Magnolia Oil & Gas Corp. — Q3 2022 Form 10-Q
Business context and reporting period. Magnolia is an independent oil and gas producer operating primarily in the Eagle Ford Shale and Austin Chalk formations in South Texas. This unaudited report covers the three and nine months ended September 30, 2022; comparisons are with the corresponding 2021 periods. Figures below are in U.S. dollars; financial amounts are in millions unless noted.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $483.0 | $285.0 | $1,345.5 | $746.2 |
| Operating income | $311.8 | $171.5 | $875.9 | $400.6 |
| Net income | $287.0 | $159.9 | $795.5 | $367.6 |
| Net income attributable to Class A common stock | $245.5 | $119.4 | $662.1 | $267.1 |
| Diluted EPS | $1.29 | $0.67 | $3.51 | $1.53 |
| Operating margin | 64.5% | 60.2% | 65.1% | 53.7% |
Operating margins are calculated as operating income divided by revenue. Q3 production averaged 81.5 thousand boe/day, up 21% from 67.4 thousand boe/day. Average realized prices increased year over year: oil to $93.83/bbl from $68.62, natural gas to $7.49/Mcf from $3.83, and NGLs to $34.66/bbl from $31.60.
- Cash flow and investment: Nine-month operating cash flow was $1,028.7, versus $527.9 in 2021. Capital expenditures were $323.5, compared with $162.7. Operating cash flow less capital expenditures was approximately $705.2 (calculated; before other investing and financing activity).
- Liquidity and debt: Cash was $689.5 at September 30, 2022. Reported liquidity was $1,139.5, including $450.0 of RBL borrowing-base capacity; no RBL borrowings were outstanding. Senior Notes principal was $400.0, bearing 6.0% interest and due 2026; carrying value, net of financing costs, was $389.8. The company reported compliance with RBL covenants.
- Balance sheet: Current assets were $899.0 and current liabilities $342.0 (approximately 2.63 current ratio, calculated). Total assets were $2,300.6 and total equity $1,469.7.
- Capital returns: Nine-month cash dividends paid were $56.2. The company spent $153.1 on Class A share repurchases and $138.8 on Class B/unit repurchases and cancellations.
Material changes versus prior comparable periods
- Q3 revenue rose 69% and nine-month revenue rose 80%, reflecting both higher realized commodity prices and increased production. Q3 production was up 21%; nine-month production averaged 75.9 thousand boe/day versus 64.9 thousand.
- Operating income more than doubled for the nine-month period. Higher revenue was partly offset by higher lease operating, gathering and transportation, production tax, and DD&A costs. Nine-month operating expenses increased to $469.6 from $345.6.
- Nine-month net income included $6.6 of other income, primarily an earnout payment related to the 2020 sale of the company’s Ironwood Eagle Ford Midstream interest. No derivative contracts remained outstanding at September 30, 2022; the prior-year period included derivative losses.
- Cash increased by $322.6 during the first nine months, compared with $52.5 in the prior-year period. Higher operating cash flow was partly used for increased capital spending and capital returns.
- Income tax expense rose to $65.3 for the first nine months from $6.4. The company recorded a full $164.9 valuation allowance against its net deferred tax asset; management said continued profitability could affect its valuation assessment in the next 12 months.
Outlook, management commentary, and risks
- No numerical production, capital spending, revenue, or earnings guidance is provided in the supplied filing text. Management described a strategy of spending within cash flow, maintaining low leverage, pursuing moderate and predictable production growth, and balancing reinvestment with dividends and repurchases. Magnolia operated two rigs in Q3 and said current cash, operating cash flow, and available liquidity should meet cash requirements.
- Management attributed improved Giddings production growth to a gradual, measured development approach and resulting operating efficiencies. It also noted inflation and labor shortages could increase operating and capital costs.
- Results remain sensitive to volatile oil, gas, and NGL prices, supply and demand, geopolitical developments, regulation, production and reserve levels, drilling risks, input availability, weather, and interest rates. The company reported no commodity hedges at quarter-end. It estimated that a $1/bbl oil-price change would affect annualized revenue by about $12.3 and a $0.10/Mcf gas-price change by about $5.1, based on nine-month production.
- Two legal matters are described: a working-interest lawsuit in pre-trial proceedings, for which exposure is not reasonably estimable and which the co-defendants retained liability for, and an appeal concerning a well-drilling permit. No litigation accrual was recorded; management did not expect the disputes to have a material effect. Environmental risks are not fully insured.
- The Inflation Reduction Act was enacted in August 2022. Magnolia was evaluating its provisions and did not then expect a material impact on reported results, cash flows, or financial position.
- The board declared a subsequent quarterly dividend of $0.10 per share/unit, payable December 1, 2022. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported for the quarter.
Important facts for investors to verify
- How much of the sharp year-over-year revenue and earnings growth reflects commodity prices versus sustainable production growth, and how results respond if prices decline.
- Whether inflation, labor availability, and higher operating costs affect per-boe margins and the economics of the two-rig capital program.
- Capital allocation trade-offs among drilling, dividends, Class A repurchases, and Class B/unit repurchases; the filing reported 9.3 million shares remaining under the authorized repurchase program at September 30.
- Future tax expense and the potential for a change to the $164.9 million deferred-tax valuation allowance, as well as the tax consequences of the Inflation Reduction Act.
- Developments in the permit appeal and working-interest litigation, including any change in exposure or financial-statement accruals.
- Liquidity and covenant headroom if commodity prices weaken, including the borrowing base and terms of the RBL facility.