Magnolia Oil & Gas Corporation (MGY) Earnings Call Transcript & Summary

Good morning, everyone, and thank you for participating in Magnolia Oil & Gas Corporation's Second Quarter 2026 Earnings Conference Call. My name is Megan, and I will be your moderator for today's call. [Operator Instructions] The 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' 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. 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 second quarter 2026 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.

Thanks, Tom, and good morning, everyone. Thank you all for joining us today for a discussion of our second quarter 2026 financial and operating results. I know that today is a very busy day of earnings. I will briefly cover our second quarter results, which continue to validate the consistent high-quality nature of our Giddings asset and provide strong overall financial results, returns together with our Karnes area business. I'll then highlight a few items related to the financing underlying our recent agreement to acquire WildFire Energy. Brian will then review our financial results for the second quarter in greater detail and provide some additional guidance before we take your questions. Beginning on Slide 3 in our quarterly investor presentation, Magnolia marked its 8-year anniversary by delivering another quarter of strong and consistent execution as seen through our financial and operating metrics, which continue to underscore the strength of our differentiated business model and the quality of our asset base. Our strong second quarter financial metrics were supported by both solid production growth and higher year-over-year oil and NGL prices. Our second quarter adjusted net income was approximately $184 million or $0.99 per diluted share with adjusted EBITDAX of $370 million during the period. Drilling and completion capital for the second quarter was $125 million with a reinvestment rate of just 34% of our adjusted EBITDAX and our lowest quarterly rate of capital reinvestment since 2022. Our pretax adjusted operating income margins averaged a very robust 51% for the quarter. Magnolia generated $235 million of free cash flow in the second quarter and returned $80 million of this free cash to our shareholders through a combination of our base dividend and our share repurchase program where we bought back just over 1.7 million shares during the quarter. Our ongoing discipline around capital allocation, strong operational performance and continued focus on our financial returns allow us to generate meaningful free cash flow and to continue to execute on our proven business model. For the second quarter of 2026, total company production volumes grew by 8% year-over-year to 106,100 barrels of oil equivalent per day, above our expectations and earlier guidance with oil production growing by 5% and averaging 41,900 barrels per day. Both total production and oil production volumes established new quarterly records for the company. Based on the strong second quarter production, we are raising Magnolia's stand-alone full year 2026 production growth guidance to 6% from 5%. Production at Giddings continues to be the primary growth driver for Magnolia and setting a new quarterly record with total Giddings production increasing 10% year-over-year to 85,500 barrels of oil equivalent per day and oil production of 29,000 barrels per day with growth of 7% over the same period. Giddings production accounts for approximately 81% of Magnolia's total company volumes. Production in our Karnes area was relatively flat year-over-year at just over 20,000 barrels of oil equivalent per day during the second quarter and which we expect to sustain for many years. The Karnes area assets continue to generate a significant amount of free cash flow for Magnolia. Turning to Slide 4. As we announced last month, we entered into a definitive agreement to acquire WildFire Energy for a total consideration of approximately $4.06 billion. The acquisition will add approximately 810,000 net acres to Magnolia's Giddings area position and total oil and gas production of roughly 53,000 barrels of oil equivalent per day, including 37,000 barrels per day of oil. The acquisition of the WildFire oil and gas properties and acreage is a natural and strategic fit for Magnolia and greatly improves our business by extending our runway of advantaged profitability and the durability of our significant free cash flow generation. This fit should be clear given the sizable overlap and with roughly 70% of Magnolia's existing acreage benefiting from the transaction with significantly more acreage benefiting from adjacency. Our combined position in the Giddings field will amount to more than 1.25 million net acres with upside development opportunities across multiple benches, including the Austin Chalk, Eagle Ford and Woodbine. The acquisition is a culmination of our extensive subsurface understanding, experience and the demonstration of our proven resource capture in the Giddings field. This creates a premier upstream operation in South Texas by combining 2 high-quality and complementary assets near Gulf Coast markets, which offer premium pricing for our products. We expect the transaction to be immediately and highly accretive to our key per share financial metrics, including cash flow, free cash flow and earnings in addition to enhancing our D&C capital reinvestment rate. WildFire is not only a strong fit for Magnolia, offering unique benefits, but it also provides several important characteristics we look for, namely focused high-quality assets with concentrated scale, a low capital reinvestment rate, the ability to provide moderate production growth with high operating margins and steady free cash flow, allowing for consistent and significant shareholder returns. Following the WildFire announcement, Magnolia executed multiple capital markets transactions to partially fund the acquisition. Magnolia issued 53.3 million new shares in a public equity offering for net proceeds of $1.23 billion, in addition to $500 million of senior notes at a 6.625% coupon due in 2034. These 2 transactions closed on July 22 and August 5, respectively. In total, the WildFire acquisition will be funded with a balanced mix of approximately half equity and half debt with the acquisition on track and expected to close late in the third quarter. Turning to Slide 5. One of the most important elements of the WildFire acquisition is that Magnolia's differentiated, proven and highly investable business model remains unchanged. While the acquisition adds more leverage than we have carried historically, we believe this is very manageable. Given the significant increase in our free cash flow generation, we have a clear line of sight towards the reduction of debt, which we expect to be less than 1x our net debt to EBITDA by year-end 2027, if not sooner, and returning us to our traditionally more conservative leverage profile. As part of our disciplined capital plan, we will continue to limit our D&C spending to 55% of adjusted EBITDAX, which provides consistent free cash flow through the cycle while delivering both moderate annual total production growth and oil growth. With our combined oil production mix of approximately 50%, we expect to generate high pretax operating margins and in keeping with our business model, continue to return a significant portion of our free cash flow to our shareholders. This includes a safe, sustainable and growing dividend, which is expected to compound at a rate of about 10% over the long term in addition to our ongoing share repurchases of at least 1% of the outstanding shares per quarter. I often mention that one of Magnolia's primary goals is to be the most efficient operator of our best-in-class oil and gas assets to generate the highest returns on those assets while spending the least amount of capital on drilling and completing wells. The combination of Magnolia and WildFire creates a larger and stronger enterprise with a concentrated acreage position that offers moderate growth, best-in-class financial returns while generating significant free cash flow. Magnolia will continue to look and behave like it has historically with an emphasis on managing both operational and financial risk and using the same differentiated and proven business model to continuously compound value for our shareholders. As we were briefly restricted from share repurchases while working on the WildFire acquisition, we expect to resume our share repurchases after today's quarterly results. I'll now turn the call over to Brian for further details on the quarter for some additional guidance.

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 2026 before turning it over for questions. Beginning on Slide 6, Magnolia delivered a strong quarter, generating adjusted net income of $184 million or $0.99 per diluted share. Our adjusted EBITDAX for the quarter was $370 million with total capital associated with drilling completions and associated facilities of $125 million, representing just 34% of our adjusted EBITDAX. Second quarter production volumes grew 8% year-over-year to 106,100 barrels of oil equivalent per day while generating free cash flow of $235 million. Our second quarter annualized return on capital employed was 39% as a result of higher prices and increased production. Looking at the quarterly cash flow waterfall chart on Slide 7. We started the quarter with $124 million of cash. Cash flow from operations before changes in working capital was $362 million, with working capital changes and other small items impacting cash by $15 million. During the quarter, we paid dividends of $31 million and allocated $49 million towards share repurchases. We incurred $125 million in drilling completions and associated facilities and leasehold, and we ended the quarter with $296 million of cash, an increase of $172 million. Looking at Slide 8. This chart illustrates the significant amount of share repurchases we have done since beginning the program in the second half of 2019. Since that time, we have repurchased 85.5 million shares. We repurchased just over 1.7 million shares during the quarter prior to being restricted due to the transaction, leading to the diluted weighted average shares outstanding of 184.6 million shares during the second quarter. We currently have 9.9 million shares remaining under our repurchase authorization. Turning to Slide 9. Our dividend growth has grown substantially over the past few years, including a 10% increase announced early 2026, an additional 9% increase announced a couple of weeks ago in conjunction with our definitive agreement to acquire WildFire to $0.18 per share on a quarterly basis. Our next quarterly dividend is payable on September 1 and provides an annualized dividend payout rate of $0.72 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 continues to have a strong balance sheet, and we ended the quarter with $296 million of cash. Our $400 million senior notes does not mature until 2032, and our recently closed offering of $500 million senior notes associated with the financing of the WildFire transaction matures in 2034. Upon closing, estimated late in the third quarter, we will also assume WildFire's $600 million senior notes due in 2029. Also upon closing, our credit facility will increase to a $2 billion borrowing base with elected commitments of $1.75 billion, providing plenty of available liquidity. We thoughtfully financed the transaction with half equity and half debt, positioning Magnolia to have a very manageable debt load at the close of the transaction, allowing us to maintain our business model and our consistent return of capital program. With a significant increase to pro forma cash flows, our plan is to immediately begin to reduce our debt post closing of the transaction. Our condensed 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 increased approximately 39% year-over-year due to the strength in oil prices. Our total adjusted cash operating costs, including G&A, were $11.55 per BOE in the second quarter of '26, and our adjusted operating income margin for the second quarter was $25.15 per BOE or 51% of our total revenue. Turning to guidance. Third quarter D&C capital expenditures for Magnolia stand-alone is expected to be approximately $115 million. In addition, total production for the third quarter is estimated to be similar to second quarter levels or approximately 106,000 barrels of oil equivalent a day. Our full year 2026 outlook for total production growth has increased to approximately 6% from our prior guidance of 5%. Oil realizations have trended back to our historical differentials, and we are anticipating prices for the third quarter to be a $3 per barrel discount to Magellan East Houston benchmark pricing. The fully diluted share count after closing the WildFire transaction is expected to be approximately 269 million shares. We expect our effective tax rate to be approximately 21% and cash taxes for 2026 to be minimal. We are now ready to take your questions.

[Operator Instructions] The first question comes from Neal Dingmann with William Blair.

This is Bert filling in. I know WildFire hasn't closed yet, but maybe you could give early thoughts on maybe what a blended D&C plan might look like. Last call, I think you mentioned you're picking up the rig -- 2 rigs and a crew. That might imply 50-50, but we've kind of looked at the data in Giddings on Enverus and that seems pretty strong. So it would be impressive for the new assets to kind of get equal screen time. Just any thoughts on how you would prioritize the 2 assets?

Yes. So if you just simplistically took what we have, what we've been doing and what they've been doing and combine it, that's not a bad starting point. So there's 2 rigs for each of us and 1 completion crew for each of us. It's still very early. We haven't closed. We'll have more information for you probably later at the back part of this year and after we close on the combined business and our activity. I do believe that we can do better on a combined basis. We're obviously going through it. As I've always said, our emphasis is to do this as efficiently as possible. And I think we'll be able to do that. We know the field very well. We know the subsurface very well. We've got some very good vendors to work with and good crews, and we'll be evaluating theirs. And collectively, I do believe that on a combined basis, we'll be able to do better.

That makes perfect sense. And then on the capital allocation of your free cash flow, you kind of laid out the 5 pillars. We assume most of it will go towards debt. But is there a large opportunity to add working interest or I think you called it small bolt-ons? I just imagine there'd be some white space, but also that WildFire was probably out there buying up everything they could. So I just didn't know if there was anything left in the area? Or was that implying outside the kind of pro forma footprint?

No, I wouldn't tell you it's much outside the pro forma footprint. They did a very good job with line of sight and looking sort of over the hill, if you will, on needing to sort of pick up additional working interest as they were going ahead permitting wells and moving forward with drilling. So they did a little of that, certainly. I do think that there are and will be opportunities for us to pick up additional working interest and royalties on a concentrated basis, if you will, here and there within the existing footprint of combined Magnolia-WildFire. So I don't think we'll be moving vastly out of that footprint. I think there's still plenty to work on. These will be sort of the typical usual blocking and tackling smaller bolt-ons that we've done that will amount to smallish amounts of money outflow, if you will. I wouldn't tell you that there's anything very, very large by any means. So the money, the free cash flow in excess of our return of capital plan will go to the debt first and foremost. And then there's a little left over, we'll certainly be open to picking off some working interest and royalties to make us better and improve our capability.

That sounds like the right thing to do.

The next question comes from Phillip Jungwirth with BMO.

I wanted to come back to the Austin Chalk potential discussion for WildFire. Obviously, they mostly targeted the Lower Eagle Ford, but they do have some strong Chalk wells across the Robertson, Milam area, offsetting you even in Washington and also Eastern Brazos County. But just wondering which of these areas do you think are more interesting? And could the Chalk potential also just be more widespread across the footprint than just the areas that they've tested?

You could be right. We'll certainly give it our best shot and try to figure that out. This is an enormous footprint, obviously, 1.25 million net acres. So it's going to take us some time to work through. I think the areas that you identified are correct in addition to areas in Burleson. So no, there's a tremendous amount of potential upside. There has been up to now vis-a-vis WildFire sort of limited testing drilling. So I think there's a lot of low-hanging fruit, if you will, that will be accumulated under Magnolia's experience and expertise and just technical knowledge, and we'll get at it over time into next year and beyond and continue adding to it. So there's lots -- there'll be lots to work on. To some extent, our folks are going to feel like kids in a candy store. So there'll be lots to work on.

Sounds good. And then can you talk about the acquired sand mine and the benefits here? Just are you able to quantify well cost savings from the vertical integration and any optionality it provides you on completion design for both WildFire and legacy Magnolia?

Yes, we didn't actually quantify it or break out the specific savings for the sand mine. But I would tell you, in aggregate, it's several million dollars of the synergies and cost saving benefits that will get captured in the process. So that's something different for us owning a sand mine. But clearly, we were sourcing and are sourcing most of the large majority of our sand requirements and demand from that mine. So it's important to us, and they've done a good job running it. So it will be meaningful in the outcome in terms of what we're able to do going forward.