Magnolia Oil & Gas Corporation (NYSE:MGY) Q1 2024 Earnings Call Transcript May 8, 2024
Magnolia Oil & Gas Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, everyone, and thank you for participating in Magnolia Oil & Gas Corporation’s First 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.
Tom Fitter: Thank you, Megan, and good morning, everyone. Welcome to Magnolia Oil & Gas’ first 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 first-quarter 2024 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.
Chris Stavros: Thank you, Tom, and good morning, everyone. We appreciate you joining us today for a discussion of our first quarter 2024 financial and operating results. I will provide some comments on our first quarter, noting the progress of our development plan so far this year, discuss an important bolt-on acquisition that we recently completed and highlight some actions we’re taking at the field level to reduce our cash operating costs. Brian will then review our first quarter financial results in greater detail and provide some additional guidance before we take your questions. Starting on Slide 3 of the investor presentation. Magnolia delivered a strong first quarter with total adjusted net income of $101 million. In keeping with our consistent business model, we continued our capital-efficient D&C program by spending $119 million or 52% of adjusted EBITDAX, while generating $117 million of free-cash flow.
As part of our goal to return significant portion of our free cash flow to our shareholders, we returned 68% of our free cash through our ongoing share repurchase program and our recently increased dividend payment. Total Company production was toward the top-end of our guidance at 84,800 barrels of oil equivalent per day, representing year-over-year production growth of 7%. Production at Giddings was 61,400 BOE per day, providing overall growth of 17% compared to last year’s first quarter, including oil production growth of 16%. Total company oil production during the quarter was ahead of expectations coming in at 37,500 barrels of oil per day, benefiting from strong well performance, activity in Karnes and solid performance from the assets we acquired late last year.
We had planned for this year’s program to be a little oilier than last year and our first quarter production provides some early evidence of that plan. Last week, we closed on a very meaningful bolt-on acquisition of oil and gas properties in the heart of our Giddings acreage. These assets were acquired from a private operator for $125 billion, have similar attractive operational financial characteristics to our core acreage position at Giddings. As I’ve often mentioned, the key part of our strategy is to use some of the excess cash generated by the business to seek out attractive bolt-on acquisition opportunities with the goal of making Magnolia better, not by simply replacing the oil and gas that is produced, but to improve the future opportunity set of our overall business and enhance the capability and sustainability of our high returns.
This latest bolt-on acquisition adds new high-quality acreage that is contiguous to our existing core footprint in Giddings, while also increasing our working interest in some of our current acreage. The transaction leverages the significant knowledge we have gained through operating in this field and extends our deep inventory of high-return development opportunities in Giddings from both new locations and incremental working interests. As shown on Slide 4, the majority of the properties are located in the core of Giddings with acreage in Washington, Lee and Fayette Counties, representing an additional 27,000 net acres spanning over 80,000 total gross acres. The properties include a relatively small amount of base production of approximately 1,000 BOE per day and about 35% oil with Magnolia operating most of the volumes.
This is an ideal acquisition for Magnolia, which significantly enhances our position in Giddings and strengthens the Company moving forward. Magnolia continues to operate two drilling rigs and one completion group with the majority of this year’s activity planned in Giddings. Our full-year 2024 guidance for D&C spending remains unchanged and is expected to be in the range of $450 million to $480 million. Following on last year’s success in reducing our well cost by nearly 20%, our drilling and completions have gotten off to a strong start in 2024 and we continue to drive further operating efficiencies. While this year’s program includes drilling somewhat longer laterals, we have realized considerable recent improvement in reducing our drilling days per well.
Lower well costs combined with improved operating efficiencies allow for more wells to be drilled, completed and turned-in line during 2024, helping to support Magnolia’s overall high margin growth. As I mentioned earlier, we expect this year’s development program to be oilier than last year and our strong first-quarter oil volumes support the plan. We anticipate that this year’s oil production should remain resilient as a portion of our activity will focus on some of the oilier assets acquired last year. Some of our drilling activity leaned away from natural gas early in the year due to very weak prices, and we expect that our natural gas production should reassert its growth as the year progresses with the view that gas prices would see some recovery later in the year.
Lastly, our operations and supply-chain teams have initiated a field-level optimization and cost-reduction program throughout our assets. Part of these efforts will employ improved field management systems that will increase efficiencies and optimize processes across the field and targeting such areas such as contract labor utilization, surface repair and maintenance and procurement, just to name a few, while capturing synergies from the acquired assets. These and other initiatives to lower our cash costs are expected to deliver a 5% to 10% reduction in our cash LOE per BOE during the second half of the year compared to the first quarter. As Magnolia has grown and learned while operating our assets over the past six years, we believe this is an appropriate time in our evolution to embark on this program.
Our goal is to improve on our track record for generating high operating margins, while providing additional free cash flow to either return to our shareholders or efficiently reinvest in the business and these actions should help us achieve these objectives. I’ll now turn the call over to Brian to provide more details on our first quarter financial and operating results.
Brian Corales: Thanks, Chris, and good morning, everyone. I will review some items from our first quarter results and refer to the presentation slides found on our website. I’ll also provide some additional guidance for the second quarter of 2024 and the remainder of the year before turning it over for questions. Beginning on Slide 5, and as Chris discussed, Magnolia had a solid first-quarter across the board. During the quarter, we generated total GAAP net income attributable to Class A Common Stock of $85 million with total adjusted net income of $101 million or $0.49 per diluted share. Our adjusted EBITDAX for the quarter was $228 million with total capital associated with drilling, completions and associated facilities of $119 million or 52% of our adjusted EBITDAX and almost 10% below our guidance.
First-quarter total production volumes grew 7% year-over-year to 84,800 barrels of oil equivalent per day and our diluted share count fell by 5% year-over-year to $204.3 million shares. Looking at the quarterly cash flow waterfall chart on Slide 6, we started the year with $401 million of cash. Cash flow from operations before changes in working capital for the first quarter was $218 million, with working capital changes and other small items increasing cash by $6 million. We spent $27 million on bolt-on acquisitions, primarily in Giddings, paid dividends of $27 million and allocated $51 million toward share repurchases. Total capital was $121 million and we ended the quarter with $399 million of cash and relatively flat from year-end 2023 levels.
Looking at Slide 7, this chart illustrates the progress in reducing our total outstanding shares since we begun our share repurchase program in the second half of ’19. Since that time, we have repurchased 64.3 million shares, leading to a change in diluted shares outstanding of over 20% net of issuances and supports our goal of improving our per share metrics. Magnolia’s weighted average fully diluted share count declined by more than 2 million shares sequentially, averaging 204.3 million shares during the first quarter. We have 6.9 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 8, 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 June 3 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 payout capacity of the Company. Magnolia benefits from a very strong balance sheet and we ended the quarter with approximately zero net debt and $399 million of cash. Our $400 million of principal debt is reflected in our senior notes, which do not mature until 2026. Including our first quarter ending cash balance of $399 million and our undrawn $450 million revolving credit facility, our total liquidity is approximately $850 million.
Our condensed balance sheet as of March 31 is shown on Slide 9. Turning to Slide 10 and looking at our per unit cash cost and operating income margins. Total revenue per BOE declined year-over-year due to decrease in natural gas and NGL prices when compared to the first quarter of ’23. Our total adjusted cash operating costs, including G&A were $11.86 per BOE in the first quarter of ’24, a decrease of $0.79 per BOE or 6% compared to year-ago levels. The year-over-year decrease was primarily due to lower production taxes in GT&P. Our operating income margin for the first quarter was $16.15 per BOE or 39% of our total revenue. The year-over-year decrease in our pre-tax operating margin was driven by the decrease in commodity prices and higher DD&A rate.
Turning to guidance, we are reiterating our expected 2024 D&C capital spending to be in the range of $450 million to $480 million, which includes an estimate of non-operating capital that is about the same as 2023 levels. Total production and oil production are still expected to grow high-single-digits on an annual basis. For the second quarter, our D&C and associated facilities capital expenditures are expected to be approximately $120 million to $125 million with total production for the second quarter estimated to be approximately 89 million-barrel — sorry, 89,000 barrels equivalent a day. Oil production — 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.
The fully diluted share count for the second quarter of 2024 is expected to be approximately 203 million shares, which is 4% lower than second quarter 2023 levels. We expect our effective tax rate to be approximately 21% and with increased oil prices, our cash tax rate is expected to be approximately 9% to 10% for 2024. We are now ready to take your questions.
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