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Magnolia Oil & Gas First Quarter 2022 Results

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   |    Wednesday,May 11,2022

Magnolia Oil & Gas Corp. announced its financial and operational results for the first quarter of 2022.

First Quarter 2022 Highlights:

• Magnolia reported first quarter 2022 net income attributable to Class A Common Stock of $166.0 million, or $0.90 per diluted share. First quarter 2022 total net income increased 128% to $208.6 million and diluted weighted average total shares outstanding decreased by 9% to 227.4 million⁽¹⁾ compared to first quarter 2021.

• Adjusted EBITDAX was $298.4 million during the first quarter of 2022, driven by strong production growth and significantly higher product prices as compared to prior year results. Total drilling and completions ("D&C") capital during the first quarter was $83.4 million, representing just 28% of adjusted EBITDAX.

• Net cash provided by operating activities was $238.9 million during the first quarter and the Company generated free cash flow⁽²⁾ of $197.9 million. Magnolia generated operating income as a percentage of revenue of 62%.

• Total production in the first quarter of 2022 grew 15% from the first quarter of 2021 to 71.8 thousand barrels of oil equivalent per day ("Mboe/d") and at the high end of our production guidance, led by our Giddings asset. Production at Giddings and Other of 42.9 Mboe/d in the first quarter of 2022 grew 24% compared to the prior year first quarter including year-over-year oil production growth of 31%.

• During the first quarter, Magnolia repurchased a total of 6.0 million shares of Class A and Class B Common Stock for $129.6 million. At the end of the first quarter, Magnolia had 14.3 million Class A Common shares remaining under its current repurchase authorization.

• During the quarter, Magnolia paid the final semi-annual cash dividend related to 2021 results of $0.20 per share, bringing the total dividend payment associated with 2021 to $0.28 per share. Magnolia ended the year with $346.4 million of cash on the balance sheet. The Company remains undrawn on its $450 million revolving credit facility, with no debt maturities until 2026 and has no plans to increase its debt levels.

• We currently expect our D&C capital to be approximately $400 million for 2022, compared to our earlier guidance of $350 million. The increase is due to additional net wells in Giddings resulting from faster drilling times, the drilling of longer laterals, as well as other operational efficiencies, combined with oil field service cost inflation. These efficiencies and longer laterals result in greater well activity and are now expected to provide full year 2022 production growth in excess of 10%, compared to our previous estimate of high single-digit growth

CEO Steve Chazen said: "We had a very strong start to the year as demonstrated by our record quarterly financial and operating results. The ongoing execution of our strategy and business plan, which includes disciplined capital spending, continues to provide moderate and steady production growth, high pre-tax operating margins, and significant free cash flow. The absence of hedges which resulted in strong product price realizations, combined with our continued efforts around cost containment, is reflected in record quarterly pre-tax operating margins of 62 percent. Our operating team continues to make strong progress steadily advancing the development of our Giddings asset. As Giddings is still in the relatively early stages of development, our team has been successful in offsetting some of the oil field cost inflation through ongoing efficiency gains.

"During the first quarter of 2022, we grew our total production by more than 3 percent sequentially while spending just 28 percent of our adjusted EBITDAX. We generated nearly $200 million of free cash flow during the quarter and returned 89 percent of this to our shareholders, mainly through share repurchases of $130 million as well as $46 million for the final semi-annual dividend payment related to our 2021 results. We repurchased a total of 6 million shares during the first quarter, and our total diluted shares outstanding declined by 9 percent compared to last year's first quarter. Despite the significant return of cash to our shareholders, we ended the quarter with $346 million of cash on our balance sheet, and roughly unchanged during the quarter.

"We continue to operate two drilling rigs with one completion crew split between our two assets at Giddings and in the Karnes County area. Our gradual and measured approach toward both the appraisal and development of the Giddings field has created operating efficiencies leading to some acceleration of our well activity this year. Faster drilling combined with the drilling of longer laterals at Giddings, and oil field service cost inflation is expected to add a small amount of capital to our program for the remainder of the year. This is also expected to boost our full year production growth to more than 10 percent compared to our previous outlook of high single-digits. At current product prices, we expect our capital spending to be around a third of our adjusted EBITDAX, well-below our 55 percent spending cap, and resulting in significant free cash flow. Most of the free cash flow is expected to be allocated toward improving the per share value of the company, including our plan to repurchase more than 1 percent of our outstanding shares each quarter. We would also expect our dividend to grow at least 10 percent annually based on the continued successful execution of our strategy."

Operational Update

First quarter 2022 total company production averaged 71.8 Mboe/d, representing a more than 3 percent sequential increase and 15 percent higher than the prior year's first quarter. Overall production grew during the quarter despite our spending only 28 percent of adjusted EBITDAX on drilling and completing wells. Production was at the high end of our guidance mainly due to better well performance at our Giddings asset. Compared to the same period last year, Giddings and Other production grew 24 percent and oil production at Giddings grew 31 percent.

Magnolia continues to operate two drilling rigs and expects to maintain this level of activity for the balance 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 the Karnes and Giddings areas, including some appraisal wells in Giddings. We continue to realize efficiency gains at Giddings as evidenced by approximately a 20 percent improvement in our drilling feet per day compared to the first quarter of 2021. Our average lateral length per well continues to rise and we expect this year's average length to be around 8,000 feet with some wells surpassing 10,000 feet. We also plan to drill some larger pads in Giddings during the second half of the year. Efficiencies such as the reduction in drilling times, longer laterals, and more wells per pad leads to more net well activity during the year and a little more capital. These efficiencies should also help mitigate some of the service cost inflation in addition to boosting our production during the remainder of 2022 and into early next year.

Our overall lease operating expenses increased compared to the prior year mainly due to higher workover related activity, which can vary from period to period. G&A expenses declined on a year-over-year basis as a result of savings from the termination of the EnerVest operating services agreement, and partly offset by higher personnel costs associated with our growth.

Additional Guidance

We estimate our second quarter D&C capital to be approximately $100 to $110 million and currently expect it to be in this range for the remaining quarters of the year, and with full year capital estimated at about $400 million. Total production for the second quarter is estimated to be approximately 72 to 74 Mboe/d. Most of our wells in the current quarter are expected to be turned in line during the latter half of the period and resulting in higher production during the second half of the year. Based on continued strong well performance, faster drilling times and other operational efficiencies seen at Giddings, we now expect our total production growth to exceed 10 percent for the full year 2022 and compared to our earlier estimate of high single-digit growth. Production at Giddings is also expected to grow approximately 25 percent during this year.

Oil price differentials are anticipated to be approximately a $3 per barrel discount to Magellan East Houston and Magnolia remains completely unhedged for all its oil and natural gas production. The fully diluted total share count for the second quarter of 2022 is expected to be approximately 223 million shares which is 8 percent lower than second quarter 2021 levels.