UNITED STATESSECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
| |
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 20182019
OR
| |
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File Number: 001-38083
Magnolia Oil & Gas CorporationCorporation
(Exact Name of Registrant as Specified in its Charter)
|
| | | |
Delaware | | 81-5365682 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | | |
1001 Fannin Street,Nine Greenway Plaza, Suite 400
Houston, TX1300
| | 7700277046 |
Houston, | Texas | |
(Address of principal executive offices) | | (Zip Code) |
Registrant’s telephone number, including area code: (713) (713) 842-9050
|
| | |
Securities registered pursuant to section 12(b) of the Act: |
| | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Class A Common Stock, par value $0.0001 | MGY | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x☒ No ¨☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x☒ No ¨☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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| | | | | | |
Large accelerated filer | | ¨☒ | | Accelerated filer | | ¨ ☐ |
| | | | | | |
Non-accelerated filer | | x ☐ | | SmallSmaller reporting company | | ¨☐ |
| | | | | | |
| | | | Emerging growth company | | x☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨☐ No x
☒
As of November 13, 2018,4, 2019, there were 156,332,733167,280,858 shares of Class A Common Stock, $0.0001 par value per share, and 93,346,72591,789,814 shares of Class B Common Stock, $0.0001 par value per share, outstanding.
Table of Contents
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PART I. | | | | |
Item 1. | | | | |
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Item 2. | | | | |
Item 3. | | | | |
Item 4. | | | | |
PART II. | | | | |
Item 1. | | | | |
Item 1A. | | | | |
Item 2. | | | | |
Item 3. | | | | |
Item 4. | | | | |
Item 5. | | | | |
Item 6. | | | | |
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PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
Magnolia Oil & Gas Corporation
Consolidated Balance Sheets (Unaudited)
(inIn thousands)
| | | | | | | | | Successor |
| | Successor September 30, 2018 | Predecessor December 31, 2017 | | September 30, 2019 | | December 31, 2018 |
ASSETS | | | | | (Unaudited) | | (Audited) |
CURRENT ASSETS: | | | | |
CURRENT ASSETS | | | | | |
Cash and cash equivalents | | $ | 36,715 |
| $ | — |
| | $ | 164,489 |
| | $ | 135,758 |
|
Accounts receivable | | 167,174 |
| 100,512 |
| | 120,664 |
| | 140,284 |
|
Accounts receivable - related party | | — |
| 13,692 |
| |
Drilling advances | | 5,791 |
| — |
| | 2,055 |
| | 12,259 |
|
Other current assets | | 2,033 |
| 332 |
| | 5,047 |
| | 4,058 |
|
Total current assets | | 211,713 |
| 114,536 |
| | 292,255 |
| | 292,359 |
|
PROPERTY, PLANT AND EQUIPMENT | | | | | | | |
Oil and natural gas properties | | 3,081,740 |
| 1,731,696 |
| | 3,741,357 |
| | 3,250,742 |
|
Other | | | 2,710 |
| | 360 |
|
Accumulated depreciation, depletion and amortization | | (65,069 | ) | (166,159 | ) | | (563,901 | ) | | (177,898 | ) |
Total property, plant and equipment, net | | 3,016,671 |
| 1,565,537 |
| | 3,180,166 |
| | 3,073,204 |
|
OTHER ASSETS | | | | | | | |
Deferred financing costs, net | | 11,321 |
| — |
| | 8,980 |
| | 10,731 |
|
Equity method investment, net | | 18,409 |
| 8,901 |
| |
Intangibles, net | | 41,983 |
| — |
| |
Equity method investment | | | 19,482 |
| | 18,873 |
|
Intangible assets, net | | | 27,477 |
| | 38,356 |
|
Other long-term assets | | | 4,773 |
| | — |
|
TOTAL ASSETS | | $ | 3,300,097 |
| $ | 1,688,974 |
| | $ | 3,533,133 |
| | $ | 3,433,523 |
|
| | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | |
CURRENT LIABILITIES: | | | | |
CURRENT LIABILITIES | | | | | |
Accounts payable and accrued liabilities | | $ | 178,072 |
| $ | 74,536 |
| | $ | 186,627 |
| | $ | 196,357 |
|
Derivative liability | | — |
| 6,764 |
| |
Other current liabilities | | | 3,684 |
| | 1,004 |
|
Total current liabilities | | 178,072 |
| 81,300 |
| | 190,311 |
| | 197,361 |
|
LONG-TERM LIABILITIES: | | | | |
LONG-TERM LIABILITIES | | | | | |
Long-term debt, net | | 388,343 |
| — |
| | 389,528 |
| | 388,635 |
|
Asset retirement obligations, net of current | | 43,437 |
| 3,929 |
| | 93,102 |
| | 84,979 |
|
Long-term derivative liability | | — |
| 3,052 |
| |
Deferred taxes, net | | 47,236 |
| 2,724 |
| | 74,200 |
| | 54,593 |
|
Other long term liabilities | | — |
| 131 |
| |
Other long-term liabilities | | | 2,039 |
| | — |
|
Total long-term liabilities | | 479,016 |
| 9,836 |
| | 558,869 |
| | 528,207 |
|
| |
|
|
|
| |
COMMITMENTS AND CONTINGENCIES (Note 13) | |
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|
|
| |
COMMITMENTS AND CONTINGENCIES (Note 16) | | |
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| |
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STOCKHOLDERS’ EQUITY | |
|
| | | | | |
Class A Common stock, $0.0001 par value, 1,300,000,000 shares authorized, 155,227,284 shares issued and outstanding | | 16 |
| — |
| |
Class B Common stock, $0.0001 par value, 225,000,000 shares authorized, 90,452,174 shares issued and outstanding | | 9 |
| — |
| |
Additional paid in capital | | 1,647,905 |
| — |
| |
Class A Common Stock, $0.0001 par value, 1,300,000 shares authorized, 168,260 shares issued and 167,310 shares outstanding in 2019 and 156,333 shares issued and outstanding in 2018 | | | 17 |
| | 16 |
|
Class B Common Stock, $0.0001 par value, 225,000 shares authorized, 91,790 and 93,346 shares issued and outstanding in 2019 and 2018, respectively | | | 9 |
| | 9 |
|
Additional paid-in capital | | | 1,704,652 |
| | 1,641,237 |
|
Treasury Stock, at cost, 950 shares in 2019 | | | (9,722 | ) | | — |
|
Retained earnings | | 3,120 |
| — |
| | 74,823 |
| | 35,507 |
|
Noncontrolling interest | | 991,959 |
| — |
| | 1,014,174 |
| | 1,031,186 |
|
PARENTS’ NET INVESTMENT | | — |
| 1,597,838 |
| |
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | | $ | 3,300,097 |
| $ | 1,688,974 |
| |
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | | | $ | 3,533,133 |
| | $ | 3,433,523 |
|
The accompanying notes are an integral part to these consolidated financial statements.
Magnolia Oil & Gas Corporation
Consolidated and Combined Statements of Operations (Unaudited)
(inIn thousands, except per share data) |
| | | | | | | | | | | | | | | | | | | | | |
| | Successor | | | Predecessor |
| | Three Months Ended September 30, 2019 | | Nine Months Ended September 30, 2019 | | July 31, 2018 Through September 30, 2018 | | | July 1, 2018 Through July 30, 2018 | | January 1, 2018 Through July 30, 2018 |
REVENUES | | | | | | | | | | | |
Oil revenues | | $ | 207,840 |
| | $ | 584,009 |
| | $ | 143,202 |
| | | $ | 68,487 |
| | $ | 399,124 |
|
Natural gas revenues | | 21,243 |
| | 71,208 |
| | 13,414 |
| | | 3,646 |
| | 22,135 |
|
Natural gas liquids revenues | | 15,716 |
| | 51,215 |
| | 21,547 |
| | | 4,754 |
| | 27,927 |
|
Total revenues | | 244,799 |
| | 706,432 |
| | 178,163 |
| | | 76,887 |
| | 449,186 |
|
OPERATING EXPENSES | | | | | | | | | | | |
Lease operating expenses | | 24,344 |
| | 70,755 |
| | 11,016 |
| | | 3,681 |
| | 23,513 |
|
Gathering, transportation and processing | | 9,270 |
| | 26,016 |
| | 5,353 |
| | | 2,240 |
| | 12,929 |
|
Taxes other than income | | 13,333 |
| | 40,825 |
| | 9,351 |
| | | 2,087 |
| | 23,763 |
|
Exploration expense | | 3,924 |
| | 10,017 |
| | 11,221 |
| | | 40 |
| | 492 |
|
Asset retirement obligation accretion | | 1,394 |
| | 4,095 |
| | 391 |
| | | 21 |
| | 104 |
|
Depreciation, depletion and amortization | | 143,894 |
| | 385,942 |
| | 65,902 |
| | | 23,157 |
| | 137,871 |
|
Amortization of intangible assets | | 3,626 |
| | 10,879 |
| | 2,418 |
| | | — |
| | — |
|
General and administrative expenses | | 17,345 |
| | 52,648 |
| | 10,297 |
| | | 1,701 |
| | 12,710 |
|
Transaction related costs | | — |
| | 438 |
| | 22,366 |
| | | — |
| | — |
|
Total operating costs and expenses | | 217,130 |
| | 601,615 |
| | 138,315 |
| | | 32,927 |
| | 211,382 |
|
OPERATING INCOME | | 27,669 |
| | 104,817 |
| | 39,848 |
| | | 43,960 |
| | 237,804 |
|
OTHER INCOME (EXPENSE) | | | | | | | | | | | |
Income (loss) from equity method investee | | 92 |
| | 608 |
| | 309 |
| | | (345 | ) | | 711 |
|
Interest expense, net | | (6,896 | ) | | (21,611 | ) | | (4,959 | ) | | | — |
| | — |
|
Gain (loss) on derivatives, net | | — |
| | — |
| | — |
| | | 3,865 |
| | (18,127 | ) |
Other income (expense), net | | 21 |
| | 8 |
| | (7,019 | ) | | | 24 |
| | (50 | ) |
Total other income (expense) | | (6,783 | ) | | (20,995 | ) | | (11,669 | ) | | | 3,544 |
| | (17,466 | ) |
INCOME BEFORE INCOME TAXES | | 20,886 |
| | 83,822 |
| | 28,179 |
| | | 47,504 |
| | 220,338 |
|
Income tax expense | | 3,529 |
| | 12,449 |
| | 3,538 |
| | | 766 |
| | 1,785 |
|
NET INCOME | | 17,357 |
| | 71,373 |
| | 24,641 |
| | | 46,738 |
| | 218,553 |
|
LESS: Net income attributable to noncontrolling interest | | 6,810 |
| | 29,294 |
| | 18,465 |
| | | — |
| | — |
|
NET INCOME ATTRIBUTABLE TO MAGNOLIA | | 10,547 |
| | 42,079 |
| | 6,176 |
| | | 46,738 |
| | 218,553 |
|
LESS: Non-cash deemed dividend related to warrant exchange | | 2,763 |
| | 2,763 |
| | — |
| | | — |
| | — |
|
NET INCOME ATTRIBUTABLE TO CLASS A COMMON STOCK | | $ | 7,784 |
| | $ | 39,316 |
| | $ | 6,176 |
| | | $ | 46,738 |
| | $ | 218,553 |
|
NET INCOME PER COMMON SHARE | | | | | | | | | | | |
Basic | | $ | 0.05 |
| | $ | 0.25 |
| | $ | 0.04 |
| | | | |
|
|
Diluted | | $ | 0.05 |
| | $ | 0.24 |
| | $ | 0.04 |
| | | | | |
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING | | | | | | | | | | | |
Basic | | 166,872 |
| | 160,051 |
| | 151,992 |
| | | | |
|
|
Diluted | | 167,108 |
| | 161,488 |
| | 157,072 |
| | | | | |
|
| | | | | | | | | | | | | | | | | | | |
| | Successor | Predecessor |
| | July 31, 2018 through September 30, 2018 | July 1, 2018 through July 30, 2018 | | January 1, 2018 through July 30, 2018 | | Three Months Ended September 30, 2017 | | Nine Months Ended September 30, 2017 |
REVENUES: | | | | | | | | | |
Oil revenues | | $ | 143,202 |
| $ | 68,487 |
| | $ | 399,124 |
| | $ | 72,706 |
| | $ | 240,778 |
|
Natural gas revenues | | 14,201 |
| 3,646 |
| | 22,135 |
| | 6,925 |
| | 19,436 |
|
Natural gas liquids revenues | | 21,153 |
| 4,754 |
| | 27,927 |
| | 6,984 |
| | 18,002 |
|
Total revenues | | 178,556 |
| 76,887 |
| | 449,186 |
| | 86,615 |
| | 278,216 |
|
| | | | | | | | | |
OPERATING EXPENSES | | | | | | | | | |
Lease operating expenses | | 11,016 |
| 3,681 |
| | 23,513 |
| | 6,180 |
| | 18,931 |
|
Gathering, transportation and processing | | 5,746 |
| 2,240 |
| | 12,929 |
| | 3,997 |
| | 12,238 |
|
Taxes other than income | | 9,351 |
| 2,087 |
| | 23,763 |
| | 5,823 |
| | 18,028 |
|
Exploration expense | | 11,221 |
| 40 |
| | 492 |
| | 77 |
| | 383 |
|
Asset retirement obligation accretion | | 391 |
| 21 |
| | 104 |
| | 87 |
| | 175 |
|
Depreciation, depletion and amortization | | 67,478 |
| 23,157 |
| | 137,871 |
| | 27,124 |
| | 88,844 |
|
General & administrative expenses | | 10,297 |
| 1,701 |
| | 12,710 |
| | 4,960 |
| | 13,224 |
|
Transaction related costs | | 22,366 |
| — |
| | — |
| | — |
| | — |
|
Total operating costs and expenses | | 137,866 |
| 32,927 |
| | 211,382 |
| | 48,248 |
| | 151,823 |
|
| | | | | | | | | |
OPERATING INCOME | | 40,690 |
| 43,960 |
| | 237,804 |
| | 38,367 |
| | 126,393 |
|
| | | | | | | | | |
OTHER INCOME (EXPENSE): | | | | | | | | | |
Income (loss) from equity method investee | | 309 |
| (345 | ) | | 711 |
| | (84 | ) | | (85 | ) |
Interest expense | | (4,959 | ) | — |
| | — |
| | — |
| | — |
|
Gain (loss) on derivatives, net | | — |
| 3,865 |
| | (18,127 | ) | | (1,648 | ) | | 1,041 |
|
Other income (expense), net | | (7,019 | ) | 24 |
| | (50 | ) | | — |
| | (20 | ) |
Total other income (expense) | | (11,669 | ) | 3,544 |
| | (17,466 | ) | | (1,732 | ) | | 936 |
|
| | | | | | | | | |
INCOME BEFORE INCOME TAXES | | 29,021 |
| 47,504 |
| | 220,338 |
| | 36,635 |
| | 127,329 |
|
Income tax expense | | 3,538 |
| 766 |
| | 1,785 |
| | 630 |
| | 1,967 |
|
NET INCOME | | 25,483 |
| 46,738 |
| | 218,553 |
| | 36,005 |
| | 125,362 |
|
LESS: Net income attributable to noncontrolling interest | | 18,775 |
| — |
| | — |
| | — |
| | — |
|
NET INCOME ATTRIBUTABLE TO CLASS A COMMON STOCK | | $ | 6,708 |
| $ | 46,738 |
| | $ | 218,553 |
| | $ | 36,005 |
| | $ | 125,362 |
|
| | | | | | | | | |
NET INCOME PER COMMON SHARE | | | | | | | | | |
Basic | | $ | 0.04 |
|
|
| |
|
| |
|
| |
|
|
Diluted | | $ | 0.04 |
| | | | | | | |
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING | | | | | | | | | |
Basic | | 151,992 |
|
|
| |
|
| |
|
| |
|
|
Diluted | | 157,072 |
| | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
Magnolia Oil & Gas Corporation
Combined Statement of Changes in Parents' Net Investment (Unaudited)
(in thousands)
|
| | | |
| Predecessor |
BALANCE, DECEMBER 31, 2017 | $ | 1,597,838 |
|
Parents’ contribution, net | 62,641 |
|
Net income | 218,553 |
|
Balance – July 30, 2018 | $ | 1,879,032 |
|
The accompanying notes are an integral part of these consolidated financial statements.
Magnolia Oil & Gas Corporation
Combined Statement of Changes in Parents’ Net Investment (Unaudited)
(In thousands)
|
| | | |
| Predecessor |
BALANCE, DECEMBER 31, 2017 | $ | 1,597,838 |
|
Parents’ contribution, net | 133,117 |
|
Net income | 85,366 |
|
Balance – March 31, 2018 | $ | 1,816,321 |
|
Parents’ distributions, net | (48,937 | ) |
Net income | 86,449 |
|
Balance – June 30, 2018 | $ | 1,853,833 |
|
Parents’ distributions, net | (21,539 | ) |
Net income | 46,738 |
|
Balance – July 30, 2018 | $ | 1,879,032 |
|
The accompanying notes are an integral part of these consolidated financial statements.
Magnolia Oil & Gas Corporation
Consolidated Statements of Changes in Stockholders’ Equity (Successor) (Unaudited)
(inIn thousands)
| | | Class A Common Stock | Class B Common Stock | Class F Common Stock | Additional Paid In Capital | Accumulated Deficit | Total Stockholders' Equity | Noncontrolling Interest | Total Equity | Class A Common Stock | Class B Common Stock | Class F Common Stock | Additional Paid In Capital | Retained Earnings | Total Stockholders’ Equity | Noncontrolling Interest | Total Equity |
| Shares | Value | Shares | Value | Shares | Value | | Shares | Value | Shares | Value | Shares | Value | |
Balance, July 30, 2018 | 3,052 |
| $ | — |
| — |
| $ | — |
| 16,250 |
| $ | 2 |
| $ | 8,370 |
| $ | (3,588 | ) | $ | 4,784 |
| $ | — |
| $ | 4,784 |
| 3,052 |
| $ | — |
| — |
| $ | — |
| 16,250 |
| $ | 2 |
| $ | 8,370 |
| $ | (3,588 | ) | $ | 4,784 |
| $ | — |
| $ | 4,784 |
|
Class A Common Stock released from possible redemption | 61,948 |
| 6 |
| — |
| — |
| — |
| — |
| 619,473 |
| — |
| 619,479 |
| — |
| 619,479 |
| 61,948 |
| 6 |
| — |
| — |
| — |
| — |
| 619,473 |
| — |
| 619,479 |
| — |
| 619,479 |
|
Class A Common Stock redeemed | (1 | ) | — |
| — |
| — |
| — |
| — |
| (9 | ) | — |
| (9 | ) | — |
| (9 | ) | (1 | ) | — |
| — |
| — |
| — |
| — |
| (9 | ) | — |
| (9 | ) | — |
| (9 | ) |
Conversion of Common Stock from Class F to Class A at closing of Business Combination | 16,250 |
| 2 |
| — |
| — |
| (16,250 | ) | (2 | ) | — |
| — |
| — |
| — |
| — |
| 16,250 |
| 2 |
| — |
| — |
| (16,250 | ) | (2 | ) | — |
| — |
| — |
| — |
| — |
|
Common Stock issued as part of the Business Combination | 31,791 |
| 3 |
| 83,939 |
| 9 |
| — |
| — |
| 391,017 |
| — |
| 391,029 |
| 1,032,455 |
| 1,423,484 |
| |
Class A Common Stock issuance in private placement | 35,500 |
| 4 |
| — |
| — |
| — |
| — |
| 354,996 |
| — |
| 355,000 |
| — |
| 355,000 |
| |
Common stock issued as part of the Business Combination | | 31,791 |
| 3 |
| 83,939 |
| 9 |
| — |
| — |
| 391,017 |
| — |
| 391,029 |
| 1,032,455 |
| 1,423,484 |
|
Common stock issued in private placement | | 35,500 |
| 4 |
| — |
| — |
| — |
| — |
| 354,996 |
| — |
| 355,000 |
| — |
| 355,000 |
|
Earnout consideration issued as part for the Business Combination | — |
| — |
| — |
| — |
| — |
| — |
| 41,371 |
| — |
| 41,371 |
| 108,329 |
| 149,700 |
| — |
| — |
| — |
| — |
| — |
| — |
| 41,371 |
| — |
| 41,371 |
| 108,329 |
| 149,700 |
|
Non-compete consideration | — |
| — |
| — |
| — |
| — |
| — |
| 44,400 |
| — |
| 44,400 |
| — |
| 44,400 |
| — |
| — |
| — |
| — |
| — |
| — |
| 44,400 |
| — |
| 44,400 |
| — |
| 44,400 |
|
Changes in ownership interest adjustment | — |
| — |
| — |
| — |
| — |
| — |
| 206,966 |
| — |
| 206,966 |
| (206,966 | ) | — |
| — |
| — |
| — |
| — |
| — |
| — |
| 206,966 |
| — |
| 206,966 |
| (206,966 | ) | — |
|
Changes in deferred tax liability | — |
| — |
| — |
| — |
| — |
| — |
| (52,787 | ) | — |
| (52,787 | ) | — |
| (52,787 | ) | — |
| — |
| — |
| — |
| — |
| — |
| (52,787 | ) | — |
| (52,787 | ) | — |
| (52,787 | ) |
Balance, July 31, 2018 | 148,540 |
| 15 |
| 83,939 |
| 9 |
| — |
| — |
| 1,613,797 |
| (3,588 | ) | 1,610,233 |
| 933,818 |
| 2,544,051 |
| 148,540 |
| $ | 15 |
| 83,939 |
| $ | 9 |
| — |
| $ | — |
| $ | 1,613,797 |
| $ | (3,588 | ) | $ | 1,610,233 |
| $ | 933,818 |
| $ | 2,544,051 |
|
Issuance of earnout share consideration Tranche I | 1,244 |
| — |
| 3,256 |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 1,244 |
| — |
| 3,256 |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
Issuance of earnout share consideration Tranche II | 1,244 |
| — |
| 3,256 |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 1,244 |
| — |
| 3,256 |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
Issuance of shares in connection with Harvest Acquisition | 4,200 |
| 1.0 |
| — |
| — |
| — |
| — |
| 58,211 |
| — |
| 58,212 |
| — |
| 58,212 |
| |
Common stock issued in connection with Harvest Acquisition | | 4,200 |
| 1 |
| — |
| — |
| — |
| — |
| 58,211 |
| — |
| 58,212 |
| — |
| 58,212 |
|
Net income | — |
| — |
| — |
| — |
| — |
| — |
| — |
| 6,708 |
| 6,708 |
| 18,775 |
| 25,483 |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 6,176 |
| 6,176 |
| 18,465 |
| 24,641 |
|
Changes in ownership interest adjustment | — |
| — |
| — |
| — |
| — |
| — |
| (39,366 | ) | — |
| (39,366 | ) | 39,366 |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| (39,366 | ) | — |
| (39,366 | ) | 39,366 |
| — |
|
Changes in deferred tax liability | — |
| — |
| — |
| — |
| — |
| — |
| 15,263 |
| — |
| 15,263 |
| — |
| 15,263 |
| — |
| — |
| — |
| — |
| — |
| — |
| 15,263 |
| — |
| 15,263 |
| — |
| 15,263 |
|
Balance, September 30, 2018 | 155,228 |
| $ | 16 |
| 90,451 |
| $ | 9 |
| — |
| $ | — |
| $ | 1,647,905 |
| $ | 3,120 |
| $ | 1,651,050 |
| $ | 991,959 |
| $ | 2,643,009 |
| 155,228 |
| $ | 16 |
| 90,451 |
| $ | 9 |
| — |
| $ | — |
| $ | 1,647,905 |
| $ | 2,588 |
| $ | 1,650,518 |
| $ | 991,649 |
| $ | 2,642,167 |
|
The accompanying notes are an integral part to these consolidated financial statements.
Magnolia Oil & Gas Corporation
Consolidated Statements of Changes in Stockholders’ Equity (Successor) (Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Class A Common Stock | Class B Common Stock | Additional Paid In Capital | Treasury Stock | Retained Earnings | Total Stockholders’ Equity | Noncontrolling Interest | Total Equity |
| Shares | Value | Shares | Value | | Shares | Value | | | | |
Balance, December 31, 2018 | 156,333 |
| $ | 16 |
| 93,346 |
| $ | 9 |
| $ | 1,641,237 |
| — |
| $ | — |
| $ | 35,507 |
| $ | 1,676,769 |
| $ | 1,031,186 |
| $ | 2,707,955 |
|
Stock based compensation expense | — |
| — |
| — |
| — |
| 2,432 |
| — |
| — |
| — |
| 2,432 |
| — |
| 2,432 |
|
Changes in ownership interest adjustment | — |
| — |
| — |
| — |
| (919 | ) | — |
| — |
| — |
| (919 | ) | 832 |
| (87 | ) |
Final settlement adjustment related to Business Combination | (496 | ) | — |
| (1,556 | ) | — |
| (6,095 | ) | — |
| — |
| — |
| (6,095 | ) | (19,150 | ) | (25,245 | ) |
Contributions from noncontrolling interest owners | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 8,809 |
| 8,809 |
|
Net income | — |
| — |
| — |
| — |
| — |
| — |
| — |
| 13,026 |
| 13,026 |
| 9,687 |
| 22,713 |
|
Balance, March 31, 2019 | 155,837 |
| $ | 16 |
| 91,790 |
| $ | 9 |
| $ | 1,636,655 |
| — |
| $ | — |
| $ | 48,533 |
| $ | 1,685,213 |
| $ | 1,031,364 |
| $ | 2,716,577 |
|
Stock based compensation expense | — |
| — |
| — |
| — |
| 3,115 |
| — |
| — |
| — |
| 3,115 |
| — |
| 3,115 |
|
Changes in ownership interest adjustment | — |
| — |
| — |
| — |
| 108 |
| — |
| — |
| — |
| 108 |
| 634 |
| 742 |
|
Common stock issued in connection with acquisition | 3,055 |
| — |
| — |
| — |
| 33,693 |
| — |
| — |
| — |
| 33,693 |
| — |
| 33,693 |
|
Offering expenses incurred in connection with warrants exchange | — |
| — |
| — |
| — |
| (1,055 | ) | — |
| — |
| — |
| (1,055 | ) | — |
| (1,055 | ) |
Distributions to noncontrolling interest owners | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| (227 | ) | (227 | ) |
Net income | — |
| — |
| — |
| — |
| — |
| — |
| — |
| 18,506 |
| 18,506 |
| 12,797 |
| 31,303 |
|
Balance, June 30, 2019 | 158,892 |
| $ | 16 |
| 91,790 |
| $ | 9 |
| $ | 1,672,516 |
| — |
| $ | — |
| $ | 67,039 |
| $ | 1,739,580 |
| $ | 1,044,568 |
| $ | 2,784,148 |
|
Stock based compensation expense | — |
| — |
| — |
| — |
| 2,829 |
| — |
| — |
| — |
| 2,829 |
| — |
| 2,829 |
|
Changes in ownership interest adjustment | — |
| — |
| — |
| — |
| 28,215 |
| — |
| — |
| — |
| 28,215 |
| (36,715 | ) | (8,500 | ) |
Common stock issued in connection with warrants exchange | 9,179 |
| 1 |
| — |
| — |
| 1,624 |
| — |
| — |
| (2,763 | ) | (1,138 | ) | — |
| (1,138 | ) |
Common stock issued related to stock based compensation, net | 189 |
| — |
| — |
| — |
| (532 | ) | — |
| — |
| — |
| (532 | ) | — |
| (532 | ) |
Common stock repurchased | — |
| — |
| — |
| — |
| — |
| 950 |
| (9,722 | ) | — |
| (9,722 | ) | — |
| (9,722 | ) |
Distributions to noncontrolling interest owners | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| (489 | ) | (489 | ) |
Net income | — |
| — |
| — |
| — |
| — |
| — |
| — |
| 10,547 |
| 10,547 |
| 6,810 |
| 17,357 |
|
Balance, September 30, 2019 | 168,260 |
| $ | 17 |
| 91,790 |
| $ | 9 |
| $ | 1,704,652 |
| 950 |
| $ | (9,722 | ) | $ | 74,823 |
| $ | 1,769,779 |
| $ | 1,014,174 |
| $ | 2,783,953 |
|
The accompanying notes are an integral part to these consolidated financial statements.
Magnolia Oil & Gas Corporation
Consolidated and Combined Statements of Cash Flows (Unaudited)(inIn thousands) | | | Successor | Predecessor | Successor | | | Predecessor |
| July 31, 2018 through September 30, 2018 | January 1, 2018 through July 30, 2018 | | Nine Months Ended September 30, 2017 | Nine Months Ended September 30, 2019 | | July 31, 2018 Through September 30, 2018 | | | January 1, 2018 Through July 30, 2018 |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | |
Net Income | $ | 25,483 |
| $ | 218,553 |
| | $ | 125,362 |
| |
CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | | |
Net income | | $ | 71,373 |
| | $ | 24,641 |
| | | $ | 218,553 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | |
Depreciation, depletion and amortization | 67,478 |
| 137,871 |
| | 88,844 |
| 385,942 |
| | 65,902 |
| | | 137,871 |
|
Amortization of intangible assets | | 10,879 |
| | 2,418 |
| | | — |
|
Exploration expense, non-cash | | 536 |
| | — |
| | | — |
|
Asset retirement obligations accretion expense | 391 |
| 104 |
| | 175 |
| 4,095 |
| | 391 |
| | | 104 |
|
Amortization of deferred financing costs | 570 |
| — |
| | — |
| 2,644 |
| | 570 |
| | | — |
|
Non-cash interest expense | 4,206 |
| — |
| | — |
| |
(Gain) loss on derivatives, net | — |
| 18,127 |
| | (1,041 | ) | |
Loss on derivatives, net | | — |
| | — |
| | | 18,127 |
|
Cash settlements of matured derivative contracts | — |
| (27,617 | ) | | 52 |
| — |
| | — |
| | | (27,617 | ) |
Deferred taxes | 3,493 |
| 324 |
| | 1,119 |
| 11,765 |
| | 3,493 |
| | | 324 |
|
Contingent consideration change in fair value | 6,700 |
| — |
| | — |
| — |
| | 6,700 |
| | | — |
|
Stock based compensation | | 8,376 |
| | — |
| | | — |
|
Other | (218 | ) | (796 | ) | | (189 | ) | (526 | ) | | (218 | ) | | | (796 | ) |
Changes in assets and liabilities, net of amounts acquired: | |
| |
| |
Account receivable | (77,500 | ) | (61,405 | ) | | (28,113 | ) | |
Changes in operating assets and liabilities: | | | | | | | |
Accounts receivable | | (6,937 | ) | | (77,500 | ) | | | (61,405 | ) |
Prepaid expenses and other assets | (282 | ) | — |
| | (624 | ) | 996 |
| | (275 | ) | | | — |
|
Accounts payable and accrued liabilities | 60,312 |
| 36 |
| | 7,539 |
| (6,345 | ) | | 64,511 |
| | | 36 |
|
Drilling advances | | 10,205 |
| | (3,376 | ) | | | — |
|
Other assets and liabilities, net | 45 |
| (385 | ) | | — |
| (4,392 | ) | | 45 |
| | | (385 | ) |
Net cash provided by (used in) operating activities | 90,678 |
| 284,812 |
| | 193,124 |
| |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | |
Net cash provided by operating activities | | 488,611 |
| | 87,302 |
| | | 284,812 |
|
| | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | |
Proceeds withdrawn from Trust Account | 656,078 |
| — |
| | — |
| — |
| | 656,078 |
| | | — |
|
Acquisition of EnerVest properties | (1,219,217 | ) | — |
| | — |
| 4,250 |
| | (1,219,217 | ) | | | — |
|
Acquisitions, other | (135,652 | ) | (150,139 | ) | | (58,653 | ) | (93,221 | ) | | (135,652 | ) | | | (150,139 | ) |
Additions to oil and natural gas properties | (37,100 | ) | (197,314 | ) | | (188,205 | ) | (364,859 | ) | | (33,724 | ) | | | (197,314 | ) |
Purchase of and contributions to equity method investment | — |
| — |
| | (8,788 | ) | |
Payment of Contingent Consideration | (26,000 | ) | — |
| | — |
| — |
| | (26,000 | ) | | | — |
|
Other investing | | (247 | ) | | — |
| | | — |
|
Net cash used in investing activities | (761,891 | ) | (347,453 | ) | | (255,646 | ) | (454,077 | ) | | (758,515 | ) | | | (347,453 | ) |
CASH FLOW FROM FINANCING ACTIVITIES: | | | | | |
| | | | | | | |
CASH FLOW FROM FINANCING ACTIVITIES | | | | | | | |
Parents’ contribution, net | — |
| 62,641 |
| | 62,522 |
| — |
| | — |
| | | 62,641 |
|
Contributions from noncontrolling interest owners | | 7,301 |
| | — |
| | | — |
|
Distributions to noncontrolling interest owners | | (716 | ) | | — |
| | | — |
|
Issuance of common stock | 355,000 |
| — |
| | — |
| — |
| | 355,000 |
| | | — |
|
Proceeds from issuance of long term debt | 400,000 |
| — |
| | — |
| — |
| | 400,000 |
| | | — |
|
Repayments of deferred underwriting compensation | (22,750 | ) | — |
| | — |
| — |
| | (22,750 | ) | | | — |
|
Cash paid for debt issuance costs | (23,336 | ) | — |
| | — |
| — |
| | (23,336 | ) | | | — |
|
Common stock repurchased | | (9,722 | ) | | — |
| | | — |
|
Other financing activities | (1,009 | ) | — |
| | — |
| (2,666 | ) | | (1,009 | ) | | | — |
|
Net cash provided by financing activities | 707,905 |
| 62,641 |
| | 62,522 |
| |
Net cash provided by (used in) financing activities | | (5,803 | ) | | 707,905 |
| | | 62,641 |
|
| | | | | | | |
NET CHANGE IN CASH AND CASH EQUIVALENTS | 36,692 |
| — |
| | — |
| 28,731 |
| | 36,692 |
| | | — |
|
CASH AND CASH EQUIVALENTS – Beginning of period | 23 |
| — |
| | — |
| |
CASH AND CASH EQUIVALENTS – End of period | $ | 36,715 |
| $ | — |
| | $ | — |
| |
SUPPLEMENTAL CASH FLOW INFORMATION: | | | | | |
Cash paid for income taxes | $ | — |
| $ | 336 |
| | $ | 43 |
| |
Cash paid for interest | 350 |
| — |
| | — |
| |
Supplemental non-cash investing and financing activity | | | | | |
Accruals or liabilities for capital expenditures | 45,242 |
| 38,028 |
| | 54,968 |
| |
Contingent Consideration issued in Business Combination | 149,700 |
| | | | |
Non-Compete agreement | 44,400 |
| | | | |
Equity issuances in connection with business combinations | 1,481,695 |
| — |
| | — |
| |
Cash and cash equivalents – Beginning of period | | 135,758 |
| | 23 |
| | | — |
|
Cash and cash equivalents – End of period | | $ | 164,489 |
| | $ | 36,715 |
| | | $ | — |
|
The accompanying notes are an integral part of these consolidated financial statements.
Magnolia Oil & Gas Corporation
Notes to Consolidated Financial Statements
(Unaudited)
1. Description of Business and Basis of Presentation
Organization and General
Magnolia Oil & Gas Corporation (formerly TPG Pace Energy Holdings Corp.) (the “Company” or "Magnolia"“Magnolia”) was incorporated in Delaware onFebruary 14, 2017 (“Inception”).The Company is an “emerging growth company,” as defined in Section 2(a) of the Securities Act of 1933, as amended, as modified by the Jumpstart Our Business Startups Act of 2012.2017.
On March 15, 2018, the Company formed three indirect3 wholly owned subsidiaries;subsidiaries: Magnolia Oil & Gas Parent LLC ("(“Magnolia LLC"LLC”), Magnolia Oil & Gas Intermediate LLC ("(“Magnolia Intermediate"Intermediate”), and Magnolia Oil & Gas Operating LLC ("(“Magnolia Operating"Operating”). All three entities, all of which are Delaware limited liability companies and were formed in contemplation of the Business Combination (as defined herein).
Business Combination
On July 31, 2018 (the “Closing Date”), the Company and Magnolia LLC a consolidated subsidiaryconsummated the acquisition of the Company, consummated the previously announced acquisition of:following:
certain right, title, and interest in certain oil and natural gas assets located primarily in the Karnes County portion of the Eagle Ford Shale in South Texas (the "Karnes“Karnes County Assets"Assets” and, such business the “Karnes County Business”) pursuant to that certain Contribution and Merger Agreement (as subsequently amended, the “Karnes County Contribution Agreement”), by and among the Company, Magnolia LLC and certain affiliates (the “Karnes County Contributors”) of EnerVest Ltd. (“EnerVest”);
certain right, title, and interest in certain oil and natural gas assets located primarily in the Giddings Field of the Austin Chalk (the "Giddings Assets"“Giddings Assets”) pursuant to that certain Purchase and Sale Agreement (the “Giddings Purchase Agreement”) by and among Magnolia LLC and certain affiliates of EnerVest (the “Giddings Sellers”); and
an approximatelya 35% membership interest (the “Ironwood Interests” and together with the Karnes County Assets and the Giddings Assets, the “Acquired Assets”) in Ironwood Eagle Ford Midstream LLC ("Ironwood"(“Ironwood”), a Texas limited liability company, which owns an Eagle Ford gathering system, pursuant to that certain Membership Interest Purchase Agreement (the “Ironwood MIPA” and, together(together with the transactions contemplated by the Karnes County Contribution Agreement and the Giddings Purchase Agreement, the “Business Combination Agreements”Agreements,” and the transactions contemplated thereby, the “Business Combination”), by and among Magnolia LLC and certain affiliates of EnerVest (the “Ironwood Sellers”).
The Company consummated the Business Combination for an aggregate consideration of approximately $1.2 billion in cash, 31.8 million shares of the Company'sCompany’s Class A Common Stock, par value $0.0001 per share (the "Class“Class A Common Stock"Stock”), and 83.9 million shares of the Company'sCompany’s Class B Common Stock, par value $0.0001 per share (the "Class“Class B Common Stock"Stock”), and a corresponding number of units in Magnolia LLC (the "Magnolia“Magnolia LLC Units"Units”), as well as certain earnout rights payable in a combination of cash and additional equity securities in the Company. In connection with the Business Combination, Magnolia issued and sold 35.5 million shares of Class A Common Stock in a private placement to certain qualified institutional buyers and accredited investors for gross proceeds of $355.0 million (the “PIPE Investment”). In addition, Magnolia Operating and Magnolia Oil & Gas Finance Corp., a wholly owned subsidiary of Magnolia Operating ("(“Finance Corp."” and, together with Magnolia Operating, the "Issuers"“Issuers”), issued and sold $400.0 million aggregate principal amount of 6.0% Senior Notes due 2026 (the “2026 Senior Notes”). The proceeds of the PIPE Investment and the offering of 2026 Senior Notes were used to fund a portion of the cash consideration required to effect the Business Combination.
Business Operations and Strategy
Magnolia is an independent oil and natural gas company engaged in the acquisition, development, exploration and production of oil, natural gas, and NGL reserves fromreserves. The Company’s oil and natural gas properties are located primarily in Karnes County and the Giddings Field in South Texas, where the Company targets the Eagle Ford Shale and Austin Chalk formations in South Texas. Magnolia'sformations. Magnolia’s objective is to generate stock market value over the long term through consistent organic production growth, high full cycle operating margins, an efficient capital program with short economic paybacks, significant free cash flow after capital expenditures, and effective reinvestment of free cash flow.
Basis of Presentation
As a resultIn accordance with accounting principles generally accepted in the United States of America (“GAAP”), the Company was the acquirer in the Business Combination the Company is the acquirer for accounting purposes and the Karnes County Business, the Giddings Assets, and the Ironwood Interests arewere the acquirees. The Karnes County Business including, as applicable, its ownership of the Ironwood Interests, was deemed the "Predecessor"“Predecessor” for periods prior to the Business Combination, and does not include the consolidation of the Company and the Giddings Assets. The assets, liabilities, revenues, expenses and cash flows related to the Karnes County Business were not previously separately accounted for as a standalone legal entity and have been carved out of the overall assets, liabilities, revenues, expenses and cash flows fromAlthough the Karnes County Contributors are not under common control, each were managed by the same managing general partner, EnerVest, and as appropriate. such, these Predecessor financial statements have been presented on a combined basis for financial reporting purposes.
For the periodperiods on or after the Business Combination, the Company, including the consolidationcombination of the Karnes County Business, the Giddings Assets, and the Ironwood Interests, is the "Successor".“Successor.” The financial statements and certain footnote presentations separate the Company'sCompany’s presentations into two distinct periods, the period before the consummation of the Business Combination, which includes the period from January 1, 2018 to July 30, 2018 (the "2018 Predecessor Period"“Predecessor Period”) and the period after the Business Combination, which includes the period from July 31, 2018 to September 30, 2018 (the “2018 Successor Period”), and the three and nine months ended September 30, 2017 ("2017 Predecessor Period") and the period on and after the consummation of the Business Combination, which is from July 31, 2018 to September 30, 20182019 (the "Successor Period"“2019 Successor Period”). The Business Combination was accounted for using the acquisition method of accounting and the Successor financial statements reflect a new basis of accounting that is based on the fair value of net assets acquired and liabilities assumed. As a result of the inclusion of the Giddings Assets, the new basis of accounting, and certain other items that affect comparability, the Company’s financial information prior to the Business Combination is not comparable to its financial information subsequent to the Business Combination.
The assets, liabilities, revenues, expenses, and cash flows related to the Karnes County Business were not previously separately accounted for as a standalone legal entity and have been carved out of the overall assets, liabilities, revenues, expenses and cash flows from the Karnes County Contributors as appropriate. In addition, Parents’ Net Investment represents the Karnes County Contributors’ interest in the recorded net assets of the Karnes County Business and represents the cumulative net investment of the Karnes County Contributors’ in the Karnes County Business through the dates presented, inclusive of cumulative operating results.
The Karnes County Contributors utilized EnerVest’s centralized processes and systems for its treasury services and the Karnes County Business’ cash activity was commingled with other oil and gas assets that were not part of the Business Combination. As such, the net results of the cash transactions between the Karnes County Business and the Karnes County Contributors are reflected as Parents’ contributions and distributions in the accompanying Combined Statement of Changes in Parents’ Net Investment.
The Predecessor financial statements also include a portion of indirect costs for salaries and benefits, rent, accounting, legal services, and other expenses. In addition to the allocation of indirect costs, the financial statements reflect certain agreements executed by the Karnes County Contributors for the benefit of the Karnes County Business, including price risk management instruments. The allocations methodologies for significant allocated items include:
Corporate G&A - EnerVest, as managing general partner of the Karnes County Contributors, provided management, accounting, and advisory services to the Karnes County Contributors in exchange for a quarterly management fee based on the Karnes County Contributors’ investor commitments, which were used, in part, to acquire the Karnes County Business as well as other oil and natural properties that were not part of the Business Combination. As such, the management fee was allocated to the Karnes County Business using a ratio of asset acquisitions value to total asset acquisitions completed by the Karnes County Contributors, for the Predecessor Period.
Derivatives - Certain Karnes County Contributors entered into financial instruments to manage the Karnes County Business’ exposure to changes in commodity prices for the Karnes County Business as well as other oil and natural gas properties that were not part of the Business Combination, on a combined basis. The commodity derivative activity was allocated to the Karnes County Business using a ratio of expected crude oil and condensate, natural gas liquids (“NGLs”), and natural gas volumes produced, on an equivalents basis, by the Karnes County Business to the Karnes County Contributors’ total expected crude oil and condensate, NGLs, and natural gas produced, on an equivalents basis, for the Predecessor Period.
Indebtedness - The Karnes County Business did not historically have outstanding indebtedness, but its oil and natural gas properties were collateral to various credit facilities held by the Karnes County Contributors and/or EnerVest. Amounts outstanding on these credit facilities have not been allocated to the Karnes County Business as they were not directly attributable to the Karnes County Business.
Management believes the allocation methodologies used are reasonable and result in an allocation of the indirect costs and other items to operate the Karnes County Business as if it were a stand-alone entity. These allocations, however, may not be indicative of the cost of future operations or the amount of future allocations. Direct costs were included at the historical amounts related to each reported period.
The accompanying unaudited interim consolidated and combined financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”)GAAP and in accordance with the rules and regulations of the SEC. Accordingly, certain information and disclosures normally included in annual financial statements prepared in accordance with US GAAP have been condensed or omitted. Certain amounts have been reclassified to conform to the current period presentation resulting from the adoption of ASU No. 2014-09, Revenue from Contracts with Customers. See Note 3 - Revenue Recognition for additional information. In the opinion of management, all adjustments, consisting of only normal recurring adjustments, considered necessary for a fair presentation have been included. Interim results are not necessarily indicative of results for the full year or any future periods. The unaudited interim consolidated financial statements, including the Predecessor financial statements, should be read in conjunction with the information included in or incorporated by reference from the Company’s Definitive Proxy StatementAnnual Report on Schedule 14A filed withForm 10-K for the SEC on July 2, 2018, including the Karnes County Business annual financial statements.fiscal year ended December 31, 2018.
2. Summary of Significant Accounting Policies
PrinciplesAs of Consolidation
TheSeptember 30, 2019, the Company’s significant accounting policies are consistent with those discussed in Note 2 - Summary of Significant Accounting Policies of its consolidated financial statements have been preparedcontained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018, with the exception of Accounting Standards Update (“ASU”) 2016-02, “Leases (Topic 842)” and as noted below.
Leases
In February 2016, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2016-02, Leases, which requires lessees to recognize a right-of-use asset and a lease liability on their balance sheet for all leases, including operating leases, with a term of greater than 12 months. In July 2018, the FASB issued ASU 2018-11, which adds a transition option permitting entities to apply the provisions of the new standard at its adoption date instead of the earliest comparative period presented in the consolidated financial statements. Under this transition option, comparative reporting would not be required, and the provisions of the standard would be applied prospectively to leases in effect at the date of adoption. The Company elected the package of transition practical expedients provided by the new standard that allow the Company to not reassess under the new standard its prior conclusions about lease identification, classification related to contracts that commenced prior to adoption, and to apply the standard prospectively to all new or modified land easements and rights-of-way. The Company has also elected a policy to not recognize right of use assets and lease liabilities related to short-term leases. The Company has lease agreements with lease and non-lease components, which are generally accounted for as a single lease component.
Magnolia adopted this standard on January 1, 2019 and recognized right of use assets and lease liabilities for certain commitments primarily related to real estate, vehicles, and field equipment, while prior reporting periods are presented in accordance with US GAAP. Certain reclassificationshistorical accounting treatment under ASC Topic 840, Leases (“ASC 840”). The Company determines if an arrangement is a lease at inception. Operating leases are included in other long-term assets, other current liabilities, and other long-term liabilities in Magnolia’s consolidated balance sheet as of prior periodSeptember 30, 2019. Operating lease right-of-use (“ROU”) assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Magnolia’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expenses for lease payments are recognized on a straight-line basis over the lease term. For more information, refer to Note 10 - Leases.
Recent Accounting Pronouncements
In June 2016 the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The standards update requires the use of a forward-looking “expected loss” model as opposed to the current “incurred loss” model. This standard is effective for the Company in the first quarter of 2020. The Company is currently evaluating the new standard and does not believe the adoption will have a material impact on the Company’s consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU 2018-15”). The amendments in the update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software and hosting arrangements that include an internal-use software license. The Company early adopted ASU 2018-15 effective April 1, 2019, with prospective application. The adoption did not have a material impact on the Company’s consolidated financial statements.
3. Revenue Recognition
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. This ASU and the associated subsequent amendments (collectively, “ASC 606”), superseded virtually all of the revenue recognition guidance in GAAP by requiring companies to recognize revenue using a five-step model. The core principle of the five-step model is that an entity will recognize revenue when it transfers control of goods or services to customers at an amount that reflects the consideration to which it expects to be entitled in exchange for those goods or services. Magnolia adopted this standard on December 31, 2018 for all Successor Periods using a modified retrospective approach.
There were no significant changes to the timing of revenue recognized for sales of production as a result of ASC 606. However, the new guidance resulted in certain changes to the classification of processing and other fees between revenue and gathering, transportation, and processing expense. The change also resulted in an increase to the production volumes and depreciation, depletion and amortization. The amounts included in the accompanying unaudited interim consolidated financial statements have been madefor the 2018 Successor Period were reclassified in order to conform to the current reporting practices.period presentation resulting from the adoption of ASC 606 and are considered immaterial. The consolidated financial statementsPredecessor Period has not been restated and continues to be reported under the accounting standards in effect for that period.
Oil, Natural Gas, and NGL Revenues
Magnolia’s revenues include the accountssale of crude oil, natural gas, and NGLs. Oil, natural gas, and NGL sales are recognized as revenue when production is sold to a customer in fulfillment of performance obligations under the terms of agreed contracts. Performance obligations primarily comprise delivery of oil, natural gas, or NGLs at a delivery point, as negotiated within each contract. Each barrel of oil, million Btu of natural gas, gallon of NGLs, or other unit of measure is separately identifiable and represents a distinct performance obligation to which the transaction price is allocated.
The Company’s oil production is primarily sold under market-sensitive contracts that are typically priced at a differential to the New York Mercantile Exchange (“NYMEX”) price or at purchaser posted prices for the producing area. For oil contracts, the Company generally records sales based on the net amount received.
For natural gas contracts, the Company generally records wet gas sales (which consists of natural gas and NGLs based on end products after processing) at the wellhead or inlet of the gas processing plant (i.e., the point of control transfer) as revenues net of gathering, transportation, and processing expenses if the processor is the customer and there is no redelivery of commodities to the Company at the tailgate of the plant. Conversely, the Company generally records residual natural gas and its subsidiaries after eliminationNGL sales at the tailgate of intercompany transactionsthe plant (i.e., the point of control transfer) on a gross basis along with the associated gathering, transportation, and balances. processing expenses if the processor is a service provider and there is redelivery of one or several commodities to the Company at the tailgate of the plant. The facts and circumstances of an arrangement are considered and judgment is often required in making this determination. For processing contracts that require noncash consideration in exchange for processing services, the Company recognizes revenue and an equal gathering, transportation, and processing expense for commodities transferred to the service provider.
Contract Balances
Customers are invoiced once the Company’s performance obligations have been satisfied. Payment terms and conditions vary by contract type, although terms generally include a requirement of payment within 30 days. There are no judgments that significantly affect the amount or timing of revenue from contracts with customers. Accordingly, the Company’s product sales contracts do not give rise to material contract assets or contract liabilities.
The Company’s interests inreceivables consist mainly of receivables from oil and natural gas explorationpurchasers and production ventures and partnerships are proportionately consolidated. The Company reflects a noncontrollingfrom joint interest representing the interest owned by the Karnes County Contributors through their ownership of Magnolia LLC Units in the unaudited consolidated financial statements. The noncontrolling interest is presented as a component of equity. See Note 10—Stockholders' Equity and Parents' Net Investment for further discussion of noncontrolling interest.
Variable Interest Entities
Magnolia LLC is a variable interest entity (“VIE”). The Company determined that it is the primary beneficiary of Magnolia LLC asowners on properties the Company is the sole managing member and has the power to direct the activities most significant to Magnolia LLC’s economic performanceoperates. Receivables from contracts with customers totaled $113.2 million as well as the obligation to absorb losses and receive benefits that are potentially significant. Atof September 30, 2018, the Company had an approximate 63.2% economic interest in Magnolia LLC2019 and 100%$100.1 million as of Magnolia LLC’s assets and liabilities and results of operations are consolidated in the Company’s unaudited consolidated financial statements contained herein. At September 30, 2018, the Karnes County Contributors had approximately 36.8% economic interest in Magnolia LLC; however, the Karnes County Contributors have disproportionately fewer voting rights, and are shown as noncontrolling interest holders of Magnolia LLC. See Note 10—Stockholders' Equity and Parents' Net Investment for further discussion of noncontrolling interest.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates, and changes in these estimates are recorded when known. Significant estimates with regard to these financial statements include the fair value determination of acquired assets and liabilities, the assessment of asset retirement obligations, the estimate of proved oil and gas reserves and related present value estimates of future net cash flows, and the estimates of fair value for long-lived assets.
Accounts Receivable and Allowance for Doubtful Accounts
December 31, 2018. Accounts receivable are stated at the historical carrying amount net of write-offs and an allowance for doubtful accounts. The carrying amount of the Company’s accounts receivable approximates fair value because of the short-term nature of the instruments. The Company routinely assesses the collectability of all material trade and other receivables. The Company’s receivables consist mainly of receivables from oil and natural gas purchasers and from joint interest owners on properties the Company operates. The Company accrues a reserve on a receivable when, based on the judgment of management, it is probable that a receivable will not be collected and the amount of any reserve may be reasonably estimated. The Company had no0 allowance for doubtful accounts as of September 30, 2018 (Successor),2019 or December 31, 2017 (Predecessor).2018.
Oil and Natural Gas Properties
Disaggregation of Revenue
The Company followshas concluded that disaggregating revenue by product type appropriately depicts how the successful efforts methodnature, amount, timing, and uncertainty of accounting for its oilrevenue and gas properties. Undercash flows are affected by economic factors and has reflected this methoddisaggregation of accounting, exploration costs such as exploratory geological and geophysical costs, delay rentals, and exploration overhead are expensed as incurred. All costs related to production, general corporate overhead, and similar activities are expensed as incurred. If an exploratory well provides evidence to justify potential development of reserves, drilling costs associated with the well are initially capitalized, or suspended, pending a determination as to whether a commercially sufficient quantity of proved reserves can be attributed to the area as a result of drilling. At the end of each quarter, management reviews the status of all suspended exploratory well costs in light of ongoing exploration activities; in particular, whether the Company is making sufficient progress in its ongoing exploration and appraisal efforts. If management determines that future appraisal drilling or development activities are unlikely to occur, associated suspended exploratory well costs are expensed.
Unproved properties are assessed for impairment at least annually and are transferred to proved oil and gas properties to the extent the costs are associated with successful exploration activities. Unproved properties are assessed for impairment basedrevenue on the Company’s current exploration plans. Costs of expired or abandoned leases are charged to exploration expense, while costs of productive leases are transferred to proved oilconsolidated and gas properties. Costs of maintaining and retaining unproved properties, as well as impairment of unsuccessful leases, are included in exploration costs in the consolidated statements of operations.
Costs to develop proved reserves, including the costs of all development wells and related equipment used in the production of crude oil and natural gas, are capitalized. Depreciation of the cost of proved oil and gas properties is calculated using the unit-of-production method ("UOP"). The UOP calculation multiplies the percentage of estimated proved reserves produced each quarter by the carrying value of those reserves. The reserve base used to calculate depreciation for leasehold acquisition costs and the cost to acquire proved properties is the sum of proved developed reserves and proved undeveloped reserves. The reserve base used to calculate the depreciation for capitalized costs for exploratory and development wells is the sum of proved developed reserves only. Estimated future dismantlement, restoration and abandonment costs, net of salvage values, are included in the depreciable cost.
Oil and gas properties are grouped for depreciation in accordance with the Accounting Standards Codification ("ASC") ASC 932 "Extractive Activities—Oil and Gas” ("ASC 932"). The basis for grouping is a reasonable aggregation of properties with a common geological structural feature or stratigraphic condition, such as a reservoir or field.
When circumstances indicate that proved oil and gas properties may be impaired, the Company compares unamortized capitalized costs to the expected undiscounted pre-tax future cash flows for the associated assets grouped at the lowest level for which identifiable cash flows are independent of cash flows of other assets. If the expected undiscounted pre-tax future cash flows, based on the Company’s estimate of future crude oil and natural gas prices, operating costs, anticipated production from proved reserves and other relevant data, are lower than the unamortized capitalized cost, the capitalized cost is reduced to fair value. Fair value is generally estimated using the income approach described in the ASC 820, "Fair Value Measurements" ("ASC 820"). If applicable, the Company utilizes prices and other relevant information generated by market transactions involving assets and liabilities that are identical or comparable to the item being measured as the basis for determining fair value. The expected future cash flows used for impairment reviews and related fair value calculations are typically based on judgmental assessments of future production volumes, commodity prices, operating costs, and capital investment plans, considering all available information at the date of review. These assumptions are applied to develop future cash flow projections that are then discounted to estimated fair value, using a discount rate believed to be consistent with those applied by market participants.
Asset Retirement Costs and Obligations
Asset retirement obligations represent the present value of the estimated cash flows expected to be incurred to plug, abandon and remediate producing properties, excluding salvage values, at the end of their productive lives in accordance with applicable laws. The significant unobservable inputs to this fair value measurement include estimates of plugging, abandonment and remediation costs, well life, inflation and credit-adjusted risk-free rate. The inputs are calculated based on historical data as well as current estimates. When the liability is initially recorded, the carrying amount of the related long-lived asset is increased. Over time, accretion of the liability is
recognized each period, and the capitalized cost is amortized over the useful life of the related asset and is included in "Depreciation, depletion and amortization" in the Company’s consolidated statements of operations.
To estimate the fair value of an asset retirement obligation, the Company employs a present value technique, which reflects certain assumptions, including its credit‑adjusted risk‑free interest rate, inflation rate, the estimated settlement date of the liability and the estimated current cost to settle the liability. Changes in timing or to the original estimate of cash flows will result in change to the carrying amount of the liability and related long lived asset.
Intangible Asset (Successor)
Concurrent with the closing of the Business Combination, the Company and EnerVest entered into a Non-Compete (the "Non-Compete") pursuant to which EnerVest and certain of its affiliates are restricted from competing with the Company in certain counties comprising the Eagle Ford Shale. The Company recorded an estimated cost of $44.4 million for the Non-Compete as an intangible asset on the consolidated balance sheet of the Successor. This intangible asset has a definite life and is subject to amortization utilizing straight line method over its economic life, currently estimated to be two and a half to four years. Magnolia assesses intangible assets for impairment together with related underlying long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment is recognized in the consolidatedcombined statements of operations if the carrying amount of an intangible asset is not recoverable and its carrying amount exceeds its fair value. For the period ended September 30, 2018, no impairment was recorded. For more discussion on the Non-Compete, refer to Note 6 - Intangible Asset.
Fair Value Measurements
ASC 820 establishes a fair value hierarchy that prioritizes and ranks the level of observability of inputs used to measure investments at fair value. The observability of inputs is impacted by a number of factors, including the type of investment, characteristics specific to the investment, market conditions and other factors. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level I measurements) and the lowest priority to unobservable inputs (Level III measurements). Investments with readily available quoted prices or for which fair value can be measured from quoted prices in active markets will typically have a higher degree of input observability and a lesser degree of judgment applied in determining fair value.
The three levels of the fair value hierarchy under ASC 820 are as follows:
Level I—Quoted prices (unadjusted) in active markets for identical investments at the measurement date are used.
Level II—Pricing inputs are other than quoted prices included within Level I that are observable for the investment, either directly or indirectly. Level II pricing inputs include quoted prices for similar investments in active markets, quoted prices for identical or similar investments in markets that are not active, inputs other than quoted prices that are observable for the investment, and inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level III—Pricing inputs are unobservable and include situations where there is little, if any, market activity for the investment. The inputs used in determination of fair value require significant judgment and estimation.
In some cases, the inputs used to measure fair value might fall within different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the investment is categorized in its entirety is determined based on the lowest level input that is significant to the investment. Assessing the significance of a particular input to the valuation of an investment in its entirety requires judgment and considers factors specific to the investment. The categorization of an investment within the hierarchy is based upon the pricing transparency of the investment and does not necessarily correspond to the perceived risk of that investment.
Equity Method Investment
As part of the Business Combination, the Company acquired the Ironwood Interests . The Company accounts for its investment in Ironwood using the equity method of accounting. Accordingly, the Company recognizes its proportionate share of Ironwood’s net income in the consolidated statements of operations as “Income from equity method investee”. Any distributions by Ironwood would decrease the Company’s investment in Ironwood. The Company evaluates its investment in Ironwood for potential impairment whenever events or changes in circumstances indicate that there may be a loss in the value of Ironwood that was other than temporary.
Income Taxes (Successor)
Under ASC 740, “Income Taxes,” deferred tax assets and liabilities are recognized for the expected future tax consequences attributable to net operating losses, tax credits, and temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period of the enactment date. Valuation allowances are established when it is more likely than not that some or all of the deferred tax assets will not be realized.
The Company reports a liability or a reduction of deferred tax assets for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. When applicable, the Company recognizes accrued interest and penalties related to unrecognized tax benefits as income tax expense.
Purchase Price Allocation
Accounting for the acquisition of a business requires the allocation of the purchase price to the various assets and liabilities of the acquired business and recording deferred taxes for any differences between the allocated values and tax basis of assets and liabilities. Any excess of the purchase price over the amounts assigned to assets and liabilities is recorded as goodwill.
The purchase price allocation is accomplished by recording each asset and liability at its estimated fair value. Estimated deferred taxes are based on available information concerning the tax basis of the acquired company’s assets and liabilities and tax-related carryforwards at the merger date, although such estimates may change in the future as additional information becomes known. The amount of goodwill recorded in any particular Business Combination can vary significantly depending upon the values attributed to assets acquired and liabilities assumed relative to the total acquisition cost.
When estimating the fair values of assets acquired and liabilities assumed, the Company must apply various assumptions. The most significant assumptions relate to the estimated fair values assigned to proved and unproved crude oil and natural gas properties. To estimate the fair values of these properties, the Company prepares estimates of crude oil and natural gas reserves. Estimated fair values assigned to assets acquired can have a significant effect on results of operations in the future.
Commitments and Contingencies
Accruals for loss contingencies arising from claims, assessments, litigation, environmental and other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. These accruals are adjusted as additional information becomes available or circumstances change. Refer to Note 13 - Commitments and Contingencies for additional information.
Revenue Recognition
Oil and gas revenues are recognized when production is sold to a purchaser at a fixed or determinable price, when delivery has occurred and title has transferred, and if collectability of the revenue is probable. Cash received relating to future revenues is deferred and recognized when all revenue recognition criteria are met.
The Company follows the sales method of accounting for crude oil and natural gas production imbalances and would recognize a liability if Magnolia's existing proved reserves were not adequate to cover an imbalance. Imbalances have not been significant in the periods presented.
Net Income Per Share of Common Stock
Performance Obligations
Basic earnings per common share is calculated by dividing net income attributable to Class A Common Stock by the weighted average number of shares of Class A Common Stock outstanding each period. Diluted earnings per share adds to those shares the incremental shares that would have been outstanding assuming exchangesPerformance obligations are satisfied at a point in time once control of the Company's outstanding Class B Common Stock and warrants for Class A Common Stock. An anti-dilutive impact is an increase in earnings per share or a reduction in net loss per share resulting fromproduct has been transferred to the conversion, exercise, or contingent issuance of certain securities.
customer. The Company usesconsiders a variety of facts and circumstances in assessing the "if-converted" method to determinepoint of control transfer, including but not limited to: whether the potential dilutive effect of conversions of its outstanding Class B Common Stock andpurchaser can direct the treasury stock method to determine the potential dilutive effect of its outstanding warrants exercisable for shares of Class A Common Stock. Refer to Note 11 - Earnings Per Share for additional information and the calculation of net earnings per share.
Recent Accounting Pronouncements (Successor)
In February 2016, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") No. 2016–02, Leases (Topic 842), which will require lessees to recognize a right of use asset and a lease liability on their balance sheet for all leases, including operating leases, with a term of greater than 12 months. Currently the guidance would be applied using a modified retrospective transition method, which requires applying the new guidance to leases that exist or are entered into after the beginning of the earliest period inhydrocarbons, the financial statements. However, in July 2018, the FASB issued ASU 2018-11, which adds a transition option permitting entities to apply the provisionstransfer of the new standard at its adoption date instead of the earliest comparative period presented in the consolidated financial statements. Under this transition option, comparative reporting would not be required,significant risks and the provisions of the standard would be applied prospectively to leases in effect at the date of adoption. The standard will be effective for interim and annual periods beginning after December 15, 2018 for public companies and annual periods beginning after December 15, 2019 for all other entities, with earlier adoption permitted. It is expected that the Company will cease to be an emerging growth company by December 31, 2018 and will adopt the standard on January 1, 2019, using the optional transition method provided by ASU 2018-11. The Company is the lessee under various agreements for real estate, vehicles, and field equipment that are currently accounted for as operating leases. The Company has preliminarily determined its portfolio of leased assets and is reviewing all related contracts to determine the impact the adoption will have on its consolidated financial statements. While the Company has yet to finalize the estimated impact this standard will have on the consolidated financial statements, the adoption is anticipated to result in an increase in both assets and liabilities related to the Company's leases.
In May 2014, the FASB issued ASU No. 2014–09, Revenue from Contracts with Customers. This ASU, as amended, superseded virtually all of the revenue recognition guidance in generally accepted accounting principles in the United States. The core principle of the five–step model is that an entity will recognize revenue when it transfers control of goods or services to customers at an amount that reflects the consideration to which it expects to be entitled in exchange for those goods or services. Entities can choose to apply the standard using either the full retrospective approach or a modified retrospective approach. It is expected that the Company will cease to be an emerging growth company by December 31, 2018 and will adopt the standard on December 31, 2018, using a modified retrospective approach. Upon initial evaluation of contracts in each ofrewards, the Company’s revenue streams, theright to payment, and transfer of legal title.
The Company does not expectdisclose the adoption of this ASU to have a material impact on its consolidated financial statements. The Company continues to evaluate contracts against the requirements of the standard and is evaluating the disclosure requirements and assessing changes to the relevant business processes and the control activities within them as a result of the provisions of this ASU.
In August 2016, the FASB issued ASU No. 2016-15, "Statement of Cash Flows: Classification of Certain Cash". Receipts and Cash Payments (“ASU 2016-15”), which is intended to reduce diversity in practice in how certain transactions are classified in the statements of cash flows. ASU 2016-15 is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2017 for public companies and for fiscal years beginning after December 15, 2018 for all other entities. It is expected that the Company will cease to be an emerging growth company by December 31, 2018 and will adopt the standard on December 31, 2018. The adoption of this guidance will not impact the Company's financial position or results of operations but could result in presentation changes on Magnolia's consolidated statements of cash flows.
In January 2017, the FASB issued ASU 2017-01 "Business Combinations (Topic 805): Clarifying the Definition of a Business" ("ASU 2017-01"), which clarifies the definition of a business to provide guidance in evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 provides a screen to determine when a set of assets is not a business, requiring that when substantially all fair value of gross assets acquired (or disposed of)unsatisfied performance obligations for contracts as all contracts have either an original expected length of one year or less, or the entire future consideration is concentrated invariable and allocated entirely to a single identifiable asset or group of similar identifiable assets, the set of assets is not a business. A framework is provided to assist in evaluating whether both an input and a substantive process are present for the set to be a business. ASU 2017-01 is effective for interim and annual periods after December 15, 2017 for public companies and annual periods beginning after December 15, 2018 for all other entities. No disclosures are required at transition. The Company early adopted ASU 2017-01 upon the closing of the Business Combination. There was no material impact to the Company's financial statements as a result of this adoption, however the new standard may result in more transactions being accounted for as acquisitions (and dispositions) of assets rather than businesses in the future.
wholly unsatisfied performance obligation.
3.
4. Acquisitions
Acquisitions (Successor)
EnerVest Business Combination
As discussed in Note 1 - Description of Business and Basis of Presentation, on July 31, 2018, the Company consummated the Business Combination contemplated by the Business Combination Agreements. The Business Combination Agreements and the Business Combination were approved by the Company’s stockholders on July 17, 2018. At the closing of the Business Combination, the Karnes County Contributors received 83.9 million shares of the Company'sCompany’s Class B Common Stock and an equivalent number of Magnolia LLC Units, which, together, are exchangeable on a one-for-one1-for-one basis for shares of the Company'sCompany’s Class A Common Stock;Stock, subject to certain conditions; 31.8 million shares of Class A Common Stock; and approximately $911.5 million in cash. The sales price per the Karnes County Contribution Agreement was adjusted for customary purchase price adjustments to reflect the economic activity from the effective date of January 1, 2018 to June
30, 2018. The Company is entitled to an additional cash purchase price adjustment for the revenues after expenses (and other purchase price adjustments) attributable to the Acquired Assets from July 1 through July 31. The Giddings Sellers received approximately $282.7 million in cash, after customary purchase price adjustments.cash. The Ironwood Sellers received $25.0 million in cash in exchange for the Ironwood Interests. TheOn March 29, 2019, Magnolia and EnerVest consummated the final adjustmentssettlement pursuant to the respective purchase price agreements have not yet been made.Contribution and Merger Agreement and as otherwise agreed to by the parties, with Magnolia receiving a net cash payment of $4.3 million and the Karnes County Contributors forfeiting to Magnolia 0.5 million shares of Class A Common Stock and 1.6 million shares of Class B Common Stock (and forfeiting a corresponding number of Magnolia LLC Units to Magnolia LLC).
The Business Combination has been accounted for using the acquisition method. The acquisition method of accounting is based on ASC 805 "Business Combination" ("ASC 805"),“Business Combinations,” and uses the fair value concepts defined in ASC 820. ASC 805 requires, among other things, that the assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date by the Company.
Contingent Consideration
Pursuant to the Karnes County Contribution Agreement, for a period of five years following the Closing Date, the Karnes County Contributors will bewere entitled to receive an aggregate of up to 13.0 million additional shares of Class A Common Stock or shares of Class B Common Stock (and a corresponding number of Magnolia LLC Units) based on certain EBITDA and free cash flow or stock price thresholds. As of September 30,December 31, 2018, the Company had met the defined stock price thresholds for two ofand, as a result, the three tranches as defined in the Karnes County Contribution Agreement andCompany had issued an aggregate of 2.53.6 million additional shares of Class A Common Stock and 6.59.4 million additional shares of Class B Common Stock to the Karnes County Contributors. Additionally, on October 4, 2018, the Company met the stock price threshold for the third and final tranche and subsequently issued 1.1 million additional shares(and a corresponding number of Class A Common Stock and 2.9 million additional shares of Class B Common StockMagnolia LLC Units) to the Karnes County Contributors.
Pursuant to the Giddings Purchase Agreement, until December 31, 2021, the Giddings Sellers were entitled to receive an aggregate of up to $47.0 million in cash earnout payments based on certain net revenue thresholds. On September 28, 2018, the Company paid the Giddings Sellers a cash payment of $26.0 million to fully settle the earnout obligation. In conjunction with this payment, Magnolia recognized a loss of $6.7 million included in Other income (expense) in the Consolidated Statement of Operations.
The purchase consideration for the Business Combination was as follows:
| | | | At July 31, 2018 (in thousands) | |
Preliminary Purchase Consideration: | | | |
(In thousands) | |
|
|
Purchase Consideration: | |
|
|
Cash consideration | | $ | 1,219,217 |
|
| $ | 1,214,966 |
|
Stock consideration (1) | | 1,423,483 |
|
| 1,398,238 |
|
Fair value of contingent earnout purchase consideration (2) | | 169,000 |
|
| 169,000 |
|
Total purchase price consideration | | $ | 2,811,700 |
|
| $ | 2,782,204 |
|
| |
(1) | At closing of the Business Combination, the Karnes County Contributors received 83.9 million shares of Class B Common Stock (and a corresponding number of Magnolia LLC Units) and 31.8 million shares of Class A Common Stock. On March 29, 2019, Magnolia and EnerVest consummated the final settlement pursuant to the Contribution and Merger Agreement as agreed to by the parties, with the Karnes County Contributors forfeiting an aggregate of 2.1 million shares of Class A and Class B Common Stock to Magnolia (and a corresponding number of Magnolia LLC Units). |
| |
(2) | Pursuant to ASC 805, ASC 480, "Distinguishing“Distinguishing Liabilities from Equity"Equity,” and ASC 815, "Derivatives“Derivatives and Hedging",Hedging,” the Karnes County earnout consideration has beenwas valued at fair value as of the Closing Date and has beenwas classified in stockholders’ equity. The Giddings earnout has beenwas valued at fair value as of the Closing Date and has beenwas classified as a liability. The fair value of the earnouts was determined using the Monte Carlo simulation valuation method based on Level 3 inputs in the fair value hierarchy. |
The following table summarizes the allocation of the purchase consideration to the assets acquired and liabilities assumed on the acquisition date:
|
| | | | |
(In thousands) | | |
Fair value of assets acquired | | |
Accounts receivable | | $ | 61,790 |
|
Other current assets | | 2,853 |
|
Oil and natural gas properties (1) | | 2,813,140 |
|
Ironwood equity investment | | 18,100 |
|
Total fair value of assets acquired | | 2,895,883 |
|
Fair value of liabilities assumed | | |
Accounts payable and other current liabilities | | (65,908 | ) |
Asset retirement obligations | | (34,132 | ) |
Deferred tax liability | | (13,639 | ) |
Fair value of net assets acquired | | $ | 2,782,204 |
|
| |
(1) | The fair value measurements of oil and natural gas properties and asset retirement obligations are based on inputs that are not observable in the market and therefore represent Level 3 inputs. The fair values of oil and natural gas properties and asset retirement obligations were measured using valuation techniques that convert future cash flows to a single discounted amount. Significant inputs to the valuation of oil and natural gas properties included estimates of: (i) recoverable reserves; (ii) production rates; (iii) future operating and development costs; (iv) future commodity prices; and (v) a market-based weighted average cost of capital rate. |
The Company incurred $24.8 million in transaction costs associated with the Business Combination. The Company also incurred a total of $23.5 million of debt issuance costs in connection with the consummation of the Business Combination related to the establishment of the RBL Facility (as defined herein) and the issuance of the 2026 Senior Notes.
Unaudited Pro Forma Operating Results
The following unaudited pro forma combined financial information has been prepared as if the Business Combination and other related transactions had taken place on January 1, 2017.
The information reflects pro forma adjustments based on available information and certain assumptions that the Company believes are reasonable, including depletion of the Company’s fair-valued proved oil and gas properties, and the estimated tax impacts of the pro forma adjustments. Additionally, pro forma net income attributable to Class A Common Stock excludes $34.3 million of transaction related costs, $11.0 million related to a one-time purchase of a seismic license continuation, and a $6.7 million loss related to the settlement of the Giddings earnout obligation.
The pro forma combined financial information has been included for comparative purposes and is not necessarily indicative of the results that might have actually occurred had the Business Combination taken place on January 1, 2017; furthermore, the financial information is not intended to be a projection of future results.
|
| | | | | | | |
| (Unaudited Pro Forma) (In thousands) |
| Three Months Ended September 30, 2018 | | Nine Months Ended September 30, 2018 |
Total revenues | $ | 267,659 |
| | $ | 723,768 |
|
Net income attributable to Class A Common Stock | 57,891 |
| | 151,316 |
|
Net income per share - basic | 0.39 |
| | 1.02 |
|
Net income per share - diluted | 0.38 |
| | 0.98 |
|
Non-Compete
On the Closing Date, the Company and EnerVest, separate and apart from the Business Combination, entered into a non-compete agreement (the “Non-Compete”) restricting EnerVest and certain of its affiliates from competing with the Company in certain counties comprising the Eagle Ford Shale following the Closing Date. An affiliate of EnerVest will have the right to receive 4.0 million shares of Class A Common Stock issuable in 2 tranches of 2.0 million shares in two and one half and four years from the Closing Date provided EnerVest does not compete with Magnolia in the Eagle Ford Shale until the later of July 31, 2022 or the date the Services Agreement with EnerVest Operating, LLC (“EVOC”), a wholly owned subsidiary of EnerVest, (the “Services Agreement”), is terminated. For more discussion on the Non-Compete, refer to Note 7 - Intangible Assets.
Harvest Acquisition
On August 31, 2018, the Company completed the acquisition of substantially all of Harvest Oil & Gas Corporation’s South Texas assets for approximately $133.3 million in cash and 4.2 million shares of Class A Common Stock for a total consideration of $191.5 million. The acquisition added an undivided working interest across a portion of Magnolia’s existing Karnes County Assets and all of the Company’s existing Giddings Assets. On March 14, 2019, Magnolia consummated the final settlement with Harvest receiving a cash payment of $1.4 million. The transaction was accounted for as a business combination.
The following table summarizes the allocation of the purchase consideration to the assets acquired and liabilities assumed:
|
| | | | |
| | At July 31, 2018 (in thousands) |
Estimated fair value of assets acquired | | |
Account receivable | | $ | 89,674 |
|
Other current assets | | 2,853 |
|
Oil & gas properties (1) | | 2,800,258 |
|
Ironwood equity investment | | 18,100 |
|
Total fair value of assets acquired | | 2,910,885 |
|
Estimated fair value of liabilities assumed | | |
Accounts payable and other current liabilities | | (56,315 | ) |
Asset retirement obligation | | (34,132 | ) |
Deferred tax liability | | (8,738 | ) |
Fair value of net assets acquired | | $ | 2,811,700 |
|
|
| | | | |
(In thousands) | | |
Fair value of assets acquired | | |
Other current assets | | $ | 1,290 |
|
Oil and natural gas properties (1) | | 201,337 |
|
Total fair value of assets acquired | | 202,627 |
|
Fair value of liabilities assumed | | |
Asset retirement obligations and other current liabilities | | (9,666 | ) |
Fair value of net assets acquired | | $ | 192,961 |
|
| |
(1) | The fair value measurements of oil and natural gas properties and asset retirement obligations are based on inputs that are not observable in the market and therefore represent Level 3 inputs. The fair values of oil and natural gas properties and asset retirement obligations were measured using valuation techniques that convert future cash flows to a single discounted amount. Significant inputs to the valuation of oil and natural gas properties included estimates of: (i) recoverable reserves; (ii) production rates; (iii) future operating and development costs; (iv) future commodity prices; and (v) a market-based weighted average cost of capital rate. These inputs required significant judgments and estimates by management at the time of the valuation and may be subject to change.valuation. |
The total purchase consideration and the related purchase consideration allocation above are preliminary as the Company has not yet completed all the necessary fair value assessments, including the assessments of property, plant and equipment, intangibles, contingent consideration and the related tax impacts on these items. Any changes within the measurement period in the estimated fair values of the assets acquired and liabilities assumed and the working capital adjustments may change the allocation of the purchase consideration. The fair value and related tax impact assessments are to be completed within twelve months of the Closing Date and could have a material impact on the components of the total purchase consideration and the purchase consideration allocation.Certain Other Acquisitions
Transaction costs incurred by the Company associated with the Business Combination were $22.4 million for the Successor Period. The Company also incurred a total of $23.5 million of debt issuance costs in connection with the consummation of the Business Combination related to the establishment of the RBL Facility (as defined herein) and the issuance of the 2026 Senior Notes.
Non-Compete
On the Closing Date, the Company and EnerVest entered into the Non-Compete restricting EnerVest and certain of its affiliates from competing with the Company in certain counties comprising the Eagle Ford Shale following the Closing Date. An affiliate of EnerVest will have the right to receive up to 4,000,000 shares of Class A Common Stock issuable in two and half to four years provided EnerVest does not compete. For more discussion on the Non-Compete, refer to Note 6 - Intangible Asset.
Unaudited Pro Forma Operating Results
The following unaudited pro forma combined financial information has been prepared as if the Business Combination and other related transactions had taken place on January 1, 2017.
The information reflects pro forma adjustments based on available information and certain assumptions that the Company believes are reasonable, including depletion of the Company’s fair-valued proved oil and gas properties, and the estimated tax impacts of the pro forma adjustments. Additionally, pro forma net income attributable to Class A Common Stock excludes $34.3 million of transaction related costs, $11.0 million related to a one time purchase of a seismic license continuation, and a $6.7 million loss related to the settlement of the Giddings earnout obligation.
The pro forma combined financial information has been included for comparative purposes and is not necessarily indicative of the results that might have actually occurred had the Business Combination taken place on January 1, 2017; furthermore, the financial information is not intended to be a projection of future results.
|
| | | | | | | | | | | | |
| (Unaudited Pro Forma) (in thousands) |
| Three Months Ended September 30, 2018 | Three Months Ended September 30, 2017 | Nine Months Ended September 30, 2018 | Nine Months Ended September 30, 2017 |
Total Revenues | $ | 267,659 |
| $ | 110,294 |
| $ | 723,768 |
| $ | 356,254 |
|
Net income attributable to Class A Common Stock | 57,891 |
| 6,531 |
| 151,316 |
| 26,257 |
|
Income per share - basic | 0.39 |
| 0.04 |
| 1.02 |
| 0.21 |
|
Income per share - diluted | 0.38 |
| 0.04 |
| 0.98 |
| 0.20 |
|
Harvest Acquisition
On AugustMay 31, 2018,2019, the Company completed the acquisition to purchase substantially all of certain oil and gas assets located in the South Texas assets of Harvest Oil & Gas CorporationCompany’s Karnes County Assets for approximately $133.3$36.3 million in cash, subject to customary closing adjustments, and 4.2approximately 3.1 million newly issued shares of the Company’s Class A Common StockStock. The transaction was accounted for as an asset acquisition.
On February 5, 2019, Magnolia Operating formed a totaljoint venture, Highlander Oil & Gas Holdings LLC (“Highlander”), to complete the acquisition of a 72% working interest in the Eocene-Tuscaloosa Zone, Ultra Deep Structure gas well located in St. Martin Parish, Louisiana and 31.1 million royalty trust units in the Gulf Coast Ultra Deep Royalty Trust from McMoRan
Oil & Gas, LLC. Highlander paid cash consideration of $191.5 million. The acquisition added an undivided working interest across$50.9 million, for such interests. MGY Louisiana LLC, a portionwholly owned subsidiary of Magnolia's existing Karnes County Assets and allMagnolia Operating, holds approximately 85% of the Company's existing Giddings Assets.units in Highlander. The transaction was accounted for as an asset acquisition.
The following table summarizes the allocation of the purchase consideration to the assets and liabilities assumed:
|
| | | | |
| | At August 31, 2018 (in thousands) |
Estimated fair value of assets acquired | | |
Other current assets | | $ | 1,290 |
|
Oil & gas properties (1) | | 200,035 |
|
Total fair value of assets acquired | | 201,325 |
|
Estimated fair value of liabilities assumed | | |
Asset retirement obligation and other current liabilities | | (9,812 | ) |
Fair value of net assets acquired | | $ | 191,513 |
|
| |
(1) | The fair value measurements of oil and natural gas properties and asset retirement obligations are based on inputs that are not observable in the market and therefore represent Level 3 inputs. The fair values of oil and natural gas properties and asset retirement obligations were measured using valuation techniques that convert future cash flows to a single discounted amount. Significant inputs to the valuation of oil and natural gas properties included estimates of: (i) recoverable reserves; (ii) production rates; (iii) future operating and development costs; (iv) future commodity prices; and (v) a market-based weighted average cost of capital rate. These inputs required significant judgments and estimates by management at the time of the valuation and may be subject to change. |
The total purchase consideration and the related purchase consideration allocation above are preliminary as the Company has not yet completed all the necessary fair value assessments, including the assessments of property, plant and equipment. Any changes within the measurement period in the estimated fair values of the assets acquired and liabilities assumed and the working capital adjustments may change the allocation of the purchase consideration. The fair value assessments are to be completed within twelve months of the closing date and could have a material impact on the components of the total purchase consideration and the purchase consideration allocation.
Acquisitions (Predecessor)
Subsequent GulfTex Acquisition
On March 1, 2018, the Predecessor acquired certain oil and natural gas properties located in the Eagle Ford Shale from GulfTex Energy III, L.P. and GulfTex Energy IV, L.P. for an adjusted purchase price of approximately $150.1 million, net of customary closing adjustments (the “Subsequent GulfTex Acquisition”).
The recognized fair value of identifiable assets and acquired liabilities assumed in connection with the Subsequent GulfTex Acquisition, is as follows:
|
| | | | |
(In thousands) | | |
Purchase price allocation: | | |
Accounts receivable | | $ | 10,501 |
|
Proved oil and natural gas properties | | 118,572 |
|
Unproved oil and natural gas properties | | 22,802 |
|
Accounts payable and accrued liabilities | | (1,679 | ) |
Asset retirement obligations | | (57 | ) |
| | $ | 150,139 |
|
|
| | | | |
(In thousands) | | |
Total consideration | | $ | 150,139 |
|
| | |
Purchase price allocation: | | |
Accounts receivable | | 10,501 |
|
Proved oil and natural gas properties | | 118,572 |
|
Unproved oil and natural gas properties | | 22,802 |
|
Accounts payable and accrued liabilities | | (1,679 | ) |
Asset retirement obligations | | (57 | ) |
| | $ | 150,139 |
|
BlackBrush Acquisition
On January 31, 2017, the Predecessor acquired assets from BlackBrush Karnes Properties, LLC for aggregate consideration of approximately $58.7 million, net of customary closing adjustments (the “Subsequent BlackBrush Acquisition”).
The recognized fair value of identifiable assets and acquired liabilities assumed in connection with the Subsequent BlackBrush Acquisition, is as follows:
|
| | | | |
(In thousands) | | |
Total consideration | | $ | 58,653 |
|
| | |
Purchase price allocation: | | |
Accounts receivable | | 2,193 |
|
Proved oil and natural gas properties | | 57,263 |
|
Unproved oil and natural gas properties | | 1,552 |
|
Accounts payable and accrued liabilities | | (2,244 | ) |
Asset retirement obligations | | (111 | ) |
| | $ | 58,653 |
|
The Predecessor accounted for these acquisitions as Business Combinations. The assets acquired and the liabilities assumed have been measured at fair value based on various estimates. These estimates are based on key assumptions related to the Business Combination, including reviews of publicly disclosed information for other acquisitions in the industry, historical experience of the companies, data that was available through the public domain and due diligence reviews of the acquired business. Any acquisition related transaction costs are not included as components of consideration transferred but are accounted for as expenses in the period in which the costs are incurred.
The results of operations for these acquisitions are included in the Predecessor combined financial statements from the date of closing of each acquisition.
4.5. Derivative Instruments and Hedging Activities (Predecessor)
The Company'sCompany’s activities expose it to risks associated with changes in the market price of oil, natural gas, and natural gas liquids.NGLs. As such, future earnings are subject to fluctuation due to changes in the market price of oil, natural gas, and natural gas liquids.NGLs. The Company doeshas not engageengaged in any hedging activities and does not expect to engage in any hedging activities with respect to the market risk to which the Company is exposed. The Karnes County Contributors, on behalf of the Predecessor, used derivatives to reduce itsthe risk of volatility in the prices of oil, natural gas, and natural gas liquidsNGLs and itstheir policies did not permit the use of derivatives for speculative purposes.
The Predecessor elected not to designate any of its derivatives as hedging instruments. Accordingly, changes in the fair value of the Predecessor's derivatives arewere recorded immediately to earnings as “Gain (loss) on derivatives, net” in the consolidatedcombined statements of operations. During the periodperiods from July 1 through July 30, 2018 and January 1 2018 through July 30, 2018, the Predecessor terminated substantially allincurred a gain on derivatives of its derivative contracts which, together with regular monthly settlements, resulted in total cash settlement payments$3.9 million and a loss on derivatives of approximately $27.6 million.$18.1 million, respectively.
The following table sets forth the fair values and classification of the outstanding derivatives entered into by the Karnes County Contributors, on behalf of the Predecessor, as of December 31, 2017:
|
| | | | | | | | | | | | |
(In thousands) | | Gross Amounts of Recognized Assets | | Gross Amounts of Offset in the Balance Sheet | | Net Amounts Of Assets Presented in the Balance Sheet |
Derivatives | | | | | | |
As of December 31, 2017 (Predecessor): | | | | | | |
Derivative asset | | $ | 180 |
| | $ | (180 | ) | | $ | — |
|
Long-term derivative asset | | 48 |
| | (48 | ) | | — |
|
Total | | $ | 228 |
| | $ | (228 | ) | | $ | — |
|
| | | | | | |
| | Gross Amounts of Recognized Liabilities | | Gross Amounts Offset in the Balance Sheet | | Net Amounts Of Liabilities Presented in the Balance Sheet |
Derivatives | | | | | | |
As of December 31, 2017 (Predecessor): | | | | | | |
Derivative liability | | $ | 6,944 |
| | $ | (180 | ) | | $ | 6,764 |
|
Long-term derivative liability | | 3,100 |
| | (48 | ) | | 3,052 |
|
Total | | $ | 10,044 |
| | $ | (228 | ) | | $ | 9,816 |
|
The Predecessor entered into master netting arrangements with its counterparties. The amounts above are presented on a net basis in the Predecessor's unaudited consolidated balance sheet when such amounts are with the same counterparty. In addition, the Predecessor has recorded accounts payable and receivable balances related to settled derivatives that are subject to the master netting agreements. These amounts are not included in the above table; however, under the master netting agreements, the Predecessor has the right to offset these positions against forward exposure related to outstanding derivatives.
5.6. Fair Value Measurements
Certain of the Company’s assets and liabilities are carried at fair value and measured either on a recurring or non-recurring basis. The Company'sCompany’s fair value measurements are based either on actual market data or assumptions that other market participants would use in pricing an asset or liability in an orderly transaction, using the valuation hierarchy prescribed by GAAP. See Note 2GAAP under ASC 820.
The three levels of the fair value hierarchy under ASC 820 are as follows:
Level I - SummaryQuoted prices (unadjusted) in active markets for identical investments at the measurement date are used.
Level II - Pricing inputs are other than quoted prices included within Level I that are observable for the investment, either directly or indirectly. Level II pricing inputs include quoted prices for similar investments in active markets, quoted prices for identical or similar investments in markets that are not active, inputs other than quoted prices that are observable for the investment, and inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level III - Pricing inputs are unobservable and include situations where there is little, if any, market activity for the investment. The inputs used in determination of Significant Accounting Policies for more information regarding the valuation hierarchy. fair value require significant judgment and estimation.
Fair Values - Recurring (Predecessor)
The PredecessorPredecessor’s derivatives consistconsisted of over-the-counter (“OTC”) contracts which arethat were not traded on a public exchange. As the fair value of these derivatives iswas based on inputs using market prices obtained from independent brokers or determined using quantitative models that useused as their basis readily observable market parameters that are actively quoted and can be validated through external sources, including third partythird-party pricing services, brokers and market transactions, the Predecessor categorized these derivatives as Level 2. The Predecessor valued these derivatives using the income approach using inputs such as the forward curve for commodity prices based on quoted market prices and prospective volatility factors related to changes in the forward curves. Estimates of fair value have beenwere determined at discrete points in time based on relevant market data. Furthermore, fair values arewere adjusted to reflect the credit risk inherent in the transaction, which may includehave included amounts to reflect counterparty credit quality and/or the effect of the Predecessor’s creditworthiness. These assumed credit risk adjustments are based on published credit ratings, public bond yield spreads and credit default swap spreads.
The following table presents the fair value hierarchy table for the Predecessor’s assets and liabilities that are required to be measured at fair value on a recurring basis:
|
| | | | | | | | | | | | | | | | |
(In thousands) | | Level 1 | | Level 2 | | Level 3 | | Total Fair Value |
As of December 31, 2017 (Predecessor): | | | | | | | | |
Assets: | | | | | | | | |
Oil, natural gas and natural gas liquids derivatives | | $ | — |
| | $ | 228 |
| | $ | — |
| | $ | 228 |
|
Liabilities: | | | | | | | | |
Oil, natural gas and natural gas liquids derivatives | | $ | — |
| | $ | 10,044 |
| | $ | — |
| | $ | 10,044 |
|
Fair Values - Nonrecurring
The fair value measurements of assets acquired and liabilities assumed in a business combination are measured on a nonrecurring basis on the acquisition date using an income valuation technique based on inputs that are not observable in the market, and therefore, represent Level 3 inputs. Significant inputs to the valuation of acquired oil and gas properties includes estimates of: (i) reserves; (ii) production rates; (iii) future operating and development costs; (iv) future commodity prices, including price differentials; (v) future cash flows; and (vi) a market participant-based weighted average cost of capital rate. These inputs require significant judgments and estimates by the Company'sCompany’s management at the time of the valuation. Refer to Note 34 - Acquisitions for additional information.
Deemed Dividend
In July 2019, the Company issued an aggregate of 9.2 million shares of Class A Common Stock in exchange for all of its warrants. The difference in fair value between the Class A Common Stock issued and the warrants exchanged was recorded as a non-cash deemed dividend for the incremental value provided to the holders of the warrants. The fair value of the non-cash deemed dividend related to the warrant exchange was determined based on unadjusted quoted prices in an active market, which are considered a Level 1 input in the fair value hierarchy. Refer to Note 11 - Stockholders’ Equity for additional information.
Debt obligationsObligations
Carrying valuesThe carrying value and fair valuesvalue of the financial instrumentsinstrument that areis not carried at fair value in the accompanying consolidated balance sheetssheet as of September 30, 20182019 is as follows:
|
| | | | | | | | |
| | September 30, 2019 |
(In thousands) | | Carrying Value | | Fair Value |
Long-term debt | | $ | 389,528 |
| | $ | 404,000 |
|
|
| | | | | | | | |
| | September 30, 2018 |
(In thousands) | | Carrying Value | | Fair Value |
Long-term debt | | $ | 388,343 |
| | $ | 399,000 |
|
The fair value of the 2026 Senior Notes at September 30, 20182019 was based on unadjusted quoted prices in an active market, which are considered a Level 1 input in the fair value hierarchy.
The Company has other financial instruments consisting primarily of receivables, payables, and other current assets and liabilities that approximate fair value due to the nature of the instrument and their relatively short maturities. Non-financial assets and liabilities initially measured at fair value include assets acquired and liabilities assumed in the Business Combinationbusiness combinations and asset retirement obligations.
6.7. Intangible AssetAssets
Non-Compete Agreement
On the Closing Date, the Company and EnerVest, separate and apart from the Business Combination, entered into the Non-Compete, which prohibits EnerVest and certain of its affiliates from competing with the Company in the Eagle Ford Shale (the “Market Area”) followinguntil the Closing Date.later of July 31, 2022 or the date the Services Agreement is terminated. Under the Non-Compete, an affiliate of EnerVest will have the right to receive up to 4.0 million shares of Class A Common Stock subject to the achievementin 2 tranches of certain stock price thresholds that were met by October 4, 2018. The2.0 million shares are issuable in two and aone half toand four years from the Closing Date provided EnerVest does not compete in the Market Area.
The Company recorded an estimated cost of $44.4 million for the Non-Compete as an intangible assetassets on the Company’s consolidated balance sheet of the Successor. Thissheet. These intangible asset hasassets have a definite life and isare subject to amortization utilizing the straight linestraight-line method over itstheir economic life, currently estimated to be two and aone half to four years. The Company includes the amortization in depreciation, depletion and amortization expenses“Amortization of intangible assets” on the Company’s consolidated statementsstatement of operations.
|
| | | |
(In thousands) | September 30, 2019 |
Non-compete intangible assets | $ | 44,400 |
|
Accumulated amortization | (16,923 | ) |
Intangible assets, net | $ | 27,477 |
|
Weighted average amortization period (in years) | 3.25 |
|
|
| | | |
(In thousands) | September 30, 2018 (Successor) |
Non-Compete Intangible Asset | $ | 44,400 |
|
Accumulated amortization | (2,417 | ) |
Intangible, net | $ | 41,983 |
|
Weighted average amortization (years) | 3.25 |
|
7.Asset Retirement Obligation
A summary of the changes in asset retirement obligations is included in the table below:
|
| | | | |
(In thousands) | | 2018 |
Balance, as of January 1 (Predecessor) | | $ | 3,929 |
|
Liabilities incurred and assumed through acquisitions | | 553 |
|
Liabilities settled | | (85 | ) |
Accretion expense | | 104 |
|
Balance, as of July 30 (Predecessor) | | $ | 4,501 |
|
| | |
Balance, as of July 31 (Successor) | | $ | — |
|
Liabilities incurred and assumed through acquisitions | | 43,930 |
|
Liabilities settled | | — |
|
Accretion expense | | 391 |
|
Balance, as of September 30 (Successor) | | 44,321 |
|
Less: Current portion | | (884 | ) |
Long-term portion | | $ | 43,437 |
|
8. Income Taxes
The Company estimates its annual effective tax rate in recording its quarterly provision for income taxes in the various jurisdictions in which Magnolia operates.and its subsidiaries operate. The tax effects of statutory rate changes, significant unusual or infrequent items, and certain changes in the assessment of the realizability of deferred tax assets are excluded from the determination of the Company'sCompany’s annual effective tax rate as such items are recognized as discrete items in the quarterperiod in which they occur.
Income tax expense recorded infor the Successor Periodperiod is based on applying an estimated annual effective income tax rate to the net income from July 31, 2018January 1, 2019 through September 30, 2018.2019. There were no significant unusual or infrequently occurring items that are required to be recorded as discrete items in the Successor Period.as of September 30, 2019. The computation of the annual estimated effective tax rate at each interim period requires certain estimates and significant judgment including, but not limited to, the Successor’sCompany’s expected operating income for the year, projections of the proportion of income earned and taxed in various jurisdictions, the effect of noncontrolling interest, permanent and temporary differences, and the likelihood of recovering deferred tax assets in the current year. The accounting estimates used to compute the income tax benefitexpense may change as new events occur, more experience is obtained, additional information becomes known, or as the tax environment changes. For the Successor Period,three and nine months ended September 30, 2019, the Company incurred United StatesU.S. federal income tax expense of approximately $3.5 million.$3.1 million and $11.6 million, respectively. The Company'sCompany’s annual effective tax rate as offor the three and nine months ended September 30, 20182019 was 12.2%.16.9% and 14.9%, respectively. The primary differences between the annual effective tax rate and the statutory rate of 21% were21.0% are income attributable to noncontrolling interest and state taxes, and non-deductible expenses.taxes.
The Company'sCompany’s income tax provision (benefit) consistedconsists of the following components:
|
| | | | | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor |
(In thousands) | Three Months Ended September 30, 2019 | | Nine Months Ended September 30, 2019 | | July 31, 2018 Through September 30, 2018 | | | July 1, 2018 Through July 30, 2018 | | January 1, 2018 Through July 30, 2018 |
Current: | | | | | | | | | | |
Federal | $ | — |
| | $ | — |
| | $ | — |
| | | $ | — |
| | $ | — |
|
State | 115 |
| | 684 |
| | 45 |
| | | 631 |
| | 1,461 |
|
| 115 |
| | 684 |
| | 45 |
| | | 631 |
| | 1,461 |
|
Deferred: | | | | | | | | | | |
Federal | 3,135 |
| | 11,588 |
| | 3,493 |
| | | — |
| | — |
|
State | 279 |
| | 177 |
| | — |
| | | 135 |
| | 324 |
|
| 3,414 |
| | 11,765 |
| | 3,493 |
| | | 135 |
| | 324 |
|
Total provision | $ | 3,529 |
| | $ | 12,449 |
| | $ | 3,538 |
| | | $ | 766 |
| | $ | 1,785 |
|
|
| | | | | | | | | | | | | | | | | | | |
(In thousands) | | Successor | Predecessor |
| | July 31, 2018 through September 30, 2018 | July 1, 2018 through July 30, 2018 | | January 1, 2018 through July 30, 2018 | | Three Months Ended September 30, 2017 | | Nine Months Ended September 30, 2017 |
Current: | | | | | | | | | |
Federal | | $ | — |
| $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
State | | 45 |
| 631 |
| | 1,461 |
| | 81 |
| | 848 |
|
| | 45 |
| 631 |
| | 1,461 |
| | 81 |
| | 848 |
|
Deferred: | | | | | | | | | |
Federal | | 3,493 |
| — |
| | — |
| | — |
| | — |
|
State | | — |
| 135 |
| | 324 |
| | 549 |
| | 1,119 |
|
| | 3,493 |
| 135 |
| | 324 |
| | 549 |
| | 1,119 |
|
Total provision | | $ | 3,538 |
| $ | 766 |
| | $ | 1,785 |
| | $ | 630 |
| | $ | 1,967 |
|
The Company is subject to U.S. federal income tax, as well as the margin tax in the state of Texas. NoTexas, and Louisiana corporate income tax. NaN amounts have been accrued for income tax uncertainties or interest and penalties as of September 30, 2018.2019. The Company is currently not aware of any issues under review that could result in significant payments, accruals, or material deviation from its position. The Company is openCompany’s tax years since its formation remain subject to possible income tax examinations by its major taxing authorities since Inception.for all periods.
9. Long Term Debt (Successor)
The Company'sCompany’s debt is comprised of the following:
|
| | | | |
(In thousands) | | September 30, 2019 |
Revolving credit facility | | $ | — |
|
6.0% Senior Notes due 2026 | | 400,000 |
|
Total long-term debt | | 400,000 |
|
| | |
Less: Unamortized deferred financing cost | | (10,472 | ) |
Total debt, net | | $ | 389,528 |
|
|
| | | | |
(In thousands) | | Successor September 30, 2018 |
Revolving credit facility | | $ | — |
|
6.0% Senior Notes due 2026 | | 400,000 |
|
Total long-term debt | | 400,000 |
|
| | |
Less: unamortized deferred financing cost | | (11,657 | ) |
Total debt, net | | $ | 388,343 |
|
Credit Facility
In connection with the consummation of the Business Combination, Magnolia Operating entered into a senior secured reserve-based revolving credit facility (the “RBL Facility”) among Magnolia Operating, as borrower, Magnolia Intermediate, as holdings,its holding company, the banks, financial institutions, and other lending institutions from time to time party thereto, as lenders, the other parties from time to time party thereto and Citibank, N.A., as administrative agent, collateral agent, issuing bank and swingline lender, providing for maximum commitments in an aggregate principal amount of $1.0 billion with a letter of credit facility with a $100.0 million sublimit. The borrowing base as of September 30, 20182019 was $550$550.0 million. The RBL Facility is guaranteed by certain parent companies and subsidiaries of Magnolia LLC and is collateralized by certain of ourMagnolia Operating’s oil and natural gas properties and has a borrowing base subject to semi-annual redetermination.
Borrowings under the RBL Facility bear interest, at Magnolia Operating’s option, at a rate per annum equal to either the adjusted LIBOR rate or the alternative base rate plus the applicable margin. Additionally, Magnolia Operating is required to pay a commitment fee quarterly in arrears in respect of unused commitments under the RBL Facility. The applicable margin and the commitment fee rate are calculated based upon the utilization levels of the RBL Facility as a percentage of the borrowing base then in effect.
The RBL Facility contains certain affirmative and negative covenants customary for financings of this type, including compliance with a leverage ratio of less than 4.00 to 1.00 and, if the leverage ratio is in excess of 3.00 to 1.00, a current ratio of greater than 1.00 to 1.00. As of September 30, 2018,2019, the Company was in compliance with all covenants (including the financial covenants) under the RBL Facility.
Deferred financing costs incurred in connection with securing the RBL Facility were $11.7 million, which will be are amortized on a straight-line basis over a period of five years and included in "Interest expense"“Interest expense, net” in the Company'sCompany’s consolidated statementsstatement of operations. During the Successor Periodthree and nine months ended September 30, 2018,2019, the Company recognized interest expense of $0.8$1.1 million and $3.4 million, respectively, related to the RBL
Facility. The unamortized portion of the deferred financing costs are included in "Deferred“Deferred financing costs, net"net” on the accompanying unaudited consolidated balance sheet as of September 30, 2018.2019.
The Company did not0t have any outstanding borrowings under its RBL Facility as of September 30, 2018.2019.
2026 Senior Notes
On the Closing Date, the Issuers closed the previously announced private offering ofissued and sold $400.0 million aggregate principal amount of 2026 Senior Notes. The 2026 Senior Notes were issued under the Indenture, dated as of the Closing Date (the “Indenture”), by and among the Issuers and Deutsche Bank Trust Company Americas, as trustee (the “Trustee”).trustee. The 2026 Senior Notes are guaranteed on a senior unsecured basis by the Company, Magnolia Operating, and Magnolia Intermediate and may be guaranteed by certain future subsidiaries of the Company.
The 2026 Senior Notes will mature on August 1, 2026. The Notes2026 and bear interest at the rate of 6.0% per annum, payable semi-annually in arrears on each February 1st and August 1st, commencing February 1, 2019.annum.
At any time prior to August 1, 2021, the Issuers may, on any one or more occasions, redeem all or a part of the 2026 Senior Notes at a redemption price equal to 100% of the principal amount of the 2026 Senior Notes redeemed, plus a “make whole” premium on accrued and unpaid interest, if any, to, but excluding, the date of redemption. After August 1, 2021, the Issuers may redeem all or a part of the Notes based on principal plus a set premium, as set forth in the Indenture, including any accrued and unpaid interest.
DeferredThe Company incurred $11.8 million of deferred financing costs incurred in connection with securingrelated to the issuance of the 2026 Senior Notes, were $11.8 million which were capitalized, and will beare amortized using the effective interest method over the term of the 2026 Senior Notes, and are included in "Interest expense"“Interest expense, net” in the Company'sCompany’s consolidated statement of operations. The unamortized portion of the deferred financing costs is included as a reduction to the carrying value of the 2026 Senior Notes, which have been recorded as Long-term debt, net on the consolidated balance sheet as of September 30, 2018.2019. During the Successor Period,three and nine months ended September 30, 2019, the Company recognized interest expense of $4.2$6.3 million and $18.9 million, respectively, related to the 2026 Senior Notes.
Affiliate Guarantors
AllCertain subsidiaries of the Company's wholly owned subsidiariesCompany are guarantors under the terms of its Senior Notes and RBL Facility. The parent guarantees may be released upon the request of Magnolia Operating. Magnolia'sMagnolia’s consolidated financial statements reflect the financial position of these subsidiary guarantors. As the parent company, Magnolia has no independent operations, assets, or liabilities.operations. The guarantees are full and unconditional (except for customary release provisions) and joint and several. There are restrictions on dividends, distributions, loans, or other transfers of funds from the subsidiary guarantors to the Company.
10. Stockholders'Leases
Magnolia’s leases primarily consist of real estate, vehicles, and field equipment. The Company’s leases have remaining lease terms of up to 8 years, some of which include options to renew or terminate the lease. The exercise of lease renewal options is at the Company’s sole discretion. Magnolia’s lease agreements do not contain any residual value guarantees or restrictive covenants.
As most of Magnolia’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The Company used the incremental borrowing rate on January 1, 2019, for operating leases that commenced prior to that date.
|
| | | |
(In thousands) | September 30, 2019 |
Operating Leases | |
Operating lease assets | $ | 4,772 |
|
| |
Operating lease liabilities - current | $ | 2,724 |
|
Operating lease liabilities - long-term | 2,039 |
|
Total operating lease liabilities | $ | 4,763 |
|
| |
Weighted average remaining lease term (in years) | 2.0 |
|
Weighted average discount rate | 3.8 | % |
For the three and nine months ended September 30, 2019, respectively, the Company incurred $0.9 million and $2.1 million of lease costs for operating leases included on the Company’s balance sheet, $5.9 million and $21.1 million for short-term lease costs and $0.6 million and $2.5 million for variable lease costs. Cash paid for amounts included in the measurement of lease liabilities in operating cash flows from operating leases for the nine months ended September 30, 2019 is $2.0 million.
Maturities of lease liabilities as of September 30, 2019 under the scope of ASC 842 are as follows: |
| | | |
(In thousands) | |
Maturity of Lease Liabilities(1) | Operating Leases |
2019 (remaining) | $ | 771 |
|
2020 | 2,653 |
|
2021 | 1,170 |
|
2022 | 165 |
|
2023 | 98 |
|
After 2023 | 91 |
|
Total lease payments | $ | 4,948 |
|
Less: Interest | (185 | ) |
Present value of lease liabilities | $ | 4,763 |
|
| |
(1) | As of December 31, 2018, minimum future contractual payments for long-term operating leases under the scope of ASC 840 were $881 thousand in 2019, $646 thousand in 2020, $198 thousand in 2021, $14 thousand in 2022, $15 thousand in 2023 and $63 thousand thereafter. |
11. Stockholders’ Equity and Parents' Net Investment
Stockholders' Equity (Successor)
Class A Common Stock
In connection with the closing of the Business Combination, the Company increased the number of authorized shares of Class A Common Stock to 1.3 billion. At September 30, 2018,2019, there were 155.2168.3 million shares issued and 167.3 million shares outstanding of Class A Common Stock issued and outstanding.Stock. The holders of Class A Common Stock and Class B Common Stock vote together as a single class on all matters and are entitled one1 vote for each share held.
There is no cumulative voting with respect to the election of directors, which results in the holders of more than 50% of the shares being able to elect all of the directors.directors, subject to voting obligations under the Stockholder Agreement (defined below). In the event of a liquidation, dissolution, or winding up of the Company, the common stockholders are entitled to share ratably in all assets remaining available for distribution to them after payment of liabilities and after provision is made for each class of stock, if any, having preference over the common stock. The Company's common stockholdersholders of the Class A Common Stock have no preemptive or other subscription rights. Thererights, and there are no sinking fund provisions applicable to the common stock.such shares.
Class B Common Stock
In connection with the closing of the Business Combination, the Company authorized 225.0 million shares of Class B Common Stock. At September 30, 2018,2019, there were 90.591.8 million shares of Class B Common Stock issued and outstanding. Holders of Class B Common Stock will vote together as a single class with holders of Class A Common Stock on all matters properly submitted to a vote of the stockholders. The holders of Class B Common Stock generally have the right to exchange all or a portion of their Class B Common Stock, together with an equal number of Magnolia LLC Units, for the same number of shares of Class A Common Stock or, at Magnolia LLC’s option, an equivalent amount of cash. Upon the future redemption or exchange of Magnolia LLC Units held by any holder of
Class B Common Stock, a corresponding number of shares of Class B Common Stock held by such holder of Class B Common Stock will be canceled. In the event of a liquidation, dissolution, or winding up of the Company, the common stockholders are entitled to share ratably in all assets remaining available for distribution to them after payment of liabilities and after provision is made for each class of stock, if any, having preference over the common stock. The Company's common stockholdersholders of the Class B Common Stock have no preemptive or other subscription rights. Thererights, and there are no sinking fund provisions applicable to the common stock.such shares.
Warrants
As of September 30, 2018,On June 7, 2019, the Company had 31.7 millioncommenced an exchange offer (the “Offer”) and consent solicitation (the “Consent Solicitation”), pursuant to which the Company (1) offered to holders of its warrants outstanding, consistingthe opportunity to receive 0.29 shares of 21.7 million publicClass A Common Stock in exchange for each warrant validly tendered and (2) solicited the consent from the holders of its warrants originally sold as partto approve an amendment to the Company’s existing warrant agreement, by and between the Company and Continental Stock Transfer & Trust Company, to amend the agreement to provide the Company with the right to require any holder of the units sold in the initial public offering (the "IPO")Company’s warrants to exchange their warrants for Class A Common Stock at an exchange ratio of TPG Pace Energy Holdings Corp., a Delaware corporation ("TPGE") that later became Magnolia after the completion of the Business Combination, and 10.0 million warrants (the "Private Placement Warrants") sold in a private placement concurrently with the IPO to the TPG Pace Energy Sponsor LLC, a Delaware limited liability company (the "Sponsor"). Each whole warrant entitles the holder to purchase one whole share0.261 shares of Class A Common Stock for $11.50 per share. each whole warrant (the “Warrant Amendment”). Pursuant to the Offer, certain of the Company’s warrantholders, including directors and executive officers, agreed to tender their warrants and provide the corresponding consent to the Warrants Amendment in the Consent Solicitation by entering into the Tender and Support Agreement (as defined below).
The warrants became exercisable on August 30, 2018Offer and will expireConsent Solicitation expired on July 31, 2023 or earlier upon redemption or liquidation. The5, 2019.In connection with the closing of the Offer on July 10, 2019 and the subsequent exercise of the Company’s right to exchange all remaining warrants on July 25, 2019, the Company may redeem the outstanding warrants at a priceissued an aggregate of $0.01 per existing warrant, if the last sale price9.2 million shares of Magnolia's Class A Common Stock equals or exceeds $18.00 per sharein exchange for any 20 trading days withinall of its 31.7 million warrants outstanding, which consisted of 21.7 million public warrants and 10.0 million private placement warrants.
As the fair value of the warrants exchanged in the Offer was less than the fair value of the Class A Common Stock issued, the company recorded a 30 trading day period ending onnon-cash deemed dividend of $2.8 million for the third business day before Magnolia sends the notice of redemptionincremental value provided to the warrant holders. The Private Placement Warrants, however, are non-redeemable so long as they are held byfair value of warrants and the Sponsor or its permitted transferees.Class A Common Stock was determined using unadjusted quoted prices in an active market, a Level 1 fair value input. The Company capitalized $2.2 million of expenses related to the Offer within additional paid-in capital.
Share Repurchase Program
On August 5, 2019, the Company’s Board of Directors authorized a share repurchase program of up to 10 million shares. The program does not require purchases to be made within a particular timeframe. As of September 30, 2019, the Company had repurchased 950 thousand shares of Class A Common Stock at a weighted average price of $10.23, for a total cost of approximately $9.7 million.
Noncontrolling Interest
The noncontrollingNoncontrolling interest relatesin Magnolia’s consolidated subsidiaries include amounts attributable to Magnolia LLC Units that were issued to the Karnes County Contributors in connection with the Business Combination. The noncontrolling interest percentage is affected by various equity transactions such as issuances of Class A Common Stock exercise of warrants and the conversion of Class B Common Stock to Class A Common Stock. As of September 30, 2018, the Company2019, Magnolia owned approximately 63.2%64.6% of the interest in Magnolia LLC and the noncontrolling interest was 36.8%35.4%. Net incomeIn the first quarter of 2019, Magnolia Operating formed a joint venture, in which MGY Louisiana LLC, a wholly owned subsidiary of Magnolia Operating, holds approximately 85% of the units, with the remaining 15% attributable to noncontrolling interest.
12. Supplemental Cash Flow Information
Supplemental cash flow disclosures are presented below:
|
| | | | | | | | | | | | |
| Successor | | | Predecessor |
(In thousands) | Nine Months Ended September 30, 2019 | | July 31, 2018 Through September 30, 2018 | | | January 1, 2018 Through July 30, 2018 |
Supplemental non-cash operating activity: | | | | | | |
Cash paid for income taxes | $ | 390 |
| | $ | — |
| | | $ | 336 |
|
Cash paid for interest | 25,687 |
| | 350 |
| | | — |
|
Supplemental non-cash investing and financing activity: | | | | | | |
Accruals or liabilities for capital expenditures | $ | 37,241 |
| | $ | 45,242 |
| | | $ | 38,028 |
|
Contingent Consideration issued in Business Combination | — |
| | 149,700 |
| | | — |
|
Non-Compete agreement entered into in Business Combination | — |
| | 44,400 |
| | | — |
|
Equity issuances in connection with acquisitions | 33,693 |
| | 1,481,695 |
| | | — |
|
Non-cash deemed dividend related to warrant exchange | 2,763 |
| | — |
| | | — |
|
Supplemental non-cash lease operating activity: | | | | | | |
Right-of-use assets obtained in exchange for operating lease obligations | $ | 6,720 |
| | — |
| | | — |
|
13. Stock Based Compensation
On October 8, 2018, the Company’s board of directors adopted the “Magnolia Oil & Gas Corporation Long Term Incentive Plan” (the “Plan”), effective as of July 17, 2018. A total of 11.8 million shares of Class A Common Stock have been authorized for issuance under the Plan. The Company granted employees stock based compensation awards in the form of restricted stock units (“RSUs”) and performance stock units (“PSUs”) to enhance the Company and its affiliates’ ability to attract, retain and motivate persons who make important contributions to the Company and its affiliates by providing these individuals with equity ownership opportunities. Shares issued as a result of awards granted under the Plan are generally new shares of Class A Common Stock.
Stock based compensation expense is recognized within general and administrative expense on the consolidated statement of operations and was $2.8 million and $8.4 million for the Successor Period includes allthree and nine months ended September 30, 2019. The Company has elected to account for forfeitures of awards granted under the Plan as they occur in determining compensation expense.
Restricted Stock Units
The Company grants service-based RSU awards to employees and non-employee directors, which generally vest ratably over a three-year service period. RSUs represent the right to receive shares of Class A Common Stock at the end of the one-time transaction costsvesting period equal to the number of $22.4 million incurred in connection with Business Combination as well as allRSUs granted. RSUs are subject to restrictions on transfer and are generally subject to a risk of forfeiture if the award recipient is no longer an employee or director of the federal income taxCompany for any reason prior to vesting of the award. Compensation expense for the service-based RSU awards is based upon the grant date market value of $3.5 million.the award and such costs are recorded on a straight-line basis over the requisite service period for each separately vesting portion of the award, as if the award was, in-substance, multiple awards. Unrecognized compensation expense related to unvested restricted shares at September 30, 2019 was $12.0 million, which the Company expects to recognize over a weighted average period of 2.1 years.
The table below summarizes restricted stock unit activity for the nine months ended September 30, 2019.
|
| | | | | | |
| Restricted Stock Units | | Weighted Average Grant Date Fair Value |
Unvested restricted stock units, beginning of period | 807,431 |
| | $ | 13.97 |
|
Granted | 585,659 |
| | $ | 12.33 |
|
Vested | 237,702 |
| | $ | 14.58 |
|
Forfeited | — |
| | — |
|
Unvested restricted stock units, end of period | 1,155,388 |
| | $ | 13.06 |
|
Performance Stock Units
During the nine months ended September 30, 2019, the Company granted PSUs to certain employees, with each PSU representing the contingent right to receive 1 share of Class A Common Stock. The number of shares of Class A Common Stock issuable upon vesting, however, ranges from 0 to 150% of the number of PSUs granted based on the total shareholder return (“TSR”) of the Class A Common Stock relative to the TSR achieved by a specific industry peer group over an approximate three-year performance period, the last day of which is also the vesting date. Unrecognized compensation expense related to unvested PSUs at September 30, 2019 was $7.0 million, which the Company expects to recognize over a weighted average period of 2.1 years.
The table below summarizes performance stock award and unit activity for the nine months ended September 30, 2019.
|
| | | | | | |
| Performance Stock Units | | Weighted Average Grant Date Fair Value |
Unvested performance stock units, beginning of period | 475,312 |
| | $ | 14.58 |
|
Granted | 267,482 |
| | $ | 13.87 |
|
Vested | 33,333 |
| | $ | 14.58 |
|
Forfeited | — |
| | — |
|
Unvested performance stock units, end of period | 709,461 |
| | $ | 14.31 |
|
The grant date fair value of the PSUs granted during the nine months ended September 30, 2019 was $3.7 million, calculated using a Monte Carlo simulation. The following table summarizes the assumptions used to calculate the grant date fair value of these PSUs.
|
| |
| Grant Date Fair Value Assumptions |
Expected term (in years) | 2.85 - 2.67 |
Expected volatility | 33.61% - 31.58% |
Risk-free interest rate | 2.48% - 2.29% |
14. Earnings Per Share
A reconciliation of the numerators and denominators of the basic and diluted per share computations follows. No such computation is necessary for the Predecessor periodsPeriod as the Predecessor was not previously accounted for as a standalone legal entity and did not have publicly traded shares.securities.
|
| | | | | | | | | | | |
(In thousands, except per share data) | Three Months Ended September 30, 2019 | | Nine Months Ended September 30, 2019 | | July 31, 2018 Through September 30, 2018 |
Basic: | | | | | |
Net Income attributable to Class A Common Stock | $ | 7,784 |
| | $ | 39,316 |
| | $ | 6,176 |
|
Weighted average number of common shares outstanding during the period - basic | 166,872 |
| | 160,051 |
| | 151,992 |
|
Net income per common share - basic | $ | 0.05 |
| | $ | 0.25 |
| | 0.04 |
|
| | | | | |
Diluted: | | | | | |
Net Income attributable to Class A Common Stock | $ | 7,784 |
| | $ | 39,316 |
| | $ | 6,176 |
|
Weighted average number of common shares outstanding during the period - basic | 166,872 |
| | 160,051 |
| | 151,992 |
|
Add: Dilutive effect warrants and stock based compensation | 236 |
| | 1,437 |
| | 5,080 |
|
Weighted average number of common shares outstanding during the period - diluted | 167,108 |
| | 161,488 |
| | 157,072 |
|
Net income per common share - diluted | $ | 0.05 |
| | $ | 0.24 |
| | $ | 0.04 |
|
|
| | | | |
| | Successor |
(In thousands) | | July 31, 2018 through September 30, 2018
|
Basic: | | |
Net Income attributable to Class A Common Stock | | $ | 6,708 |
|
Weighted average number of common shares outstanding during the period | | 151,992 |
|
Net income per common share - basic | | $ | 0.04 |
|
| | |
Diluted: | | |
Net Income attributable to Class A Common Stock | | $ | 6,708 |
|
Basic weighted average number of common shares outstanding during the period | | 151,992 |
|
Add: Dilutive effect of warrants | | 5,080 |
|
Diluted weighted average number of common shares outstanding during the period | | 157,072 |
|
Net income per common share - diluted | | $ | 0.04 |
|
The calculation for weighted average shares reflects shares outstanding over the reporting period based on the actual number of days the shares were outstanding. For the period presented, theThe Company excluded 91.8 million, 92.3 million, and 87.6 million of weighted average shares of Class A Common Stock issuable upon conversion of the Company’s Class B Common Stock (and the corresponding Magnolia LLC Units) for the three and nine months ended September 30, 2019 and for the period from July 31, 2018 through September 30, 2018, respectively, as the effect was anti-dilutive. In addition, for the three months ended September 30, 2019 the effect of warrants were excluded because their inclusion would be anti-dilutive.
12.15. Related Party Transactions
As of September 30, 2018,2019, EnerVest Energy Institutional Fund XIV-A, L.P., a Delaware limited partnership, and EnerVest Energy Institutional Fund XIV-C, L.P., a Delaware limited partnership, both entitiesof which are part of the Karnes County Contributors, group as
defined in Note 1 - Description of Business and Basis of Presentation, each held more than 10% of the Company'sCompany’s common stock and qualified as principal owners of the Company, as defined in ASC 850, "Related“Related Party Disclosures." In addition, the Sponsor had a beneficial ownership of approximately 10% and also qualified as a principal owner of the Company.”
Amended and Restated Limited Liability Company Agreement of Magnolia LLC
On the Closing Date, the Company, Magnolia LLC, and certain of the Karnes County Contributors entered into Magnolia LLC’s amended and restated limited liability company agreement, , which sets forth, among other things, the rights and obligations of the holders of units in Magnolia LLC. Under the Magnolia LLC Agreement, the Company becameis the sole managing member of Magnolia LLC.
Registration Rights Agreement
At the closing of the Business Combination, the Company entered into a registration rights agreement (the “Registration Rights Agreement”) with TPG Pace Energy Sponsor LLC, a Delaware limited liability company (“TPG Pace”), the Karnes County Contributors, the Sponsor, and the Company’s four4 independent directors prior to the Business Combination (collectively, the “Holders”), pursuant to which the Company will beis obligated, subject to the terms thereof and in the manner contemplated thereby, to register for resale under the Securities Act all or any portion of the shares of Class A Common Stock that the Holders holdheld as of July 31, 2018 and that they may have acquired or might acquire thereafter, including upon conversion, exchange, or redemption of any other security therefor. Under the New Registration Rights Agreement, Holders also have “piggyback” registration rights exercisable at any time that allow them to include the shares of Class A Common Stock that they own in certain registrations initiated by the Company.
On August 10, 2018,Pursuant to the Registration Rights Agreement, the Company has filed a Registration Statementand taken effective 2 registration statements on Form S-3, (subsequently amendedeach of which registered, among others, the offering by Amendment No. 1 on August 28, 2018, the “Registration Statement”) to register the Private Placement Warrants and sharesHolders of the Company’s Class A Common Stock, including all of shares of Class A Common Stock held by Holders as of July 31, 2018. The Registration Statement was declared effective by the Securities and Exchange Commission on August 30, 2018. included therein.
Stockholder Agreement
On the Closing Date, the Company, Sponsor,TPG Pace, and the Karnes County Contributors entered into the Stockholder Agreement (the “Stockholder Agreement”). Under the Stockholder Agreement,, under which the Karnes County Contributors wereare entitled to nominate two2 directors, one of whom shall be independent under the listing rules of the New York Stock Exchange, the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Sarbanes-Oxley Act of 2002, for appointment to the board of directors of the Company (the “Board”) so long as they collectively own at least 15% of the outstanding shares of Class A Common Stock and Class B Common Stock, (on a fully diluted basis, including equity securities exercisable into common stock, and on a combined basis), and one1 director so long as they ownedcollectively own at least 2% of the outstanding shares of Class A Common Stock and Class B Common Stock (on a fully diluted basis, including equity securities exercisable into common stock, and on a combined basis). Sponsor is entitled to nominate two directors for appointment to the Board so long as it owns at least 60% of the voting common stock that it owns at the Closing Date (including any shares of common stock issuable upon the exercise of any Private Placement Warrants held by Sponsor), and one director so long as it owns at least 25% of the voting common stock that it owns at the Closing Date (including any shares of common stock issuable upon the exercise of any Private Placement Warrants held by Sponsor). The Karnes County Contributors and Sponsor are eachcollectively entitled to appoint one1 director to each committee of the Board (subject to applicable lawlaws and stock exchange rules). Furthermore, TPG Pace was entitled to certain director nomination rights under the Stockholder Agreement, but those rights ceased following a distribution by TPG Pace of its shares in August 2019.
Contingent Consideration
Pursuant to the Karnes County Contribution Agreement, for a period of five years following the Closing Date, the Company agreed to issue or cause to be issued to the Karnes County Contributors up to 13.0 million additional shares ofequity in the Company's stockCompany and Magnolia LLC upon satisfaction of certain EBITDA and free cash flow or stock price thresholds in three3 tranches. As of September 30,December 31, 2018, the Company had met the defined stock price thresholds required for two of the three tranches and thus had issued an aggregate of 2.53.6 million additional shares of Class A Common Stock and 6.59.4 million additional shares of Class B Common Stock to the Karnes County Contributors. The effect of this share issuance is included in Magnolia's basic share count as of September 30, 2018. Additionally, on October 4, 2018,Contributors and had caused Magnolia met the stock price threshold for the third and final tranche and subsequently issued 1.1LLC to issue 9.4 million additional shares of Class A Common Stock and 2.9 million additional shares of Class B Common StockMagnolia LLC Units to the Karnes County Contributors. The effect of this share issuance is not reflected in these financial statements.
Sponsor LoanTender and Support Agreement
AtPursuant to the closingOffer, certain of the Business Combination,Company’s warrantholders, including directors and executive officers, agreed to tender their warrants by entering into the tender and support agreement, dated as of June 7, 2019, by and between the Company repaid in full $1.0 million unsecured promissory note to the Sponsor.and such holders (the “Tender and Support Agreement”). See Note 11 - Stockholders’ Equity for more information.
Predecessor Transactions
Related Party (Predecessor)
EnerVest, as managing general partner of the Karnes County Contributors, provided management, accounting and advisory services to the Karnes County Contributors in exchange for a quarterly management fee based on the Karnes County Contributors' investor commitments. The management fees incurred have beenwere allocated to the Predecessor using a ratio of asset acquisitions value to total asset acquisitions completed by the Karnes County Contributors. The management fees and other costs allocated to the Predecessor and included in "General and administrative expenses" in the combined statements of operations were $1.5$1.6 million and $3.9$11.6 million for the periodperiods of July 1 2018 through July 30, 2018 and three months ended September 30, 2017, respectively, and $9.8 million and $11.3 million for the period of January 1 2018 through July 30, 2018, and nine months ended September 30, 2017, respectively.
The Karnes County Contributors also entered into operating agreements with EnerVest Operating, LLC (“EVOC”), a wholly-owned subsidiary of EnerVest,EVOC to act as contract operator of the Predecessors’Predecessor’s oil and natural gas wells. The Predecessor reimbursed EVOC for direct expenses incurred. A majority of such expenses arewere charged on an actual basis (i.e., no mark-up or subsidy is charged or received byto EVOC). These costs are included in lease“Lease operating expensesexpenses” in the consolidatedcombined statements of operations in the Predecessor period.Period. Additionally, in its role as contract operator, EVOC also collected proceeds from oil, natural gas, and natural gas liquidsNGL sales and distributed them to the Predecessor and other working interest owners. Accounts receivable from EVOC and other related parties was $13.7 million as of December 31, 2017.
13.16. Commitments and Contingencies
Legal Matters
The Company is involved in disputes or legal actions in the ordinary course of business. For example, certain of the Karnes County Contributors and the Company have been named as defendants in a lawsuit where the plaintiffs claim to be entitled to a minority working interest in certain Karnes County Business properties. The litigation is in the discovery stage. The exposure related to this litigation is currently not reasonably estimable. The Karnes County Contributors retained all such liability in connection with the Business Combination. In the 2018 Successor Period,At September 30, 2019, the Company does not believe the outcome of any such disputes or legal actions will have a material effect on its unaudited financial statements. No amounts were accrued with respect to outstanding litigation during the 2017consolidated statement of operations, balance sheet, or 2018 Predecessor Periods or during the Successor Period.cash flows.
Environmental Matters
The Company, as an owner or lessee and operator of oil and gas properties, is subject to various federal, state, local laws and regulations relating to discharge of materials into, and protection of, the environment. These laws and regulations may, among other
things, impose liability on the lessee under an oil and gas lease for the cost of pollution clean-up resulting from operations and subject the lessee to liability for pollution damages. In some instances, the Company may be directed to suspend or cease operations in the affected area. The Company maintains insurance coverage, which it believes is customary in the industry, although the Company is not fully insured against all environmental risks.
Commitments
At September 30, 2018, contractual obligations for long-term operating leases and purchase obligations are as follows:
|
| | | | | | | | | | | | | | | | | | | | | |
Net Minimum Commitments (in thousands) | Remainder of 2018 | 2019 | 2020 | 2021 | 2022 | Thereafter | Total |
Purchase obligations (1) | $ | 7,977 |
| $ | 14,641 |
| $ | 2,346 |
| $ | 131 |
| $ | 131 |
| $ | 241 |
| $ | 25,467 |
|
Operating lease obligations (2) | 109 |
| 436 |
| 274 |
| 44 |
| — |
| — |
| 863 |
|
Service fee commitment (3) | 5,891 |
| 23,564 |
| 13,745 |
| — |
| — |
| — |
| 43,200 |
|
Total Net Minimum Commitments | $ | 13,977 |
| $ | 38,641 |
| $ | 16,365 |
| $ | 175 |
| $ | 131 |
| $ | 241 |
| $ | 69,530 |
|
| |
(1) | Amounts represent any agreements to purchase goods or services that are enforceable and legally binding and that specify all significant terms. These include minimum commitments associated with firm transportation contracts and frac sand commitments. |
| |
(2) | Amounts include long-term lease payments for compressors, vehicles and office space. |
| |
(3) | On the Closing Date, the Company and EVOC entered into a Services Agreement (the "Services Agreement"), pursuant to which EVOC, under the direction of the Company’s management, will provide the Company's services identical to the services historically provided by EVOC in operating the Acquired Assets, including administrative, back office and day-to-day field level services reasonably necessary to operate the business of the Company and its assets, subject to certain exceptions. As consideration for the services to be provided under the Services Agreement, the Company will pay EVOC a fixed annual services fee of approximately $23.6 million. The annual services fee may be (a) increased or decreased to account for asset acquisitions and dispositions of assets, (b) increased to account for an increase in the rig count attributable to the assets and (c) decreased if the Company must perform any of such services itself because EVOC is unable or fails to do so. The term of the Services Agreement is five years, but the Services Agreement is subject to termination by either party after two years. |
Risks and Uncertainties
The Company’s revenue, profitability, and future growth are substantially dependent upon the prevailing and future prices for oil and natural gas, which depend on numerous factors beyond the Company’s control such as overall oil and natural gas production and inventories in relevant markets, economic conditions, the global political environment, regulatory developments, and competition from other energy sources. Oil and natural gas prices historically have been volatile, and may be subject to significant fluctuations in the future.
14. Subsequent Events
The Company has evaluated subsequent events through November 13, 2018 and has determined, other than those disclosed, there are no events that required disclosure or recognition in these unaudited consolidated financial statements.
On October 4, 2018, the Company met the stock price threshold for the third and final tranche of the Karnes County earnout consideration and subsequently issued 1.1 million additional shares of Class A Common Stock and 2.9 million additional shares of Class B Common Stock to the Karnes County Contributors. The effect of this share issuance will be included in the Company's year end filing.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
FORWARD-LOOKING STATEMENTS
This report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts included or incorporated by reference in this report, including, without limitation, statements regarding the Company'sCompany’s future financial position, business strategy, budgets, projected revenues, projected costs, and plans and objectives of management for future operations, are forward-looking statements. Such forward-looking statements are based on the beliefs of management, as well as assumptions made by, and information currently available to, the Company’s management. In addition, forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “could,” “expect,” “intend,” “project,” “estimate,” “anticipate,” “plan,” “believe,” or “continue” or similar terminology. Although Magnolia believes that the expectations reflected in such forward-looking statements are reasonable, the Company can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from the Company'sCompany’s expectations include, but are not limited to, Magnolia'sMagnolia’s assumptions about:
the market prices of oil, natural gas, natural gas liquids (NGLs)(“NGLs”), and other products or services;
the supply and demand for oil, natural gas, NGLs, and other products or services;
production and reserve levels;
drilling risks;
economic and competitive conditions;
the availability of capital resources;
capital expenditureexpenditures and other contractual obligations;
currency exchange rates
weather conditions;
inflation rates;
the availability of goods and services;
legislative, regulatory, or policy changes;
cyber attacks;
occurrence of property acquisitions or divestitures;
the integration of acquisitions; and
the securities or capital markets and related risks such as general credit, liquidity, market, and interest-rate risks.
All of Magnolia'sMagnolia’s forward-looking information is subject to risks and uncertainties that could cause actual results to differ materially from the results expected. Although it is not possible to identify all factors, these risks and uncertainties include the risk factors
and the timing of any of those risk factors identified in the Company’s Definitive Proxy StatementAnnual Report on Schedule 14AForm 10-K for the fiscal year ended December 31, 2018 filed with the SEC on July 2, 2018.February 27, 2019.
Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with ourthe Company’s unaudited consolidated financial statements and the related notes thereto.
Overview
Magnolia Oil & Gas Corporation (the "Company" or "Magnolia") is a Delaware limited liability companycorporation formed in February 2017 as a special purpose acquisition company under the name TPG Pace Energy Holdings Corp. for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization, or similar business combination with one or more businesses.
Magnolia’s business model was designed with a primary objective to generate stock market value over the long term. The Company’s strategy is to establish a company whose characteristics would demonstrate a certain basic set of criteria that appeal to generalist investors and to generate growing earnings per share over time, high operating and full cycle margins, and maintain a very strong balance sheet with a low amount of leverage.
On July 31, 2018, the Company and Magnolia Oil & Gas Parent LLC a Delaware limited liability company and a consolidated subsidiary of the Company,(“Magnolia LLC”), as applicable, consummated the previously announced acquisition of: (i) certain right, title, and interest in certain oil and natural gas assets located primarily in the Karnes County portion of the Eagle Ford Shale in South Texas (the "Karnes County Assets") pursuant to that certain Contribution and Merger Agreement (as subsequently amended, the"Karnesthe "Karnes County Contribution Agreement"), by and among the Company, Magnolia Oil & Gas Parent LLC and certain affiliates (the "Karnes County Contributors") of EnerVest Ltd. ("EnerVest"); (ii) certain right, title, and interest in certain oil and natural gas assets located primarily in the Giddings Field of the Austin Chalk (the "Giddings Assets") pursuant to that certain Purchase and Sale Agreement (the "Giddings Purchase Agreement") by and among Magnolia Oil & Gas Parent LLC and certain affiliates of EnerVest (the "Giddings Sellers"); and (iii) an approximatelya 35% membership interest (the “Ironwood Interests”) in Ironwood Eagle Ford Midstream, LLC, a Texas limited liability company, which owns an Eagle Ford gathering system, pursuant to that certain Membership Interest Purchase Agreement, (the “Ironwood MIPA” and, together with the transactions contemplated by the Karnes County Contribution Agreement and the Giddings Purchase Agreement, the "Business Combination Agreements"), and the transactions contemplated thereby, the "Business Combination"), by and among Magnolia Oil & Gas Parent LLC and certain affiliates of EnerVest (the "Ironwood Sellers") (collectively, the “Business Combination”).
In connection with the consummation of the Business Combination, on July 31, 2018, the Karnes County Contributors received 83.9 million shares of Class B Common Stock;Stock, par value $0.0001 per share (“Class B Common Stock”), 31.8 million shares of Class A Common Stock;Stock, par value $0.0001 per share (“Class A Common Stock”), and approximately $911.5 million in cash. Thecash; the Giddings Sellers received approximately $282.7 million in cashcash; and the Ironwood Sellers received $25.0 million in cash.
The Company operates On March 29, 2019, Magnolia and EnerVest consummated the final settlement of the Business Combination, with Magnolia LLC receiving a net cash payment of $4.3 million in one reportable segment engaged incash and the acquisition, development and production of oil and natural gas properties located in the United States. The Company's oil and natural gas properties are located primarily in Karnes County and the Giddings Field in South Texas, where the Company primarily targets the Eagle Ford Shale and the Austin Chalk formation.
Contributors forfeiting to Magnolia plans to spend within 60%0.5 million shares of EBITDAX on drilling and completing wells to achieve moderate production growth of 10% to 15% per year. This level of spending and growth is expected to result in meaningful free cash flow generation and will be used for accretive acquisitions, share repurchases and debt reduction.
As of September 30, 2018, Magnolia's assets include approximately 14,600 net acres in Karnes County and approximately 459,000 net acres in the Giddings Field. As of September 30, 2018, Magnolia had approximately 1,300 gross operated wells (1,100 net) with total production of 60 MBoe/d in September 2018. In the third quarter of 2018, we operated three drilling rigs across our acreage with two rigs in Karnes County and one rig in the Giddings Field and brought 19 operated horizontal wells on production. We expect to add a second rig in the Giddings Field during the first quarter of 2019 to further appraise and delineate the opportunities within our large net acreage position.
Magnolia reported net income attributable to Class A common stock of $6.7 million or $0.04 per diluted common share for the Successor Period of 2018. Magnolia reported net income of $25.5 million which includes noncontrolling interest of $18.8 million related to Class B shares issued to certain affiliates of EnerVest in connection with the Business Combination. As of September 30, 2018, the noncontrolling interest ownership was 36.8%. Net income attributable to Class A Common Stock for the Successor Period includes alland 1.6 million shares of the one-time transaction costsClass B Common Stock (and forfeiting a corresponding number of $22.4 million incurred in connection with the Business Combination as well as federal income tax expense of $3.5 million.Magnolia LLC Units to Magnolia LLC).
Predecessor and Successor Reporting
In connectionaccordance with accounting principles generally accepted in the Business Combination,United States of America (“GAAP”), the Company has been identified as the acquirer for accounting purposesin the Business Combination and the Karnes County Business was deemed to be the accounting "Predecessor"“Predecessor”. The Business Combination was accounted for using the acquisition method of accounting and the Successor financial statements reflect a new basis of accounting based on the fair value of net assets acquired. As a result of the application of the acquisition method of accounting, the Company’s consolidated and combined financial statements and certain presentations of information therein are separated into two distinct periods to indicate the different ownership and accounting basis between the periods presented, the period before the consummation of the Business Combination, which includes the period from January 1, 2018 to July 30, 2018 (the "2018 Predecessor Period"“Predecessor Period”), and the period after the Business Combination, which includes the period from July 31, 2018 to September 30, 2018 (the “2018 Successor Period”), and the three and nine months ended September 30, 2017 ("2017 Predecessor Period"2019 (the “2019 Successor Period”).
The Company operates in one reportable segment and is engaged in the acquisition, development, exploration, and production of oil and natural gas properties located in the United States. The Company's oil and natural gas properties are located primarily in Karnes County and the period onGiddings Field in South Texas, where the Company primarily targets the Eagle Ford Shale and after the consummationAustin Chalk formations.
As of September 30, 2019, Magnolia’s assets in South Texas included 21,946 net acres in Karnes, Gonzales, DeWitt, and Atascosa counties and 428,682 net acres in the Giddings Field. As of September 30, 2019, Magnolia held an interest in approximately 1,618 gross wells (1,128 net), with total production of 66.3 thousand barrels of oil equivalent per day (“Mboe/d”) for the nine months ended September 30, 2019. In the third quarter of 2019, Magnolia operated two drilling rigs across its acreage, one rig in Karnes County and one rig in the Giddings Field.
Magnolia’s production averaged 71.3 Mboe/d for the third quarter of 2019, a 9.5% increase compared to 65.1 Mboe/d in the second quarter. Third quarter oil production averaged 53.7% of total volumes.
In July, 2019, the Company exchanged all of its warrants for an aggregate of 9.2 million shares of Class A Common Stock. For more information, see Note 11 - Stockholders’ Equity in the Company’s unaudited consolidated financial statements included in this Quarterly Report.
Magnolia recognized net income attributable to Class A Common Stock of $7.8 million and $39.3 million, or $0.05 and $0.24 per diluted common share, for the three and nine months ended September 30, 2019, respectively. Net income attributable to Class A Common Stock for the three and nine months ended September 30, 2019 was reduced by $2.8 million related to the non-cash deemed dividend as a result of the Business Combination,warrant exchange. Magnolia also recognized net income of $17.4 million and $71.4 million, which is from July 31, 2018includes noncontrolling interest of $6.8 million and $29.3 million related to the Class B Common Stock held by certain affiliates of EnerVest for the three and nine month 2019 Successor Period ended September 30, 2018 (the "Successor Period").2019, respectively.
On August 5, 2019, the Company’s Board of Directors authorized a share repurchase program of up to 10 million shares. The program does not require purchases to be made within a particular timeframe. During the three and nine months ended September 30, 2019, the Company repurchased 950 thousand shares at a weighted average price of $10.23, for a total cost of approximately $9.7 million.
Results of Operations
Factors Affecting the Comparability of the Historical Financial Results
The 2018 and 2019 Successor Period financial statements reflect a new basis of accounting for the assets acquired and liabilities ofassumed by the acquired companyCompany in the Business Combination that is based on thetheir fair value of the assets acquired and liabilities assumed.value. As a result, the statement of operations subsequent to the Business Combination includes depreciation and amortization expense on Magnolia'sMagnolia’s property, plant, and equipment balances made under the new basis of accounting. Therefore, the Company'sCompany’s financial information prior to the Business Combination ismay not be comparable to its financial information subsequent to the Business Combination. Certain other items of income and expense aremay not be comparable as a result of the following factors:
For the periods prior to July 31, 2018, the results of operations presented below reflect the results of solely the Predecessor, which, as described above, consists of only the results of the Karnes County Business, including, as applicable, its ownership of the Ironwood Interests, when the Predecessor was not owned by the Company, and do not include the results of the Giddings Assets;
The results of operations of the Predecessor were not previously accounted for as the results of operations of a stand-alone legal entity, and accordingly have been carved out, as appropriate, for the periods presented. The results of operations of the Predecessor therefore include a portion of indirect costs for salaries and benefits, depreciation, rent, accounting, legal services, and other expenses. In addition to the allocation of indirect costs, the results of operations reflect certain agreements executed by the Karnes County Contributors for the benefit of the Successor,Predecessor, including price risk management instruments. For more information, please refer to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018. These allocations may not be indicative of the cost of future operations or the amount of future allocations;
The Predecessor completed the acquisition of certain assets from GulfTex Energy III, L.P. and GulfTex Energy IV, L.P. on March 1, 2018 during the Predecessor Period, and accordingly the results of operations of the Predecessor reflect the impact of the assets acquired in that acquisition only from their respective acquisition date;
As a corporation, the Company is subject to U.S. federal income taxes at a statutory rate of 21% of pretax earnings whereas the Karnes County Contributors elected to bewere treated as individual partnerships for income tax purposes. As a result, items of income, expense, gains and losses flowed through to the partnersowners of the Karnes County Contributors and were taxed at the partnerowner level. Accordingly, no U.S. tax provision for federal income taxes is included in the financial statements of the Predecessor; and
On August 31, 2018, the Company completed the acquisition to purchase | |
• | On August 31, 2018, the Company acquired substantially all of the South Texas assets of Harvest Oil & Gas Corporation (the “Harvest Acquisition”) for approximately $133.3 million in cash and 4.2 million shares of the Company’s Class A Common Stock. The Harvest Acquisition added an undivided working interest across a portion of the Karnes County Assets and all of the Giddings Assets; |
On February 5, 2019, Magnolia Operating formed a joint venture, Highlander Oil & Gas Corporation ("Harvest Acquisition") for approximately $133.3 million in cash and 4.2 million newly issued sharesHoldings LLC, to complete the acquisition of the Company’s Class A Common Stock. The Harvest Acquisition added an undivideda 72% working interest across a portion ofin the Company's existing Karnes County AssetsEocene-Tuscaloosa Zone, Ultra Deep Structure gas well located in St. Martin Parish, Louisiana (the “Highlander Well”); and the existing Giddings Assets.
| |
• | The financial results for the Successor Period reflect the adoption of ASU No. 2014-09, Revenue from Contracts with Customers, which the Company adopted on December 31, 2018 and applied to all periods presented in the Successor Period. The Predecessor Period continues to be reported under the accounting standards in effect for that period. |
As a result of the factors listed above, the combined historical results of operations and period-to-period comparisons of these results and certain financial data may not be comparable or indicative of future results.
Three Months Ended September 30, 20182019 Compared to the Three Months Ended September 30, 20172018
Oil, Natural Gas and NGL Sales Revenues. The following table provides the components of Magnolia'sMagnolia’s revenues for the periods indicated, as well as each period'speriod’s respective average prices and production volumes. This table shows production on a Boebarrels of oil equivalent (“boe”) basis in which natural gas is converted to an equivalent barrel of oil based on a ratio of 6 Mcfsix thousand cubic feet of natural gas (“Mcf”) to 1one barrel. This ratio ismay not be reflective of the current price ratio between the two products.
| | | | Successor | Predecessor | | Successor | | | Predecessor |
(In thousands, except per unit data) | | July 31, 2018 through September 30, 2018 | July 1, 2018 through July 30, 2018 | | Three Months Ended September 30, 2017 | | Three Months Ended September 30, 2019 | | July 31, 2018 Through September 30, 2018 | | | July 1, 2018 Through July 30, 2018 |
PRODUCTION VOLUMES: | | | | | | |
Production: | | | | | | | | |
Oil (MBbls) | | 2,023 |
| 897 |
| | 1,562 |
| | 3,520 |
| | 2,023 |
| | | 897 |
|
Natural gas (MMcf) | | 5,047 |
| 1,153 |
| | 2,094 |
| | 10,763 |
| | 5,341 |
| | | 1,153 |
|
NGLs (MBbls) | | 642 |
| 160 |
| | 337 |
| | 1,245 |
| | 678 |
| | | 160 |
|
Total (MBoe) | | 3,506 |
| 1,249 |
| | 2,248 |
| |
Total (Mboe) | | | 6,559 |
| | 3,591 |
| | | 1,249 |
|
| | | | | | | | | | | | |
Average daily production volume: | | | | | | |
Average daily production: | | | | | | | | |
Oil (Bbls/d) | | 33,164 |
| 28,935 |
| | 16,978 |
| | 38,261 |
| | 33,164 |
| | | 28,935 |
|
Natural gas (Mcf/d) | | 82,738 |
| 37,194 |
| | 22,761 |
| | 116,989 |
| | 87,557 |
| | | 37,194 |
|
NGLs (Bbls/d) | | 10,525 |
| 5,161 |
| | 3,663 |
| | 13,533 |
| | 11,115 |
| | | 5,161 |
|
Total (Boe/d) | | 57,475 |
| 40,290 |
| | 24,435 |
| |
Total (boe/d) | | | 71,292 |
| | 58,872 |
| | | 40,290 |
|
| | | | | | | | | | | | |
REVENUES: | | | | | | |
Revenues: | | | | | | | | |
Oil revenues | | $ | 143,202 |
| $ | 68,487 |
| | $ | 72,706 |
| | $ | 207,840 |
| | $ | 143,202 |
| | | $ | 68,487 |
|
Natural gas revenues | | 14,201 |
| 3,646 |
| | 6,925 |
| | 21,243 |
| | 13,414 |
| | | 3,646 |
|
Natural gas liquids revenues | | 21,153 |
| 4,754 |
| | 6,984 |
| | 15,716 |
| | 21,547 |
| | | 4,754 |
|
Total revenues | | 178,556 |
| $ | 76,887 |
| | $ | 86,615 |
| | $ | 244,799 |
| | $ | 178,163 |
| | | $ | 76,887 |
|
| | | | | | | | | | | | |
AVERAGE PRICE: | | | | | | |
Average Price: | | | | | | | | |
Oil (per barrel) | | $ | 70.79 |
| $ | 76.35 |
| | $ | 46.55 |
| | $ | 59.05 |
| | $ | 70.79 |
| | | $ | 76.35 |
|
Natural gas (per Mcf) | | 2.81 |
| 3.16 |
| | 3.31 |
| | 1.97 |
| | 2.51 |
| | | 3.16 |
|
NGLs (per barrel) | | 32.95 |
| 29.71 |
| | 20.72 |
| | 12.62 |
| | 31.78 |
| | | 29.71 |
|
Oil revenueswere 85%, 80%, 89% and 84%89% of the Company'sCompany’s total revenues fromfor the 2019 Successor Period, the 2018 Predecessor Period and the 2017 Predecessor Period, respectively. The total oil revenues for the Successor Period, and the 2018 Predecessor Period, increasedrespectively. Oil revenues for the 2019 Successor Period were $3.8 million lower compared to the 2017combined 2018 Successor Period and Predecessor Period due to highera 19% decrease in average prices and frompartially offset by 21% higher production. The higher volumes are attributable to the inclusion of the Giddings assets,Assets, recent acquisitions, and continued development. Oil production was 58%54%, 72%56%, and 69%72% of total production volume for the 2019 Successor Period, the 2018 PredecessorSuccessor Period, and the 2017 Predecessor Period, respectively.
Natural gas revenues were 9%, 8%, 5% and 8%5% of the Company's total revenues for the 2019 Successor Period, the 2018 PredecessorSuccessor Period, and the 2017 Predecessor Period, respectively. The total naturalNatural gas revenues for the 2019 Successor Period were $4.2 million higher compared to the combined 2018 Successor and Predecessor Period due to a 66% increase in natural gas production primarily attributable to the Successor’s inclusion of the Giddings Assets and the acquisition of the Highlander Well, partially offset by a 25% decrease in average
prices. Natural gas production was 27%, 25%, and 15% of total production volume for the 2019 Successor Period, 2018 Successor Period and the 2018 Predecessor Period, increasedrespectively.
Natural gas liquids revenues were 6%, 12%, and 6% of the Company’s total revenues for the 2019 Successor Period, the 2018 Successor Period, and the Predecessor Period, respectively. NGL production was 19%, 19%, and 13% of total production volume for the 2019 Successor Period, the 2018 Successor Period, and the Predecessor Period, respectively. Natural gas liquids revenues for the 2019 Successor Period were $10.6 million lower compared to the 2017combined 2018 Successor Period and Predecessor Period due to an increasea 60% decrease in productionaverage prices, partially offset by lower average prices.49% higher production. The higher production volumes are primarily attributable to the Successor’s inclusion of the Giddings Assets, recent acquisitions, and continued development. Natural gas production was 24%, 15% and 16% of total production volume for the Successor Period, the 2018 Predecessor Period and the 2017 Predecessor Period, respectively.
Natural gas liquid revenues were 12%, 6% and 8% of the Company's total revenues for the Successor Period, the 2018 Predecessor Period and the 2017 Predecessor Period, respectively. Natural gas liquids production was 18%, 13% and 15% of total production volume for the Successor Period, the 2018 Predecessor Period and the 2017 Predecessor Period, respectively. The increase in the Successor Period is primarily due to the natural gas liquid volumes attributable to the Giddings Assets.
Operating Expenses and Other Income (Expense). The following table summarizes the Company'sCompany’s operating expenses and other income (expense) for the periods indicated.
| | | | Successor | Predecessor | | Successor | | | Predecessor |
(In thousands, except per unit data) | | July 31, 2018 through September 30, 2018 | July 1, 2018 through July 30, 2018 | | Three Months Ended September 30, 2017 | | Three Months Ended September 30, 2019 | | July 31, 2018 Through September 30, 2018 | | | July 1, 2018 Through July 30, 2018 |
OPERATING EXPENSES: | | | | | | |
Operating Expenses: | | | | | | | | |
Lease operating expenses | | $ | 11,016 |
| $ | 3,681 |
| | $ | 6,180 |
| | $ | 24,344 |
| | $ | 11,016 |
| | | $ | 3,681 |
|
Gathering, transportation and processing | | 5,746 |
| 2,240 |
| | 3,997 |
| | 9,270 |
| | 5,353 |
| | | 2,240 |
|
Taxes other than income | | 9,351 |
| 2,087 |
| | 5,823 |
| | 13,333 |
| | 9,351 |
| | | 2,087 |
|
Exploration expenses | | 11,221 |
| 40 |
| | 77 |
| | 3,924 |
| | 11,221 |
| | | 40 |
|
Asset retirement obligations accretion | | 391 |
| 21 |
| | 87 |
| | 1,394 |
| | 391 |
| | | 21 |
|
Depreciation, depletion and amortization | | 67,478 |
| 23,157 |
| | 27,124 |
| | 143,894 |
| | 65,902 |
| | | 23,157 |
|
General & administrative expenses | | 10,297 |
| 1,701 |
| | 4,960 |
| |
Amortization of intangible assets | | | 3,626 |
| | 2,418 |
| | | — |
|
General and administrative expenses | | | 17,345 |
| | 10,297 |
| | | 1,701 |
|
Transaction related costs | | 22,366 |
| — |
| | — |
| | — |
| | 22,366 |
| | | — |
|
Total operating costs and expenses | | $ | 137,866 |
| $ | 32,927 |
| | $ | 48,248 |
| | $ | 217,130 |
| | $ | 138,315 |
| | | $ | 32,927 |
|
| | | | | | | | | | | | |
OTHER INCOME (EXPENSE): | | | | | | |
Income from equity method investee | | $ | 309 |
| $ | (345 | ) | | $ | (84 | ) | |
Interest expense | | (4,959 | ) | — |
| | — |
| |
Gain (loss) on derivatives, net | | — |
| 3,865 |
| | (1,648 | ) | |
Other Income (Expense): | | | | | | | | |
Income (loss) from equity method investee | | | $ | 92 |
| | $ | 309 |
| | | $ | (345 | ) |
Interest expense, net | | | (6,896 | ) | | (4,959 | ) | | | — |
|
Gain on derivatives, net | | | — |
| | — |
| | | 3,865 |
|
Other income (expense), net | | (7,019 | ) | 24 |
| | — |
| | 21 |
| | (7,019 | ) | | | 24 |
|
Total other income (expense) | | $ | (11,669 | ) | $ | 3,544 |
| | $ | (1,732 | ) | | $ | (6,783 | ) | | $ | (11,669 | ) | | | $ | 3,544 |
|
| | | | | | | | | | | | |
AVERAGE OPERATING COSTS PER BOE: | | | | | | |
Average Operating Costs per Boe: | | | | | | | | |
Lease operating expenses | | $ | 3.14 |
| $ | 2.95 |
| | $ | 2.75 |
| | $ | 3.71 |
| | $ | 3.07 |
| | | $ | 2.95 |
|
Gathering, transportation and processing | | 1.64 |
| 1.79 |
| | 1.78 |
| | 1.41 |
| | 1.49 |
| | | 1.79 |
|
Taxes other than income | | 2.67 |
| 1.67 |
| | 2.59 |
| | 2.03 |
| | 2.60 |
| | | 1.67 |
|
Exploration costs | | 3.20 |
| 0.03 |
| | 0.03 |
| | 0.60 |
| | 3.12 |
| | | 0.03 |
|
Asset retirement obligation accretion | | 0.11 |
| 0.02 |
| | 0.04 |
| | 0.21 |
| | 0.11 |
| | | 0.02 |
|
Depreciation, depletion and amortization | | 19.25 |
| 18.54 |
| | 12.07 |
| | 21.94 |
| | 18.35 |
| | | 18.54 |
|
Amortization of intangible assets | | | 0.55 |
| | 0.67 |
| | | — |
|
General and administrative expenses | | 2.94 |
| 1.36 |
| | 2.21 |
| | 2.64 |
| | 2.87 |
| | | 1.36 |
|
Transaction related costs | | 6.38 |
| — |
| | — |
| | — |
| | 6.23 |
| | | — |
|
Lease operating expenses (“LOE”) are the costs incurred in the operation of producing properties and certain workover costs andwhich include expenses for utilities, direct labor, water disposal, workover rigs, and workover expenses, materials, and supplies. Lease operating expenses were $24.3 million, $11.0 million, $3.7 million, and $6.2$3.7 million for the 2019 Successor Period, the 2018 PredecessorSuccessor Period, and the 2017 Predecessor Period, respectively. Lease operating expenses were $3.14$3.71 per Boe,boe, $3.07 per boe, and $2.95 per Boe, and $2.75 per Boeboe for the 2019 Successor Period, the 2018 PredecessorSuccessor Period, and the 2017 Predecessor Period, respectively. The increase in cost per Boe inLease operating expenses for the 2019 Successor Period were $9.6 million higher than the combined 2018 Successor Period and 2018 Predecessor Period primarily due to the inclusion of the Giddings Assets, recent acquisitions, and continued development. The higher cost per boe in the 2019 Successor Period compared to the 2017combined 2018 Successor Period and Predecessor
Period was primarily due to increased field service pricingthe inclusion of the Giddings Assets as the Giddings Assets deliver less production per well than the Karnes County Assets, resulting from rising commodity prices and increased activity.in lease operating costs spread over fewer volumes.
Gathering, transportation and processing costs are costs incurred to deliver oil, natural gas, and natural gas liquidsNGLs to the market. Cost levels of these expenses can vary based on the volume of oil, natural gas, and natural gas liquidsNGLs produced as well as the cost of commodity processing. Gathering, transportation and processing costs were $5.7$9.3 million, $5.4 million, and $2.2 million and $4.0 million for the 2019 Successor Period, the 2018 PredecessorSuccessor Period and the 2017 Predecessor Period, respectively.respectively, or $1.41, $1.49, and $1.79 on a per boe basis. The $1.7 million higher costs in the 2019 Successor Period, compared to the combined 2018 Successor Period and Predecessor Period, were primarily due to the inclusion of the Giddings Assets as the Giddings Assets produce more gas than the Karnes County Assets and require more gathering, transportation, and processing than the Karnes County Assets. The lower cost per boe in the 2019 Successor Period compared to the combined 2018 Successor Period and Predecessor Period was primarily attributable to the adoption of the new revenue recognition requirements.
Taxes other than income include production and ad valorem taxes. These taxes are based on rates primarily established by federal, state and local taxing authorities. Production taxes are based on the market value of production. Ad valorem taxes are based on the fair market value of the mineral interests or business assets. Taxes other than income were $13.3 million, $9.4 million, $2.1 million, and $5.8$2.1 million for the 2019 Successor Period, the 2018 PredecessorSuccessor Period, and the 2017 Predecessor Period, respectively. The $1.9 million higher taxes other than income incurred during the 2019 Successor Period compared to the combined 2018 periodsSuccessor Period and Predecessor Period are primarily due to higher production with a corresponding increase in revenues.fair market values of mineral interest and business assets. Taxes
other than income were $2.67$2.03 per Boe,boe, $2.60 per boe, and $1.67 per Boe, and $2.59 per Boeboe for the 2019 Successor Period, the 2018 PredecessorSuccessor Period, and the 2017 Predecessor Period, respectively. The lower costs per boe in the 2019 Successor Period compared to the combined 2018 Successor Period and Predecessor Period were primarily due to lower production taxes in the 2019 Successor Period.
Exploration costs are geological and geophysical costs that include seismic surveying costs, costs of unsuccessful exploratory dry holes, and lease abandonmentcosts of expired or abandoned leases, and delay rentals. Exploration expenses increasedof $3.9 million in the 2019 Successor Period fromcompared to the Predecessor Periods to $11.2 million. The Company incurred $11.0 million in exploration expense in thecombined 2018 Successor Period related to theand Predecessor Period were $7.3 million lower primarily as a result of a one-time purchase of a seismic license continuation in connection with the Business Combination.Combination in the 2018 Successor Period.
Asset retirement obligation accretion increasedwas $1.0 million higher during the 2019 Successor Period as compared to the combined 2018 Successor Period and Predecessor Periods to $0.4 million.Period. The higher$1.4 million asset retirement obligation accretion incurred during the 2019 Successor Period was driven by the inclusion of the Giddings Assets in the Successor Period.Assets. This resulted in higher accretion expense per Boeboe in the Successor period of $0.11 per Boe in the2019 Successor Period as compared to $0.02of $0.21 per Boe, and $0.04 per Boe for the 2018 Predecessor Period and the 2017 Predecessor Period, respectively.boe.
Depreciation, depletion and amortization (“DD&A”) was $67.5$143.9 million, $65.9 million, and $23.2 million and $27.1 million for the 2019 Successor Period, the 2018 PredecessorSuccessor Period, and the 2017 Predecessor Period, respectively. DD&A was $19.25$21.94 per Boeboe for the 2019 Successor Period as compared to $18.54$18.35 per Boe and $12.07 per Boeboe for the 2018 Successor Period, and $18.54 per boe for the Predecessor Period. DD&A in the 2019 Successor Period was $54.8 million higher than the combined 2018 Successor and Predecessor Period primarily attributable to the increase in property, plant, and equipment and the 2017 Predecessor Period, respectively.increased production as a result of the Successor’s inclusion of the Giddings Assets, recent acquisitions, and continued development. The higher rate per Boeboe for the 2019 Successor Period compared to the combined 2018 Successor Period and Predecessor Period is mostly due to Magnolia’s higher property, plant, and equipment balances recorded as a result of the new basis of accounting related to the Business Combination.Combination, recent acquisitions and decrease in proved reserves. The Predecessor’s reserves are based on a five-year development plan, whereas the vast majority of the Successor’s proved undeveloped reserves are planned to be developed within one year.
The amortization of intangible assets was $3.6 million and $2.4 million for the 2019 Successor Period and the 2018 Successor Period, respectively. In connection with the close of the Business Combination, the Company recorded an estimated cost of $44.4 million for the Non-Compete Agreement (the “Non-Compete”) entered into with EnerVest on the Closing Date as intangible assets on the Company’s consolidated balance sheet. The $1.2 million higher amortization of intangible assets in the 2019 Successor Period as compared to the 2018 Successor Period is due to three months of amortization in the 2019 Successor Period as compared to approximately two months of amortization in the 2018 Successor Period. These intangible assets have a definite life and are subject to amortization utilizing the straight-line method over their economic life, currently estimated to be two and one half to four years. There were no intangible assets in any of the Predecessor Periods.
General and administrative ("(“G&A"&A”) expenses are costs incurred for overhead, including payroll and benefits for corporate staff, costs of maintaining a headquarters, IT expenses, and audit and other fees for professional services, including legal compliance expenses. The Company will incurincurs G&A related to the Services Agreement (the "Services Agreement"“Services Agreement”) with EnerVest Operating Company L.L.C. ("EVOC"(“EVOC”), in which EVOC will provideprovides the Company'sCompany’s day-to-day field level and back office operations and support for the operation and development of the assets, subject to certain exceptions. As consideration for the services to be provided under the Services Agreement, EVOC is paid an annual net general and administrative fee of $23.6 million that is adjusted in accordance with industry standard inflationary measures.million. In addition, the Company will paypays industry standard per well overhead payments to EVOC that are adjusted
in accordance with industry standard inflationary measures and will reimbursereimburses EVOC for certain costs the Company incurred by EVOC in performing the services. General and administrativeG&A expenses were $17.3 million, $10.3 million, $1.7 million, and $5.0$1.7 million for the 2019 Successor Period, the 2018 PredecessorSuccessor Period, and the 2017 Predecessor Period, respectively. The $5.3 million higher general and administrativeG&A expenses incurred during the 2019 Successor Period compared to the combined 2018 periods areSuccessor Period and Predecessor Period were primarily due to the Successor incurringcertain additional G&A expenses related to fees payable to EVOC under the Services Agreement.Agreement as well as increased salaries and wages and stock-based compensation costs.
Transaction related costs are costs incurred during the Successor Period were $22.4 million. Transaction related costs incurred related to the execution of the Business Combination and Harvest Acquisition, including legal fees, consulting fees, accounting fees, and other transaction and facilitation costs.
Interest expense, net was $6.9 million for the 2019 Successor Period and $5.0 million for the 2018 Successor Period. Interest expense incurred in the 2019 Successor Period and the 2018 Successor Period is due to interest andas well as amortization of debt issuance costs related to the Company'sCompany’s 6.0% senior notes due 2026 (the "2026“2026 Senior Notes"Notes”) and the senior secured reserve-based revolving credit facility (the "RBL Facility"“RBL Facility”).
GainLoss on derivatives, net was $3.9 million for the 2018 Predecessor Period as compared with a loss of $1.6 million for the 2017 Predecessor Period. This change was attributable to changesMagnolia has not engaged in future oil and natural gas prices.
Other expense of $7.0 million in the Successor Period included a loss of $6.7 million relatedany hedging activities with respect to the difference in fair market value ofrisk to which the Giddings Purchase Agreement earnout as recorded in the Business Combination and the payment made to fully settle the earnout agreement on September 28, 2018.Company is exposed.
Nine Months Ended September 30, 20182019 Compared withto the Nine Months Ended September 30, 20172018
Oil, Natural Gas and NGL Sales Revenues. The following table provides the components of the Company'sMagnolia’s revenues for the periods indicated, as well as each period'speriod’s respective average prices and production volumes.
This table shows production on a boe basis in which natural gas is converted to an equivalent barrel of oil based on a ratio of six Mcf to one barrel. This ratio may not be reflective of the current price ratio between the two products.
| | | | Successor | Predecessor | | Successor | | | Predecessor |
(In thousands, except per unit data) | | July 31, 2018 through September 30, 2018 | January 1, 2018 through July 30, 2018 | | Nine Months Ended September 30, 2017 | | Nine Months Ended September 30, 2019 | | July 31, 2018 Through September 30, 2018 | | | January 1, 2018 Through July 30, 2018 |
PRODUCTION VOLUMES: | | | | | | |
Production: | | | | | | | | |
Oil (MBbls) | | 2,023 |
| 5,755 |
| | 5,176 |
| | 9,615 |
| | 2,023 |
| | | 5,755 |
|
Natural gas (MMcf) | | 5,047 |
| 7,595 |
| | 6,287 |
| | 30,583 |
| | 5,341 |
| | | 7,595 |
|
NGLs (MBbls) | | 642 |
| 1,097 |
| | 937 |
| | 3,389 |
| | 678 |
| | | 1,097 |
|
Total (MBoe) | | 3,506 |
| 8,118 |
| | 7,161 |
| |
Total (Mboe) | | | 18,101 |
| | 3,591 |
| | | 8,118 |
|
| | | | | | | | | | | | |
Average daily production volume: | | | | | | |
Average daily production: | | | | | | | | |
Oil (Bbls/d) | | 33,164 |
| 27,146 |
| | 18,960 |
| | 35,220 |
| | 33,164 |
| | | 27,146 |
|
Natural gas (Mcf/d) | | 82,738 |
| 35,825 |
| | 23,029 |
| | 112,026 |
| | 87,557 |
| | | 35,825 |
|
NGLs (Bbls/d) | | 10,525 |
| 5,175 |
| | 3,432 |
| | 12,414 |
| | 11,115 |
| | | 5,175 |
|
Total (Boe/d) | | 57,475 |
| 38,292 |
| | 26,231 |
| |
Total (boe/d) | | | 66,305 |
| | 58,872 |
| | | 38,292 |
|
| | | | | | | | | | | | |
REVENUES: | | | | | | |
Revenues: | | | | | | | | |
Oil revenues | | $ | 143,202 |
| $ | 399,124 |
| | $ | 240,778 |
| | $ | 584,009 |
| | $ | 143,202 |
| | | $ | 399,124 |
|
Natural gas revenues | | 14,201 |
| 22,135 |
| | 19,436 |
| | 71,208 |
| | 13,414 |
| | | 22,135 |
|
Natural gas liquids revenues | | 21,153 |
| 27,927 |
| | 18,002 |
| | 51,215 |
| | 21,547 |
| | | 27,927 |
|
Total revenues | | $ | 178,556 |
| $ | 449,186 |
| | $ | 278,216 |
| | $ | 706,432 |
| | $ | 178,163 |
| | | $ | 449,186 |
|
| | | | | | | | | | | | |
AVERAGE PRICE: | | | | | | |
Oil (per MBbls) | | $ | 70.79 |
| $ | 69.35 |
| | $ | 46.52 |
| |
Natural gas (per MMcf) | | 2.81 |
| 2.91 |
| | 3.09 |
| |
NGLs (per MBbls) | | 32.95 |
| 25.46 |
| | 19.21 |
| |
Average Price: | | | | | | | | |
Oil (per barrel) | | | $ | 60.74 |
| | $ | 70.79 |
| | | $ | 69.35 |
|
Natural gas (per Mcf) | | | 2.33 |
| | 2.51 |
| | | 2.91 |
|
NGLs (per barrel) | | | 15.11 |
| | 31.78 |
| | | 25.46 |
|
Oil revenueswere 83%, 80%, and 89% of the Company’s total revenues for the 2019 Successor Period, the 2018 Successor Period, and the Predecessor Period, respectively. Oil revenues for the 2019 Successor Period were $41.7 million higher compared to the combined 2018 Successor Period and Predecessor Period due to 24% higher production partially offset by a 13% decrease in average prices. The higher volumes in the 2019 Successor Period compared to the combined 2018 Successor Period and Predecessor Period are
attributable to the inclusion of the Giddings Assets, recent acquisitions and continued development. Oil production was 53%, 56%, and 71% of total production volume for the 2019 Successor Period, the 2018 Successor Period, and the Predecessor Period, respectively.
Natural gas revenueswere 80%10%, 89%8%, and 87%5% of the Company's total revenues for the 2019 Successor Period, the 2018 Predecessor Period and the 2017 Predecessor Period, respectively. Oil revenues for the Successor Period, and the 2018 Predecessor Period, increasedrespectively. Natural gas revenues for the 2019 Successor Period were $35.7 million higher compared to the 2017combined 2018 Successor Period and Predecessor Period due to higher136% more natural gas production primarily attributable to the Successor’s inclusion of the Giddings Assets and the acquisition of the Highlander Well partially offset by a 15% decrease in average prices and increased production. Oilprices. Natural gas production was 58%28%, 71%25%, and 72%16% of total production volume for the 2019 Successor Period, the 2018 PredecessorSuccessor Period and the 2017 Predecessor Period, respectively.
Natural gas liquids revenues were 8%7%, 5%12%, and 7%6% of the Company'sCompany’s total revenues for the 2019 Successor Period, the 2018 Predecessor Period and the 2017 Predecessor Period, respectively. The total natural gas revenues for the Successor Period, and the 2018 Predecessor Period, increased compared to the 2017 Predecessor Period due to an increase in production partially offset by lower average prices. Natural gasrespectively. NGL production was 24%19%, 16%19%, and 15%14% of total production volume for the 2019 Successor Period, the 2018 PredecessorSuccessor Period, and the 2017 Predecessor Period, respectively. Natural gas liquids revenues for the 2019 Successor Period were $1.7 million higher in the 2019 Successor Period compared to the combined 2018 Successor Period and Predecessor Period due to 91% higher production partially offset by a 46% decrease in average prices. The higher natural gas production volumes are primarily driven byattributable to the Successor’s inclusion of the Giddings Assets.Assets, recent acquisitions and continued development.
Natural gas liquid revenues were 12%, 6% and 6% of the Company's total revenues for the Successor Period, the 2018 Predecessor Period and the 2017 Predecessor Period, respectively. Natural gas liquid revenues for the Successor Period and the 2018 Predecessor Period increased compared to the 2017 Predecessor Period due to higher average prices and an increase in production primarily attributable to the Giddings Assets. Natural gas liquids production was 18%, 14% and 13% of total production volume for the Successor Period, the 2018 Predecessor Period and the 2017 Predecessor Period, respectively.
Operating Expenses and Other Income (Expense). The following table summarizes the Company'sCompany’s operating expenses and other income (expense) for the periods indicated.
| | | | Successor | Predecessor | | Successor | | | Predecessor |
(In thousands, except per unit data) | | July 31, 2018 through September 30, 2018 | January 1, 2018 through July 30, 2018 | | Nine Months Ended September 30, 2017 | | Nine Months Ended September 30, 2019 | | July 31, 2018 Through September 30, 2018 | | | January 1, 2018 Through July 30, 2018 |
OPERATING EXPENSES: | | | | | | |
Operating Expenses: | | | | | | | | |
Lease operating expenses | | $ | 11,016 |
| $ | 23,513 |
| | $ | 18,931 |
| | $ | 70,755 |
| | $ | 11,016 |
| | | $ | 23,513 |
|
Gathering, transportation and processing | | 5,746 |
| 12,929 |
| | 12,238 |
| | 26,016 |
| | 5,353 |
| | | 12,929 |
|
Taxes other than income | | 9,351 |
| 23,763 |
| | 18,028 |
| | 40,825 |
| | 9,351 |
| | | 23,763 |
|
Exploration expenses | | 11,221 |
| 492 |
| | 383 |
| | 10,017 |
| | 11,221 |
| | | 492 |
|
Asset retirement obligation accretion | | 391 |
| 104 |
| | 175 |
| |
Asset retirement obligations accretion | | | 4,095 |
| | 391 |
| | | 104 |
|
Depreciation, depletion and amortization | | 67,478 |
| 137,871 |
| | 88,844 |
| | 385,942 |
| | 65,902 |
| | | 137,871 |
|
General & administrative expenses | | 10,297 |
| 12,710 |
| | 13,224 |
| |
Amortization of intangible assets | | | 10,879 |
| | 2,418 |
| | | — |
|
General and administrative expenses | | | 52,648 |
| | 10,297 |
| | | 12,710 |
|
Transaction related costs | | 22,366 |
| — |
| | — |
| | 438 |
| | 22,366 |
| | | — |
|
Total operating costs and expenses | | $ | 137,866 |
| $ | 211,382 |
| | $ | 151,823 |
| | $ | 601,615 |
| | $ | 138,315 |
| | | $ | 211,382 |
|
| | | | | | | | | | | | |
OTHER INCOME (EXPENSE): | | | | | | |
Other Income (Expense): | | | | | | | | |
Income from equity method investee | | $ | 309 |
| $ | 711 |
| | $ | (85 | ) | | $ | 608 |
| | $ | 309 |
| | | $ | 711 |
|
Interest expense | | (4,959 | ) | — |
| | — |
| |
Gain (loss) on derivatives, net | | — |
| (18,127 | ) | | 1,041 |
| |
Other income (expense), net | | (7,019 | ) | (50 | ) | | (20 | ) | |
Total other income (expense) | | $ | (11,669 | ) | $ | (17,466 | ) | | $ | 936 |
| |
Interest expense, net | | | (21,611 | ) | | (4,959 | ) | | | — |
|
Loss on derivatives, net | | | — |
| | — |
| | | (18,127 | ) |
Other expense, net | | | 8 |
| | (7,019 | ) | | | (50 | ) |
Total other expense | | | $ | (20,995 | ) | | $ | (11,669 | ) | | | $ | (17,466 | ) |
| | | | | | | | | | | | |
AVERAGE OPERATING COSTS PER BOE: | | | | | | |
Average Operating Costs per Boe: | | | | | | | | |
Lease operating expenses | | $ | 3.14 |
| $ | 2.90 |
| | $ | 2.64 |
| | $ | 3.91 |
| | $ | 3.07 |
| | | $ | 2.90 |
|
Gathering, transportation and processing | | 1.64 |
| 1.59 |
| | 1.71 |
| | 1.44 |
| | 1.49 |
| | | 1.59 |
|
Taxes other than income | | 2.67 |
| 2.93 |
| | 2.52 |
| | 2.26 |
| | 2.60 |
| | | 2.93 |
|
Exploration costs | | 3.20 |
| 0.06 |
| | 0.05 |
| | 0.55 |
| | 3.12 |
| | | 0.06 |
|
Asset retirement obligations accretion expense | | 0.11 |
| 0.01 |
| | 0.02 |
| |
Asset retirement obligation accretion | | | 0.23 |
| | 0.11 |
| | | 0.01 |
|
Depreciation, depletion and amortization | | 19.25 |
| 16.98 |
| | 12.41 |
| | 21.32 |
| | 18.35 |
| | | 16.98 |
|
Amortization of intangible assets | | | 0.60 |
| | 0.67 |
| | | — |
|
General and administrative expenses | | 2.94 |
| 1.57 |
| | 1.85 |
| | 2.91 |
| | 2.87 |
| | | 1.57 |
|
Transaction related costs | | 6.38 |
| — |
| | — |
| | 0.02 |
| | 6.23 |
| | | — |
|
Lease operating expenses are the costs incurred in the operation of producing properties including expenses for utilities, direct labor, water disposal, workover rigs, workover expenses, materials, and supplies. Lease operating expenses were $70.8 million, $11.0 million, $23.5 million, and $18.9$23.5 million for the 2019 Successor Period, the 2018 PredecessorSuccessor Period, and the 2017 Predecessor Period, respectivelyrespectively. Lease operating expenses were $3.91 per boe, $3.07 per boe, and on a per unit basis were $3.14 per Boe, $2.90 per Boe, and $2.64 per Boeboe for the 2019 Successor Period, the 2018 PredecessorSuccessor Period, and the 2017 Predecessor Period, respectively. TheLease operating expenses were $36.2 million higher LOE incurred duringin the 2019 Successor Period as compared to the combined 2018 periods areSuccessor Period and Predecessor Period primarily due to generalthe inclusion of the Giddings Assets, recent acquisitions, and continued development. The higher per boe cost increasesin the 2019 Successor Period compared to the combined 2018 Successor Period and Predecessor period was primarily due to the inclusion of the Giddings Assets as the Giddings Assets deliver less production per well than the Karnes County Assets, resulting from rising commodity prices and increased activity.in lease operating costs spread over fewer volumes.
Gathering, transportation and processing costs are costs incurred to deliver oil, natural gas, and NGLs to the market. Cost levels of these expenses can vary based on the volume of oil, natural gas, and NGLs produced as well as the cost of commodity processing. Gathering, transportation and processing costs were $5.7$26.0 million, $5.4 million, and $12.9 million and $12.2 million for the 2019 Successor Period, the 2018 PredecessorSuccessor Period and the 2017 Predecessor Period, respectively.respectively, or $1.44, $1.49, and $1.59 on a per boe basis. The $7.7 million higher costs in the 2019 Successor Period compared to the combined 2018 Successor Period and Predecessor Period were primarily due to the inclusion of the Giddings Assets as the Giddings Assets produce more gas than the Karnes County Assets and require more gathering, transportation, and processing costs incurred duringthan the Karnes County Assets. The lower cost per boe in the 2019 Successor Period compared to Combined 2018 periods areSuccessor and Predecessor Period was primarily dueattributable to increased production.the adoption of the new revenue recognition requirements that were not retroactively applied to the Predecessor Period.
Taxes other than income include production and ad valorem taxes. These taxes are based on rates primarily established by state and local taxing authorities. Production taxes are based on the market value of production. Ad valorem taxes are based on the fair market value of the mineral interests or business assets. Taxes other than income were $40.8 million, $9.4 million, $23.8 million, and $18.0$23.8 million for the 2019 Successor Period, the 2018 PredecessorSuccessor Period, and the 2017 Predecessor Period, respectively. The $7.7 million higher taxes other than income incurred during the 2019 Successor Period compared to the combined 2018 periodsSuccessor Period and Predecessor Period are primarily due to higher production and a correspondingan increase in revenues.
Exploration expenses Taxes other than income were $11.2 million, $0.5 million,$2.26 per boe, $2.60 per boe, and $0.4 million$2.93 per boe for the 2019 Successor Period, the 2018 PredecessorSuccessor Period, and the 2017 Predecessor Period, respectively. The increaselower costs per boe in exploration expenses isthe 2019 Successor Period compared to the combined 2018 Successor Period and Predecessor Period were primarily due to the inclusion of the Giddings Assets as the Giddings Assets incur lower production taxes.
Exploration costs are geological and geophysical costs that include seismic surveying costs, costs of unsuccessful exploratory dry holes, costs of expired or abandoned leases, and delay rentals. Exploration expenses of $10.0 million in the 2019 Successor Period were $1.7 million lower compared to the combined 2018 Successor Period and Predecessor Period as a result of a one-time purchase of a seismic license continuation in connection with the Business Combination. Combination in the 2018 Successor Period.
Asset retirement obligation accretion was $0.4 million, $0.1 million, and $0.2 million forhigher during the 2019 Successor Period as compared to the combined 2018 Successor and Predecessor Period, and the 2017 Predecessor Period, respectively.Period. The higher$4.1 million asset retirement obligation accretion incurred during the 2018 periods2019 Successor Period was a result ofdriven by the inclusion of the Giddings Assets and more wells in the 2018 period, as compared to the 2017 Predecessor Period, resultingAssets. This resulted in higher accretion expense per Boeboe in the 2019 Successor periodPeriod of $0.11$0.23 per Boe as compared to $0.01 per Boe and $0.02 per Boe for the 2018 Predecessor Period and the 2017 Predecessor Period, respectively.boe.
DD&A was $67.5$385.9 million, $65.9 million, and $137.9 million and $88.8 million for the 2019 Successor Period, the 2018 PredecessorSuccessor Period, and the 2017 Predecessor Period, respectively. DD&A was $19.25$21.32 per Boe, $16.98 per Boe, and $12.41 per Boeboe for the 2019 Successor Period. DD&A was $182.2 million higher in the 2019 Successor Period compared to the combined 2018 PredecessorSuccessor Period and the 2017 Predecessor Period, respectively.Period. The higher DD&A and the higher DD&A rate per BOEboe for the 2019 Successor Period compared to the combined 2018 Successor Period and Predecessor Period is mostly due to Magnolia’s higher property, plant, and equipment balances recorded as a result of the new basis of accounting related to the Business Combination.Combination, recent acquisitions and decrease in proved reserves. The Predecessor’s reserves are based on a five-year development plan, whereas the vast majority of the Successor’s proved undeveloped reserves are planned to be developed within one year.
G&A expenses were $10.3 million, $12.7The amortization of intangible assets was $10.9 million and $13.2$2.4 million for the Successor Period, the 2018 Predecessor Period, and the 2017 Predecessor Period, respectively. The higher G&A expenses incurred during the 2018 periods are primarily due to the Successor incurring certain additional G&A related to professional service fees as well as the Services Agreement fee payable to EVOC as referenced above.
Transaction related costs are costs incurred during the Successor Period were $22.4 million. Transaction related costs incurred related to the execution of the Business Combination and Harvest Acquisition, including legal fees, consulting fees, accounting fees, and other transaction and facilitation costs.
Income from equity method investees were $0.3 million and $0.7 million for the2019 Successor Period and the 2018 PredecessorSuccessor Period, respectively, and a lossrespectively. In connection with the close of $0.1the Business Combination, the Company recorded an estimated cost of $44.4 million for the 2017 Predecessor Period.Non-Compete Agreement as intangible assets on the Company’s consolidated balance sheet. The increase$8.5 million higher amortization of intangible assets in the 2019 Successor Period as compared to the 2018 Successor Period is due to increased operationsnine months of amortization in the Ironwood equity2019 Successor Period as compared to approximately two months of amortization in the 2018 Successor Period. These intangible assets have a definite life and are subject to amortization utilizing the straight-line method investment.over their economic life, currently estimated to be two and one half to four years. There was no amortization of intangible assets in the Predecessor Period.
G&A expenses were $52.6 million, $10.3 million, and $12.7 million for the 2019 Successor Period, the 2018 Successor Period, and the Predecessor Period, respectively. The $29.6 million higher G&A expenses and higher G&A expenses per boe incurred during the 2019 Successor Period compared to the combined 2018 Successor Period and Predecessor Period were primarily due to the Successor
Gain
incurringcertain additional G&A expenses related to fees payable to EVOC under the Services Agreement as well as increased salaries and wages and stock-based compensation costs.
Interest expense, net was $21.6 million for the 2019 Successor Period, and $5.0 million for the 2018 Successor Period. Interest expense incurred in the 2019 Successor Period and 2018 Successor Period is due to interest and amortization of debt issuance costs related to the 2026 Senior Notes and the RBL Facility.
Loss on derivatives, net was $1.0 million for the 2017 Predecessor Period as compared with a loss of $18.1 million for the 2018 Predecessor Period. This change was attributable to changes in future oil and natural gas prices.
Other expense of $7.0 million inDuring the 2019 Successor Period included a loss inand the 2018 Successor Period, of $6.7 million relatedMagnolia has not engaged in any hedging activities with respect to the difference in fair market value ofrisk to which the Giddings earnout as recorded in the initial Business Combination and the payment made to fully settle the earnout agreement on September 28, 2018.Company is exposed.
Liquidity and Capital Resources
Magnolia'sMagnolia’s primary sources of liquidity and capital have been cash flows from operations and, at the close of the Business Combination, issuances of equity and debt securities and cash flows from operations.securities. The Company'sCompany’s primary uses of cash have been acquisitions of oil and natural gas properties and related assets, development of the Company'sCompany’s oil and natural gas properties, and general working capital needs.
For the remainder of 2018, Magnolia believes that cash on hand, net cash flows generated from operations, and the borrowings available under the RBL Facility will be adequate to fund Magnolia'sMagnolia’s capital budget and satisfy the Company'sCompany’s short-term liquidity needs.
The Company may also utilize borrowings under other various financing sources available to Magnolia, including the issuance of equity or debt securities through public offerings or private placements, to fund Magnolia'sMagnolia’s acquisitions and long-term liquidity needs. Magnolia'sMagnolia’s ability to complete future offerings of equity or debt securities and the timing of these offerings will depend upon various factors including prevailing market conditions and the Company'sCompany’s financial condition.
As of September 30, 2018,2019, the Company had $400.0 million of principal debt related to the 2026 Senior Notes outstanding and no outstanding borrowings related to the Company's RBL Facility. As of 2018,September 30, 2019, the Company has over $586.7$714.5 million of liquidity betweencomprised of the $550.0 million of borrowing base capacity of the RBL Facility and $164.5 million of cash and cash on hand.equivalents.
For additional information aboutA decrease in commodity prices may adversely affect proved reserves values which would likely result in a proved property impairment. Negative revisions of estimated reserves quantities, increases in future cost estimates or divestiture of a significant component of the Company's long-term debt, such as interest ratesasset group could also lead to a reduction in expected future cash flows and covenants, please see Note 9 - Long Term Debt contained herein.possibly an impairment of long-lived assets in future periods.
Cash and Cash Equivalents
At September 30, 2018,2019, Magnolia had $36.7$164.5 million of cash and cash equivalents. The Company’s cash isand cash equivalents are maintained with a majorvarious financial institutioninstitutions in the United States. Deposits with this financial institutionthese institutions may exceed the amount of insurance provided on such deposits;deposits, however, the Company regularly monitors the financial stability of thisits financial institutioninstitutions and believes that they arethe Company is not exposed to any significant default risk.
Sources and Uses of Cash and Cash Equivalents
The following table presents the sources and uses of the Company’s cash for the periods presented:
| | | | Successor | Predecessor | | Successor | | | Predecessor |
(In thousands) | | July 31, 2018 through September 30, 2018 | January 1, 2018 through July 30, 2018 | | Nine Months Ended September 30, 2017 | | Nine Months Ended September 30, 2019 | | July 31, 2018 Through September 30, 2018 | | | January 1, 2018 Through July 30, 2018 |
Sources of cash and cash equivalents | | | | | | | | |
Net cash provided by operating activities | | $ | 90,678 |
| $ | 284,812 |
| | $ | 193,124 |
| | $ | 488,611 |
| | $ | 87,302 |
| | | $ | 284,812 |
|
Net cash used in investing activities | | (761,891 | ) | (347,453 | ) | | (255,646 | ) | |
Net cash provided by financing activities | | 707,905 |
| 62,641 |
| | 62,522 |
| |
Issuance of common stock | | | — |
| | 355,000 |
| | | — |
|
Proceeds from issuance of debt | | | — |
| | 400,000 |
| | | — |
|
Proceeds withdrawn from Trust Account | | | — |
| | 656,078 |
| | | — |
|
Other | | | 7,301 |
| | — |
| | | 62,641 |
|
| | | 495,912 |
| | 1,498,380 |
| | | 347,453 |
|
Uses of cash and cash equivalents: | | | | | | | | |
Acquisition of EnerVest properties | | | 4,250 |
| | (1,219,217 | ) | | | — |
|
Acquisitions, other | | | (93,221 | ) | | (135,652 | ) | | | (150,139 | ) |
Additions to oil and natural gas properties | | | (364,859 | ) | | (33,724 | ) | | | (197,314 | ) |
Payment of Contingent Consideration | | | — |
| | (26,000 | ) | | | — |
|
Repayments of deferred underwriting compensation | | | — |
| | (22,750 | ) | | | — |
|
Cash paid for debt issuance costs | | | — |
| | (23,336 | ) | | | — |
|
Repurchase of common stock | | | (9,722 | ) | | — |
| | | — |
|
Other | | | (3,629 | ) | | (1,009 | ) | | | — |
|
| | | (467,181 | ) | | (1,461,688 | ) | | | (347,453 | ) |
Increase in cash and cash equivalents | | | $ | 28,731 |
| | $ | 36,692 |
| | | $ | — |
|
Operating ActivitiesSources of Cash and Cash Equivalents
Business Combination
The primary source of cash for the Business Combination in the 2018 Successor Period were proceeds from the issuance of common stock of $355 million, proceeds from issuance of debt of $400 million, and proceeds withdrawn from Trust account of $656.1 million related to the Company’s May 2017 initial public offering. See Overview of this Item 2 for more information on the Business Combination.
Net cash provided by operating activities
Operating cash flows are the Company’s primary source of capital and liquidity and are impacted, both in the short term and the long term, by volatile oil and natural gas prices. The factors that determine operating cash flows are largely the same as those that affect net earnings, with the exception of certain non-cash expenses such as DD&A, asset impairments, asset retirement obligation accretion, expense, and deferred income tax expense.
Net cash provided by operating activities was $90.7totaled $488.6 million, $284.8$87.3 million, and $193.1$284.8 million for the 2019 Successor Period, the 2018 PredecessorSuccessor Period, and the 2017 Predecessor Period, respectively. Net cashCash provided by operations foroperating activities was positively impacted by the inclusion of the Giddings Assets in the Successor Period included oilbut was partially offset by interest expense payments, EnerVest service fee payments, and gas revenues reduced byhigher production tax payments. The 2018 Successor Period includes $22.4 million one-time transaction costs of $22.4 million associated with the Business Combination, and the Harvest Acquisition, exploration expenseexpenses of $11.0$11.2 million associated withprimarily related to a one-time purchase of a seismic license continuation.
Uses of Cash and other operating expenditures.Cash Equivalents
Investing ActivitiesBusiness Combination
Cash used in investing activities was approximately $761.9 millionThe primary use of cash in the 2018 Successor Period was the acquisition of EnerVest properties which included cash paid to effect the Business Combinationan aggregate of approximately $1.2 billion in cash, cash paid for debt issuance costs of $23.3 million, and the payment of a deferred underwriting compensation liability of approximately $22.8 million.
Other acquisitions
During the 2019 Successor Period, the Company completed leasehold and property acquisitions for a total cash purchase price of $93.2 million, comprised of the Highlander acquisition, and other acquisitions of additional oil and gas assets primarily located in Karnes County. The 2018 Successor Period activity of $135.7 million is primarily comprised of the Harvest Acquisition. The Predecessor Period activity of $150.1 million is comprised of the Subsequent GulfTex Acquisition.
Additions to oil and natural gas properties
The following table sets forth the Company’s capital expenditures for other acquisitions, a $26.0 million paymentthe 2019 Successor Period:
|
| | | | |
(In thousands) | | Nine Months Ended September 30, 2019 |
Drilling and completion | | $ | 344,179 |
|
Leasehold acquisition costs | | 8,556 |
|
Total capital expenditures | | $ | 352,735 |
|
In the third quarter of 2019, Magnolia operated two drilling rigs across its acreage, one rig in Karnes County and one rig in the Giddings Field. The activity in the 2019 Successor Period was largely driven by the number of operated drilling rigs. The number of operating drilling rigs is largely dependent on commodity prices and the Company’s strategy of maintaining spending within 60% of adjusted EBITDAX.
Payment of Contingent Consideration
Pursuant to the Giddings Purchase Agreement, during the 2018 Successor Period, the Company paid the Giddings Sellers a cash payment of $26.0 million to fully settle anthe earnout agreement, and capital expenditures for oil and gas properties offset by proceeds withdrawn fromobligation.
Capital Requirements
Repurchase of common stock
On August 5, 2019, the trust accountCompany’s Board of Directors authorized a share repurchase program of up to 10 million shares. The program does not require purchases to be made within a particular timeframe. During the 2019 Successor Period, the Company maintained prior to the Business Combinationrepurchased 950 thousand shares at a weighted average price of $10.23, for a total cost of approximately $656.1$9.7 million. Cash used in investing activities was $347.5 million and $255.6 million for the 2018 Predecessor Period and the 2017 Predecessor Period, respectively, and was comprised of capital expenditures for property and equipment of approximately $197.3 million and $188.2 million. Acquisitions of oil and gas properties for the 2018 Predecessor Period and 2017 Predecessor Period were approximately $150.1 million and $58.7 million, respectively.
Financing Activities
Cash provided by financing activities was $707.9 million in the Successor Period. Proceeds provided by the issuance of Class A Common Stock of approximately $355.0 million and proceeds from offering of the 2026 Senior Notes of $400.0 million were offset by cash payments of approximately $22.8 million for deferred underwriting compensation and $23.3 million for debt issuance costs. Cash provided by financing activities was $62.6 million and $62.5 million for the 2018 Predecessor Period and the 2017 Predecessor Period, respectively.
Contractual Obligations and Commitments
As of September 30, 2018, amounts due under our contractual commitments were as follows:
|
| | | | | | | | | | | | | | | | |
Contractual Obligations (in thousands) | Note Reference | Total | Remainder of 2018 | 2019-2020 | 2021-2022 | 2023 & Beyond |
On-Balance Sheet: | | | | | | |
Debt, at face value | Note 9 | $ | 400,000 |
| $ | — |
| $ | — |
| $ | — |
| $ | 400,000 |
|
Interest payments (1) | Note 9 | 202,112 |
| 527 |
| 52,188 |
| 52,182 |
| 97,215 |
|
Off-Balance Sheet: | | | | | | |
Purchase obligation (2) | Note 13 | $ | 25,467 |
| $ | 7,977 |
| 16,986 |
| 263 |
| $ | 241 |
|
Operating lease obligations (3) | Note 13 | 863 |
| 109 |
| 710 |
| 44 |
| — |
|
Service fee commitment (4) | Note 13 | 43,200 |
| 5,891 |
| 37,309 |
| — |
| — |
|
Total Contractual Obligations | | $ | 671,642 |
| $ | 14,504 |
| $ | 107,193 |
| $ | 52,489 |
| $ | 497,456 |
|
| |
(1) | Interest payments include cash payments and estimated commitments fees on long-term debt obligations. |
| |
(2) | Amounts represent any agreements to purchase goods or services that are enforceable and legally binding and that specify all significant terms. These include minimum commitments associated with firm transportation contracts and frac sand commitments. |
| |
(3) | Amounts include long-term lease payments for compressors, vehicles and office space. |
| |
(4) | On the Closing Date, the Company and EVOC entered into a Services Agreement, pursuant to which EVOC, under the direction of the Company’s management, will provide the Company's services identical to the services historically provided by EVOC in operating the Acquired Assets, including administrative, back office and day-to-day field level services reasonably necessary to operate the business of the Company and its assets, subject to certain exceptions. As consideration for the services to be provided under the Services Agreement, the Company will pay EVOC a fixed annual services fee of approximately $23.6 million. The annual services fee may be (a) increased or decreased to account for asset acquisitions and dispositions of assets, (b) increased to account for an increase in the rig count attributable to the assets and (c) decreased if the Company must perform any of such services itself because EVOC is unable or fails to do so. The term of the Services Agreement is five years, but the Services Agreement is subject to termination by either party after two years. |
Off-Balance Sheet Arrangements
Magnolia enters into customary agreements in the oil and gas industry for field equipment, vehicles, and other obligations as described below in “Contractual Obligations” in this Item 2. Other than theAs of September 30, 2019, there were no off-balance sheet arrangements described herein, Magnolia does not have any off-balance sheet arrangements with unconsolidated entities that are reasonably likely to materially affect our liquidity or capital resource positions.
arrangements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Risk
For variable rate debt, interest rate changes generally do not affect the fair market value of such debt, but do impact future earnings and cash flows, assuming other factors are held constant. The Company is subject to market risk exposure related to changes in interest rates on borrowings under Magnolia'sthe RBL Facility. Interest on borrowings under the RBL Facility is based on adjustedthe LIBOR plusrate or alternative base rate plus an applicable margin as stated in the agreement. At September 30, 20182019, the Company had no borrowings outstanding under Magnolia'sthe RBL Facility.
Magnolia's 2026 Senior Notes bear interest at a fixed rate and fair value will fluctuate based on changes in prevailing market interest rates and market perceptions of the Company's credit risk. The fair value of Magnolia's 2026 Senior Notes was approximately $399.0 million at September 30, 2018, compared to the carrying value of $388.3 million.
Commodity Price Risk
The Company has not engaged in, any hedging activities since Magnolia's inception. We doand does not expect to engage in any hedging activities with respect to the market risk to which we areit is exposed.
Magnolia'sMagnolia’s primary market risk exposure is to the prices it receives for its oil, natural gas, and NGL production. RealizedThe prices are primarily driven by the prevailing worldwide priceCompany ultimately realizes for its oil, and regional spot market prices for natural gas, production.and NGLs are based on a number of variables, including prevailing index prices attributable to the Company’s production and certain differentials to those index prices. Pricing for oil, natural gas, and NGLs has historically been volatile and unpredictable, for several years, and the Company expects this volatility is expected to continue in the future. The prices the Company receives for
production depend on factors outside of its control, including physical markets, supply and demand, financial markets, and national and international policies. A $1.00 per barrel increase (decrease) in the weighted average oil price for the Successor Periodnine months ended September 30, 2019 would have increased (decreased) ourthe Company’s revenues by approximately $12.1$12.8 million on an annualized basis
and a $0.10 per Mcf increase (decrease) in the weighted average natural gas price for the Successor Periodnine months ended September 30, 2019 would have increased (decreased) Magnolia'sMagnolia’s revenues by approximately $3.0$4.1 million on an annualized basis.
Item 4. Controls and Procedures.
Management is responsible for designing, implementingEvaluation of Disclosure Controls and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a- 15(f) and 15d-15(f)Procedures
As required by Rule 13a-15(b) under the Exchange Act. Internal control overAct, Magnolia has evaluated, under the supervision and with the participation of the Company’s management, including Magnolia’s principal executive officer and principal financial reporting, no matter how well designed, has inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Further, because of changes in conditions,officer, the effectiveness of internal control over financial reporting may vary over time.
As discussed elsewhere in this Quarterly Report on Form 10-Q, the Company completed the Business Combination on July 31, 2018 pursuant to which Magnolia obtained the Acquired Assets. Prior to the Business Combination, Magnolia was a special purpose acquisition company formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization, or other similar Business Combination with one or more target businesses. As a result, previously existing internal controls are no longer applicable or comprehensive enough as of the assessment date as the Company's operations prior to the business combination were insignificant compared to those of the consolidated entity post-Business Combination. The design and implementation of internal controls over financial reporting for the Company's post-Business Combination has required and will continue to require significant time and resources from management and other personnel. Because of this, the design and ongoing developmentoperation of Magnolia's framework for implementation and evaluation of internal control over financial reporting is in its preliminary stages. As a result, management was unable, without incurring unreasonable effort or expense, to conduct an assessment on the effectiveness of Magnolia's disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2018.2019. Based on such evaluation, Magnolia’s principal executive officer and principal financial officer have concluded that as of such date, its disclosure controls and procedures were effective. The Company’s disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed by it in reports that it files under the Exchange Act is accumulated and communicated to management, including the Company’s principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure and is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC.
Changes to Internal Control Over Financial Reporting
As of September 30, 2018, the Company completed the Business Combination and is engaged2019, there have been no changes in the process of the design and implementation of Magnolia'sMagnolia’s internal control over financial reporting in a manner commensurate withthat have materially affected, or is reasonably likely to materially affect, the scale of Magnolia's operations post-Business Combination.Company’s internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
From time to time, the Company is party to certain legal actions and claims arising in the ordinary course of business. While the outcome of these events cannot be predicted with certainty, management does not currently expect these matters to have a materially adverse effect on the financial position or results of operations of the Company.
Item 1A. Risk Factors.
Factors that could cause the Company's actual resultsPlease refer to differ materially from those in this report include anyPart I, Item IA - Risk Factors of the risks disclosed in our definitive proxy statement, which was filed withCompany’s Annual Report on Form 10-K for the SECfiscal year ended December 31, 2018, and Part I, Item 3 - Quantitative and Qualitative Disclosures About Market Risk of this Quarterly Report on July 2, 2018.Form 10-Q. Any of these factors could result in a significant or material adverse effect on Magnolia'sMagnolia’s business, results of operations or financial condition. As of the date of this Quarterly Report on Form 10-Q, thereThere have been no material changes to the suchCompany’s risk factors.factors since its Annual Report on Form 10-K for the year ended December 31, 2018. Additional risk factors not presently known to usthe Company or that the Company currently deemdeems immaterial may also impair Magnolia'sits business, results of operations, or financial condition.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.The following table sets forth the Company’s share repurchase activities for each period presented.
|
| | | | | | | | | | | | |
Period | Number of Shares of Class A Common Stock Purchased | | Average Price Paid per Share | | Total Number of Common Shares Purchased as Part of Publicly Announced Program (1)(2) | | Maximum Number of Common Shares that May Yet be Purchased Under the Program |
July 1, 2019 - July 31, 2019 | — |
| | $ | — |
| | — |
| | — |
|
August 1, 2019 - August 31, 2019 | 600,000 |
| | 10.07 |
| | 600,000 |
| | 9,400,000 |
|
September 1, 2019 - September 30, 2019 | 350,000 |
| | 10.52 | | 350,000 |
| | 9,050,000 |
|
Total | 950,000 |
| | $ | 10.23 |
| | 950,000 |
| | 9,050,000 |
|
| |
(1) | In August 2019, the Company’s Board of Directors authorized a share repurchase program of up to 10 million shares. |
| |
(2) | On September 30, 2019, the Company repurchased 50,000 additional shares that did not settle until October 2, 2019 and are not included in the table above. |
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
Magnolia currently intends to hold its first Annual Meeting of Stockholders (the “Annual Meeting”) on June 7, 2019, at a time and location to be determined and specified in our proxy statement related to the Annual Meeting. Under the SEC’s rules, shareholders who have continuously held at least $2,000 in market value, or 1%, of the common stock of the Company for at least one year by the date they submit the proposal are eligible to submit a proposal. We have set the deadline for submission of proposals to be included in our proxy materials for the Annual Meeting as of December 31, 2018. Accordingly, in order for a shareholder proposal to be considered for inclusion in our proxy materials for the Annual Meeting, the proposal must be received by the Secretary of the Company at the Company’s offices at 1001 Fannin Street, Suite 400, Houston, TX 77002, on or before such date, and comply with the procedures and requirements set forth in Rule 14a-8 under the Exchange Act.None.
In accordance with the advance notice requirements contained in our bylaws, for director nominations or other business to be brought before the Annual Meeting by a shareholder, other than Rule 14a-8 proposals described above, written notice must be delivered to our Secretary no earlier than February 7, 2019, and no later than March 9, 2019. These shareholder notices also must comply with the requirements of our bylaws and will not be effective otherwise.
Item 6. Exhibits.
The following exhibits are filed as part of, or incorporated by reference into, this Quarterly Report on Form 10-Q.
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| | |
Exhibit Number | | Description |
| | |
2.1*†3.1 | | Contribution and Merger Agreement, dated as of March 20, 2018, by and among TPG Pace Energy Holdings Corp., TPG Pace Energy Parent LLC, EnerVest Energy Institutional Fund XIV-A, L.P., EnerVest Energy Institutional Fund XIV-WIC, L.P., EnerVest Energy Institutional Fund XIV-2A, L.P., and EnerVest Energy Institutional Fund XIV-3A, L.P. and EnerVest Energy Institutional Fund XIV-C, L.P. (incorporated herein by reference to Exhibit 2.1 filed with the Current Report on Form 8-K, as amended, filed on March 20, 2018 (File No. 001-38083)). |
| | |
2.2*† | | Amendment No. 1 to the Contribution and Merger Agreement, dated May 10, 2018, by and among TPG Pace Energy Holdings Corp., TPG Pace Energy Parent, LLC, EnerVest Energy Institutional Fund XIV-A, L.P., EnerVest Energy Institutional Fund XIV-WIC, L.P., EnerVest Energy Institutional Fund XIV-2A, L.P., EnerVest Energy Institutional Fund XIV-3A, L.P. and EnerVest Energy Institutional Fund XIV-C, L.P. (incorporated herein by reference to Exhibit 2.2 filed with the Quarterly Report on Form 10-Q filed on May 14, 2018 (File No. 001-38083)). |
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2.3*† | | Amendment No. 2 to the Contribution and Merger Agreement, dated June 27, 2018, by and among TPG Pace Energy Holdings Corp., TPG Pace Energy Parent, LLC, EnerVest Energy Institutional Fund XIV-A, L.P., EnerVest Energy Institutional Fund XIV-WIC, L.P., EnerVest Energy Institutional Fund XIV-2A, L.P., EnerVest Energy Institutional Fund XIV-3A, L.P. and EnerVest Energy Institutional Fund XIV-C, L.P. (incorporated by reference to Exhibit 2.3 filed with the Quarterly Report on Form 10-Q filed on August 14, 2018 (File No. 001-38083)). |
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2.4*† | | Purchase and Sale Agreement, dated as of March 20, 2018, by and among TPG Pace Energy Parent LLC, EnerVest Energy Institutional Fund XI-A, L.P., EnerVest Energy Institutional Fund XI-WI, L.P., EnerVest Holding, L.P., and EnerVest Wachovia Co-Investment Partnership, L.P. (incorporated herein by reference to Exhibit 2.2 filed with the Current Report on Form 8-K, as amended, filed on March 20, 2018 (File No. 001-38083)). |
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2.5*† | | Membership Interest Purchase Agreement, dated as of March 20, 2018, by and among TPG Pace Energy Parent LLC, EnerVest Energy Institutional Fund XIV-A, L.P., EnerVest Energy Institutional Fund XIV-WIC, L.P. and EnerVest Energy Institutional Fund XIV-C, L.P. (incorporated herein by reference to Exhibit 2.3 filed with the Current Report on Form 8-K, as amended, filed on March 20, 2018 (File No. 001-38083)). |
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2.6**† | | Amendment No. 1 to the Purchase and Sale Agreement, dated September 28, 2018, by and among EnerVest Energy Institutional Fund XI-A, L.P., EnerVest Energy Institutional Fund XI-WI, LP., EnerVest Holding, L.P., EnerVest Wachovia Co-Investment Partnership, L.P. |
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3.1* | | |
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3.2*3.2 | | |
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4.1*4.1 | | |
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4.2* | | |
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Exhibit
Number
| | Description |
4.3* | | |
| | |
4.4* | | |
| | |
4.5* | | Registration Rights Agreement, dated as of July 31, 2018, by and among Magnolia Oil & Gas Corporation, EnerVest Energy Institutional Fund XIV-A, L.P., EnerVest Energy Institutional Fund XIV-WIC, L.P., EnerVest Energy Institutional Fund XIV-2A,L.P., EnerVest Energy Institutional Fund XIV-3A, L.P., EnerVest Energy Institutional Fund XIV-C, L.P., TPG Pace Energy Sponsor, LLC, Arcilia Acosta, Edward Djerejian, Chad Leat and Dan F. Smith (incorporated herein by reference to Exhibit 4.2 filed with the Current Report on Form 8-K, filed on August 6, 2018 (File No. 001-38083)). |
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4.6* | | Stockholder Agreement, dated as of July 31, 2018, by and among Magnolia Oil & Gas Corporation, EnerVest Energy Institutional Fund XIV-A, L.P., EnerVest Energy Institutional Fund XIV-WIC, L.P., EnerVest Energy Institutional Fund XIV-2A,L.P., EnerVest Energy Institutional Fund XIV-3A, L.P., EnerVest Energy Institutional Fund XIV-C, L.P. and TPG Pace Energy Sponsor, LLC (incorporated herein by reference to Exhibit 4.3 filed with the Current Report on Form 8-K, filed on August 6, 2018 (File No. 001-38083)). |
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10.1* | | Credit Agreement, dated as of July 31, 2018, by and among Magnolia Oil & Gas Intermediate LLC (f/k/a TPG Pace Energy Intermediate LLC), Magnolia Oil & Gas Operating LLC, the lenders from time to time party thereto, Citibank, N.A., as administrative agent and collateral agent, as the swingline lender and an issuing bank and each other issuing bank from time to time party thereto (incorporated herein by reference to Exhibit 10.1 filed with the Current Report on Form 8-K, filed on August 6, 2018 (File No. 001-38083)). |
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10.2* | | |
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10.3* | |
|
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10.4* | |
|
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10.5* | |
|
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10.6* | |
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10.7* | |
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10.8* | | |
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10.9* | |
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10.10* | |
|
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31.1** | | |
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31.2** | | |
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32.1*** | | |
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|
| | |
Exhibit
Number
| | Description |
32.2*** | | |
| | |
101.INS** | | XBRL Instance Document |
| | |
101.SCH** | | XBRL Taxonomy Extension Schema Document |
| | |
101.CAL** | | XBRL Taxonomy Extension Calculation Linkbase Document |
| | |
101.DEF** | | XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB** | | XBRL Taxonomy Extension Label Linkbase Document |
| | |
101.PRE** | | XBRL Taxonomy Extension Presentation Linkbase Document |
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104* | | Cover Page Interactive Data File (embedded within the Inline XBRL document). |
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* | Incorporated herein by reference as indicated. |
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† | Certain schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. A copy of any omitted schedule or exhibit will be furnished supplementally to the SEC upon request. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | | |
| | MAGNOLIA OIL & GAS CORPORATION |
| | | |
Date: November 13, 20185, 2019 | | By: | /s/ Stephen Chazen |
| | | Stephen Chazen |
| | | Chief Executive Officer (Principal Executive Officer) |
| | | |
Date: November 13, 20185, 2019 | | By: | /s/ Christopher G. Stavros |
| | | Christopher G. Stavros |
| | | Chief Financial Officer (Principal Financial Officer) |