have more undeveloped upside, but you're generally right, the prices for acreage have climbed. I mean, we're not out there looking to build a data center anytime soon. In terms of what you're seeing for what's happening in real estate or land prices. But for all I know, we could be competing with those who are looking to build a data center. I just don't know, but it's certainly reflected in some of the elevated levels of pricing.

You called out the faster cycle times last year in the release. I was also hoping you could talk to well cost reductions and how those might have contributed to the better capital efficiency and lower F&D. And any expectations here as we go into 2026 or what you're seeing on the service cost front?

Yes, sure. Over a year ago, we were observing the standard cost of a Giddings well at around $1,100 per foot, which has since been trending down to approximately $1,000 per foot. Currently, for a standard Giddings well, which measures between 8,000 to 8,500 feet, a reasonable estimate falls between these two figures, likely closer to $1,000 per foot. As for service costs, they remain stable or slightly decreasing this year; however, their future direction may depend on commodity prices. We maintain regular discussions with our service partners since we value their collaboration, especially during these challenging times for the industry. The OFS market is facing ongoing pricing pressures this year, particularly if oil prices are at or below $60. We've arranged to secure some service costs with our key providers for most of the first half of the year and plan to revisit negotiations later in the spring for the latter half of the year. I believe we are in a favorable position, and while we are not looking to exploit the situation, we understand the need to maintain our margins. Thus, while our circumstances are positive, the situation for OFS providers is less advantageous.

Right. Makes sense. And then we've seen really strong equity performance year-to-date for the sector and Magnolia. I mean, helped by geopolitical risk. So how tactical do you plan to be on the buyback? Do you view this as more programmatic as far as deploying it or maintaining dry powder to take advantage of any pull back given that we're likely to continue to see volatility?

Yes. The programmatic aspect of our strategy is the small part that we are minimally committed to in my perspective. It does have a significant impact as it starts to reduce the shares outstanding and benefits from the serial compounding I've mentioned. The tactical part was evident in our fourth quarter, where we didn't perform as expected, and while some factors like mean reversion may have played a role, the business itself didn't fundamentally change. Since we manage this process without broker discretion, we have the flexibility to decide how to proceed. The stock will be volatile, and if we notice discrepancies that I can't explain, we can choose to act or not. If that situation arises again, we will.

Understanding the weather impacts for the first quarter, I wonder if you could just touch on your expectations for the shape of the 2026 production outlook. Is it fair to think that beyond the step back here in 1Q that we should kind of see maybe a steady growth rate through the year? Or is there any other factors that we should keep in mind kind of as we go through 2026?

Yes, more or less. I mean, you can do the arithmetic. I mean, I think we've provided you with enough information where with the winter storm impact in the quarter and sort of adding it back what it might have looked like perhaps without the occurrence of the event. So '26 is off to a good start, and I sort of see things gradually progressing through the year, but it's a little bit heavier capital outlay in the first half of the year, certainly the first quarter. So typically, that's sort of the way the curve works for us just in terms of timing of the spend, 4Q, 1Q is a little heavier, and then it sort of tapers off in the mid part of the year. And then again, rises on the capital as we ended out or finish out the full year. But the goal would be to spend as little as possible and generate better results on growth if we can. And I'm optimistic around the outcome of the wells. But generally, I think you'll see a gradual steady progress through the year on the volumes.

I wanted to ask about the development approach for the year. You talked about 75% of activity on multi-well pads and Giddings, almost identically to your comments a year ago. Can you sort of refresh our memories on sort of leading edge, the pad template? I know there's unique pads for different regions. But are you still sort of in that 3- to 4-well package size? Why not kind of push out laterals more to 10,000 feet or above? Just trying to kind of understand what development looks like as we think about incremental efficiency opportunities.

Yes. The 3 to 4 per pad is still about right. There's no real change there. We do have some 5-well pads. We do have some 2-well pads. But generally, I would tell you, it's probably around 3 to 4 on average. And the lateral lengths will vary. I mean we'll drill, if possible. I mean, we're not trying to drill shorter laterals. We'll drill longer laterals if and when we can. And that's part of the assist that we get with a little bit of the ground game, if we can acquire some adjacent or open acreage that could assist or help us out in that way. There's opportunities to do that. We drilled wells that are 12,000, 13,000 feet. And if we can do it, we will. But on average, it's sort of 8 to 8.5. That's sort of the typical program that I would expect to see this year, not very different.

Okay. That's helpful context. And if I could just circle back to the M&A question. You talked about some more competition on the larger side. I know there's at least 2 large packages right now in the market from public, not really in your Giddings backyard. But do you still feel the better opportunities are on those sort of smaller side? Would there be interested in doing something big, potentially on that transformative side if the pricing was correct in your favor?

Yes. What I mentioned earlier is that we are focused on properties that are heavy on produced developed properties, or PDP, which have been well established and extensively drilled. It's important to avoid acquiring declining assets from others. I am interested in opportunities with untested potential or undrilled acreage, but these are harder to find. I'm not inclined to pay a premium for the PDP-heavy assets. Additionally, we prefer to lean more towards liquid assets on the oil side when possible. While I don't dismiss gas, I would rather prioritize production that leans more towards oil. It's also worth noting that larger deals come with increased risks, so it's essential to manage these opportunities carefully and ensure we have a solid understanding of what we are engaging with below the surface. We need to evaluate older properties that are being divested by public companies carefully to ensure they align with our business model and contribute positively to our overall equity.

I would like to pivot real quick to your D&C cost savings year-on-year. I learned yesterday from your own Tom Fitter that you've been running the same Patterson rig since Magnolia's inception, and I thought that's just the epitome of your industrial approach. So I wonder if you can, in a very succinct manner unpack how much of the D&C cost gains year-on-year have been on as a consequence of that industrial approach to the business versus any kind of service deflation? And perhaps with your additional commentary on how much more you can squeeze via that continued repetition on the drilling side specifically?

Well, it's a very good point in observation. I mean, running these rigs, not just one, but both consistently over a multiyear period has led to a wonderful understanding of the field, the drilling challenges and capabilities that the assets bring to us. And so not just the rig, but the crews that we have and equipment really does provide us with that further understanding and capability and consistency that I think drive some of the efficiencies that we've been seeing. So if you want to call that the industrial approach, that's fine. But it does translate into benefits with time. The crews, the people, the equipment, all of it, we like what we have. We're always looking to continue to utilize those things. But at the same time, be competitive and look elsewhere, but there's advantages to having that consistency for sure.

And great execution and reliable capital allocation. And I'd just like Chris comments that another rig cost won't creep into the picture. But Chris, I just wanted to follow up on just another Giddings thread. How much more confident are you in future outcomes of new wells there, bringing more net acreage into the portfolio with some higher predictability than you were maybe 18 months ago? If you could add any color on your look back of EUR pre-drill and post-drill results for new wells in Giddings. I mean they came out a couple of percent better. Or just any thoughts on that would be helpful.

I'm very confident because of the ongoing appraisal and even where you say maybe adding to that a touch of sprinkle of exploration, if you will, in and around some of our areas. So whether it's that or some of previous bolt-ons or things that we may be working on, there is a very good chance in there will be more opportunity set to work on that will deliver the types of results that we've been accustomed to seeing. So I'm very confident around that.

Just one question for me. And you commented on this a little bit, but you have delivered some pretty significant gains in productivity this year that's allowed you to grow production more than originally planned at lower CapEx. Do you think that higher level of productivity is sustainable going forward? And maybe comment on how much of that productivity uplift is factored into your 2026 guidance.

We have analyzed our drilling plan and the anticipated outcomes are similar to what we expected for this year’s program. There is a reasonable chance that we might exceed our predictions, as we did last year, but there are no guarantees. However, it seems feasible that improvements could happen in certain areas. Our program is balanced, aimed at achieving moderate volume growth while considering various risks. This year's risks appear to be less significant than last year, which turned out well. Therefore, I believe we will see positive results.

Just a quick one for me. Just talked a bit about the improvement in drilling feet per day, completion feet per day and kind of just general overall cycle improvement. I guess just trying to understand, as we look forward, how much is up in that bone is there? Take the recent trend is indicative of what we should expect over the next 12 to 18 months or say it the thought there?

Yes, I can't provide exact estimates or specify how much improvement we can expect in the next 12 to 18 months. However, I do believe there will be gradual improvement. This is partly due to the consistency and understanding of our drilling and completion processes, as well as the experience of both the equipment and the personnel involved. As our understanding increases, we will unlock more efficiencies over time, so I anticipate a gradual improvement.

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