Magnolia Oil & Gas Corporation Q1 2023 Earnings Call
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Good day and welcome.
The oil and gas first quarter 2023 conference call.
All participants will be in listen only mode. If you need assistance. Please signal conference specialist by pressing the star key Globus zero.
After todays presentation, there will be an opportunity to ask questions. Please note that this event is being recorded.
The conference over to Mr. Jim Johnson. Please go ahead.
Thank you and good morning, everyone welcome to Magnolia oil and gas as first quarter earnings conference call participating on the call today are Chris Stavros, Magnolia is president and Chief Executive Officer, and Brian Corral as 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.
Available on the company's annual report on Form 10-K filed with the SEC.
Full safe Harbor can be found on slide two of the conference call slide presentation with the supplemental data on our website you.
You can download and Magnolia is first quarter of 2023 earnings press release as well as the conference call slides from the investors section of the company's website at Www Dot Magnolia oil and gas Dot Com I will now turn the call over to Mr. Chris <unk>.
Thank you and good morning, everyone. We appreciate you joining us today for a discussion of our first quarter 2023 results I will make some brief comments about the latest quarter talk about where we stand currently and address some actions that we're taking around our capital spending and how this will impact our outlook for the rest of the year.
Brian will then review our first quarter financial results in more detail and provide some additional guidance before we take your questions.
Our first quarter results delivered a solid start to the year supported by strong well performance in both karnes and giddings areas steady activity and ongoing operating efficiencies at Giddings provided production growth of 10% for last year's first quarter.
Additional D&C efficiencies realized in our giddings assets helped to partly mitigate the higher cost.
We generated more than $60 million of free cash flow during the quarter and despite sustaining lower operating margins caused by weaker oil and gas prices as well as higher costs associated with oilfield service inflation.
Since our inception Magnolia is focus has remained consistent and includes a disciplined approach toward capital spending.
Targeting moderate annual production growth with high pre tax operating margins, while generating reliable free cash flow.
Tried to achieve these goals, while continuously improving our per share metrics and maintaining a strong balance sheet low levels of debt.
Well oil and gas prices have moved significantly lower since late last year and into 2023, while all sales service and materials costs remain elevated.
This combination has weakened our operating margins and returns.
Our current cost structure for oilfield services materials does not reflect the sharp decline in overall product prices as compared to last year.
So how we responded to this instead of allocating more capital to achieve higher growth, which would drive our F&D costs higher and further dilute our margins, we've taken prudent actions to better align our capital spending to reflect the current environment.
Beginning in the first quarter, we proactively worked with our top service providers and material suppliers to reduce our costs, while planning to defer only a modest amount of our operated activity.
We expect this to impact Magnolia.
These measures should result in at least a 10% reduction in this year's capital spending deliver.
To deliver full year 2023 production growth in the range of 5% to 7% and provide us with greater operating flexibility, while generating greater amounts of free cash flow during the year.
We currently expect our total D&C capital for 2023 to be in the range of $440 million to $460 million, which represents at least a 10% reduction from our original guidance.
New level of spending which is expected to be lower than our full year 2022 capital focus is on achieving improved returns and higher free cash flow until service and material costs are better aligned with oil and gas prices.
As I mentioned, the discussions with our service providers and suppliers and the modest adjustments Tri County began during the first quarter and we're proactive decisions on our part to reduce our capital costs.
The impact of our actions is expected to be immediately evident and is reflected in our second quarter guidance for D&C capital of approximately $100 million, which is about 30% lower than first quarter levels.
This plan also allows for operational flexibility should the cost and commodity environment become more aligned later this year.
The overall outcome is consistent with our business model, which includes limiting our capital spending approximately 55% of our EBITDAX.
Along with achieving mid single digit annual production growth.
I want to praise our teams for working collaboratively and creatively to find solutions and adapting to the current environment to preserve our capital and maximize efficiencies.
Our valued partners with whom we built strong relationships continue to work cooperatively with our teams to help us reduce costs, which allows us to maintain a steady pace of activity without losing the momentum around operating efficiencies that we that we have worked hard to achieve.
Despite the deferral of a modest amount of our operated activity. We plan to continue operating two drilling rigs through the remainder of the year.
One one we'll drill development wells at Giddings, while the other rig will drill in both karnes and giddings, including some appraisal well wells at Giddings.
We continue to gain efficiencies at Giddings with several recent past, establishing new company records for completion stages per day. These.
These efficiencies provide us further flexibility and options to maximize our free cash flow.
Giddings is currently producing well over 50000 Boe per day and represents approximately two thirds of the total company production.
Most of the Magnolia has grown this year will come from our Giddings asset is a larger proportion of our capital is allocated to this area.
Our disciplined approach around capital allocation ideally positions us to create value through the cycle, while supporting our differentiated return of capital program, which focuses on increasing the per share value of the company in pursuing actions to increase our dividend payout capacity.
This balanced strategy is underpinned by the by targeting moderate annual production growth, we're purchasing at least 1% of our outstanding shares each quarter and pursuing small accretive bolt on oil and gas property acquisitions.
<unk> reinforced our investment proposition of providing 10% annual production growth over time, I'll now turn the call over to Brian .
Thanks, Chris and good morning, everyone I'll review some items from our first quarter and refer to the presentation slides found on our website.
Also provide some additional guidance for the second quarter of 2023 and remainder of the year before turning it over for questions.
Beginning with slide three and I know you continue to execute on our business model as demonstrated by our strong first quarter financial and operating results. Despite softer commodity prices as Chris detailed the objective for Magnolia is creating long term value for our shareholders and with an eye towards focusing on our operating margins and returns we believe the actions outlaw.
Today helped to achieve that goal by taking prudent steps to better align our capital spending with the current product price environment to generate more free cash flow, which can be used to enhance the purchase per share value of the company.
During the first quarter, we generated GAAP net income of $107 million, excluding the noncash impairment associated with our Louisiana well. Our total adjusted net income for the quarter was $119 million or 56 cents per diluted share our adjusted EBITDAX for the quarter was 217 million with total cap.
Associated with drilling completions and associated facilities of approximately $140 million.
First quarter production volumes grew 10% year over year to $79 3000 barrels of oil equivalent equivalent per day, an 8% sequential growth from the fourth quarter of 2022 during.
During the first quarter, we repurchased two 4 million shares and our diluted share count fell by 6% year over year.
Looking at the quarterly cash flow chart on slide four we started the first quarter was $675 million of cash.
Cash flow from operations before changes in working capital was $214 million.
With working capital changes and other small items impacting cash by $12 million during the quarter, we allocated 46 million towards share repurchases and paid dividends of $25 million. We ended the quarter with 667 million and approximately at the same level that we started.
Looking at the slide looking at Slide five this chart illustrates the progress of the reduction in our total outstanding shares since we began our repurchase program in the second half of 2019.
Since that time, we have reduced our total diluted share count by $54 7 million shares or approximately 21% Magnolia just weighted average fully diluted share count declined by $2 4 million shares sequentially, averaging $213 9 million during the first quarter.
We currently have $6 5 million shares remaining under our current repurchase authorization, which are specifically directed towards repression repurchasing class a shares in the open market.
Turning to slide six our dividend has grown substantially over the past few years, including a 15% increase announced earlier this year to 11 and a half cents per share on a quarterly basis. Our next quarterly dividend is payable on June 1st and provides an annualized dividend payback payout rate of 46.
<unk> per share our.
Our plan for annualized dividend growth of at least 10% is an important part of bank noise investment proposition and supported by the overall strategy of achieving moderate annually annual production growth and reducing our outstanding shares by at least 1% per quarter.
Magnolia has the benefit of a strong balance sheet and we ended the quarter with a net cash position of $267 million or $400 million of gross debt is reflected in our senior notes, which do not mature until 2026.
Including our first quarter, ending cash balance of $667 million and our undrawn $450 million revolving credit facility. Our total liquidity is more than $1 1 billion, our condensed balance sheet and liquidity as of March 31 are shown on slides seven and eight.
Turning to slide nine and looking at our per unit cash costs and operating income margins. Our total adjusted cash operating costs, including G&A or $12 65 per Boe in the first quarter of 2023, that's a decrease of 53 per Boe compared to year ago levels.
Year over year decrease was primarily due to lower production taxes, lower <unk> and lower exploration expense.
We offset by higher LOE.
Our DD&A rate of $9 90 per BOE increased roughly 20% compared to last year and is directly related to higher well cost, resulting from rising oil field service material and labor costs <unk>.
Excluding our noncash impairment our adjusted operating income margin for the first quarter was $19 98 per Boe.
Our 46% of our total revenue.
A year over year decrease in our pretax operating margins is primarily driven by the decrease in commodity prices.
Turning to guidance for the second quarter and for the remainder of 2023. We are currently operating two rigs and plan to continue this level of activity through the end of the year, one rig will continue to drill multi well development pads in our giddings asset the second we'll drill a mix of wells in both karnes and giddings area areas, including some appraisal well.
In Giddings as Chris mentioned, we would expect our total D&C capital for 2023 to be in the range of $440 million to $460 million, which represents at least a 10% reduction from our original guidance. The reduction comes from a mix of both cost savings and a modest decrease in activity.
This level of reduced spending we expect to deliver full year 2023 production growth of between 5% to 7% with with most of the growth expected to come from our development program mechanics.
The reduction to our capital is expected to generate more free cash flow for Magnolia and provide us with increased flexibility going forward.
For the full year 2023, we expect our effective tax rate to be approximately 21% with most of this being deferred or cash tax rate is expected to be approximately 6% for 2023.
Looking at the second quarter of 2023, we expect total production volumes to be approximately 80000 barrels of equivalent per day with overall volumes anticipated to be more gas weighted compared to the first quarter.
Our D&C capital was estimated to be approximately $100 million, which is approximately 30% sequential decrease oil price differentials are anticipated to be a $3 per barrel discount to <unk>, our fully diluted share count for the second quarter is estimated to be approximately 212 million shares which is 5% below year ago.
<unk>, we're now ready to take your questions.
Okay.
Thank you.
The question and answer exactly.
That's a good question you might put a star then one on your Touchstone phone.
Speakerphone, please pick up your handset before Mcgee.
With all of your questions.
Arvind Sood at this time, we'll pause momentarily to assemble the roster.
Thank you first question will be from this segment of course. Please go ahead.
Hi, good morning, Thanks for the time Chris.
Definitely appreciate the latest Capex changed in how you guys have always been among the most capital disciplined company. My question is has your thoughts on uses of the cash balance you have now changed as the commodities overall market continue to breakdown.
Yeah. Thanks Neal.
I guess I'll address that that.
The cash aspect.
First from a capital angle and then I'll I'll address it a little bit more on.
Cash after capital.
You know again just to be clear.
Where we're choosing to do this take these actions that we talked about today really from a proactive approach towards our costs.
We want to be sort of early movers on this rather than late movers.
You know the.
The reason as I said in my remarks. The reason that we're doing this is really to get try to get price concessions from our vendors and suppliers.
Yeah. It it just it's a situation where.
Going into the year pricing and costs were out of kilter.
With with prices that you're seeing on the screen and and certainly relative to last year.
So.
We can sort of mosey on along here and continue to do what we're doing and not try to capture any improvements.
We're basically capitalizing our reserves at last year's higher costs.
And you know I I, just don't think that's a good good outcome.
I would.
Lean more on the savings the capital savings coming from the benefit that we're going to see on materials and services because I.
I will tell you at these prices.
These things are going to start coming down even more than we probably already are thinking.
On the on the growth on the production growth, we adjusted that a little bit but.
And just keep in mind.
We could grow faster if we wanted to we're just simply choosing not to.
And we retained that option in other words the importance of.
Reducing the capital from a cost perspective allows for more activity to fit into the program with time, So I think as things become more balanced.
The growth could be better but this is what this is what the outcome is that at the current level of costs.
On the on the cash you know.
Some of the winnings.
The cash winnings were accumulated turned up period peak period of the cycles, certainly we're not looking to squander the winnings.
So you know we'll continue to run the business model using what I would call a balanced approach, which again calls for this mid single digit growth share repurchases you know on the order of 1% per quarter of outstanding.
Certainly if things get out of whack or the or the stock sort of doesn't perform as well as we think or doesn't perform in line with the model or perform in line with the peers. You know, we could sort of lean in more on that we have the ability to do that.
And we continue to expect you to pay our base dividend, which will grow you know as we talked about 10% a year just based on the outcome of the model and the strategy.
M&A market I figured somebody would ask sort of may as well address it.
Alright.
It's soft right now and as you can imagine.
You know with all the volatility and uncertainty of product prices. There's been things that have just been yanked from the market or you know sellers are lesser and lesser inclined certainly around natural gas assets lesser inclined to offer up assets that it just might not command what they're interested in getting.
You know will continue to be disciplined around this and focus on things that are.
You know look more like singles and doubles as opposed to Grand slams and I think it's very much a.
And opportunistic approach and ground game.
A strategy that we have around improving the business and looking to pick up.
Assets here and there that fit into the model just as we are with Giddings and I think there's some things that we can do around that but I wouldnt expect or anticipate that you're going to see something very large from us right now I just don't see that.
But I think there's some things that you know like I said more single type opportunities.
So that's where we're happy with the cash balance we don't want to we don't want to squander. It we want to use it in a good way because you know things are.
More challenging now than they were just a few months ago.
Yes, I really like your Optionality I'm glad you guys been methodical with that and my follow up is just on prospective locations.
Are you able to give an idea of the number of top tier locations do you believe.
You still have I mean getting into obviously, a big Big area and then maybe what you have in karnes or you don't.
I don't need exact details maybe just on broader color around sort of how you're seeing each of these assets sit today.
Yes, it's an interesting question I mean, you know as we especially as we come up on Magnolia is five year anniversary this year.
Five years ago, we talked about our planning process that incorporates sort of five years of activity.
And here we are five years after the fact and I would tell you. We're still talking about five years of activity, we have lots of things to keep us busy lots of things to work on and so I don't see this as any issue around.
Inventory or whatnot it is.
So we'll be able to sort of keep our two rigs busy.
For awhile.
Thank you so much.
Thank you and our next question from you might try to three Oh Goldman Sachs. Please go ahead Sir.
Hi, good morning, and thank you for taking my questions.
My first question Hey, My first question was on the updated guidance.
I mean, a lot of moving pieces that you highlighted plans to defer completions are all the things that benefit from service cost deflation and ongoing getting if giddings efficiencies.
Can you help us unpack these points from a modeling perspective like how many plants. How many beds are applying to deferred and any color you can give us on the cost trends.
Trying to understand the cadence of production and completions this year.
Yeah, I mean on the material side.
You know, we're seeing costs come down for most of our materials some of our service as well, but certainly a lot on the materials side steel or CTG tubular goods out fluids green.
Granular completion materials, otherwise known as sand.
Pressure pumping so.
Everything is coming down some things, maybe a little bit more stickier than others. Some labor related items, some service related items, but in this environment I would anticipate them continuing to.
See you know declines over time and it certainly winds up better for the second half of the year.
Not to mention you know the next thing on tap for us to go after and address is or our field expenses lifting costs low.
And so you know I have.
My belief is that we'll be able to make some progress there in the back half of the year or two so.
That's sort of how I would see it in terms of the wells.
It amounts to just a few wells.
Are you just looking at some some deferred completions that's about it.
So I'm and this deferred completions is it more in Q2, because if we look at the way the contango is that on the gas curve.
It would probably imply a more pronounced weakness in Q2, and a little bit better pricing in the back half of this year.
No I wouldn't say we're that.
So it could be that we're that smart around it I mean look it's sort of spread out through the year.
I would tell you that there's probably for the remainder of the year on average you're looking at capital of about $100 million a quarter, there might be a little bit of lumpiness.
A little bit of lower capital in two Q that might bump up again at three Q come down it <unk> hard to really say, but it might be a little bit lumpy, but on average about $100 billion per quarter for the rest of the year.
Very helpful. Thank you.
Thank you and our next question will be from Jeff J of Daniel Energy Partners. Please go ahead.
So hey, guys. If I can just beat the service.
Dead horse a little longer.
Just curious if you have to strip kind of holds out here and was right you over and over the next you know the remainder of this year and next year, how far down do you think service costs need to come in order for you to sort of I guess get back to the rate of activity you would kind of planned out at the beginning of the year.
Well, Jeff I mean, we still haven't.
You know what right now all we're clawing back is you know some.
The stated increases going into 2023, and so this still is not reflective of some of the you know the.
The.
Ramp up that is that you saw in 2022 and so.
You know you probably.
And look I'm, a I'm, a little bit sort of finger in the wind here, but.
My view is that another 15%, 20% maybe.
Down the down the path in order to get things better aligned.
Gotcha that makes sense, just it's always sort of an interesting calculus right. Because obviously I think the service guys would say hey, we just started to make money you know at some point last year. So I'm trying to figure out where you thought the right balance was well we realized that you know and that's why we've tried to work collaboratively with.
The the vendors and the service providers and say look if you want to keep.
Your your crews and and your <unk>.
Your activity going where all we're trying to do is work with you. So we can continue that.
Relative consistency and steadiness going going through time here, rather than you know, creating a situation where they have to.
Drop folks or drop activity themselves and sort of stall it out.
Cool that's great color I appreciate it thanks guys.
Thanks, Jeff.
Thank you and I guess, if we need to ask a question. Please press Star then one.
The next question will be from Paul Diamond of Citi. Please go ahead.
Good morning, all and thanks for taking my call.
Wanted to touch base quickly I know, we had spoken about or we've seen some volatility in our price realizations as well I just wanted to kind of get your take on how you see that progressing through the year given the current kind of dislocated.
Okay pricing.
Yeah, Hey, Paul I mean, if we look at the oil price in general.
We've got a $3 off MGH for several years, plus or minus or dollar around that there is a little volatility, but we still think that's a good number of long term and to continue to use now gas has seen a lot more volatility, especially we sell most of our gas at ship channel and as you know with with Freeport outage there has been a.
You know some wider spreads that we've seen not just magnolia, but just ship channel compared to Henry hub and so I think those are the largest contributors oil I think will be relatively consistent you know roughly about $3 off of any age but ship channel I mean, it has narrowed a but it was stubbornly wide for so.
Several months.
Understood. Thank you and just one quick follow up just kind of talking about some appraisal wells up to do that.
Just wanted to know if there was any sort of update on there because when you change the cadence or trend.
Did you guys see fig.
Yeah.
No not really I mean, it just in terms of.
The pace of activity a little bit as I mentioned, just some deferrals, but you know really around things like what we're doing giddings more I would characterize more tweaking trying to optimize results.
Where we're still seeing quite a bit in the way of efficiencies on.
You know completion timing.
Yeah.
Understood. Thanks for the clarity.
Thank you that concludes.
A question and answer session. The conference has now concluded you may now disconnect. Thank you for attending.
Okay.