Magnolia Oil & Gas Corporation — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Magnolia is an independent oil and gas producer focused on the Eagle Ford and Austin Chalk in South Texas. Unless stated otherwise, amounts below are in millions of dollars.
Financial performance and operating metrics
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $484.6 | $252.1 | $862.5 | $461.2 |
| Operating income | $328.3 | $129.2 | $564.1 | $229.1 |
| Net income | $299.9 | $116.2 | $508.5 | $207.7 |
| Net income attributable to Class A | $250.6 | $84.4 | $416.6 | $147.7 |
| Diluted EPS | $1.32 | $0.48 | $2.22 | $0.85 |
- Q2 revenue rose about 92% year over year, while operating income increased about 154%. Operating margin was approximately 67.7%, versus 51.3% a year earlier. Six-month revenue increased about 87% and operating margin was approximately 65.4%, versus 49.7%.
- Q2 average daily production was 74,200 boe, up from 64,946 boe; six-month daily production averaged 73,024 boe, compared with 63,611 boe. Higher commodity prices and increased production contributed to revenue growth. Q2 realized prices were $110.22/bbl for oil, $6.85/Mcf for gas, and $40.17/bbl for NGLs.
- Six-month operating cash flow was $618.0, versus $306.0. Capital expenditures were $207.5, yielding approximately $410.5 of operating cash flow less capital expenditures, compared with $211.7 in the prior-year period. Cash rose to $501.9 from $367.0 at year-end 2021.
- At June 30, current assets were $750.5 and current liabilities $333.0 (current ratio approximately 2.25). Gross debt was $400.0, consisting of 6.0% senior notes due 2026; there were no RBL borrowings. Cash exceeded gross debt by approximately $101.9. Reported liquidity was $951.9, including cash and $450.0 of RBL borrowing-base capacity.
Material changes and capital allocation
- Oil, gas, and NGL prices increased substantially year over year, alongside production growth. Operating costs also rose: lease operating, gathering/transportation, production taxes, and DD&A were higher. Management attributed cost increases to activity, production, commodity prices, workovers, and higher operating costs.
- G&A declined year over year, partly because the Services Agreement ended in June 2021; the prior-year period also included intangible-asset amortization that was fully completed in June 2021. Q2 2022 included $6.5 of other income, primarily an earnout related to the 2020 sale of Magnolia’s Ironwood midstream interest.
- During the first half, Magnolia spent $92.2 on Class A repurchases and $138.8 to repurchase and cancel LLC units and corresponding Class B shares; it also paid $37.2 in dividends. The company declared a $0.20-per-share semiannual dividend in February. In August, after quarter-end, the board declared a $0.10-per-share quarterly dividend, payable September 1, 2022.
- The RBL facility was amended and restated in February 2022, with a $1.0 billion maximum commitment, an initial $450.0 borrowing base, and maturity in February 2026. Magnolia reported covenant compliance at quarter-end.
Outlook, risks, and contingencies
- Management said current cash, operating cash flows, and available liquidity were expected to meet cash requirements. Its stated approach is to spend within cash flow, pursue moderate and predictable production growth, maintain low leverage, and balance reinvestment with shareholder returns. No specific full-year revenue, earnings, production, or capital-spending guidance is provided in the filing text.
- Magnolia operated a two-rig program in Q2, including a rig drilling multi-well development pads in Giddings. Management cited operating efficiencies and higher production growth from its measured Giddings development approach.
- Commodity prices are the principal market risk. The filing estimates that a $1/bbl change in weighted average oil price would change annualized revenue by about $11.7, and a $0.10/Mcf gas-price change by about $5.0. The company had no derivative contracts outstanding at June 30, 2022.
- Management cited inflation, labor shortages, supply and demand, COVID-19 effects, Russia’s invasion of Ukraine and related sanctions, regulation, weather, operational and drilling risks, and access to goods, services, and capital as uncertainties. It warned that actual results may differ from forward-looking statements.
- Two legal matters are described, including a dispute concerning working interests in Karnes County assets and an appeal involving a Texas Railroad Commission drilling permit. The exposure in the working-interest litigation was not reasonably estimable; no litigation accrual was recorded. Management did not expect the matters to materially affect the company. Environmental insurance does not cover all risks.
- A $198.4 net deferred tax asset was fully offset by a valuation allowance. Management noted that sustained profitability could affect its assessment of realizability in the next 12 months. The six-month income tax expense was $46.0, versus $2.8 in 2021.
Important facts for investors to verify
- Whether elevated commodity prices and production growth persist, and how they affect realized prices, costs, and cash generation.
- Actual production and capital spending against management’s stated growth and spend-within-cash-flow approach; the filing gives no formal numerical full-year guidance.
- Availability and terms of RBL capacity, covenant headroom, and refinancing or repayment plans for the $400.0 senior notes due 2026.
- Future capital returns and share count, including Class A buybacks, LLC-unit repurchases and exchanges, and dividends.
- Whether the full deferred-tax valuation allowance changes, and the outcome or potential financial exposure of the disclosed legal and environmental matters.