MNR

Business Context and Reporting Period

Mach Natural Resources LP (NYSE: MNR) is an independent upstream oil and gas company focused on the Anadarko Basin in Western Oklahoma, Southern Kansas, and the Texas panhandle. This Form 10-Q covers the quarterly period ended June 30, 2024. The Company completed its Initial Public Offering (IPO) in October 2023 and a significant corporate reorganization, consolidating its operating subsidiaries (BCE-Mach, BCE-Mach II, and BCE-Mach III) into a single reporting entity.

Key Financial Metrics (Six Months Ended June 30, 2024)

Note: Debt figure represents outstanding borrowings under the Term Loan Credit Agreement. The Revolving Credit Facility was undrawn with $70.0 million remaining availability.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 33% to $479.1 million compared to $359.1 million in the prior year period. This was driven by a 56% increase in oil, natural gas, and NGL sales, primarily due to production increases from the December 2023 Paloma Acquisition and the 2023 Corporate Reorganization.
• Production Volumes: Total production increased 87% to 16,228 MBoe. Oil production rose 37%, natural gas 92%, and NGLs 173% compared to the six months ended June 30, 2023.
• Net Income Decline: Despite revenue growth, Net Income decreased 52% to $81.2 million from $169.5 million. This decline was primarily due to a $49.6 million swing in derivative results (from a $15.7 million gain in 2023 to a $33.9 million loss in 2024) and a significant increase in interest expense ($53.3 million vs. $3.8 million) resulting from the new Term Loan Credit Agreement.
• Operating Expenses: Total operating expenses increased 84% to $341.4 million. Depreciation, depletion, and amortization (DD&A) increased 126% due to the expanded asset base from acquisitions.

Guidance, Outlook, and Risks

• Capital Expenditure Budget: Management updated the 2024 capital expenditure budget to a range of $215.0 million to $240.0 million. The program is largely discretionary and focuses on drilling Oswego wells due to their high oil reserves and low breakeven costs.
• Derivative Hedging: As of June 30, 2024, the Company has hedged approximately 1,487 Mbbl of oil for the remainder of 2024 at a weighted average price of $72.98/Bbl and 20,811 Bbtu of natural gas at $3.34/Bbtu. The Company recorded a $33.9 million unrealized loss on derivatives for the six-month period.
• Liquidity: The Company maintains a senior secured Term Loan of $825.0 million (maturity Dec 2026) and a $75.0 million Revolving Credit Facility. Mandatory principal repayments of $41.3 million are due in 2024.
• Risks: Key risks include commodity price volatility, the concentration of operations in the Anadarko Basin, and the impact of inflation on drilling and completion costs. The Company noted that a substantial decline in commodity prices could impair oil and natural gas properties.

Investor Verification Checklist

• Derivative Impact: Verify the sensitivity of Net Income to commodity price fluctuations given the $33.9 million unrealized derivative loss recorded in Q2 2024.
• Debt Service: Confirm the ability to service the $804.4 million Term Loan, which carries an effective interest rate of 13.0% as of June 30, 2024.
• Acquisition Integration: Assess the performance of the Paloma Acquisition (closed Dec 2023) and the Corporate Reorganization assets, which drove the majority of production volume increases.
• Capital Discipline: Monitor adherence to the updated 2024 capital budget ($215M-$240M) and the potential for deferral if commodity prices or drilling success rates decline.
• Dividend Sustainability: Review the "Cash Available for Distribution" metric ($134.9M for six months) against the $161.6M in distributions paid to unitholders during the same period to assess payout ratios.