Magnolia Oil & Gas - Earnings Call - Q3 2025

Executive Summary

• Record total production of 100.5 Mboe/d; revenue $324.9M (-2% YoY), diluted EPS $0.40, operating income margin 31%, adjusted EBITDAX $218.8M, and free cash flow $133.9M.
• Consensus comparison: Q3 EPS modest beat (Primary EPS 0.421 vs 0.414), revenue slight beat ($324.9M vs $323.0M), but EBITDA a notable miss ($213.9M vs $223.3M) — bold miss on EBITDA; estimates from S&P Global.*
• Guidance reinforced: FY25 production growth ~10% (raised from initial 5–7%); FY25 D&C capital ~$454M; Q4 production ~101 Mboe/d, LOE ~$5.20/boe, fully diluted share count ~189M; company remains unhedged; effective tax rate ~21% with zero cash taxes expected for FY25.
• Shareholder returns: Returned ~$80M (60% of FCF) via $51M buybacks (2.15M shares) and $29M dividends; cash ended at $280M with $450M undrawn revolver.

What Went Well and What Went Wrong

What Went Well

• Record volumes with disciplined spend: Production reached 100.5 Mboe/d (+11% YoY); reinvestment rate held at 54% of adjusted EBITDAX; free cash flow $134M. CEO: “We…maximize free cash flow…from our high-quality assets”.
• Strong gas/NGL realizations supported margins despite lower oil prices: Operating income margin 31%; management cited “strong natural gas and NGL price realizations” underpinning revenue/EBITDAX.
• Giddings outperformance driving growth: Giddings production +15% YoY; oil +5% YoY; management deferred several completions to 2026 to save ~5% capital and preserve flexibility.

What Went Wrong

• Pricing-driven margin compression: Revenue/boe fell to $35.14 from $39.92 YoY; operating income margin declined to 31% from 39%, largely due to lower oil prices.
• Gathering/processing costs higher YoY: GTP costs rose to $1.92/boe from $1.28/boe YoY, pressuring adjusted cash operating margin (68% vs 73%).
• EBITDA missed Street: Q3 EBITDA ~$213.9M vs consensus ~$223.3M; the miss likely reflects lower oil price realizations and higher GTP costs — bold miss noted; estimates from S&P Global.*

Transcript

Speaker 5

Good morning everyone and thank you for participating in Magnolia Oil & Gas Corporation's third quarter 2025 earnings conference call. My name is Danielle and I will be your moderator for today's call. At this time, all participants will be in a listen-only mode as our call is being recorded. I will now turn the call over to Magnolia's management for their prepared remarks, which will be followed by a brief question and answer session.

Thank you, Danielle, and good morning, everyone. Welcome to Magnolia Oil & Gas third quarter earnings conference call. Participating on the call today are Chris Stavros, Magnolia's Chairman, 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 third quarter 2025 earnings press release as well as the conference call slides from the Investor section of the company's website at www.magnoliaoilgas.com. I will now turn the call over to Mr. Chris Stavros.

Speaker 2

Thank you, Tom, and good morning, everyone. Thanks, everyone, for joining us today for discussion of our third quarter 2025 financial and operating results. I plan to highlight our quarterly results, which represent another strong period of consistent execution for Magnolia and continue to deliver on the capital efficient program that we outlined during the first half of this year, and one that has provided us with more free cash flow. Brian will then review our third quarter financial results in greater detail and provide some additional guidance before we take your questions. We continually remind the financial community that Magnolia's primary goals and objectives are to be the most efficient operator of our best-in-class oil and gas assets, to generate the highest returns on those assets, and while employing the least amount of capital for drilling and completing wells.

A substantial portion of the free cash flow Magnolia generates is returned to investors through our secure and growing cash dividend and ongoing share repurchases, and we continue to enhance and expand our asset base through bolt-on acquisitions stemming from our accumulated subsurface knowledge and experience near areas where we operate and understand well. Magnolia's latest quarter is characterized by achieving these objectives, and our year-to-date performance demonstrates our ability to execute our business model despite the decline in product prices that we've seen recently. We operate a focused business with an emphasis on driving financial returns and do not plan to add incremental activity at current product prices. At Magnolia, our mission is straightforward: generating consistent and sustainable free cash flow through disciplined capital allocation, profitability, pursuing opportunities.

All.

That said and turning to Slide 3 of our investor presentation, Magnolia delivered another strong quarter and our overall business continues to operate exceptionally well. We achieved a record quarterly total production rate of 100.5 thousand barrels of oil equivalent per day during the third quarter, representing year-over-year production growth of 11% with total production quarters saw low single-digit year-over-year growth despite a small sequential quarterly decline due to the timing of turn in lines, while oil production at Giddings grew by nearly 5% compared to the prior year. As we are now well into the fourth quarter, our production is off to a very strong start and we anticipate both record total production and oil production in the current period.

Continued strong well performance during the year is expected to provide us with full-year 2025 total production growth of approximately 10% and well above our initial guidance of 5 to 7% at the start of the year. Our Giddings well results have not only outperformed our expectations, but have exceeded levels of the last couple of years and despite a similar drilling and activity program, the outperformance led us to defer the completion of several wells into next year, allowing for a reduction in our capital earlier this year and is expected to result in a roughly 5% savings in spending during 2025. This had the dual benefit of improving our free cash flow during 2025 as well as enhancing our operational flexibility as we move and look into 2026.

Our adjusted EBITDAX for the third quarter was $219 million and operating income margins were 31% during the period, while our annualized return on capital employed was 17%. Each of these metrics was supported by solid overall production volumes during the quarter in addition to strong relative price realizations for both natural gas and NGL production. Our disciplined approach around spending, a focus on financial returns, including our efforts and initiatives to improve the efficiency of our DNC program, all contributed to limiting our capital reinvestment rate to 54% of our adjusted EBITDAX during the third quarter. Our low reinvestment rate helped generate a strong level of free cash flow in the quarter of $134 million. We returned 60% of this free cash, or approximately $80 million, to our shareholders through the repurchase of more than 2.1 million Magnolia shares and the cash payment of our quarterly base dividend.

Both our consistent share repurchase program and the secure, growing base dividend are a mainstay of Magnolia's ongoing investment proposition. Incorporating these outlays, we ended the quarter with $28 million of additional cash and with a cash balance of $280 million at quarter end, which was the highest level of the year. As I mentioned, we expect to end the year on a strong note and with record oil and gas production in the fourth quarter and with capital spending of approximately $110 million. As we did during 2024, we continue to focus on our field level operating costs, which have reduced our lease operating expenses through capturing additional production efficiencies in such areas as water handling and fluid management as examples. These and other initiatives are the result of continuous improvements in how we plan, drill, complete, and operate our wells.

Additional drilling and completion efficiencies that we expect to realize will accrue to the business through additional learnings and the further delineation of our Giddings asset. We expect these efficiencies to accumulate at a measured pace and have no plan to accelerate our activity to pursue this. Looking ahead to 2026, we remain committed to our business model, which limits our capital spending to 55% of our adjusted EBITDAX or gross cash flow. Similar to 2025, we plan to operate two drilling rigs and one completion crew next year and expect to allocate a modest amount of capital toward appraisal activities in both Giddings and the Karnes area and to further enhance our resource opportunity set. Assuming current product prices, we expect that our 2026 program would deliver mid single digit total production growth with capital spending at similar levels to 2025.

This also allows for significant free cash flow generation in support of our investment proposition, providing a secure and growing dividend and consistent share repurchases. We remain well positioned with ample financial and operational flexibility, allowing us to adapt within a volatile product price environment. When we ask our larger shareholders why they're invested in Magnolia, a common reply is because you do what you say you're going to do. Since our founding more than seven years ago, Magnolia has consistently executed around the principles of its differentiated business model, which includes our strong balance sheet and disciplined capital spending philosophy designed to maximize free cash flow generation from our high quality assets. We remain committed to our business model and our strategy that has helped compound per share value for Magnolia shareholders.

I'll now turn the call over to Brian to provide some further details on our third quarter 2025 results and some additional guidance for the fourth. Thanks, Chris.

Speaker 6

Good morning everyone. I will review some items from our third quarter results and refer to the presentation slides found on the website. I'll also provide some additional guidance for the fourth quarter of 2025 before turning it over for questions. Beginning on slide 5, Magnolia delivered a strong quarter as we continue to execute our differentiated business model. During the third quarter, we generated adjusted net income of $78 million or $0.41 per diluted share. Our adjusted EBITDAX for the quarter was $219 million, with total capital associated with drilling, completions, and associated facilities of $118 million, representing 54% of our adjusted EBITDAX. Third quarter production volumes grew 11% year over year to 100.5 thousand barrels of oil equivalent per day while generating free cash flow of $134 million. Looking at the quarterly cash flow waterfall chart on slide 6, we started the quarter with $252 million of cash.

Cash flow from operations before changes in working capital was $247 million, with working capital changes and other small items impacting cash by $5 million. We added $25 million of small bolt-on acquisitions comprised of additional acreage, working interest, and royalties that we discussed last quarter. During the quarter, we paid dividends of $29 million and allocated $51 million towards share repurchases. We incurred $119 million of drilling, completions, associated facilities, and leasehold and ended the quarter with $280 million of cash. Our cash position is the highest it has been all year despite lower oil prices and acquiring approximately $65 million of bolt-on acquisitions during the year. Looking at slide 7, this chart illustrates the progress in reducing our total outstanding shares since we began our repurchase program in the second half of 2019.

Since that time, we have repurchased 79.4 million shares, leading to a change in weighted average diluted shares outstanding of 26% net of issuances. Magnolia's weighted average diluted share count declined by approximately 2 million shares, sequentially averaging 190.3 million shares during the third quarter. We currently have 5.2 million shares remaining under our repurchase authorization, which are specifically directed toward repurchasing Class A shares in the open market. Turning to slide 8, our dividend has grown substantially over the past few years, including a 15% increase announced earlier this year to $0.15 per share on a quarterly basis. Our next quarterly dividend is payable on December 1st and provides an annualized dividend payout rate of $0.60 per share.

Our plan for annualized dividend growth is an important part of Magnolia's investment proposition and supported by our overall strategy of achieving moderate annual production growth, reducing our outstanding shares, and increasing the dividend payout capacity of the company. Magnolia continues to have a very strong balance sheet and we ended the quarter with $280 million of cash.

Speaker 2

Our.

Speaker 6

$400 million of senior notes does not mature until 2032. Including our third quarter cash balance of $280 million and our undrawn $450 million revolver, our total liquidity is approximately $730 million. Our condensed balance sheet as of September 30 is shown on slide 9. Looking at slide 10 and looking at our per unit cash cost and operating income margins, total revenue per BOE declined approximately 12% year over year due to the decline in oil prices, partially offset by an increase in natural gas prices. Our total adjusted cash operating costs including G&A were $11.36 per BOE in the third quarter of 2025, and our operating income margin for the third quarter was $10.98 per BOE, or 31% of our total revenue.

Turning to guidance, fourth quarter D&C capital expenditures are expected to be approximately $110 million, which would bring the total capital for the year to about the midpoint of our previously reduced annual capital budget. This includes an estimate of non-operated capital that is similar to that of 2024. We are reiterating our full year 2025 outlook for total production growth of approximately 10% compared to our guidance at the beginning of the year of 5% to 7%. Total production for the fourth quarter is estimated to be approximately 101,000 barrels equivalent a day, and we expect that total production and oil production for the quarter to be at the highest levels of the year and new Magnolia records. Our price differentials are anticipated to be approximately a $3 per barrel discount to Magellan East Houston, and Magnolia remains completely unhedged on all of its oil and natural gas production.

The fully diluted share count for the fourth quarter of 2025 is expected to be approximately 189 million shares, which is about 4% lower than fourth quarter 2024 levels. We expect our effective tax rate to be approximately 21%, and with the passing of new legislation during the third quarter, we expect zero cash taxes for full year 2025. We are now ready to take your questions.

Speaker 5

We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. The first question comes from Neil Dingman from William Blair. Please go ahead.

Speaker 0

Morning, guys.

Nice quarter.

Nice to be back on.

Speaker 6

Chris.

Speaker 0

My question for you, Brian. You continue to have these pretty amazing operational efficiencies, and I'm just wondering if that continues at the pace that we've seen, driven by these Giddings wells, could you envision, I mean, again, I think about would you accelerate production potentially even more than 10%, would you be able to, or would you think more so about, you know, you'd even be able to cut CapEx. I'm just wondering when you toggle those two and if you keep having the same upside, you know, where can we see those benefits lie next year?

Speaker 2

Neil, thanks for the question. Good to have you back. Look, we can do largely anything we'd like to do or we want to do within the context or framework that you mentioned. I think the point is we want to stay true to the business model. It works for us and it works for our shareholders in terms of maximizing the free cash flow that we have to give back to them. Rather than elevating activity levels, if you will, or rushing to get there, they will get there with time and over time. As we continue to pursue new areas and probe around the vast acreage position that we have in Giddings and also parts of Karnes and appraise more of it and bring more of it into the fold, we will have more of the way in realized efficiencies. I'm very confident of that. We've seen it.

There's a litany of things that I could tell you that the teams are working on that they currently see. I could spend 20 minutes on talking just about that. We're going to talk more about it as a team. That will happen as we go forward. There's no real reason to rush the activity levels or rush the production volumes or reach or stretch for higher levels that could get you into a situation where you're forced to spend that much more as your volumes sort of decline and get you on that sort of treadmill. We sort of live within the model, moderate mid single digit growth if the assets exceed that which oftentimes they have. Over the life of Magnolia, we've seen that better than expected performance. We'll take it, but we're not going to overstretch or overreach on the capital or activity just because.

We'll live the model and will live within our governor of the capital. I think in that way everyone will be satisfied.

Speaker 0

No, I love that you'll be able to do that. Lastly, when you look at M&A, you guys have been doing a fantastic job of replacing your, you know, more than replacing your inventory. When you look at just sort of white space in your general area, is there still plenty of white space, or how would you describe the, I don't know, I guess the ability just to continue to do these strategic bolt-on acquisitions? You guys have done a nice job, as I said, replacing the inventory. Is there still a lot of potential to do so?

Speaker 2

Yeah, no. Good question. There's a fair amount of white space, as you called it, and there's a fair amount of smaller private operators, things that, you know, we'll always evaluate. It has to be the right fit. I will say that, you know, first and foremost, it has to be the right fit for Magnolia. It has to, at its essence, actually improve the business, improve the company, improve our durability to fit into the model and extend what we have been able to do over the last, you know, however many years. If we can find something that fits that way or looks like us, we will do that or we will certainly consider it if it, you know, presents the proper fit. There may be some things like that. Not a day goes by where I don't get an email or phone call from a banker.

They're transactional, so they love to reach out, but they may not like us very much because the answer is more likely no than yes. We haven't found many of those things, but we continue to try and chip away and these are just over time, additive to our business. A lot of it, or certainly some of it, has come through the appraisal program that we've had over the years where we learn about a certain area, we like it, we tend to figure it out and then we look for more of it in the way of filling in that white space, if it can be had. We'll continue to do some of those things.

Speaker 0

Thank you again. Nice quarter.

Speaker 2

Thanks.

Speaker 5

The next question comes from Tim Rezvan from KeyBanc Capital Markets. Please go ahead.

Speaker 1

Good morning, folks. Thank you for taking my question.

Speaker 2

I want to start.

Speaker 1

Chris, you mentioned in your prepared comments and in that last response, appraisal work going on at Karnes. You know, there's a market perception that Karnes is sort of on its last legs as one of the earlier, you know, shale plays.

Speaker 2

Can you talk about what you're.

Speaker 1

Referring to the appraisal activity there, is that non op?

Speaker 2

Is it operated?

Speaker 1

Is it Austin Chalk or something else?

Speaker 2

Just curious.

Speaker 1

Any color you can provide?

Speaker 2

I would not write Karnes off just yet. Certainly, good rock is good and tends to have a long life. That is good rock and some of the best acreage in Karnes. We're continuing to look at that and see what else we can do, what iteration of it that we're on. Fortunately, I still think it's relatively early for us, so there may be more to be had there and we'll continue to probe around. I'm not going to say exactly what we're going to do or exactly what we're planning on doing, but there will be some things that we will test that may have some upside or provide some extended life, if you will, to Karnes. That would not surprise me in the least. The question is always, when you do these appraisal things, what do the economics look like?

There's no unlikelihood that we're not going to find producing quantities of oil and gas. That's certain for sure. The question is, can we do it economically and provide a good amount of duration around it? I think there's a reasonable chance around that. I'm certainly not going to write it off. I would say the same thing with Giddings, although Giddings is a lot bigger just in terms of its footprint, and we're quite active there too, and we have some things planned as well. I think I'm optimistic. Okay.

Speaker 1

I guess we'll have to stay tuned into next year. Yeah, my follow up is sort of a similar theme. You know, the western Haynesville evolution has been interesting and now there's folks leasing sort of up to your acreage line. I'd be shocked, I think, if you did some appraisal drilling there. Is there discussion at the board level about trying to understand if you think you have that resource and do.

Speaker 2

You have the deep rights? Thank you. That's a bit further afield in the area that you're referring to compared to where we are. We currently don't have an area up and around where you're talking about. There are other areas within Giddings that have extensive amounts of natural gas exposure. We've talked about that at the organizational level throughout. As I mentioned earlier, it's more about, to some extent, economics as opposed to quantities of producible hydrocarbons. We know it's there. It's just, can we figure out a way to make it more economic? Okay, thank you. Thanks.

Speaker 5

The next question comes from Carlos Escalante from Wolfe Research. Please go ahead.

Speaker 9

Yeah, thank you. Hey, guys, thank you for taking my questions. I'd like to go back real quick to your discussion on your appraisal program. If just taking an early look at how you intend to manage your appraisal program in 2026, particularly in the event of any weakness, I wonder how you would intend to manage that and what are the levers that you could pull because at your current adjusted EBITDAX cap on CapEx, we certainly think that implies, at least in our view, that you won't touch your growth capital until perhaps anywhere close to $50 per barrel WTI. I wonder if you can frame the appraisal program in the context of those levers and, again, in the event of a sustained oil weakness. Thank you.

Speaker 2

Yeah, thanks for the question, Carlos. The appraisal program has been quite beneficial to Magnolia in terms of our resource and capabilities over time and expanding the footprint in Giddings. I'd be somewhat reluctant to take a machete to that program and just.

Speaker 6

Cut it off.

Speaker 2

Too harshly. You need to do what you need to do and some mix of oil and gas prices. In the current outlook or in the current sort of price dynamics that we're seeing, there is still room for a reasonable amount of that type of activity and we'll continue with that. Look, I say this internally all the time. Few ways to find resource and you decline every day, just like all our peers. You either buy it or you find it. We continue to look for ways to supplement our existing resource. The appraisal program for us up to now has worked out exceptionally well. You know, particularly in Giddings, we've tested some new concepts, we've tested some of the boundaries. There's almost always, really not almost, but really always going to be reducible amounts again of oil and gas when we drill.

The question is, can we make the economics of a particular area work well for us that fit into our matrix of returns and are competitive for capital. We will continue to do that. It's an important element of what we do and you know, we will continue to examine different parts of it and try to high grade the program if you will.

Speaker 9

Wonderful, thank you. Appreciate that, Chris. On my follow-up, I think that certainly to us, at least from a vantage point, one of the many sell points that Magnolia has as an organization is its ability to capitalize on natural gas realizations compared to a lot of your oil-levered peers. We just had a very interesting quarter in Waha, for example. I am just wondering where you are today, and considering all the reshuffling that you see just in the backyard of where you are with Gulf Coast LNG growing and growing, if there are any kind of initiatives that you have for sustain at your organizational level that may be aimed to further improve that and further gain that edge that you have over some of your oil-levered peers.

Speaker 2

Thanks for the commercial message. I really appreciate it. On the natural gas realizations, I would agree with you that we've been able to benefit from some strong realizations on a year over year basis and into most of 2025. The answer is, you know, I don't exactly know. I mean there's a lot of complicated factors. Had we taken actions based on some impressions or opinions that we had heard say a year ago and done some things to perhaps consider hedging basis or even consider options such as that, we probably would have been wrong. The impact of what you've seen up to now, coming out of the Permian, with it and in some of the associated gas producing areas as we move more gas to Waha, et cetera, hasn't seemed to influence it yet.

I don't know if it will, but I would have, you know, others said that it would have and they were wrong and there's a lot of other variables and factors that may offset that. I'm not necessarily willing to lean in and make something fully deterministic on somebody's view because there's just so many moving parts.

Speaker 9

Wonderful. Thank you, Chris.

Speaker 2

Thanks.

Speaker 5

The next question comes from Charles Meade from Johnson Rice & Company. Please go ahead.

Speaker 4

Good morning, Chris, Brian, and the rest of the Magnolia team there. Chris, I'd like to go back to the A&D market and ask a question there. Can you offer your view? Have you seen anything different on the packages that you look at around getting either in the quality of what is available, what's being brought forward, or the ask that you're seeing relative to the value?

Speaker 2

Are you referring to South Texas specifically or just South Texas inclusive of the entire trend?

Speaker 4

I was asking more specifically about Giddings, but I'd be curious to hear whatever views you want to share on the whole kind of Eagle Ford, Austin Chalk trend if you'd care to.

Speaker 2

Yeah, let's start with Giddings. Giddings is, in terms of the bigger packages or bigger concentrated assets, fairly concentrated. There's us and a large private player without naming names, and then there's probably a smattering, scattered positions of a variety of private players. There are very few, if any, sizable or even smaller packages in Giddings that are operated by public companies.

Just to set that straight, in this environment what may happen is that bigger packages may be holdouts for live to fight another day or live to see a better day, if you will, on product prices, oil prices before considering a sale, and smaller things may be more reasonable as far as connectivity and alignment between a buyer and a seller because the seller may run out of patience or money or whatever, and those are small things and they may just ultimately pop up somewhere else at the end of the day. That smaller things may be more easy to move. I can't guarantee that, but certainly a better chance at that than a larger thing as prices come down because the bid and the ask just widen apart between the players, broadly.

In South Texas, I would tell you that everything's getting generally gassier, GORs are rising, and the quality is waning. There are heat pockets of things here and there. I would characterize it as generally over time, gassier, generally over time, somewhat scattered and maybe less synergistic opportunities. On occasion you'll find a private player who's done a good job. True to form, many private equity-backed players will press on the accelerator to push activity and volumes in order to create more cash and EBITDA to try to sell an asset. That typically doesn't work very well for a public buyer to acquire somebody else's decline rate while they run through the better part of their inventory. That's sort of how I would characterize things generally.

Speaker 4

Got it. Thank you for that. A question about your flexibility around your activity levels. When I look at you guys, you have been really steady at two rigs, one frac fleet. At least from the outside looking in, it looks like if you were to have dropped from there, you're kind of sitting right above the minimum efficient threshold of keeping one frac crew pretty much continuously busy. Is that something that you guys think about, and is that something that you agree would be the case, that you'd lose some efficiency if you had to cut activity in response to lower commodity prices? How would you manage that?

Speaker 2

I'm not all that worried about it. We have very strong relationships with the crews and equipment that we use. I don't see our activity pulling back dramatically in this environment, if at all. We could certainly adapt and do some things from an efficiency standpoint. I'm not all that worried about it. We've entered into some contracts that give us quite a bit of flexibility to take advantage of some softness in pricing that we've seen recently, but at the same time, not so long as to take us out of play and considering things that, if things should worsen in the market, to take advantage of that later on. I'm not very worried about it.

Speaker 6

Great.

Speaker 2

Thanks for the color. Thanks.

Speaker 5

The next question comes from Peyton Rogers Dorne from UBS Investment Bank. Please go ahead.

Hey, good morning, Chris and team. I know earlier you gave the indications on the 2026 budget, but I just.

Speaker 6

Wonder if you have any details too.

Share on how the plan theoretically might be shaped. I ask just because you've highlighted those six deferrals and maybe targeting completions to benefit from higher winter gas prices. Should we infer from that that maybe the spending is going to be.

A bit more weighted to Def. Half or first quarter.

Thank you.

Speaker 2

Yeah, thanks for the question. I would say generally, and this is probably not maybe very different from any in the industry, the spending levels would probably be a little bit more skewed to the earlier part of the year, which will include some test areas. Also, just because we have a little bit more line of sight on pricing sooner, we'll pull forward some activity and volumes into the first half, first quarter of the year. If I had to skew it that way, I would say it'll be a subtle heavier amount of activity and capital in the early part of the year, but not a dramatic difference. Say from 1Q to the back half. I mean on a % basis it wouldn't look that way. It'll be more subtle.

All right, great. Thanks for getting me on.

Speaker 9

Thank you.

Speaker 5

The next question comes from Phillips Johnston from Capital One Securities. Please go ahead.

Speaker 6

Hey, thanks for the time.

Speaker 2

First question is on oil volumes, Chris. I think your comments on the second quarter call suggested that oil production should grow in 2026 at a rate that's a little bit below the mid single digit target for total BOE production. Is that still a good way to think about next year? Which I think would sort of put you somewhere in the 40,000 to 41,000 a day range, give or take. Yeah, that's sort of what I would think. I mean, like I said, the fourth quarter is off to a very strong start. I anticipate sort of record volumes, BOEs, but also oil in the fourth quarter. If I had to frame it, I would say clearly the record was earlier in the second quarter. We did 40,000 a day of oil.

If I had to guess, you'd sort of be at 40,000 to 41,000 is a fair number. I would expect, you know, lower single digit oil growth year on year, full year 2026 over full year 2025. Call it 2% to 3%. Okay, perfect. For modeling purposes, if we assume you sort of remain at this current two rig program throughout next year, would that still imply somewhere around 55 gross wells next year or has the annual run rate continued to sort of creep up some with the efficiencies? Yeah, I think plus or minus, that's about right. There's not a dramatic shift or change in the number of actual gross wells. Okay, great. Thanks, Chris. Thank you.

Speaker 5

The next question comes from Zach Parham from J.P. Morgan. Please go ahead.

Speaker 2

Hey, thanks for taking my question. You exited the quarter with the most cash on the balance sheet you've had since 1Q24. Obviously that's a great problem to have, but how do you think about use of that cash? You know, if you continue to build cash, do you continue to consider potentially increasing your buyback case? The goal is not only to generate free cash, it's to ultimately, you know, to your point, really find a way to put it back into the business or utilize it to generate more returns over time, properly allocate it. We'll just have to see how things move out, you know, or transpire into the late into the year and into next year. As far as, you know, the business, we're not going to sort of amp up activity, if you will, to, you know, reach for more volumes necessarily.

That's not the point. The point is to look for pockets of, you know, maybe underperformance or disruptions in the equity. If we had the opportunity to buy more shares, sure, we'll do that. The shares that we repurchase actually conveniently work in our favor and with the model in terms of providing us with a little bit of advantage on the base dividend. It just means we can grow the per share amount of the dividend a little bit more as a result of buying the shares and have less cash outlay that way. It does provide us with a lot of flexibility, Zach.

I think we'll just sort of wait and see and take a lot of things into consideration on all those aspects of cash returns to shareholders and even ultimately into, you know, looking at some bolt-on opportunities if they come along and if we can find something that's attractive and the right fit for the business.

Speaker 0

Thanks, Chris.

Speaker 2

My follow up, just wanted to ask, on OpEx, you got into $5.20 for Boe, for LOE in 4Q. Can you just give us some color on how you expect that to trend into 2026?

Speaker 9

I know you've done a lot.

Speaker 2

Work this year to try to bring that down. I think, as I mentioned in my comments, that there are some things that we're looking at in terms of saltwater disposal, managing chemicals, fluid management, generally managing our crews in the field somewhat more efficiently. I think so far we've had a lot of small wins and improvements in several areas and I think some of that will stay with us. In particular, as you know, workovers continue to represent the largest variability in the field level operating costs from quarter to quarter. We're doing some good work on surface facility expenses and other things in terms of moving around both oil and gas. I think that should generally help us. I said $5.20 for the fourth quarter. Seasonally, you pick up a little bit in the year seasonally into the first quarter.

Once you get through that, I think you can come down a little bit from the $5.20 level into next year, I believe at sort of current commodity prices. Thanks. Thank you.

Speaker 5

The next question comes from Tim Moore from Clear Street. Please go ahead.

Thanks and congrats on a great free cash flow and execution. One of the questions I have for you, Chris, or maybe even Brian, is how should we think about the gathering, transportation, and processing expense going forward as a % of revenue? I know you commented earlier this year about maybe upticking a bit. Oil price came down. It doesn't help, but are there any kind of drivers you can speak to that maybe get a little bit utilization benefit for it maybe next year if the current commodity prices hold up?

Speaker 6

GP I think you're referring to is not really a % of revenue generally. I'm sorry, it's not a.

If when.

You look at it, it should be relatively stable. As long as commodity prices are somewhat stable, it should be relatively stable. If you see increases in gas and NGL pricing, you could see that cost go higher. On the flip side, if commodity prices, gas and NGLs go lower, you may see some savings there.

That's helpful. Just to follow up, I know Chris already gave some comment on some of the improved efficiencies with water disposal, fluid handling, some of the chemicals. I was just wondering, you've been working on getting very well and getting some efficiencies. Are there any other kind of surface repairs or low hanging fruit there, or do you think it's mostly done and seventh inning?

Speaker 2

There's always going to be some things that we continue to look at in terms of process management and doing things better. It's really never over. You're always turning over rocks and looking for other things to create more and more efficiencies over time, whether it's with personnel crews moving things. It's a business of moving things in many ways, moving and managing equipment, moving and managing your products. There's always things to pursue beyond just what I mentioned.

Great. Thanks, Chris and Brian. All my other questions were already answered.

Thank you.

Speaker 5

The next question comes from Fu Pham from Watts Capital. Please go ahead.

Speaker 2

Hi, thanks for giving my question. My first question is about the Giddings expansions. In the last quarter we know that we expand by 40,000 acres. I'm just wondering if any new wells were drilled in the area, and also if not, do you expect any known potential expansion or any new wells in the future in that area? Thank you. Yeah, thanks for the question.

Speaker 6

If you're referring to some of the.

Speaker 2

Wells that we've drilled earlier this year and even late last year in a new area that provided us with quite a bit of the outperformance that we experienced. The answer is yes, we do plan to go back there. Those wells are continuing to perform quite good and continue to outperform with time. We will plan to go back there next year and over time in the future. There's more to go after there and I expect it to be folded into the program partly into next year and beyond. My second question would be about the Eagle Ford production. I saw that the Eagle Ford was a bit up this quarter. I was wondering if there were any wells drilled in the waters. If so, what was the performance of the wells?

Speaker 6

I assume you're talking about the Karnes area. Look, we go to Karnes a couple times a year and again we have one completion crew. You will see a little bit of volatility just in terms of Karnes production. I think you can probably assume that if there was an increase, there was probably a little bit of activity, whether operated or non-operated.

Speaker 2

All right, thank you.

Speaker 5

The next question comes from Noah Hungness from Bank of America. Please go ahead.

Speaker 6

Morning.

Speaker 2

For my first question here, Chris, I was wondering how are you seeing service pricing right now and how do you see that and do you think it's aligned with kind of where the curve is for oil prices? Thanks for the question, Noah. Yeah, look, I mean things have come down throughout the better part of 2025, conditions are still relatively soft. I think the rate of change has lessened here recently for us and probably for the sector, for the industry, for us. I would tell you we're obviously going to see some things on the OCTG side, steel that's tariff related, that will have some underlying upside pressure. Most if not all of that, really, probably all of that will be offset by the softness that we're seeing and the improvements that we're seeing.

A combination of some of our own efficiencies, but also some of the savings that we're getting out of contractual arrangements and working with our vendors. There still is some softness. I would tell you that for the moment in this range of product prices, things have seemed to have found a bit of a leveling out, if you will. That's not to say that couldn't change if product prices were to turn south late this year or into next year. Typically what's underpinning some of that is the industry sort of prepping itself for more activity early into the new year. Some of that is seasonal. If that were to dissipate or as it dissipates into 2026, you could see some further round of softness perhaps, but we'll see it remains to be seen. That's really helpful. And then for my second question.

I.

You have the six deferred completions. You'll be carrying 26, but could you maybe talk about how many DUCs that you're carrying into the new year? Also, how many DUCs do you think you'll be exiting 2026 with?

Speaker 6

We generally know we don't really carry planned DUCs. That's why I guess we talked about the deferral of some of these earlier this year. Outside of kind of work in process wells, we don't really plan to, you know, we don't usually carry DUCs.

Speaker 2

We're not purposefully carrying ducks. It's really more, it'll end up being more of a timing issue than anything else. Would it be fair to assume you're carrying the six deferred completions into 2026, but then you'd be exiting with basically zero, zero deferred completions with the current plan?

Speaker 6

Right outside of wells that are in process.

Speaker 2

Correct. Normal ducts.

Speaker 5

The next question comes from Greta Drewke from Goldman Sachs. Please go ahead.

Speaker 8

Good morning and thank you for taking my questions. I actually wanted to follow up on the last one that was just asked there. On your outlook for activity in the macro a little bit, in the situation of a potentially derating in oil prices through the remainder of the year or into 2026, can you provide any color around what price potentially could you see some incremental deferred completions or activity adjustments, or if you have any sort of framework for how you could evaluate potential further completions or turn in line timing changes.

Speaker 2

Yeah, I mean our program, it's not a static program, it's a dynamic program. We have, as I mentioned in my remarks and in response to the questions, a lot of both financial and operational flexibility, especially considering some of those deferrals that have snaked through the system into 2025. As I said, that's really provided us with a bit of a cushion, if you will, into 2026. That's a sizable benefit. If we continue to see some good performance, the object, as we exit the year and going into 2026, that could provide us with further cushioning and the ability for additional flexibility to respond to odd movements in product prices if that were to occur. Overriding that, we do have the business model, governor of our spending, which limits us to the 55%.

We try to stay true to form to that and keep to that plan because that does keep us honest and straight narrow. Like I said, we have a lot of flexibility in the program to maneuver around product prices. I'm very comfortable with how the business is running right now and where we sit. There are lots of capabilities that we've built into that process. You can look at the sensitivities for oil and gas prices and model it out as to what the downside or upside is, if you will. It's generally right now at current prices. I'm not concerned about where we are.

Speaker 8

Great, thank you. Just for the follow up, as you highlighted in your update, Magnolia's two rig, one crew program over the past several years has supported about 50% production growth over that period of time. I was just curious, can you speak a bit about how much of that growth you view is attributable to improved rig and crew cycle time efficiencies versus acquisitions and versus, well, performance improvements potentially over the past few years?

Speaker 2

Yeah, we've not acquired very much in the way of production over the seven years we've been operating. I mean, most of it, you know, there's been maybe one or two transactions that provide us with any measurable amount of volumes that we can speak to. Most of it has been done organically. We probably produced over the, on a compounded basis, maybe 8% sort of compound annual growth for the business. By and large, most of that has come from organic drilling completions of the business. We haven't folded in a lot of PDP ads that I can speak to. Great.

Speaker 8

Thank you.

Speaker 5

This concludes our question and answer session, and the conference is now concluded. Thank you for attending today's presentation. You may now disconnect.