Magnolia Oil & Gas Corp (MGY) FY 2024 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Company’s consolidated financial statements and the related notes thereto included in this Form 10-K.

This section of this Form 10-K generally discusses 2024 and 2023 items and year-to-year comparisons between 2024 and 2023. Discussions of 2022 items and year-to-year comparisons between 2023 and 2022 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023.

Overview

Magnolia Oil & Gas Corporation (the “Company” or “Magnolia”) is an independent oil and natural gas company engaged in the acquisition, development, exploration, and production of oil, natural gas, and natural gas liquid reserves that operates in one reportable segment located in the United States. The Company’s oil and natural gas properties are located primarily in the Karnes and Giddings areas in South Texas, where the Company primarily targets the Eagle Ford Shale and the Austin Chalk formations. Magnolia’s objective is to generate stock market value over the long term through consistent organic production growth, high full cycle operating margins, an efficient capital program with short economic paybacks, significant free cash flow after capital expenditures, and effective reinvestment of free cash flow. The Company’s allocation of capital prioritizes reinvesting in its business to achieve moderate and predictable annual volume growth, balanced with returning capital to its shareholders through dividends and share repurchases.

Magnolia’s business model prioritizes prudent and disciplined capital allocation, free cash flow, and financial stability. The Company’s ongoing plan is to spend within cash flow on drilling and completing wells while maintaining low financial leverage. During 2024, Magnolia operated two rigs. The Company’s gradual and measured approach toward the development of the Giddings area has created operating efficiencies leading to higher production in 2024.

Market Conditions Update

Commodity prices experienced significant volatility in recent years, impacted by the Russia-Ukraine war, actions taken by OPEC, and the continued instability and conflict in the Middle East. Global conflict and supply chain disruptions drove high oil and natural gas prices in 2022. Beginning in 2023, due to the easing of global geopolitically driven supply fears along with record high U.S. production, natural gas and NGL prices significantly declined and oil prices weakened. In 2024, despite continued commodity price volatility, lower well costs combined with improved operating efficiencies allowed for more wells to be drilled, completed, and turned in line helping to support Magnolia's overall high-margin growth from a disciplined capital program.

Business Overview

As of December 31, 2024, Magnolia’s assets in South Texas included 79,067 gross (54,936 net) acres in the Karnes area and 738,840 gross (549,121 net) acres in the Giddings area. As of December 31, 2024, Magnolia held an interest in approximately 2,674 gross (1,818 net) wells, with total production of 89.7 thousand barrels of oil equivalent per day (“Mboe/d”) for the year ended December 31, 2024.

Magnolia recognized net income attributable to Class A Common Stock of $366.0 million, or $1.94 per diluted common share, for the year ended December 31, 2024. Magnolia also recognized net income of $397.3 million, which includes noncontrolling interest of $31.3 million related to the Magnolia LLC Units (and corresponding shares of Class B Common Stock) held by certain affiliates of EnerVest for the year ended December 31, 2024.

During the year ended December 31, 2024, the Company declared cash dividends to holders of its Class A Common Stock totaling $97.6 million.

As of December 31, 2024, the Company’s board of directors had authorized a share repurchase program of up to 40.0 million shares of Class A Common Stock. The program does not require purchases to be made within a particular timeframe. The Company had repurchased 38.3 million shares under the program at a cost of $707.8 million and had 1.7 million shares of Class A Common Stock remaining under its share repurchase authorization as of December 31, 2024. On February 12, 2025, the Company’s board of directors increased the share repurchase authorization by an additional 10.0 million shares of Class A Common Stock, which increased the total share repurchase authorization to 50.0 million shares.

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As of December 31, 2024, Magnolia owned approximately 97.2% of the interest in Magnolia LLC and the noncontrolling interest was 2.8%.

Results of Operations

Factors Affecting the Comparability of the Historical Financial Results

Magnolia’s historical financial condition and results of operations for the periods presented may not be comparable, either from period to period or going forward, as a result of the following factors:

•In November 2024, the Company amended and restated the RBL Facility, redeemed all of the 2026 Senior Notes that bore interest at 6.0% per annum, and issued the 2032 Senior Notes that bear interest at 6.875% per annum.

•In November 2023, the Company acquired certain oil and gas producing properties including leasehold and mineral interests in the Giddings area for approximately $264.1 million, subject to customary purchase price adjustments, and an additional contingent cash consideration of up to $40.0 million through January 2026 based on future commodity prices. The transaction was accounted for as an asset acquisition.

As a result of the factors listed above, the historical results of operations and period-to-period comparisons of these results and certain financial data may not be comparable or indicative of future results.

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Year Ended December 31, 2024 Compared to the Year Ended December 31, 2023

Oil, Natural Gas and NGL Sales Revenues. The following table provides the components of Magnolia’s revenues for the periods indicated, as well as each period’s respective average prices and production volumes. This table shows production on a boe basis in which natural gas is converted to an equivalent barrel of oil based on a ratio of six Mcf to one barrel. This ratio may not be reflective of the current price ratio between the two products.

Oil revenues for the year ended December 31, 2024 were $88.3 million higher than the year ended December 31, 2023. An 11% increase in oil production increased revenues for the year ended December 31, 2024 by $105.4 million compared to the same period in the prior year, partially offset by a 2% decrease in average prices which decreased revenues by $17.1 million.

Natural gas revenues for the year ended December 31, 2024 were $11.8 million lower than the year ended December 31, 2023. A 17% decrease in average prices decreased revenues for the year ended December 31, 2024 by $17.4 million compared to the same period in the prior year, partially offset by a 7% increase in natural gas production which increased revenues by $5.6 million.

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NGL revenues for the year ended December 31, 2024 were $12.4 million higher than the year ended December 31, 2023. A 9% increase in NGL production increased revenues for the year ended December 31, 2024 by $15.0 million compared to the same period in the prior year, partially offset by a 2% decrease in average prices which decreased revenues by $2.6 million.

Operating Expenses and Other Income (Expense). The following table summarizes the Company’s operating expenses and other income (expense) for the periods indicated.

Lease operating expenses are the costs incurred in the operation of producing properties, including expenses for utilities, direct labor, water disposal, workover rigs, workover expenses, materials, and supplies. Lease operating expenses for the year ended December 31, 2024 were $25.4 million, or $0.34 per boe, higher than the year ended December 31, 2023, due to an increase in chemicals, compression, operating and maintenance costs and payroll expense associated with a higher well count in addition to higher workover activity.

Gathering, transportation, and processing costs are costs incurred to deliver oil, natural gas, and NGLs to the market. These expenses can vary based on the volume of oil, natural gas, and NGLs produced as well as the cost of commodity processing. The Company is also party to a number of percent-of-proceeds arrangements that track closely to natural gas and NGL pricing and affect the cost of commodity processing. The gathering, transportation, and processing costs for the year ended December 31, 2024 were $4.5 million, or $0.26 per boe, lower than the year ended December 31, 2023, primarily due to contractual changes and lower natural gas and NGL pricing while the change per boe was due to the increase in natural gas and NGL production.

Taxes other than income include production, ad valorem, and franchise taxes. These taxes are based on rates primarily established by state and local taxing authorities. Production taxes are based on the market value of production. Ad valorem taxes are based on the fair market value of the mineral interests or business assets. Taxes other than income for the year ended December 31, 2024 were $6.3 million, or $0.01 per boe, higher than the year ended December 31, 2023, primarily due to an increase in production taxes as a result of the increase in oil and NGL revenues, which was partially offset by the decrease in natural gas revenues.

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Exploration expenses are geological and geophysical costs that include seismic surveying costs, costs of expired or abandoned leases, and delay rentals. The exploration expenses for the year ended December 31, 2024 were $4.1 million, or $0.14 per boe, lower than the year ended December 31, 2023, due to decreased spending on seismic licenses.

Depreciation, depletion and amortization (“DD&A”) during the year ended December 31, 2024 was $89.7 million, or $1.81 per boe, higher than the year ended December 31, 2023 due to increased production and a higher depreciable cost basis.

During the year ended December 31, 2024, the Company did not recognize any impairments. For the year ended December 31, 2023, the Company recognized a $15.7 million proved property impairment related to the Highlander property.

General and administrative expenses during the year ended December 31, 2024 were $11.6 million, or $0.13 per boe, higher than the year ended December 31, 2023 primarily driven by increased corporate payroll expenses and other non-recurring costs.

Interest expense, net, during the year ended December 31, 2024 was $14.3 million higher than the year ended December 31, 2023, driven by lower interest income realized during 2024 as a result of lower cash balances.

During the year ended December 31, 2024, the Company recognized a loss of $8.8 million on the extinguishment of the 2026 Senior Notes.

Other income, net, during the year ended December 31, 2024 was $11.0 million lower than the year ended December 31, 2023. In 2023, the Company recognized a gain on earnout payment associated with the sale of the Company’s 35% membership interest in Ironwood Eagle Ford Midstream LLC and a gain on sale of the Company’s 84.7% interest in Highlander, with no such gains in 2024. In addition, the decrease is impacted by the change in revaluation of the contingent consideration.

Income tax expense. The following table summarizes the Company’s income tax expense for the periods indicated.

For the year ended December 31, 2024, income tax expense was $11.4 million lower than the year ended December 31, 2023, primarily a result of additional tax credits and a decrease in income before income taxes, partially offset by an increase in controlling interest. See Note 10—Income Taxes in the notes to the consolidated financial statements included in this Annual Report on Form 10-K for further detail.

Liquidity and Capital Resources

Magnolia’s primary source of liquidity and capital has been its cash flows from operations. The Company’s primary uses of cash have been for development of the Company’s oil and natural gas properties, returning capital to shareholders, bolt-on acquisitions of oil and natural gas properties, and general working capital needs.

The Company may also utilize borrowings under other various financing sources available to Magnolia, including the RBL Facility and the issuance of equity or debt securities through public offerings or private placements, to fund Magnolia’s acquisitions and long-term liquidity needs. Magnolia’s ability to complete future offerings of equity and debt securities and the timing of these offerings will depend upon various factors, including prevailing market conditions and the Company’s financial condition.

Material cash commitments include $27.5 million in interest payments paid each year through 2032, along with contractual obligations discussed in Note 9—Commitments and Contingencies in the notes to the consolidated financial statements included in this Annual Report on Form 10-K. The Company anticipates its current cash balance, cash flows from operations, and its available sources of liquidity to be sufficient to meet the Company’s cash requirements. In the event of a sustained market deterioration, Magnolia may need additional liquidity, which would require the Company to evaluate available alternatives and take appropriate actions.

As of December 31, 2024, the Company had $400.0 million of principal debt related to the 2032 Senior Notes outstanding and no outstanding borrowings related to the RBL Facility. As of December 31, 2024, the Company has $710.0 million of liquidity comprised of the $450.0 million of borrowing capacity under the RBL Facility, and $260.0 million of cash and cash equivalents.

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Cash and Cash Equivalents

At December 31, 2024, Magnolia had $260.0 million of cash and cash equivalents. The Company’s cash and cash equivalents are maintained with various financial institutions in the United States. Deposits with these institutions may exceed the amount of insurance provided on such deposits. However, the Company regularly monitors the financial stability of its financial institutions and believes that the Company is not exposed to any significant default risk.

Sources and Uses of Cash and Cash Equivalents

The following table presents the sources and uses of the Company’s cash and cash equivalents for the periods presented:

Sources of Cash and Cash Equivalents

Net Cash Provided by Operating Activities

Operating cash flows are the Company’s primary source of liquidity and are impacted, in the short term and long term, by oil and natural gas prices. The factors that determine operating cash flows are largely the same as those that affect net earnings or net losses, with the exception of certain non-cash expenses such as DD&A, stock based compensation, amortization of deferred financing costs, revaluation of contingent consideration, impairment of oil and natural gas properties, asset retirement obligations accretion, and deferred taxes.

Net cash provided by operating activities totaled $920.9 million and $855.8 million for the years ended December 31, 2024 and 2023, respectively. During the year ended December 31, 2024, cash provided by operating activities was positively impacted by the timing of collections and the increase in oil, natural gas, and NGL production, partially offset by lower realized oil, natural gas, and NGL prices.

Proceeds from issuance of long-term debt

During the year ended December 31, 2024, the Company received $400.0 million from the issuance of the 2032 Senior Notes. For more detail, refer to Note 7—Long-term Debt.

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Uses of Cash and Cash Equivalents

Redemption of Long-term debt

During the year ended December 31, 2024, the Company paid $404.0 million to redeem the 2026 Senior Notes. For more detail, refer to Note 7—Long-term Debt.

Acquisitions

During the year ended December 31, 2024, the Company completed various leasehold, mineral rights, and property acquisitions totaling $165.4 million primarily in the Giddings area.

During the year ended December 31, 2023, the Company completed various leasehold, mineral rights, and property acquisitions totaling $355.5 million primarily in the Giddings area.

Additions to Oil and Natural Gas Properties

The following table sets forth the Company’s capital expenditures for the years ended December 31, 2024 and 2023.

During 2024, Magnolia operated two rigs. The activity during the year ended December 31, 2024 was largely driven by the number of operated and non-operated drilling rigs. The number of operated drilling rigs is largely dependent on commodity prices and the Company’s strategy of maintaining spending to accommodate the Company’s business model. The Company’s ongoing plan is to continue to spend within cash flow on drilling and completing wells while maintaining low financial leverage.

Capital Requirements

As of December 31, 2024, the Company’s board of directors had authorized a share repurchase program of up to 40.0 million shares of Class A Common Stock. On February 12, 2025, the Company’s board of directors increased the share repurchase authorization by an additional 10.0 million shares of Class A Common Stock, which increased total share repurchase authorization to 50.0 million. The program does not require purchases to be made within a particular timeframe and whether the Company undertakes these additional repurchases is ultimately subject to numerous considerations, market conditions, and other factors. During the years ended December 31, 2024 and 2023, the Company repurchased 7.5 million and 9.6 million shares under this authorization, for a total cost of approximately $182.8 million and $207.0 million, respectively.

During the year ended December 31, 2024, Magnolia LLC repurchased and subsequently canceled 3.5 million Magnolia LLC Units with an equal number of shares of corresponding Class B Common Stock for $89.7 million of cash consideration. As of December 31, 2024, Magnolia owned approximately 97.2% of the interest in Magnolia LLC and the noncontrolling interest was 2.8%.

During the year ended December 31, 2024, the Company declared and paid cash dividends to holders of its Class A Common Stock totaling $97.6 million. Additionally, $7.8 million was distributed to the Magnolia LLC Unit Holders. During the year ended December 31, 2023, the Company declared cash dividends to holders of its Class A Common Stock totaling $87.8 million. During the same time period, cash paid for dividends was $88.1 million, inclusive of dividends on vested non-participating securities. Additionally, $10.0 million was distributed to the Magnolia LLC Unit Holders. The amount and frequency of future dividends is subject to the discretion of the Company’s board of directors and primarily depends on earnings, capital expenditures, debt covenants, and various other factors.

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Critical Accounting Policies and Estimates

Magnolia prepares its financial statements and the accompanying notes in conformity with accounting principles generally accepted in the United States of America, which require management to make estimates and assumptions about future events that affect the reported amounts in the financial statements and the accompanying notes. Magnolia identifies certain accounting policies as critical based on, among other things, their impact on the portrayal of Magnolia’s financial condition, results of operations, or liquidity and the degree of difficulty, subjectivity, and complexity in their deployment. Critical accounting policies cover accounting matters that are inherently uncertain because the future resolution of such matters is unknown. Management routinely discusses the development, selection, and disclosure of each of the critical accounting policies. The following is a discussion of Magnolia’s most critical accounting policies and estimates.

Reserves Estimates

Proved oil and natural gas reserves are those quantities of oil, natural gas, and NGLs which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible—from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulations—prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation. The project to extract the hydrocarbons must have commenced, or the operator must be reasonably certain, that it will commence within a reasonable time. Estimated proved developed oil and natural gas reserves can be expected to be recovered through existing wells with existing equipment and operating methods or where the cost of the required equipment is relatively minor compared to the cost of a new well.

Proved undeveloped reserves are proved reserves that are expected to be recovered from new wells on undrilled acreage or from existing wells where a relatively major expenditure is required for recompletion. Reserves on undrilled acreage are limited to those that are directly offsetting development spacing areas that are reasonably certain of production when drilled, unless evidence using reliable technology exists that establishes reasonable certainty of economic producibility at greater distances. Undrilled locations can be classified as undeveloped reserves only if a plan has been adopted indicating that they are scheduled to be drilled within five years, unless the specific circumstances justify a longer time. All of Magnolia’s proved undeveloped reserves as of December 31, 2024, that are included in this Annual Report, are planned to be developed within one year.

Despite the inherent imprecision in these engineering estimates, Magnolia’s reserves are used throughout the Company’s financial statements. For example, since Magnolia uses the unit-of-production method to amortize its oil and natural gas properties, the quantity of reserves could significantly impact Magnolia’s DD&A expense. A material adverse change in the estimated volumes of reserves could result in property impairments. Finally, these reserves are the basis for Magnolia’s supplemental oil and natural gas disclosures.

Reserves are calculated using an unweighted arithmetic average of commodity prices in effect on the first day of each of the previous 12 months, held flat for the life of the production, except where prices are defined by contractual arrangements. These historical prices often do not approximate the average price that the Company expects to receive for its oil and natural gas production in the future. Operating costs, production and ad valorem taxes, and future development costs are based on current costs with no escalation. Actual costs may be materially higher or lower than the costs utilized in the estimate.

Magnolia has elected not to disclose probable and possible reserves in this filing.

Long-lived Asset Impairments

Long-lived assets used in operations are assessed for impairment whenever changes in facts and circumstances indicate a possible significant deterioration in future cash flows expected to be generated by an asset group. Individual assets are grouped for impairment purposes based on a judgmental assessment of the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets. If there is an indication that the carrying amount of an asset may not be recovered, the asset is assessed by management through an established process in which changes to significant assumptions such as prices, volumes, and future development plans are reviewed. If, upon review, the sum of the undiscounted pre-tax cash flows is less than the carrying value of the asset group, the carrying value is written down to estimated fair value. Because there usually is a lack of quoted market prices for long-lived assets, the fair value of impaired assets is assessed by management using the income approach.

Under the income approach, the fair value of each asset group is estimated based on the present value of expected future cash flows. The income approach is dependent on a number of factors including estimates of forecasted revenue and operating costs, proved reserves, the success of future exploration for and development of unproved reserves, discount rates, and other variables. Key assumptions used in developing a discounted cash flow model described above include estimated quantities of crude oil and natural gas reserves; estimates of market prices considering forward commodity price curves as of the measurement date; and estimates of

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operating, administrative, and capital costs adjusted for inflation. The resulting future cash flows are discounted using a discount rate believed to be consistent with those applied by market participants.

Although the fair value estimate of each asset group is based on assumptions the Company believes to be reasonable, those assumptions are inherently unpredictable and uncertain, and actual results could differ from the estimate. Negative revisions of estimated reserves quantities, increases in future cost estimates, or sustained decreases in oil or natural gas prices could lead to a reduction in expected future cash flows and possibly an impairment of long-lived assets in future periods.

Income Taxes

The Company is subject to U.S. federal, state and local income taxes with respect to its allocable share of any taxable income or loss of Magnolia LLC. The amount of income taxes recorded by the Company requires interpretations of complex rules related to the Company’s partnership structure and regulations of various tax jurisdictions throughout the United States. Deferred tax assets and liabilities are recognized based on the tax effects of temporary differences between the carrying amounts on the consolidated financial statements and the tax basis of assets and liabilities, as measured using currently enacted tax rates. These differences will result in taxable income or deductions in future years when the reported amounts of the assets or liabilities are recovered or settled, respectively. Considerable judgment is required in predicting when these events may occur and whether recovery of an asset is more likely than not. Magnolia records deferred tax assets and associated valuation allowances, when appropriate, to reflect amounts more likely than not to be realized based upon Company analysis. Additionally, federal and state income tax returns are generally not filed before the consolidated financial statements are prepared. Therefore, Magnolia estimates the tax basis of its assets and liabilities at the end of each period, as well as the effects of tax rate changes, tax credits, and net operating and capital loss carryforwards and carrybacks, if any. Adjustments related to differences between the estimates used by the Company and the actual amounts reported are recorded in the periods in which the Company’s income tax returns are filed. These adjustments and changes in estimates of asset recovery and liability settlement as well as significant enacted tax rate changes could have an impact on the Company’s results of operations. Please refer to Part II, Item 8, Note 2—Summary of Significant Accounting Policies and Note 10—Income Taxes in the notes to the consolidated financial statements included in this Annual Report on Form 10-K for additional discussion.