Magnolia Oil & Gas Corporation (NYSE:MGY) Q4 2023 Earnings Call Transcript

Magnolia Oil & Gas Corporation (NYSE:MGY) Q4 2023 Earnings Call Transcript February 15, 2024

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Operator: Good morning, everyone, and thank you for participating in Magnolia Oil & Gas Corporation’s Fourth Quarter 2023 Earnings Conference Call. My name is Andrea 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. Please go ahead.

Tom Fitter: Thank you, Andrea, and good morning, everyone. Welcome to Magnolia Oil & Gas’s fourth quarter earnings conference call. Participating on the call today are Chris Stavros, Magnolia’s 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 2023 earnings press release as well as the conference call slides from the investor section of the company’s website at www.magnoliaoilgas.com. I will now turn the call over to Mr. Chris Stavros.

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 2023 financial and operating results. I plan to briefly speak to our results which closed out a strong year for Magnolia and during which we took several actions to improve our overall business. I will also discuss our business model and our core principles in the context of some of last year’s accomplishments, and note how Magnolia stacks up compared to many other EMP companies on several key financial metrics. Lastly, I will provide an update on Magnolia’s 2024 capital and operating plan, which follows the same principles on which the company was founded nearly six years ago. Brian will then review our fourth quarter and full year financial results in greater detail, along with some additional first quarter guidance before we take your questions.

Starting on Slide 3 of the Investor Presentation and looking at some of the highlights. Magnolia ended 2023 on a high note with fourth quarter production volumes of 85,400 barrels of oil equivalent per day, bringing full year 2023 production to 82,300 BOE per day. This represented year-over-year production growth of 16% for the fourth quarter and full year 2023 volume growth of more than 9%. Production at our Giddings asset grew 55% compared to the prior year fourth quarter, reaching 63,000 BOE per day, which included oil production growth of 59%. Giddings production represented approximately 71% of overall Magnolia volumes last year and the Giddings area continues to see operating efficiency improvements in the field, such as fewer drilling days per well and realizing significant gains in stimulation stages per day.

D&C Capital totaled $91 million for the quarter and $422 million for the year, representing 47% of adjusted EBITDAX for the year and leading to free cash flow generation of $413 million, or roughly 10% of our current enterprise value. We returned 74% of this free cash flow to shareholders through our dividend and share repurchase programs, with the remaining allocated to our balance sheet, which helps support attractive bolt-on oil and gas property acquisitions geared toward improving the overall business. Turning to Slide 4, Magnolia’s business model remains unique since it was devised in 2018 with the objective to create a highly investable, attractive EMP business that is enduring and focused on generating absolute per share value over the long term.

As we have often expressed, Magnolia’s primary objectives are to be the most efficient operator of best-in-class oil and gas assets, generating the highest returns on those assets while employing the least amount of capital for drilling and completing wells. Our high quality asset base allows for a low reinvestment rate while still providing moderate growth for the business over time. This results in significant free cash flow generation and we strive to return a significant portion of this to our shareholders in the form of share repurchases and a safe, sustainable, and growing dividend. Some of the excess cash may accrue the balance sheet, helping us to opportunistically pursue bolt-on, attractive bolt-on oil and gas property acquisitions that improve the business, which help to sustain our returns and enhance the dividend per share payout capacity.

We continue to adhere to our core principles and believe this is a sound formula for creating long-term shareholder or value for our shareholders. I’d like to spend a moment reviewing how this model has helped us achieve our goals over the past several years and as our operating program has shifted more to our Giddings asset. Slide 5 shows that Magnolia has had one of the lowest capital reinvestment rates compared to most other EMP companies while achieving a superior compound annual rate of growth in terms of production per share over the past three years. This is a powerful combination allowing us to maximize our free cash flow generation. Turning to Slide 6, our corporate level returns or return on capital employed continue to be some of the best in the upstream energy sector, highlighting our strategy of disciplined capital spending, including last year’s success in reducing our well costs and the beneficial impact of our ongoing share repurchases.

Our cost reduction efforts in 2023 helped further support these returns as we were able to meaningfully grow our production per share with capital that was 17% less than what we had expected at the beginning of the year and 8% below full year 2022 levels. Two key elements of our business model are maintaining our low leverage and generating high operating margins. Slides 7 and 8 demonstrate that Magnolia is best-in-class when coupling one of the lowest leverage profiles in the industry with some of the highest operating margins. This is compared to EMP companies of similar size to Magnolia as well as much larger companies and is a testament to our underlying asset quality and the characteristics of our overall strategy and philosophy. Turning to our 2024 guidance shown on Slide 9.

We expect this year’s plan to deliver similarly strong results at current product prices. Magnolia’s capital and operating plan is expected to deliver high single-digit percentage growth this year, or approximately 7% to 9% on both on an oil and on a BOE basis with a capital budget estimated in the range of $450 million to $480 million. This would result in a spending level below 55% of our EBITDAX for 2024 assuming current strip pricing for products. Total production for the first quarter is estimated to be approximately 84,000 BOE to 85,000 BOE per day, which includes production of facilities downtime caused by severe winter weather conditions during a portion of mid-January. Despite the transitory weather impact last month, our production is fully recovered and it is running normally and we are confident in our full year plan and guidance of high single-digit production growth for the year.

We expect first quarter D&C capital expenditures to be approximately $130 million and anticipate this to be the highest quarterly rate of spending for the year. Most of the full year 2024 production growth is expected to come from our development program in our Giddings area and is the main driver and will receive approximately 80% of our overall capital and include some activity on our recently acquired assets. We plan to operate two drilling rigs and one completion crew during 2024 and expect to maintain this level of activity throughout the year. While this activity level is similar to last year’s operating plan, lower well costs combined with improved operating efficiencies allow for more net wells to be drilled, completed, and turned in line helping to support Magnolia’s overall high margin growth.

Most of the development activity will consist of multi-well development pads in Giddings with a smaller amount of development planned in the Karnes area, in addition to some appraisal wells. For this year’s development activity in Giddings, we currently expect to drill multi-well pads with somewhat longer lateral lengths of approximately 8,500 feet. We continue to run a focused business and in an industry where operational execution and financial discipline are essential. The actions we took last year to reduce our well costs helped to significantly reduce our capital, improve our operating margins, and generate additional free cash flow. Together with the acquisitions completed last year, these accomplishments have strengthened our position into 2024 and we expect high single-digit growth, high margin, and high margin total company production growth with our oil volumes growing at similar rates.

We have a strong five-year history of demonstrated operating and financial results and expect our business model to enhance per share value over time. I’ll now turn the call over to Brian to provide more details on our fourth quarter 2023 financial and operating results.

Brian Corales: Thanks, Chris, and good morning, everyone. I’ll review some items from our fourth quarter and full year results and refer to the presentation found on our website. I’ll also provide some additional guidance for the first quarter of 2024 and the remainder of the year before turning it over for questions. Magnolia closed out 2023 on a high note as we continue to execute on our business model. During the fourth quarter, we generated a total net income attributable to Class A common stock of $98 million with total adjusted net income of $108 million or $0.52 per diluted share. Our adjusted EBITDAX for the quarter was $240 million with total capital associated with drilling, completions and associated facilities of $91 million or just 38% of our adjusted EBITDAX and below our guidance.

For the full year, adjusted EBITDAX was $899 million with D&C capital representing 47% of EBITDAX. Fourth quarter production volumes grew 16% year-over-year to 85,400 barrels of oil equivalent per day. For the full year, production volumes grew 9% to 82,300 barrels of oil equivalent per day. During the year, we repurchased a total of 9.6 million shares and our diluted share count fell by 5% year-over-year. Looking at the annual cash flow waterfall chart on Slide 11. We started the year with $675 million of cash. Cash flow from operations before changes in working capital was $872 million, with working capital changes and other small items impacting cash by $59 million. During the year, we paid dividends of $102 million and allocated $205 million towards share repurchases.

We added $355 million of bolt-on acquisitions, primarily in Giddings, and spent $425 million on D&C and facilities capital, and we ended the year with $401 million of cash. Looking at Slide 12, this chart illustrates the progress in reducing our total shares since we began our repurchase program in the second half of 2019. Since that time, we have repurchased 61.9 million shares leading to a change in diluted shares outstanding of over 20% net of issuances. This is one of the largest decreases in the upstream energy space, with the majority of the companies increasing their diluted shares outstanding over the past five years. Magnolia’s weighted average fully diluted share count declined by more than 2 million shares sequentially, averaging 206.5 million shares during the fourth quarter.

We have 9.2 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 13, our dividend has grown substantially over the past few years, including a 13% increase announced earlier this year to $0.13 per share on a quarterly basis. Our next quarterly dividend is payable on March 1 and provides an annualized dividend payout rate of $0.52 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 per share payout capacity of the company.

Magnolia has the benefit of a very strong balance sheet and we ended the quarter with zero net debt and $401 million of cash on the balance sheet. Our $400 million of principal debt is reflected in our senior notes which do not mature until 2026. Including our fourth quarter ending cash balance of $401 million and our undrawn $450 million revolving credit facility, our total liquidity is approximately $850 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 due to the substantial decrease in product prices and especially natural gas prices when compared to fourth quarter of 2022. Our total adjusted cash and operating costs including G&A were $10.55 per BOE in the fourth quarter of 2023, a decrease of $1.60 per BOE, or 13% compared to year-ago levels.

The year-over-year decrease was primarily due to lower production taxes in GP&T. Our operating income margin for the fourth quarter was $17.56 per BOE or 43% of our total revenue. The year-over-year decrease in pre-tax operating margins was driven by the significant decrease in commodity prices. On Slide 16, Magnolia had a very successful organic drilling program during last year. The total proved developed reserves at year-end 2023 were 135 million barrels of oil equivalent. Excluding acquisitions, sales, and price-related revisions, the company added 44 million barrels of oil equivalent of proved developed reserves during the year. Total drilling completion capital was $422 million in 2023, resulting in organic proved developed F&D costs of $9.60 per BOE and reflective of our drilling program.

Our organic proved developed F&D costs declined by approximately 40% compared to last year as a result of our well cost reduction efforts and strong well results. Turning to guidance. We expect our 2024 D&C capital spending to be in the range of $450 million to $480 million, which includes an estimate of non-operated capital that is about the same as 2023 levels. We expect first-quarter D&C capital expenditures to be approximately $130 million and expect this to be the highest quarterly rate of spending for the year. Total production for the first quarter is estimated to be approximately 84,000 to 85,000 barrels of oil equivalent per day, which incorporates the impact of production and facilities downtime caused by severe winter weather conditions in January.

Despite this impact, our production has fully recovered and we are maintaining our guidance for high single-digit production growth in 2024. Most of this growth is expected to come from our development program in our Giddings area. Oil price differentials are anticipated to be approximately a $3 per barrel discount to Magellan East Houston or MEH and Magnolia remains completely unhedged for all of its oil and natural gas production. The fully diluted share count for the first quarter of 2024 is expected to be approximately 205 million shares, which is 4% lower than first quarter 2023 levels. We expect our effective tax rate to be approximately 21% with most of this being deferred. Our cash tax rate is expected to be between 6% and 9% for 2024.

We are now ready to take your questions.

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Q&A Session

Operator: We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Neal Dingmann of Truist. Please go ahead.

Neal Dingmann: Good morning, Chris and team. And guys, another nice print and guide. My first question is on Giddings, specifically. Can you all talk about the recent Giddings acquisitions and how these assets are looking, definitely realizing its early days? And then maybe, Chris, anything we should be thinking about on the development plan specifically there?

Chris Stavros: Yeah, thanks. Good morning. Giddings is one of those fields, old fields, that it sort of just keeps getting better. And my level of confidence now versus, say, five, six years ago is quite a bit better. And a lot of that is born out of the results, obviously, and certainly what we’ve learned and what we’ve been able to do with the field. So the subsurface, and as I said, it’s one of those fields that where you — it’s gone through different phases of its life over the last several decades, and we happened to get involved really prior to it going through this latest phase in utilizing modern frac techniques and design. So where this is headed is we’ve got a sizable position, more than half a million acres, and we’ve done some recent acquisitions, and I think that’s improved our position and will help us learn some more.

There’s some gassier areas of Giddings, there’s some oilier areas of Giddings, but I think the proof is in the pudding in terms of the results having been borne out. When we picked it up with the original acquisition, the field and the asset was producing maybe 10,000 a day, equivalent or so. As I said, it’s producing more than 60,000 a day now, and that will continue to grow. And this is really what the returns — the quality returns that we’ve seen in the business are really, in many cases, a function of the outcome of Giddings. So where does it go? Frankly, I think there’s more for us to go after here and there. I mean, some of them will be a little bit smaller, some things might be a little bit larger, like in similar terms so what we did or size what we did back in the fourth quarter of last year.

We’ll just have to see. I can’t tell you that we’ll go after everything or anything and everything, but we’ll go after some things and we’re starting to integrate the assets that we recently acquired. Early days look good. This particular asset happens to be a bit oilier. The wells that we plan to drill are shallower, several thousand feet shallower, as I said, a little bit oilier with the economics broadly quite similar to Giddings as a whole overall. So I remain real optimistic about our prospects going forward for the fields and what it’s going to mean to Magnolia going forward.

Neal Dingmann: Yeah, definitely love the footprint there. And maybe following up a little bit with Giddings. Noticeable as you pointed out the operating margins are certainly notable. And I’m just wondering when you look at the expanded Giddings results, I mean is that potentially, will that even lead to, do you think, even lower reinvestment rates? Because certainly notable how good your reinvestment rate and as you highlighted the operating margin. And I’m just wondering baked on maybe a higher Giddings plan, could we see even potential increases in this?

Chris Stavros: Yes, that’s a tough one. I think the results are pretty good over three-year, five-year type period. And if you want to say it’s almost through a cycle, if you will. I don’t think it’s going to be meaningfully different. I mean, there might be some things around the edges as we learn more, but I think the outcome, if I had to look out, I think the outcome is not going to be meaningfully different, which I will take that sort of any day of the week.

Neal Dingmann: Absolutely. Thank you, all. Nice quarter.

Operator: The next question comes from Leo Mariani of MKM Partners. Please go ahead.

Leo Mariani: Hi, guys. I was hoping you could provide maybe a little bit more color on the increased activity in 2024. I think in the press release you guys alluded to the fact that be some more wells this year. Is there any way to quantify that? Is it kind of five or six wells and just kind of any detail around any of the splits here? Is it primarily more of a development drilling program? You did mention there would be some appraisals. Is it a fairly similar appraisal split versus last year? And I guess there’s going to be some drilling on the newly acquired acquisition from the fourth quarter. Do you also consider that kind of appraisal drilling, and is it just a handful of wells? Any color around on the kind of complexion of the program this year versus last would be helpful.

Chris Stavros: Yeah, thanks, Leo. I think you repeated some of what I’ve said and answered your own question in some ways. But anyway, yeah, so we’ll probably drill maybe a little more than a half dozen additional wells this year versus last year net wells. Most of that is or part of it anyway is some of the new assets that will be brought or integrated into the plan. Some is just the ongoing development in Giddings. And keep in mind that the average lateral length is a little longer in this year’s program compared to last year. I would tell you also that the working interest in the wells is also a little bit higher. As far as appraisal goes, no, I wouldn’t consider the drilling on the new assets as appraisal in Giddings. But there may be, depending on product prices, there may be some appraisal drilling in Giddings, just to sort of see if we can learn a little bit more around other areas.

So we’ll see how that goes. And so that’s, by and large, some of the color, I would tell you. The Karnes program will be fairly similar to what it had been, not really very different generally.