Magnolia Oil & Gas Corporation (NYSE:MGY) Q4 2022 Earnings Call Transcript
Magnolia Oil & Gas Corporation (NYSE:MGY) Q4 2022 Earnings Call Transcript February 15, 2023
Operator: Good morning and welcome to the Magnolia Oil & Gas Fourth Quarter and Full Year 2022 Earnings Conference Call. All participants will be in a listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Jim Johnson. Please go ahead.
Jim Johnson: Thank you, Gary. Good morning, everyone. Welcome to Magnolia Oil & Gas' fourth quarter earnings conference call. Participating on the call today are Chris Stavros Magnolia's President and Chief Executive Officer; and Brian Corales, 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 is available in the Company's Annual Report on Form 10-K filed with the SEC.
A full Safe Harbor can be found on Slide 2 of the conference call slide presentation with the supplemental data on our website. You can download Magnolia's fourth quarter 2022 earnings press release as well as the conference call slides from the Investors section of the Company's website at www.magnoliaoilgas.com. I will now turn the call over to Mr. Chris Stavros.
Chris Stavros: Thanks, Jim and good morning, everyone. Thanks for joining us today. I'll provide some comments on our results and accomplishments during 2022 and will then give an update on our outlook for 2023, and how we plan to allocate our free cash flow during the year. Brian will then review our fourth quarter and full year 2022 results and provide some additional guidance before we take your questions. As we enter our sixth year as a public company, the core principles of Magnolia's business model established at the beginning are expected to continue. I've said previously that my plan is not to make significant changes or put my personal stand on Magnolia. Throughout the halls here, in the office and out in the field, every one of our employees is a Magnolia shareholder and is aligned with our investors.
We run Magnolia for our shareholders and my objective will always be to do what is in the best interest of our investors. We plan to maintain our discipline around capital spending while keeping low levels of debt. And we expect to continue our track record of achieving moderate annual production growth while generating significant amounts of free cash flow with strong operating margins. 2022 was a record year for Magnolia and I want to recognize our team's strong contributions, which helped support Magnolia's exceptional, financial and operational results. We achieved goals that further solidify the strength of Magnolia's business model and strategy while also marking some important milestones. Record production in 2022 combined with higher product prices and our team's continued focus on managing costs all contributed to expand our full year pre-tax operating margins to 63% leading to record net income for the company.
Last year, we successfully executed our development program at Giddings and the positive performance of this asset is reflected in our financial results. Giddings now represents more than half of Magnolia's overall production and proved reserves and is a significant contributor to our strong financial performance. Our Giddings development was responsible for driving overall production company production growth of more than 14% during 2022, while spending only 34% of our total EBITDAX on D&C and associated facilities capital. We generated a record $823 million of free cash flow last year and returned 54% of this amount to our shareholders in the form of share repurchases and a regular base dividend which is paid quarterly. We repurchased more than 15 million Magnolia shares during 2022, reducing our diluted share count by 8% compared to 2021 levels.
Our ability to deliver moderate annual production growth in our production volumes and reducing our outstanding shares builds greater dividend per share payout capacity over time and as demonstrated by the recent announcement of a 15% increase to our quarterly base dividend. The increase to our dividend reflects our strong operating and financial performance achieved during 2022, and demonstrates our ongoing confidence in the outlook of the business. Inclusive of the cash returned to shareholders and after spending approximately $90 million on some small bolt-on oil and gas property acquisitions during the year, our cash balance nearly doubled during 2022, ending the year at $675 million. While Magnolia's unhedged business captured the benefit of much higher product prices last year, this year's plan will focus on improving our execution and generating further operating and cost efficiencies, in order to partially offset the impact of higher oilfield service costs.
Operationally, we expect our 2023 plan to be quite similar to last year. We expect to continue to operate a two-rig drilling program, which we estimate should generate full year production growth of approximately, 10%. Our production is expected to steadily climb throughout the year and starting in the first quarter. As I noted earlier, we will stay disciplined around our D&C capital and limit our spending approximately 55% of EBITDAX, which would provide us with significant free cash flow. We estimate the current year's capital expenditures to be approximately $500 million, with the year's heaviest capital outlays occurring in the earlier part of 2023. Our supply chain and operations team did a superb job of strengthening the valued partnerships with our key vendors, as well as managing through the inflationary environment of rising oilfield service costs, that occurred throughout 2022.
These efforts have helped to mitigate some of the increased costs, and with recent signs indicating that some of the service cost inflation starting to flatten or even decline modestly in certain products and services. We plan to continue to allocate a sizable portion of our free cash flow toward enhancing the value of the existing business, and improving our per share metrics. This includes our ongoing share repurchase program, where we expect to repurchase at least 1% of our outstanding shares each quarter. We also expect to pursue small accretive bolt-on, oil and gas property acquisitions, in and around our current operating areas. These acquisition opportunities would have characteristics comparable to our existing assets, and match some of the skills and learnings from our experience in Giddings.
As an example in late 2022, we were able to acquire some acreage minerals and additional working interest in Giddings, and primarily outside of our core development area. This further builds on our strong position in the play, and is in line with our strategy of incrementally improving our opportunity set as well as our drilling economics. Allocating our free cash flow through these actions, is intended to enhance the underlying value of the business, expand our dividend per share payout capacity and strengthen our investment proposition of providing 10% average annual dividend growth over time. I'll now turn the call over to Brian, who will review our fourth quarter and full year financial results.
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Brian Corales: Thanks, Chris and good morning, everyone. I will review some items from our fourth quarter and full year results and refer to the presentation slides, found on our website. I also provide some additional guidance for the first quarter of 2023, and remainder of the year, before turning it over for questions. Beginning with Slide 3. Magnolia continued to execute on our business model, as demonstrated by our fourth quarter and full year 2022, financial and operating results. We established records for many of our key operating and financial metrics during the year including production, free cash flow, net income and most notably operating income margins of 63% during the year. The overall results for 2022, were supported by very strong product price realizations, our efforts around cost containment and supply chain management and stronger overall production growth.
During the fourth quarter, we generated total net income of $255 million, which included a non-cash tax benefit to earnings of $66 million. Excluding this non-cash tax item, we generated total adjusted net income for the quarter of $189 million or $0.88 per diluted share. Our adjusted EBITDAX for the quarter was $268 million and for the year was $1.3 billion. Total capital associated with drilling, completions and associated facilities for the fourth quarter was $150 million -- $140 million or 52% of our EBITDAX. D&C capital for the year was $460 million, or just 34% of our EBITDAX. Fourth quarter production volumes grew 6% year-on-year to 73.8000 barrels of oil equivalent per day. For the year, company production volumes grew 14% to 75.4000 barrels of oil equivalent per day.
As Chris noted earlier, we repurchased 15.5 million shares during 2022, reducing our diluted share count by 8% year-over-year. Looking at the 2022 cash flow waterfall chart on Slide 4. We started the year with $367 million of cash. Cash flow from operations before changes in working capital was $1.25 billion, with working capital changes partially offset by other items, benefiting cash by $54 million. Our D&C capital incurred including land acquisitions, was $465 million and spent $90 million on several small bolt-on oil and gas property acquisitions. During the year, we allocated $352 million towards share repurchases and paid dividends of $90 million. We ended 2022 with $675 million of cash on our balance sheet, an increase of more than $300 million during the year and after returning approximately 54% of our free cash flow to shareholders in the form of share repurchases and dividends.
Looking at slide 5. 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 52.3 million shares or approximately 20%. Magnolia's weighted average fully diluted share count declined by 2.4 million shares sequentially averaging 215.4 million during the fourth quarter. We currently have 8.9 million shares remaining on our current repurchase authorization, which is specifically directed toward repurchasing Class A shares in the open market. Turning to slide 6 and as Chris discussed earlier, we recently announced a 15% increase in our quarterly dividend to $0.115 per share, which is payable on March 1st and providing an annualized dividend payout rate of $0.46 per share.
The increase in our dividend is supported by the 24% year-over-year increase in our production per share that we achieved during 2022. Our plan for annualized dividend growth of at least 10% is part of Magnolia's investment proposition and supported by our overall strategy of achieving moderate annual production growth and reducing our outstanding shares by at least 1% per quarter. We plan to examine our dividend payout rate at least annually and after assessing our full year results recast a $55 oil price environment. Magnolia has the benefit of a very strong balance sheet and we ended the quarter with a net cash position of $275 million. Our $400 million of gross debt is reflected in our senior notes. which do not mature until 2026. Including our fourth quarter ending cash balance of $675 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 December 31st are shown on slides 7 and 8. Turning to slide 9 and looking at our per unit cash costs and operating income margins. Our total adjusted cash operating costs including G&A was $12.15 per BOE in the fourth quarter of 2022. It's an increase of $0.83 per BOE compared to year ago levels. The year-over-year increase was primarily due to higher production taxes due to higher product prices and higher LOE as a result of increased oilfield service costs and higher workover related activity. Including our DD&A rate of about $9.40 per BOE, our operating income margin for the fourth quarter was $29.16 per BOE or 57% of our total revenue. Magnolia had a very successful organic drilling program during last year.
Our 2022 proved reserves increased 16% to 157 million barrels of oil equivalent and we replaced 179% of our 2022 production. Magnolia books only one year of proved undeveloped reserves. And as a result, 80% of our 2022 proved reserves were developed. The proved undeveloped reserves represent what we plan to convert to proved developed during 2023. Turning to guidance for the first quarter and for the remainder of 2023, we are currently operating two drilling 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 rig will drill a mix of wells in both Karnes and Giddings areas, including some appraisal wells in Giddings. We continue to improve our operating efficiencies in the Giddings field and are seeing signs that cost inflation is flattening for some of our drilling and completion materials compared to last year's steep increases.
We estimate our D&C capital to be between $490 million and $520 million for the full year 2023, which includes some non-operated capital that is expected to be similar to 2022 levels. At this level of spending and activity, we expect to deliver full year production growth of approximately 10% with most of the growth expected to come from our development program at Giddings. For the full year 2023, we expect our effective tax rate to be approximately 21% with most of this being deferred. Our cash tax rate is expected to be 6% to 9% for 2023. Looking at the first quarter of 2023, we expect total production volumes to be between 80,000 boe per day and 82,000 boe per day. And our D&C capital is estimated to be in the range of $140 million and $150 million.
We expect our first quarter capital expenditures to be at the highest quarterly level for the year, with modest reductions in spending in subsequent quarters. Our price differentials are anticipated to be a $3 per barrel discount to MEH. Our fully diluted share count for the first quarter is estimated to be approximately 214 million shares, which is 6% below year ago levels. We're now ready to take your questions.
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