Earnings Call Transcript - MGY Q2 2025

Operator, Operator

Good morning, everyone, and thank you for participating in the Magnolia Oil & Gas Corporation's Second Quarter 2025 Earnings Conference Call. My name is Kim, 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.

Tom Fitter, Moderator

Thank you, Kim, and good morning, everyone. Welcome to Magnolia Oil & Gas' Second 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.

Christopher G. Stavros, CEO

Thanks, Tom, and good morning, everyone. We appreciate you joining us today for a discussion of our second quarter 2025 financial and operating results. I plan to highlight our second quarter results, which defined another strong quarter of consistent execution for Magnolia and one that's delivered an even more capital-efficient program than what we outlined earlier this year. In addition to our strong results, I'll point out some small bolt-on acquisitions that we completed within the last month and emphasize how this continues to benefit both our operational and financial performance, even through periods of product price volatility. Turning to Slide 3 of the investor presentation. Magnolia delivered strong results across all financial and operational metrics during the second quarter. Our total adjusted net income for the quarter was $81 million with adjusted EBITDAX of $223 million. D&C capital was only $95 million during the second quarter, providing a reinvestment rate of just 43%, highlighting our asset quality and the efficiency of our capital program. Pretax operating margins were 34% in the quarter, and our annualized return on capital employed was 18%. Magnolia generated free cash flow of $107 million, and we returned 72% or approximately $78 million of that free cash flow to our shareholders through our growing base dividend and ongoing share repurchase program. The company achieved another record quarterly production rate with total volumes of 98,200 barrels of oil equivalent per day during the quarter, which was above our earlier guidance and the result of continued strong well performance from both earlier wells and some newer completions. This represents year-over-year production growth of 9% with total production at Giddings showing growth of 11%. Second quarter total oil production of 40,000 barrels per day also set a new company record and remained resilient, representing 5% year-over-year growth. As a result of the continued strong well performance throughout our asset base, we have raised our full year 2025 production growth guidance to approximately 10% from the prior range of 7% to 9% growth. Notably, because of the additional operational flexibility and higher growth afforded to us by the better well performance and capital efficiencies, we are continuing with our plan to defer and preserve several well completions into 2026 and maintaining our estimate of 2025 capital spending in the range of $430 million to $470 million. Simply put, our better-than-expected results seen during the first half of the year allow us to spend less capital in 2025 while generating higher-than-expected production and advancing our goal of being the most efficient operator. Our second quarter results are an ideal example of our team's success in executing the strategy, with our recent financial results exhibiting this principle. We were able to use some of the excess cash generated by the business to close on multiple oil and gas property acquisitions from several small private operators during late June and early July, totaling about $40 million. These bolt-on transactions added approximately 18,000 net acres in Giddings, including roughly 500 barrels of oil equivalent per day of production. This acreage is contiguous to our current Giddings position, allowing new leases to increase our working interest in existing leases while adding new royalty acreage. These acquisitions further strengthen Magnolia, not simply by adding a small amount of oil and gas production but, more importantly, by expanding our prospects and the durability of our high-return business. We have regularly deployed this similar approach in Giddings of appraise, acquire, grow, and further exploit since the company's inception. Our pursuit of this strategy has allowed us to increase the extent of our development acreage in Giddings by an additional 20% to 240,000 net acres, which now represents more than 40% of our net acreage position in the area. Strong well productivity, capital efficiencies, and high operating margins are all features that are prevalent in our Giddings asset area. These high-quality attributes, along with our continued focus, capital discipline, and competitive advantages gained throughout our accumulated knowledge in the field, are responsible for much of Magnolia's overall success. A core competency of Magnolia is acquiring bolt-on oil and gas properties that have similar attractive operational and financial characteristics to our existing core assets. We will continue to look for additional opportunities over time to expand our presence and footprint within the field. For Magnolia, the crucial aspect around any acquisition is that it continues to provide us with the ability to execute our proven business model, while maintaining the same successful recipe of balance sheet strength, capital discipline, realizing high pretax operating margins, generating mid-single-digit production growth, and returning a significant portion of our free cash flow to our shareholders through ongoing share repurchases and a safe, sustainable and growing base dividend. Magnolia's operations remain consistent and steady, and we continue to execute a differentiated focus and investable E&P business model that is enduring. Solid well performance continues to drive our overall production higher, while supporting our disciplined capital spend that has been well below our self-imposed 55% reinvestment ceiling. Ongoing capital efficiencies have allowed us to generate consistent free cash flow throughout periods of product price volatility. Our top-tier assets and focused strategy centered on prudent reinvestment, steady production growth, and reliable free cash flow should continue to drive shareholder returns over the long term. I'll now turn the call over to Brian to provide some further details on our second quarter 2025 results and some additional guidance for the third quarter of this year.

Brian Michael Corales, CFO

Thanks, Chris, and good morning, everyone. I'll 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 2025 and the remainder of the year before turning it over for questions. Starting on Slide 6. Magnolia delivered an excellent quarter as we continue to adhere to our differentiated business model. During the second quarter, we generated total and adjusted net income of $81 million or $0.42 per diluted share. Our adjusted EBITDAX for the quarter was $223 million, with total capital associated with drilling completions and associated facilities of $95 million, representing 43% of adjusted EBITDAX. Second quarter production volumes grew 9% year-over-year to 98,200 barrels of oil equivalent per day, while generating free cash flow of $107 million. Looking at the quarterly cash flow waterfall chart on Slide 7. We started the quarter with $248 million of cash. Cash flow from operations before changes in working capital was $214 million, with working capital changes and other small items impacting cash by $16 million. During the quarter, we paid dividends of $29 million and allocated $49 million towards share repurchases. We had $16 million of small bolt-on acquisitions during the quarter, comprised of acreage additions, working interest, and royalties. We incurred $100 million on drilling, completions, and associated facilities as well as leasehold and ended the quarter with $252 million of cash. Looking at Slide 8, 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 77.2 million shares, leading to a reduction in weighted average diluted shares outstanding of 25% net of issuances. Magnolia's weighted average diluted share count declined by approximately 2 million shares sequentially, averaging 192.1 million shares during the second quarter. We currently have 7.4 million shares remaining under our repurchase authorization, which are specifically directed toward repurchasing Class A shares in the open market. Turning to Slide 9. Our dividend has grown substantially over the past few years, including a 15% increase announced earlier this year to $0.15 per share on a quarterly basis. Our next quarterly dividend is payable on September 2 and provides an annualized dividend payout rate of $0.60 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 has maintained a strong balance sheet, which is a key principle of our business model. Our $400 million senior notes do not mature until 2032, including our second quarter ending cash balance of $252 million and our undrawn $450 million revolving credit facility, our total liquidity is approximately $700 million. Our Giddings balance sheet as of June 30 is shown on Slide 10. Turning to Slide 11 and looking at our per unit cash costs and operating income margins. Total revenue per BOE declined approximately 13% year-over-year due to the decline in oil prices and partially offset by an increase in natural gas and NGL prices. Our total adjusted cash operating costs, including G&A, were down 4% to $10.70 per BOE in the second quarter of 2025. LOEs were exceptionally low during the quarter at $4.88 per BOE due to lower workover expenses in the quarter. We expect that to moderate in the back half of the year to approximately $5.25 per BOE. Our operating income margin for the second quarter was $12.07 per BOE, or 34% of our total revenue. Turning to guidance, we are reiterating our 2025 drilling, completion, and facilities capital spending to be in the range of $430 million to $470 million. This includes an estimate of non-operated capital that is about the same as 2024 levels. We are increasing our full year production growth guidance to approximately 10% from a prior range of 7% to 9%. This represents the second quarter in a row of increasing our production guidance for 2025 with a capital budget that is approximately 5% below our initial capital guidance in February. Total production for the third quarter is expected to be approximately 99,000 barrels of oil equivalent a day, with third quarter D&C capital expenditures expected to be approximately $115 million. Oil price differentials are anticipated to be approximately a $3 per barrel discount to Magellan East Houston, and Magnolia remains completely unhedged for all of its oil and natural gas production. We expect our effective tax rate to be approximately 21%, and with the passing of new legislation during the third quarter, we expect minimal cash taxes for the full year 2025 and assuming a similar price environment, should expect minimal cash taxes in 2026. The fully diluted share count for the third quarter of 2025 is expected to be approximately 191 million shares, which is 4% lower than the third quarter 2024 levels. We are now ready to take your questions.

Carlos Andres E. Escalante, Analyst

First of all, I'd like to ask about where you see free cash flow trending. And let me frame the question real quick. So we like to think that the value of an MP is relatively simple; it's free cash flow times duration. Given the strides you've taken in the first half of the year by raising production guidance and lowering your capital retention intensity, you have evidently grown both. So, I know it's perhaps too early to talk 2026, but it seems like given recent well performance and growth in the low single digits, it's probably inevitable, but further capital efficiency improvement is also present.

Christopher G. Stavros, CEO

Carlos, yes, it seems reasonable. I don't know how much I want to get into '26 just yet. It's a little early, but it's all trending in the right direction. I've said this a number of times on other calls. So recall, we find ourselves in a position where we're in an older field in Giddings. It's been operating for decades with an enormous amount of oil and gas in place that had not been developed with modern technology and completion practices. So when we started out from the beginning, we viewed it as if we were able to crack the code subsurface-wise, there was a lot of upside potential in the field. And this is exactly what we've experienced during the last several years. As a result of this, further capital efficiencies are creeping into our development program over time. And as I mentioned in my remarks, our more gradual and tactical way of approaching this has been to appraise, acquire, grow, and further exploit. So as we further expand the Giddings footprint, which I'm confident that we will, simply by the nature of moving into newer areas, you should likely pick up further efficiencies. I do see this, over time, trending better for us. It's an old field that will just continue to give and get better. The goal for us should be to drill the best wells with the least amount of capital as possible in order to generate the highest amount of free cash flow.

Carlos Andres E. Escalante, Analyst

Yes, most definitely. Thank you for that context. I'll keep it on the same line of conversation from my follow-up, but perhaps focus more on product mix. There is clearly a ton of variability across your Giddings position given how the Austin Chalk is laid out. The question we often get is, if your incremental molecule is getting gas here, now you turned in line some very good wells that had a lot of liquids but also a lot of gas earlier this year. So could you possibly frame your capital allocation within your Giddings plan year in and year out?

Christopher G. Stavros, CEO

It's interesting; we get the question too, and I understand maybe a little bit of the confusion. But at the end of the day, broadly Giddings, whether it's areas that are a little bit oilier or certainly areas that are gassy, the gassier wells in Giddings do come with a lot of liquids and often quite a bit of oil. To say that we're focusing on one particular area in Giddings wouldn't be accurate. Our goal is to drill good wells, and part of this is to learn more about it because we're at the relatively early stages of it. Typically, on a broad basis, well performance is quite strong.

Peyton Rogers Dorne, Analyst

This is Peyton from UBS. Quick question on Brian's side. I think I might have missed it in the prepared remarks, but you mentioned minimal cash taxes as a result of the new budget bill. Could you clarify that and any impact on taxes or forecast for '26 and beyond that we should be thinking about?

Christopher G. Stavros, CEO

Yes. The taxes for this year are minimal or negligible for '25. For '26, as Brian said in his remarks, probably not all that different at current product prices. So if that gives you insight, I think the range we provided prior to the bill was around 6%, 7%, 8%, 9%. This is quite different from that, and significantly lower, negligible.

Peyton Rogers Dorne, Analyst

Certainly good to see extra free cash flow. On the operating cost side, it was a nice trend down for the LOE. I know you attributed some of that to lower workover, but is there any more potential for declining costs on the operating side in the back half of the year?

Christopher G. Stavros, CEO

Sure. We definitely benefited from a lighter quarter of workover activity and some lower service facility expenses during the period. Having said that, we embarked on an effort to address field-level operating costs more than a year ago, and we've definitely experienced some broad improvements throughout our field operations. I think we have, and we'll continue to see some of those improvements trickle into our field operating expenses. However, we expect to normalize more towards $5 to $5.25 per BOE.

Benjamin Zachary Parham, Analyst

First, could you ask about oil production and the trajectory from here? You all hit 40,000 barrels a day in Q2, which you previously stated was the goal for Q4 this year. Do you expect continued growth in oil production in the second half of the year and into 2026?

Christopher G. Stavros, CEO

Yes. I think as I look at the program going forward, both total volumes and oil production should see continued growth similar to slightly higher than what we saw in the second quarter. I would tell you probably, and that would include the small amount of production volumes that we gained from those bolt-on acquisitions. So we're anticipating about 99,000 a day for the third quarter.

Benjamin Zachary Parham, Analyst

As you go into '26, would you expect to grow oil at a similar rate or should that grow a little slower?

Christopher G. Stavros, CEO

I don't have specifics for '26 in terms of total volumes, but typically with Giddings having more focus and capital, the business is likely to grow more so there than in other areas. So, I would expect mid-single-digit growth overall, but that may be a bit lower for oil specifically. I think there's ongoing smaller opportunities, and these tend to come from individuals or families; that's not different from what we've experienced recently. Larger assets involve other complexities and generally greater levels of complexity. There's still potential for smaller acquisitions and bolt-ons, though.

Hsu-Lei Huang, Analyst

First, just good to see success in the appraisal program, which drives the confidence to increase your growth views on core Giddings development acreage. What are the criteria or return threshold you all typically look for when shifting acreage into that bucket?

Christopher G. Stavros, CEO

If you back out any value for the production that we receive, the remainder of that represents a very reasonable amount to pay for the entry point or tuck-in of the additional acreage that is in our core area for the most part. The emphasis is on the upside potential and the cost of the entry point, which is quite low. We've done that throughout the development period. We've looked at downspacing and adding more wells per pad in order to optimize development. Over time, we'll continue to maximize and optimize the capital as we develop further, learning as we proceed.

Unidentified Analyst, Analyst

Specifically, how many appraisal wells have you drilled? How does that compare to the past few quarters?

Christopher G. Stavros, CEO

On an ongoing basis, our appraisal program typically represents about 10% of what we do overall. We're always looking to pull in opportunities to better understand the area. This could potentially lead to more bolt-ons in the future.

Noah B. Hungness, Analyst

How many completions are being deferred into '26? Has that number changed from what you talked about last quarter? How are you thinking about using that spare capacity?

Christopher G. Stavros, CEO

Currently, we have about half a dozen completions that will be deferred into next year. I don't see the need to pull any of that forward; we expect growth at a steady 10%.

Timothy A. Rezvan, Analyst

Regarding the strong well results you turned to sales in the fourth quarter of 2024, did you expect that production profile? Was that a tactical decision? What insights can you provide about your nimbleness with drilling, especially looking at the natural gas market?

Christopher G. Stavros, CEO

It was indeed a tactical decision to pivot a little more towards a gassier area, which did work out nicely. The wells were very high pressure with good returns. As a result, we're seeing good productivity, which we plan to revisit next year. So while we generally manage growth at mid-single digits, Giddings has often exceeded what we expected. We'll continue to do our best to maximize returns while focusing on capital efficiency.

Operator, Operator

This concludes our question-and-answer session and concludes the Magnolia Oil and Gas Corporation Conference Call. Thank you for attending. You may now disconnect.