A reconciliation of the numerators and denominators of the basic and diluted per share computations follows. No such computation is necessary for the Predecessor Period as the Predecessor was not previously accounted for as a standalone legal entity and did not have publicly traded securities.follows:
Stockholder Agreement
On the Closing Date, the Company, TPG Pace, and the Karnes County Contributors entered into the Stockholder Agreement (the “Stockholder Agreement”), under which the Karnes County Contributors are entitled to nominate 2 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 1 director so long as they collectively 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). The Karnes County Contributors are collectively entitled to appoint 1 director to each committee of the Board (subject to applicable laws 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 additional equity in the Company and Magnolia LLC upon satisfaction of certain EBITDA and free cash flow or stock price thresholds in 3 tranches. As of December 31, 2018, the Company had met the defined stock price thresholds and had issued an aggregate of 3.6 million additional shares of Class A Common Stock and 9.4 million additional shares of Class B Common Stock to the Karnes County Contributors and had caused Magnolia LLC to issue 9.4 million additional Magnolia LLC Units to the Karnes County Contributors.
Tender and Support Agreement
Pursuant to the Offer, certain of the 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 and such holders (the “Tender and Support Agreement”). See Note 11 - Stockholders’ Equity for more information.
Predecessor Transactions
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 were 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 $1.6 million and $11.6 million for the periods of July 1 through July 30, 2018 and January 1 through July 30, 2018, respectively.
The Karnes County Contributors also entered into operating agreements with EVOC to act as contract operator of the Predecessor’s oil and natural gas wells. The Predecessor reimbursed EVOC for direct expenses incurred. A majority of such expenses were charged on an actual basis (i.e., no mark-up or subsidy to EVOC). These costs are included in “Lease operating expenses” in the combined statements of operations in the Predecessor Period. Additionally, in its role as contract operator, EVOC collected proceeds from oil, natural gas, and NGL sales and distributed them to the Predecessor and other working interest owners.
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. 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 consolidated statement of operations, balance sheet, or 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.
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.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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’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’s expectations include, but are not limited to, Magnolia’s assumptions about:
•the length, scope and severity of the recent coronavirus disease 2019 (“COVID-19”) pandemic, including the effects of related public health concerns and the impact of actions taken by governmental authorities and other third parties in response to the pandemic and its impact on commodity prices, supply and demand considerations, and storage capacity;
•the market prices of oil, natural gas, natural gas liquids (“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 expenditures and other contractual obligations;
•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’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 this Quarterly Report on Form 10-Q and in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 20182019 filed with the SEC on February 27, 2019.26, 2020.
Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Company’s unaudited consolidated financial statements and the related notes thereto.
Overview
Magnolia Oil & Gas Corporation (the "Company"“Company” or "Magnolia"“Magnolia”) is a Delaware corporation 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 (“Magnolia LLC”), as applicable, consummated the acquisition of: (i) certain right, title, and interest in certainan independent 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 "Karnes County Contribution Agreement"), by and among the Company, Magnolia 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 LLC and certain affiliates of EnerVest (the "Giddings Sellers"); and (iii) a 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, by and among Magnolia 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, par value $0.0001 per share (“Class B Common Stock”), 31.8 million shares of Class A Common Stock, par value $0.0001 per share (“Class A Common Stock”), and approximately $911.5 million in cash; the Giddings Sellers received approximately $282.7 million in cash; and the Ironwood Sellers received $25.0 million in cash. 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 cash 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).
In accordance with accounting principles generally accepted in the United States of America (“GAAP”), the Company has been identified as the acquirer in the Business Combination and the Karnes County Business was deemed to be the accounting “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 “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, 2019 (the “2019 Successor Period”).
The Company operates in one reportable segment and is engaged in the acquisition, development, exploration, and production of oil, natural gas, and natural gas propertiesliquid (“NGL”) reserves that operates in one reportable segment 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 formations.
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. Magnolia’s business model prioritizes free cash flow, financial stability, and prudent capital allocation, and is designed to withstand challenging environments such as the one the Company is currently experiencing.
COVID-19 Pandemic and Market Conditions Update
In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. Governments have tried to slow the spread of the virus by imposing social distancing guidelines, travel restrictions, and stay-at-home orders, which have caused a significant decrease in activity in the global economy and the demand for oil and natural gas. The implications of the decrease in global demand for oil, coupled with the general oversupply, may have further negative effects on the Company’s business, such as production curtailment, reduced storage capacity, and reductions to its operating plans. During the second quarter of 2020, and thus far during the third quarter of 2020, there have been continued and, in certain cases, increasing outbreaks of COVID-19 in the United States, particularly in Texas, where the Company conducts substantially all of its operations. Demand and pricing may again decline due to the resurgence of the outbreak across the U.S. and other locations across the world and the related social distancing guidelines, travel restrictions, and stay-at-home orders. The extent of the additional impact on the industry and Magnolia’s business cannot be reasonably predicted at this time.
Magnolia’s business, like many oil and natural gas producers, has been, and is expected to continue to be, negatively affected by the crisis described above, which is ongoing and evolving. Magnolia’s revenues have significantly declined as a result of the sharp decline in commodity prices. As of June 30, 2020, the Company has not entered into any hedging arrangements with respect to the commodity price risk to which the Company is exposed. The prices ultimately realized for oil, natural gas, 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. Magnolia is unable to reasonably predict when, or to what extent, commodity prices and the overall markets and global economy will stabilize, and the pace of any subsequent recovery for the oil and gas industry. Further, the ultimate impact that these events will have on Magnolia’s business, liquidity, financial condition, and results of operations is highly uncertain and dependent on numerous evolving factors that cannot be predicted, including the duration of the pandemic.
Magnolia has taken steps and continues to actively work to mitigate the evolving challenges and growing impact of both the COVID-19 pandemic and the industry downturn on its operations, financial condition, and people. Magnolia’s business model prioritizes free cash flow, financial stability, and prudent capital allocation, and is designed to withstand challenging environments. The Company’s ongoing plan is to spend within cash flow on drilling and completing wells while maintaining low leverage. Magnolia did not bring any operated wells online during the second quarter and reduced its rig count to one rig in the Giddings Assets. However, given the trajectory in commodity prices, management continues to assess the possibility of bringing wells online during the remainder of 2020. The Company is well positioned to reduce or increase operations given the significant flexibility within its capital program, as its operated drilling rig is on a short-term contract and the Company has no long-term service obligations. Moreover, Magnolia does not have any contractual drilling obligations and nearly all the Company’s acreage is held by production. In response to the COVID-19 pandemic and industry downturn, Magnolia has initiated a corporate-wide cost reduction program to help decrease costs throughout every aspect of the Company. The Company has made reductions in general and administrative expense by reducing corporate salaries, renegotiating the fee under the Services Agreement, and working with many of its other vendors and suppliers to reduce the cost of their services. Magnolia believes these measures, taken together with its significant liquidity and lack of near term debt maturities, will provide additional flexibility in navigating the current volatile environment; however, given the tremendous uncertainty and turmoil, there is no certainty that the measures Magnolia takes will be sufficient.
As a producer of oil and natural gas, Magnolia is recognized as an essential business and has continued to operate while taking steps to protect the health and safety of its workers. Magnolia and its contractors have implemented protocols to reduce the risk of an outbreak within its operations, and these protocols have not reduced production or efficiency in a significant manner. The Company has implemented remote working procedures for a significant portion of its workforce for health and safety reasons and/or to comply with applicable national, state, and/or local government requirements. As a result, the Company relies on such persons having sufficient access to its information technology systems, including through telecommunication hardware, software, and networks. Magnolia's board of directors is monitoring the unfolding COVID-19 pandemic very closely as well as the effect of working
remotely on internal controls over financial reporting and IT security. Magnolia has been able to maintain a consistent level of effectiveness through these arrangements, including maintaining day-to-day operations, financial reporting systems, and internal control over financial reporting.
Business Overview
As of SeptemberJune 30, 2019,2020, Magnolia’s assets in South Texas included 21,946 net43,031 gross (23,559 net) acres in Karnes, Gonzales, DeWitt, and Atascosa countiesCounties, Texas, and 428,682 net630,422 gross (428,531 net) acres in the Giddings Field. As of SeptemberJune 30, 2019,2020, Magnolia held an interest in approximately 1,6181,800 gross (1,172 net) wells, (1,128 net), with total production of 66.3 thousand barrels of oil equivalent per day (“Mboe/d”) for the ninesix months ended SeptemberJune 30, 2019.2020. In the thirdsecond quarter of 2019,2020, Magnolia operated two drilling rigs across its acreage, one rig in Karnes County and one rig ina one-rig program for 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.
Assets.
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 a net incomeloss attributable to Class A Common Stock of $7.8 million and $39.3 million,$1.2 billion, or $0.05 and $0.24$7.46 per diluted common share, for the three and ninesix months ended SeptemberJune 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 as2020. Magnolia recognized a resultnet loss of the warrant exchange. Magnolia also recognized net income of $17.4 million and $71.4 million,$1.9 billion, which includes noncontrolling interest of $6.8 million and $29.3 million$0.7 billion related to the Magnolia LLC Units (and corresponding Class B Common StockStock) held by certain affiliates of EnerVest for the threesix months ended June 30, 2020. As a result of the sharp decline in commodity prices during the six months ended June 30, 2020, Magnolia recorded impairments of $1.9 billion related to proved and nine month 2019 Successor Periodunproved properties. Proved property impairment of $1.4 billion is included in “Impairment of oil and natural gas properties” and unproved property impairment of $0.6 billion is included in “Exploration expense” on the Company’s consolidated statement of operations for the six months ended SeptemberJune 30, 2019, respectively.2020.
On August 5, 2019, the Company’s Boardboard of Directorsdirectors authorized a share repurchase program of up to 10 million shares.shares of Class A Common Stock. The program does not require purchases to be made within a particular timeframe. During the three and nine months ended SeptemberAs of June 30, 2019,2020, the Company had repurchased 950 thousand2.0 million shares under the plan at a weighted average price of $10.23, for a total cost of approximately $9.7$16.8 million, 1.0 million of which were repurchased in the first quarter of 2020 at a cost of $6.5 million. No shares were repurchased in the second quarter of 2020.
Results of Operations
Factors Affecting the Comparability of the Historical Financial Results
The 2018Magnolia’s historical financial condition and 2019 Successor Period financial statements reflect a new basisresults of accountingoperations for the assets acquired and liabilities assumed by the Company in the Business Combination that is based on their fair value. As a result, the statement of operations subsequent to the Business Combination includes depreciation and amortization expense on Magnolia’s property, plant, and equipment balances made under the new basis of accounting. Therefore, the Company’s financial information prior to the Business Combinationperiods presented may not be comparable, either from period to its financial information subsequent to the Business Combination. Certain other items of income and expense may not be comparableperiod or going forward, as a result of the following factors:
For•During the periods priorfirst quarter of 2020, the Company incurred impairments of $1.9 billion related to July 31, 2018, the results of operations reflect the results of solely the Predecessor, which,proved and unproved oil and natural gas properties as described above, consists of only the resultsa result of the Karnes County Business, including, as applicable, its ownership ofsharp decline in commodity prices;
•On February 21, 2020, 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 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 non-operated oil and natural gas assets from GulfTex Energy III, L.P.located in Karnes and GulfTex Energy IV, L.P. on March 1, 2018 duringDeWitt Counties, Texas, for approximately $72.0 million in cash, subject to customary closing adjustments;
•On May 31, 2019, the Predecessor Period,Company completed the acquisition of certain oil and accordinglynatural gas assets located in the results of operationsCompany’s Karnes County Assets for approximately $36.3 million in cash and approximately 3.1 million shares of the Predecessor reflect the impact of the assets acquired in that acquisition only from their respective acquisition date;Company’s Class A Common Stock; and
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 were treated as partnerships for income tax purposes. As a result, items of income, expense, gains and losses flowed through to the owners of the Karnes County Contributors and were taxed at the owner level. Accordingly, no U.S. tax provision for federal income taxes is included in the financial statements of the Predecessor;
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• | 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;
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On February 5, 2019, Magnolia Operating formed a joint 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 (the “Highlander Well”); and, 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.
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• | 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.
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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 SeptemberJune 30, 20192020 Compared to the Three Months Ended SeptemberJune 30, 2018
2019
Oil, Natural Gas and NGL Sales Revenues. The following table provides the components of Magnolia’s revenues for the periods indicated, as well as each period’s respective average prices and production volumes. This table shows production on a barrels of oil equivalent (“boe”) basis in which natural gas is converted to an equivalent barrel of oil based on a ratio of six thousand cubic feet of natural gas (“Mcf”) to one barrel. This ratio may not be reflective of the current price ratio between the two products.
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| | | | | | | | | | | | | |
| | Successor | | | Predecessor |
(In thousands, except per unit data) | | Three Months Ended September 30, 2019 | | July 31, 2018 Through September 30, 2018 | | | July 1, 2018 Through July 30, 2018 |
Production: | | | | | | | |
Oil (MBbls) | | 3,520 |
| | 2,023 |
| | | 897 |
|
Natural gas (MMcf) | | 10,763 |
| | 5,341 |
| | | 1,153 |
|
NGLs (MBbls) | | 1,245 |
| | 678 |
| | | 160 |
|
Total (Mboe) | | 6,559 |
| | 3,591 |
| | | 1,249 |
|
| | | | | | | |
Average daily production: | | | | | | | |
Oil (Bbls/d) | | 38,261 |
| | 33,164 |
| | | 28,935 |
|
Natural gas (Mcf/d) | | 116,989 |
| | 87,557 |
| | | 37,194 |
|
NGLs (Bbls/d) | | 13,533 |
| | 11,115 |
| | | 5,161 |
|
Total (boe/d) | | 71,292 |
| | 58,872 |
| | | 40,290 |
|
| | | | | | | |
Revenues: | | | | | | | |
Oil revenues | | $ | 207,840 |
| | $ | 143,202 |
| | | $ | 68,487 |
|
Natural gas revenues | | 21,243 |
| | 13,414 |
| | | 3,646 |
|
Natural gas liquids revenues | | 15,716 |
| | 21,547 |
| | | 4,754 |
|
Total revenues | | $ | 244,799 |
| | $ | 178,163 |
| | | $ | 76,887 |
|
| | | | | | | |
Average Price: | | | | | | | |
Oil (per barrel) | | $ | 59.05 |
| | $ | 70.79 |
| | | $ | 76.35 |
|
Natural gas (per Mcf) | | 1.97 |
| | 2.51 |
| | | 3.16 |
|
NGLs (per barrel) | | 12.62 |
| | 31.78 |
| | | 29.71 |
|
Oil revenueswere 85%, 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 $3.8 million lower compared to the combined 2018 Successor Period and Predecessor Period due to a 19% decrease in average prices partially offset by 21% higher production. The higher volumes are attributable to the inclusion of the Giddings Assets, recent acquisitions, and continued development. Oil production was 54%, 56%, and 72% of total production volume for the 2019 Successor Period, the 2018 Successor Period, and the Predecessor Period, respectively.
Natural gas revenues were 9%, 8%, and 5% of the Company's total revenues for the 2019 Successor Period, the 2018 Successor Period, and the Predecessor Period, respectively. Natural 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 Predecessor Period, respectively.
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 combined 2018 Successor Period and Predecessor Period due to a 60% decrease in average prices, partially offset by 49% higher production. The higher production volumes are primarily attributable to the Successor’s inclusion of the Giddings Assets, recent acquisitions, and continued development.
Operating Expenses and Other Income (Expense). The following table summarizes the Company’s operating expenses and other income (expense) for the periods indicated.
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| | | | | | | | | | | | | |
| | Successor | | | Predecessor |
(In thousands, except per unit data) | | Three Months Ended September 30, 2019 | | July 31, 2018 Through September 30, 2018 | | | July 1, 2018 Through July 30, 2018 |
Operating Expenses: | | | | | | | |
Lease operating expenses | | $ | 24,344 |
| | $ | 11,016 |
| | | $ | 3,681 |
|
Gathering, transportation and processing | | 9,270 |
| | 5,353 |
| | | 2,240 |
|
Taxes other than income | | 13,333 |
| | 9,351 |
| | | 2,087 |
|
Exploration expenses | | 3,924 |
| | 11,221 |
| | | 40 |
|
Asset retirement obligations accretion | | 1,394 |
| | 391 |
| | | 21 |
|
Depreciation, depletion and amortization | | 143,894 |
| | 65,902 |
| | | 23,157 |
|
Amortization of intangible assets | | 3,626 |
| | 2,418 |
| | | — |
|
General and administrative expenses | | 17,345 |
| | 10,297 |
| | | 1,701 |
|
Transaction related costs | | — |
| | 22,366 |
| | | — |
|
Total operating costs and expenses | | $ | 217,130 |
| | $ | 138,315 |
| | | $ | 32,927 |
|
| | | | | | | |
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 | | 21 |
| | (7,019 | ) | | | 24 |
|
Total other income (expense) | | $ | (6,783 | ) | | $ | (11,669 | ) | | | $ | 3,544 |
|
| | | | | | | |
Average Operating Costs per Boe: | | | | | | | |
Lease operating expenses | | $ | 3.71 |
| | $ | 3.07 |
| | | $ | 2.95 |
|
Gathering, transportation and processing | | 1.41 |
| | 1.49 |
| | | 1.79 |
|
Taxes other than income | | 2.03 |
| | 2.60 |
| | | 1.67 |
|
Exploration costs | | 0.60 |
| | 3.12 |
| | | 0.03 |
|
Asset retirement obligation accretion | | 0.21 |
| | 0.11 |
| | | 0.02 |
|
Depreciation, depletion and amortization | | 21.94 |
| | 18.35 |
| | | 18.54 |
|
Amortization of intangible assets | | 0.55 |
| | 0.67 |
| | | — |
|
General and administrative expenses | | 2.64 |
| | 2.87 |
| | | 1.36 |
|
Transaction related costs | | — |
| | 6.23 |
| | | — |
|
Lease operating expenses are the costs incurred in the operation of producing properties which include expenses for utilities, direct labor, water disposal, workover rigs, workover expenses, materials, and supplies. Lease operating expenses were $24.3 million, $11.0 million, and $3.7 million for the 2019 Successor Period, the 2018 Successor Period, and the Predecessor Period, respectively. Lease operating expenses were $3.71 per boe, $3.07 per boe, and $2.95 per boe for the 2019 Successor Period, the 2018 Successor Period, and the Predecessor Period, respectively. Lease operating expenses for the 2019 Successor Period were $9.6 million higher than the combined 2018 Successor Period and 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 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 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 $9.3 million, $5.4 million, and $2.2 million for the 2019 Successor Period, the 2018 Successor Period and the Predecessor Period, 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 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, and $2.1 million for the 2019 Successor Period, the 2018 Successor Period, and the Predecessor Period, respectively. The $1.9 million higher taxes other than income incurred during the 2019 Successor Period compared to the combined 2018 Successor Period and Predecessor Period are primarily due to higher fair market values of mineral interest and business assets. Taxes other than income were $2.03 per boe, $2.60 per boe, and $1.67 per boe for the 2019 Successor Period, the 2018 Successor Period, and the 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, costs of expired or abandoned leases, and delay rentals. Exploration expenses of $3.9 million in the 2019 Successor Period compared to the combined 2018 Successor Period and 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 in the 2018 Successor Period.
Asset retirement obligation accretion was $1.0 million higher during the 2019 Successor Period as compared to the combined 2018 Successor Period and Predecessor Period. The $1.4 million asset retirement obligation accretion incurred during the 2019 Successor Period was driven by the inclusion of the Giddings Assets. This resulted in higher accretion expense per boe in the 2019 Successor Period of $0.21 per boe.
Depreciation, depletion and amortization (“DD&A”) was $143.9 million, $65.9 million, and $23.2 million for the 2019 Successor Period, the 2018 Successor Period, and the Predecessor Period, respectively. DD&A was $21.94 per boe for the 2019 Successor Period as compared to $18.35 per boe 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 increased production as a result of the Successor’s inclusion of the Giddings Assets, recent acquisitions, and continued development. The higher rate per boe 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, 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”) 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 incurs G&A related to the Services Agreement (the “Services Agreement”) with EnerVest Operating L.L.C. (“EVOC”), in which EVOC provides the Company’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 fee of $23.6 million. In addition, the Company pays industry standard per well overhead payments to EVOC that are adjusted
in accordance with industry standard inflationary measures and reimburses EVOC for certain costs incurred by EVOC in performing the services. G&A expenses were $17.3 million, $10.3 million, and $1.7 million for the 2019 Successor Period, the 2018 Successor Period, and the Predecessor Period, respectively. The $5.3 million higher G&A expenses incurred during the 2019 Successor Period compared to the combined 2018 Successor 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 as well as increased salaries and wages and stock-based compensation 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 as well as amortization of debt issuance costs related to the Company’s 6.0% senior notes due 2026 (the “2026 Senior Notes”) and the senior secured reserve-based revolving credit facility (the “RBL Facility”).
Loss on derivatives, net was $3.9 million for the Predecessor Period. Magnolia has not engaged in any hedging activities with respect to the market risk to which the Company is exposed.
Nine Months Ended September 30, 2019 Compared to the Nine Months Ended September 30, 2018
Oil, Natural Gas and NGL Sales Revenues. The following table provides the components of Magnolia’s revenues for the periods indicated, as well as each period’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 |
(In thousands, except per unit data) | | Nine Months Ended September 30, 2019 | | July 31, 2018 Through September 30, 2018 | | | January 1, 2018 Through July 30, 2018 |
Production: | | | | | | | |
Oil (MBbls) | | 9,615 |
| | 2,023 |
| | | 5,755 |
|
Natural gas (MMcf) | | 30,583 |
| | 5,341 |
| | | 7,595 |
|
NGLs (MBbls) | | 3,389 |
| | 678 |
| | | 1,097 |
|
Total (Mboe) | | 18,101 |
| | 3,591 |
| | | 8,118 |
|
| | | | | | | |
Average daily production: | | | | | | | |
Oil (Bbls/d) | | 35,220 |
| | 33,164 |
| | | 27,146 |
|
Natural gas (Mcf/d) | | 112,026 |
| | 87,557 |
| | | 35,825 |
|
NGLs (Bbls/d) | | 12,414 |
| | 11,115 |
| | | 5,175 |
|
Total (boe/d) | | 66,305 |
| | 58,872 |
| | | 38,292 |
|
| | | | | | | |
Revenues: | | | | | | | |
Oil revenues | | $ | 584,009 |
| | $ | 143,202 |
| | | $ | 399,124 |
|
Natural gas revenues | | 71,208 |
| | 13,414 |
| | | 22,135 |
|
Natural gas liquids revenues | | 51,215 |
| | 21,547 |
| | | 27,927 |
|
Total revenues | | $ | 706,432 |
| | $ | 178,163 |
| | | $ | 449,186 |
|
| | | | | | | |
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 |
|
| | | | | | | | | | | | | | |
| | Three Months Ended | | |
(In thousands, except per unit data) | | June 30, 2020 | | June 30, 2019 |
Production: | | | | |
Oil (MBbls) | | 3,089 | | | 3,189 | |
Natural gas (MMcf) | | 9,763 | | | 10,057 | |
NGLs (MBbls) | | 1,122 | | | 1,060 | |
Total (Mboe) | | 5,838 | | | 5,925 | |
| | | | |
Average daily production: | | | | |
Oil (Bbls/d) | | 33,940 | | | 35,044 | |
Natural gas (Mcf/d) | | 107,289 | | | 110,516 | |
NGLs (Bbls/d) | | 12,324 | | | 11,648 | |
Total (boe/d) | | 64,146 | | | 65,111 | |
| | | | |
Revenues: | | | | |
Oil revenues | | $ | 60,790 | | | $ | 204,513 | |
Natural gas revenues | | 13,168 | | | 22,590 | |
Natural gas liquids revenues | | 8,881 | | | 15,855 | |
Total revenues | | $ | 82,839 | | | $ | 242,958 | |
| | | | |
Average Price: | | | | |
Oil (per barrel) | | $ | 19.68 | | | $ | 64.13 | |
Natural gas (per Mcf) | | 1.35 | | | 2.25 | |
NGLs (per barrel) | | 7.92 | | | 14.96 | |
Oil revenues were 83%, 80%,73% and 89%84% of the Company’s total revenues for the three months ended June 30, 2020 and 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%54% of total production volume for the three months ended June 30, 2020 and 2019, Successor Period,respectively. The oil revenues for the 2018 Successor Period, andthree months ended June 30, 2020 were $143.7 million lower than the Predecessor Period, respectively.three months ended June 30, 2019. A 69% decrease in average prices reduced second quarter 2020 revenues by $141.7 million compared to the same period in the prior year, while a 3% decrease in oil production reduced revenues by $2.0 million.
Natural gas revenues were 10%, 8%,16% and 5%9% of the Company's total revenues for the three months ended June 30, 2020 and 2019, Successor Period,respectively. Natural gas production was 28% of total production volume for each of the 2018 Successor Period,three months ended June 30, 2020 and the Predecessor Period, respectively.2019. Natural gas revenues for the 2019 Successor Periodthree months ended June 30, 2020 were $35.7$9.4 million higherlower than the three months ended June 30, 2019. A 40% decrease in average prices reduced second quarter 2020 revenues by $9.0 million compared to the combined 2018 Successor Period and Predecessor Period due to 136% moresame period in the prior year, while a 3% decrease in natural gas production primarily attributable to the Successor’s inclusion of the Giddings Assets and the acquisition of the Highlander Well partially offsetreduced revenues by a 15% decrease in average prices. Natural gas production was 28%, 25%, and 16% of total production volume for the 2019 Successor Period, the 2018 Successor Period and the Predecessor Period, respectively.
$0.4 million.
Natural gas liquids
NGL revenues were 7%, 12%,11% and 6%7% of the Company’s total revenues for the 2019 Successor Period, the 2018 Successor Period,three months ended June 30, 2020 and the Predecessor Period,2019, respectively. NGL production was 19%, 19%, and 14%18% of total production volume for the three months ended June 30, 2020 and June 30, 2019, Successor Period, the 2018 Successor Period, and the Predecessor Period, respectively. Natural gas liquidsNGL revenues for the 2019 Successor Periodthree months ended June 30, 2020 were $1.7$7.0 million higherlower than the three months ended June 30, 2019. A 47% decrease in the 2019 Successor Periodaverage prices reduced second quarter 2020 revenues by $7.5 million compared to the combined 2018 Successor Period and Predecessor Period due to 91% highersame period in the prior year, while a 6% increase in NGL production partially offsetincreased revenues by a 46% decrease in average prices. The higher production volumes are primarily attributable to the Successor’s inclusion of the Giddings Assets, recent acquisitions and continued development.$0.5 million.
Operating Expenses and Other Income (Expense). The following table summarizes the Company’s operating expenses and other income (expense) for the periods indicated.
| | | | | | | | | | | | | | |
| | Three Months Ended | | |
(In thousands, except per unit data) | | June 30, 2020 | | June 30, 2019 |
Operating Expenses: | | | | |
Lease operating expenses | | $ | 18,310 | | | $ | 24,895 | |
Gathering, transportation, and processing | | 6,788 | | | 7,431 | |
Taxes other than income | | 5,525 | | | 13,091 | |
Exploration expenses | | 6,462 | | | 3,617 | |
Asset retirement obligations accretion | | 1,464 | | | 1,373 | |
Depreciation, depletion and amortization | | 50,870 | | | 126,102 | |
Amortization of intangible assets | | 3,626 | | | 3,626 | |
General and administrative expenses | | 15,729 | | | 19,106 | |
Transaction related costs | | — | | | 85 | |
Total operating costs and expenses | | $ | 108,774 | | | $ | 199,326 | |
| | | | |
Other Income (Expense): | | | | |
Income from equity method investee | | $ | 611 | | | $ | 128 | |
Interest expense, net | | (7,256) | | | (7,299) | |
Other expense, net | | 13 | | | (13) | |
Total other expense | | $ | (6,632) | | | $ | (7,184) | |
| | | | |
Average Operating Costs per boe: | | | | |
Lease operating expenses | | $ | 3.14 | | | $ | 4.20 | |
Gathering, transportation, and processing | | 1.16 | | | 1.25 | |
Taxes other than income | | 0.95 | | | 2.21 | |
Exploration expense | | 1.11 | | | 0.61 | |
Impairment of oil and natural gas properties | | — | | | — | |
Asset retirement obligation accretion | | 0.25 | | | 0.23 | |
Depreciation, depletion and amortization | | 8.71 | | | 21.28 | |
Amortization of intangible assets | | 0.62 | | | 0.61 | |
General and administrative expenses | | 2.69 | | | 3.22 | |
Transaction related costs | | — | | | 0.01 | |
|
| | | | | | | | | | | | | |
| | Successor | | | Predecessor |
(In thousands, except per unit data) | | Nine Months Ended September 30, 2019 | | July 31, 2018 Through September 30, 2018 | | | January 1, 2018 Through July 30, 2018 |
Operating Expenses: | | | | | | | |
Lease operating expenses | | $ | 70,755 |
| | $ | 11,016 |
| | | $ | 23,513 |
|
Gathering, transportation and processing | | 26,016 |
| | 5,353 |
| | | 12,929 |
|
Taxes other than income | | 40,825 |
| | 9,351 |
| | | 23,763 |
|
Exploration expenses | | 10,017 |
| | 11,221 |
| | | 492 |
|
Asset retirement obligations accretion | | 4,095 |
| | 391 |
| | | 104 |
|
Depreciation, depletion and amortization | | 385,942 |
| | 65,902 |
| | | 137,871 |
|
Amortization of intangible assets | | 10,879 |
| | 2,418 |
| | | — |
|
General and administrative expenses | | 52,648 |
| | 10,297 |
| | | 12,710 |
|
Transaction related costs | | 438 |
| | 22,366 |
| | | — |
|
Total operating costs and expenses | | $ | 601,615 |
| | $ | 138,315 |
| | | $ | 211,382 |
|
| | | | | | | |
Other Income (Expense): | | | | | | | |
Income from equity method investee | | $ | 608 |
| | $ | 309 |
| | | $ | 711 |
|
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: | | | | | | | |
Lease operating expenses | | $ | 3.91 |
| | $ | 3.07 |
| | | $ | 2.90 |
|
Gathering, transportation and processing | | 1.44 |
| | 1.49 |
| | | 1.59 |
|
Taxes other than income | | 2.26 |
| | 2.60 |
| | | 2.93 |
|
Exploration costs | | 0.55 |
| | 3.12 |
| | | 0.06 |
|
Asset retirement obligation accretion | | 0.23 |
| | 0.11 |
| | | 0.01 |
|
Depreciation, depletion and amortization | | 21.32 |
| | 18.35 |
| | | 16.98 |
|
Amortization of intangible assets | | 0.60 |
| | 0.67 |
| | | — |
|
General and administrative expenses | | 2.91 |
| | 2.87 |
| | | 1.57 |
|
Transaction related costs | | 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, and $23.5 million for the 2019 Successor Period, the 2018 Successor Period, and the Predecessor Period, respectively. Lease operating expensesthree months ended June 30, 2020 were $3.91$6.6 million, or $1.06 per boe, $3.07 per boe, and $2.90 per boe forlower than the three months ended June 30, 2019 Successor Period, the 2018 Successor Period, and the Predecessor Period, respectively. Lease operating expenses were $36.2 million higher in the 2019 Successor Period as compared to the combined 2018 Successor Period and Predecessor Period primarily due to the inclusionsuspension of the Giddings Assets, recent acquisitions,completion activity and continued development. The higher per boe cost in the 2019 Successor Period compared to the combined 2018 Successor Period and Predecessor period was primarily due to the inclusionreduction of the Giddings Assets as the Giddings Assets deliver less production per well than the Karnes County Assets, resulting in lease operating costs spread over fewer volumes.expenses associated with bringing new wells online.
Gathering, transportation, and processing costs are costs incurred to deliver oil, natural gas, and NGLs to the market. Cost levels of theseThese expenses can vary based on the volume of oil, natural gas, and NGLs produced as well as the cost of commodity processing. Gathering,The gathering, transportation, and processing costs were $26.0 million, $5.4 million, and $12.9 million for the 2019 Successor Period, the 2018 Successor Period and the Predecessor Period, respectively,three months ended June 30, 2020 were $0.6 million, or $1.44, $1.49, and $1.59 on a$0.09 per boe, basis. The $7.7 million higher costs inlower than the three months ended June 30, 2019 Successor Period compared to the combined 2018 Successor Period and Predecessor Period were primarily due to the inclusion oflower gas prices and production from 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 Combined 2018 Successor and Predecessor Period was primarily attributable to 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$7.6 million, $9.4 million, and $23.8 millionor $1.26 per boe, lower for the 2019 Successor Period, the 2018 Successor Period, and the Predecessor Period, respectively. The $7.7 million higher taxes other than income incurred during the 2019 Successor Periodthree months ended June 30, 2020 compared to the combined 2018 Successor Period and Predecessor Period arethree months ended June 30, 2019 primarily due to an increasea decrease in revenues. Taxes other than income were $2.26 per boe, $2.60 per boe, and $2.93 per boe forrevenues following the 2019 Successor Period, the 2018 Successor Period, and the Predecessor Period, respectively. The lower costs per boerecent decline 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 incur lower production taxes.commodity prices.
Exploration costsexpenses are geological and geophysical costs that include unproved property impairments, seismic surveying costs, costs of unsuccessful exploratory dry holes, costs of expired or abandoned leases, and delay rentals. ExplorationThe exploration costs for the three months ended June 30, 2020 were $2.8 million higher than the three months ended June 30, 2019 and $0.50 higher on a boe basis. This increase is primarily due to
higher leasehold abandonment expenses of $10.0 million inrelated to the 2019 Successor Period were $1.7Company’s unproved natural gas properties offset by lower seismic surveying costs.
Depreciation, depletion and amortization (“DD&A”) during the three months ended June 30, 2020 was $75.2 million lower compared tothan 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 in the 2018 Successor Period.
Asset retirement obligation accretion was higher during the 2019 Successor Period as compared to the combined 2018 Successor and Predecessor Period.three months ended June 30, 2019. The $4.1 million asset retirement obligation accretion incurred during the 2019 Successor Period was driven by the inclusion of the Giddings Assets. This resulted in higher accretion expense per boe in the 2019 Successor Period of $0.23 per boe.
DD&A was $385.9 million, $65.9 million, and $137.9 million for the 2019 Successor Period, the 2018 Successor Period, and the Predecessor Period, respectively. DD&A was $21.32 per boe for the 2019 Successor Period. DD&A was $182.2 million higher in the 2019 Successor Period compared to the combined 2018 Successor Period and Predecessor Period. The higher DD&A and the higher DD&A rate per boe for the three months ended June 30, 2020 was $12.57 lower than the three months ended June 30, 2019. The decrease is primarily the result of lower asset property balances associated with proved property impairments recorded in the first quarter of 2020.
General and administrative (“G&A”) expenses during the three months ended June 30, 2020 were $3.4 million lower than the three months ended June 30, 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 recordedprimarily as a result of the new basis of accounting relatedlower employee compensation and other corporate cost cutting initiatives.
Six Months Ended June 30, 2020 Compared to the Business Combination, recent acquisitionsSix Months Ended June 30, 2019
Oil, Natural Gas and decreaseNGL Sales Revenues. The following table provides the components of Magnolia’s revenues for the periods indicated, as well as each period’s respective average prices and production volumes. This table shows production on a boe basis in proved reserves. The Predecessor’s reserves arewhich natural gas is converted to an equivalent barrel of oil based on a five-year development plan, whereas the vast majorityratio of six Mcf to one barrel. This ratio may not be reflective of the Successor’s proved undeveloped reserves are planned to be developed within one year.current price ratio between the two products.
| | | | | | | | | | | | | | |
| | Six Months Ended | | |
(In thousands, except per unit data) | | June 30, 2020 | | June 30, 2019 |
Production: | | | | |
Oil (MBbls) | | 6,479 | | | 6,095 | |
Natural gas (MMcf) | | 19,817 | | | 19,820 | |
NGLs (MBbls) | | 2,276 | | | 2,144 | |
Total (Mboe) | | 12,058 | | | 11,542 | |
| | | | |
Average daily production: | | | | |
Oil (Bbls/d) | | 35,600 | | | 33,674 | |
Natural gas (Mcf/d) | | 108,882 | | | 109,503 | |
NGLs (Bbls/d) | | 12,506 | | | 11,845 | |
Total (boe/d) | | 66,253 | | | 63,770 | |
| | | | |
Revenues: | | | | |
Oil revenues | | $ | 215,476 | | | $ | 376,167 | |
Natural gas revenues | | 29,343 | | | 49,965 | |
Natural gas liquids revenues | | 19,385 | | | 35,499 | |
Total revenues | | $ | 264,204 | | | $ | 461,631 | |
| | | | |
Average Price: | | | | |
Oil (per barrel) | | $ | 33.26 | | | $ | 61.72 | |
Natural gas (per Mcf) | | 1.48 | | | 2.52 | |
NGLs (per barrel) | | 8.52 | | | 16.56 | |
The amortizationOil revenueswere 82% and 81% of intangible assets was $10.9 million and $2.4 millionthe Company’s total revenues for the six months ended June 30, 2020 and 2019, Successor Periodrespectively. Oil production was 54% and 53% of total production volume for the 2018 Successor Period,six months ended June 30, 2020 and 2019, respectively. In connection withOil revenues for the closesix months ended June 30, 2020 were $160.7 million lower than the six months ended June 30, 2019. A 46% decrease in average prices reduced revenues for the six months ended June 30, 2020 by $173.5 million compared to the same period in the prior year, while a 6% increase in oil production increased revenue $12.8 million.
Natural gas revenues were 11% of the Business Combination,Company's total revenues for each of the Company recorded an estimated costsix months ended June 30, 2020 and 2019. Natural gas production was 27% and 29% of $44.4 milliontotal production volume for the Non-Compete Agreement as intangible assets onsix months ended June 30, 2020 and 2019, respectively. Natural gas revenues for the six months ended June 30, 2020 were $20.6 million lower than the six months ended June 30, 2019 which resulted from a 41% decrease in average prices for the six months ended June 30, 2020 compared to the same period in the prior year.
NGL revenues were 7% and 8% of the Company’s consolidated balance sheet. The $8.5total revenues for the six months ended June 30, 2020 and 2019, respectively. NGL production was 19% of total production volume for each of the six months ended June 30, 2020 and June 30, 2019. NGL revenues for the six months ended were June 30, 2020 $16.1 million higher amortization of intangible assetslower than the six months ended June 30, 2019. A 49% decrease in average prices reduced revenues for the 2019 Successor Periodsix months ended June 30, 2020 by $17.2 million as compared to the 2018 Successor Period is due to nine months of amortizationsame period in the 2019 Successor Period as compared to approximately two months of amortizationprior year, while a 6% increase in NGL production increased revenue $1.1 million.
Operating Expenses and Other Income (Expense). The following table summarizes the Company’s operating expenses and other income (expense) for the periods indicated.
| | | | | | | | | | | | | | |
| | Six Months Ended | | |
(In thousands, except per unit data) | | June 30, 2020 | | June 30, 2019 |
Operating Expenses: | | | | |
Lease operating expenses | | $ | 42,473 | | | $ | 46,413 | |
Gathering, transportation, and processing | | 14,807 | | | 16,746 | |
Taxes other than income | | 15,543 | | | 27,492 | |
Exploration expenses | | 562,888 | | | 6,093 | |
Impairment of oil and natural gas properties | | 1,381,258 | | | — | |
Asset retirement obligations accretion | | 2,902 | | | 2,701 | |
Depreciation, depletion and amortization | | 193,542 | | | 242,048 | |
Amortization of intangible assets | | 7,253 | | | 7,253 | |
General and administrative expenses | | 33,809 | | | 35,302 | |
Transaction related costs | | — | | | 438 | |
Total operating costs and expenses | | $ | 2,254,475 | | | $ | 384,486 | |
| | | | |
Other Income (Expense): | | | | |
Income from equity method investee | | 1,052 | | | 516 | |
Interest expense, net | | (14,012) | | | (14,715) | |
Other expense, net | | (460) | | | (11) | |
Total other expense | | $ | (13,420) | | | $ | (14,210) | |
| | | | |
Average Operating Costs per boe: | | | | |
Lease operating expenses | | $ | 3.52 | | | $ | 4.02 | |
Gathering, transportation, and processing | | 1.23 | | | 1.45 | |
Taxes other than income | | 1.29 | | | 2.38 | |
Exploration expense | | 46.68 | | | 0.53 | |
Impairment of oil and natural gas properties | | 114.55 | | | — | |
Asset retirement obligation accretion | | 0.24 | | | 0.23 | |
Depreciation, depletion and amortization | | 16.05 | | | 20.97 | |
Amortization of intangible assets | | 0.60 | | | 0.63 | |
General and administrative expenses | | 2.80 | | | 3.06 | |
Transaction related costs | | — | | | 0.04 | |
Lease operating expenses are costs incurred in the 2018 Successor Period. These intangible assets have a definite lifeoperation of producing properties, including expenses for utilities, direct labor, water disposal, workover rigs, workover expenses, materials, 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 was no amortization of intangible assets in the Predecessor Period.
G&Asupplies. Lease operating 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 $29.6six months ended June 30, 2020 were $3.9 million, higher G&A expenses and higher G&A expensesor $0.50 per boe, incurred duringlower than the six months ended June 30, 2019 Successor Period compared to the combined 2018 Successor Period and Predecessor Period were primarily due to the Successor
suspension of completion activity and reduction of operating expenses associated with bringing new wells online.
incurring
certain additional G&A
Gathering, transportation, and processing costs are costs incurred to deliver oil, natural gas, and NGLs to the market. These expenses related to fees payable to EVOC undercan vary based on the Services Agreementvolume of oil, natural gas, and NGLs produced as well as increased salariesthe cost of commodity processing. The gathering, transportation, and wagesprocessing costs for the six months ended June 30, 2020 were $1.9 million, or $0.22 per boe, lower than the six months ended June 30, 2019 primarily due to lower gas production and stock-basedprices from the Karnes County Assets and Giddings Assets.
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 and related cost per boe were $11.9 million, or $1.09 per boe, lower for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 primarily due to a decrease in revenues following the recent decline in commodity prices.
Exploration expenses are geological and geophysical costs that include unproved property impairments, seismic surveying costs, costs of expired or abandoned leases, and delay rentals. The exploration costs for the six months ended June 30, 2020 were $556.8 million higher than the six months ended June 30, 2019 and $46.15 higher on a boe basis primarily as a result of an impairment related to Magnolia’s unproved oil and natural gas properties due to the sharp decline in commodity prices primarily driven by the COVID-19 pandemic and oversupply by producers relating to oil price and production controls. For more information, please see Note 5 “Fair Value Measurements” to the Company’s consolidated financial statements included in this Quarterly Report on Form 10-Q.
For the six months ended June 30, 2020, Magnolia recognized $1.4 billion of impairment included in “Impairment of oil and natural gas properties” in the consolidated statement of operations related to its proved oil and natural gas properties. The impairment was driven by the sharp decline in commodity prices. For more information, please see Note 5 “Fair Value Measurements” to the Company’s consolidated financial statements included in this Quarterly Report on Form 10-Q.
DD&A during the six months ended June 30, 2020 was $48.5 million lower than the six months ended June 30, 2019. The DD&A rate per boe for the six months ended June 30, 2020 was $4.92 lower than the six months ended June 30, 2019. The decrease is primarily the result of lower asset property balances associated with proved property impairments recorded in the first quarter of 2020.
G&A expenses during the six months ended June 30, 2020 were $1.5 million lower than the six months ended June 30, 2019 primarily as a result of lower employee compensation costs.and other corporate cost cutting initiatives.
Interest expense, net, was $21.6 millionincurred for the 2019 Successor Period,six months ended June 30, 2020 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 Company’s 2026 Senior Notes and the RBL Facility. The interest expense, net, incurred during the six months ended June 30, 2020 was $0.7 million lower than the six months ended June 30, 2019 due to higher interest income.
Loss on derivatives, net was $18.1 million for the Predecessor Period. During the 2019 Successor Period and the 2018 Successor Period, Magnolia has not engaged in any hedging activities with respect to the market risk to which the Company is exposed.
Liquidity and Capital Resources
Magnolia’s primary sourcessource of liquidity and capital havehas been its cash flows from operations and, at the close of the Business Combination, issuances of equity and debt securities.operations. The Company’s primary uses of cash have been for acquisitions of oil and natural gas properties and related assets, development of the Company’s oil and natural gas properties, and general working capital needs.
Magnolia believes that cash on hand, cash flows generated from operations, and the borrowings available under the RBL Facility will be adequate to fund Magnolia’s capital budget and satisfy the Company’s short-term liquidity needs.
The Company may also utilize borrowings under other various financing sources available to Magnolia, including its RBL Facility and the issuance of equity or debt securities through public offerings or private placements, to fund Magnolia’s acquisitions and long-term liquidity needs. Magnolia’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’s financial condition.
The Company anticipates its current cash balance, cash flows from operations, and its available sources of liquidity to be sufficient to meet the Company’s cash requirements. However, as the impact of recent declines in worldwide crude oil and natural gas prices and the impact of COVID-19 on the economy evolves, the Company will continue to assess its liquidity needs. In the event of a sustained market deterioration, Magnolia may need additional liquidity, which would require the Company to evaluate available alternatives and take appropriate actions.
As of SeptemberJune 30, 2019,2020, the Company had $400.0 million of principal debt related to the 2026 Senior Notes outstanding and no outstanding borrowings related to the RBL Facility. As of SeptemberJune 30, 2019,2020, the Company has $714.5had $566.9 million of liquidity comprised of the $550.0$450.0 million of borrowing base capacity of the RBL Facility and $164.5$116.9 million of cash and cash equivalents.
A 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 asset group could also lead to a reduction in expected future cash flows and possibly an impairment of long-lived assets in future periods.
Cash and Cash Equivalents
At SeptemberJune 30, 2019,2020, Magnolia had $164.5$116.9 million of cash and cash equivalents. The Company’s cash and cash equivalents are maintained with various financial institutions in the United States. Deposits with these institutions may exceed the amount of insurance provided on such deposits, however,deposits. However, the Company regularly monitors the financial stability of its financial institutions and believes that the 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 |
(In thousands) | | 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 | | $ | 488,611 |
| | $ | 87,302 |
| | | $ | 284,812 |
|
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 |
| | | $ | — |
|
| | | | | | | | | | | | | | |
| | Six Months Ended | | |
(In thousands) | | June 30, 2020 | | June 30, 2019 |
Sources of cash and cash equivalents | | | | |
Net cash provided by operating activities | | $ | 165,842 | | | $ | 309,391 | |
Other | | — | | | 11,551 | |
| | $ | 165,842 | | | $ | 320,942 | |
Uses of cash and cash equivalents | | | | |
Acquisitions, other | | $ | (69,782) | | | $ | (91,903) | |
Additions to oil and natural gas properties | | (129,651) | | | (263,064) | |
Changes in working capital associated with additions to oil and natural gas properties | | (24,381) | | | (4,245) | |
Class A Common Stock repurchase | | (6,483) | | | — | |
Other | | (1,328) | | | (779) | |
| | (231,625) | | | (359,991) | |
Decrease in cash and cash equivalents | | $ | (65,783) | | | $ | (39,049) | |
Sources 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 providedCash Provided by operating activitiesOperating Activities
Operating cash flows are the Company’s primary source of liquidity and are impacted, in the short term and long term, by oil and natural gas prices. The factors that determine operating cash flows are largely the same as those that affect net earnings or net losses, with the exception of certain non-cash expenses such as DD&A, the non-cash portion of exploration expense, impairment of oil and natural gas properties, asset retirement obligation accretion, and deferred income tax expense.
Net cash provided by operating activities totaled $488.6 million, $87.3$165.8 million and $284.8$309.4 million for the six months ended June 30, 2020 and 2019, Successor Period, 2018 Successor Period, and Predecessor Period, respectively. CashDuring the six months ended June 30, 2020, cash provided by operating activities was positivelynegatively impacted by the inclusionsharp decline of the Giddings Assets in the Successor Period but wasoil and natural gas prices and payment of liabilities, partially offset by interest expense payments, EnerVest service fee payments,positive impacts from the timing of collections, and higherlower production tax payments. The 2018 Successor Period includes $22.4 million one-time transaction costs associated with the Business Combination, exploration expenses of $11.2 million primarily related to a one-time purchase of a seismic license continuation.
Uses of Cash and Cash Equivalents
Business CombinationAcquisitions
The primary use of cash in the 2018 Successor Period was the acquisition of EnerVest properties which included an 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,six months ended June 30, 2020, the Company completed various 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 activitya $72.0 million acquisition of $150.1 million is comprised of the Subsequent GulfTex Acquisition.
Additions tocertain non-operated oil and natural gas propertiesassets located in Karnes and DeWitt Counties, Texas. During the six months ended June 30, 2019, the Company incurred $91.9 million of acquisition costs, primarily related to the formation of the Highlander joint venture.
Additions to Oil and Natural Gas Properties
The following table sets forth the Company’s capital expenditures for the 2019 Successor Period:three and six months ended June 30, 2020 and 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | Six Months Ended | | |
(In thousands) | | June 30, 2020 | | June 30, 2019 | | June 30, 2020 | | June 30, 2019 |
Drilling and completion | | $ | 27,272 | | | $ | 116,031 | | | $ | 127,883 | | | $ | 255,794 | |
Leasehold acquisition costs | | 988 | | | 1,341 | | | 1,768 | | | 7,270 | |
Total capital expenditures | | $ | 28,260 | | | $ | 117,372 | | | $ | 129,651 | | | $ | 263,064 | |
|
| | | | |
(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 quarterAs of 2019,June 30, 2020, Magnolia operated two drilling rigs across its acreage, one rig in Karnes County and one rig inwas running a one-rig program for the Giddings Field.Assets. The activity induring the 2019 Successor Periodsix months ended June 30, 2020 was largely driven by the number of operated and non-operated drilling rigs. The number of operatingoperated drilling rigs is largely dependent on commodity prices and the Company’s strategy of maintaining spending within 60% of adjusted EBITDAX.to accommodate the Company’s business model.
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 the earnout obligation.
Capital Requirements
Repurchase of common stockClass A Common Stock
On August 5, 2019, the Company’s Boardboard of Directorsdirectors authorized a share repurchase program of up to 10 million shares.shares of Class A Common Stock. The program does not require purchases to be made within a particular timeframe.timeframe and whether the Company undertakes these additional repurchases is ultimately subject to numerous considerations, market conditions, and other factors. During the 2019 Successor Period,first quarter of 2020, the Company repurchased 950 thousand1.0 million shares at a weighted average price of $10.23, for a total cost of approximately $9.7$6.5 million. No shares were repurchased during the second quarter of 2020.
Off-Balance Sheet Arrangements
As of SeptemberJune 30, 2019,2020, there were no off-balance sheet arrangements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.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 the RBL Facility. Interest on borrowings under the RBL Facility is based on the LIBOR rate or alternative base rate plus an applicable margin as stated in the agreement. At SeptemberJune 30, 2019,2020, the Company had no borrowings outstanding under the RBL Facility.
Commodity Price Risk
TheAs of June 30, 2020, the Company has not engaged in, and does not expect to engage in any hedging activities with respect to the market risk to which it is exposed.
Magnolia’s primary market risk exposure is to the prices it receives for its oil, natural gas, and NGL production. The prices the Company ultimately realizes for its oil, natural gas, 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, and 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. As the impact of recent declines in worldwide crude oil and natural gas prices and the impact of COVID-19 on the economy evolves, the Company will continue to assess its market risk exposure as appropriate. A $1.00 per barrel increase (decrease) in the weighted average oil price for the ninesix months ended SeptemberJune 30, 20192020 would have increased (decreased) the Company’s revenues by approximately $12.8$13.0 million on an annualized basis and a $0.10 per Mcf increase (decrease) in the weighted average natural gas price for the ninesix months ended SeptemberJune 30, 20192020 would have increased (decreased) Magnolia’s revenues by approximately $4.1$4.0 million on an annualized basis.
Item 4. Controls and Procedures.
Procedures
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15(b) under the Exchange Act, Magnolia has evaluated, under the supervision and with the participation of the Company’s management, including Magnolia’s principal executive officer and principal financial officer, the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of SeptemberJune 30, 2019.2020. 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 toin Internal Control Over Financial Reporting
As of September 30, 2019, there have beenThere were no changes in Magnolia’sthe system of internal control over financial reporting (as defined in Rule 13a-15(f) and Rule 15d-15(f) under the Exchange Act) during the quarter ended June 30, 2020 that have materially affected, or isare reasonably likely to materially affect, the Company’s internal control over financial reporting.reporting, including changes related to the COVID-19 pandemic and any transition to a remote working environment.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.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
Please refer to Part I, Item IA1A - Risk Factors of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018,2019, and Part I, Item 3 - Quantitative and Qualitative Disclosures About Market Risk of this Quarterly Report on Form 10-Q. Any of these factors and the factors described below could result in a significant or material adverse effect on Magnolia’s business, results of operations, or financial condition. There have been no material changes to the Company’s risk factors since its Annual Report on Form 10-K for the year ended December 31, 2018.2019, except as updated below. Additional risk factors not presently known to the Company or that the Company currently deems immaterial may also impair its business, results of operations, or financial condition.
Recent COVID-19 and other pandemic outbreaks could negatively impact Magnolia’s business and results of operations.
The company may face additional risks related to the recent outbreak of COVID-19, which has been declared a “pandemic” by the World Health Organization. International, federal, state, and local public health and governmental authorities have taken extraordinary and wide-ranging actions to contain and combat the outbreak and spread of COVID-19 in regions across the United States and the world, including mandates for many individuals to substantially restrict daily activities and for many businesses to curtail or cease normal operations. To the extent COVID-19 continues or worsens, governments may impose additional similar restrictions. The full impact of COVID-19 is unknown and rapidly evolving. The outbreak and any preventative or protective actions that the Company or its customers may take in response to this virus may result in a period of disruption, including the Company’s financial reporting capabilities, its operations generally, and could potentially impact the Company’s customers, distribution partners, and third parties. In addition, many of the Company’s non-operational employees are now working remotely, which could increase the risk of security breaches or other cyber-incidents or attacks, loss of data, fraud, and other disruptions. Any resulting impacts from the outbreak cannot be reasonably estimated at this time, and may materially affect the business and the Company’s financial condition and results of operations. The extent and duration of such impacts will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and the actions to contain COVID-19 or treat its impact, among others.
The supply and demand imbalance created by the outbreak of COVID-19 and recent actions of various oil producers relating to oil price and production controls could adversely affect Magnolia’s business, financial condition, results of operations, and ability to meet its expenditure obligations and financial commitments.
The prices Magnolia receives for its oil, natural gas, and NGL production will heavily influence its revenue, profitability, access to capital, future rate of growth, and the carrying value of its properties. Oil, natural gas, and NGLs are commodities, and their prices may fluctuate widely in response to market uncertainty and to relatively minor changes in the supply of and demand for oil, natural gas, and NGLs. Historically, oil, natural gas, and NGL prices have been volatile. Likewise, NGLs, which are made up of ethane, propane, isobutane, normal butane, and natural gasoline, each of which has different uses and pricing characteristics, have suffered significant recent declines in realized prices. During the six months ended June 30, 2020, benchmark prices for oil and natural gas were significantly depressed which resulted in a decrease in revenue in the second quarter. Should this volatility persist, Magnolia’s price realizations and production volumes could be negatively impacted further.
The imbalance between the supply of and demand for oil, as well as the uncertainty around the extent and timing of an economic recovery, has caused extreme market volatility and a substantial adverse effect on commodity prices. The commodity price environment is expected to remain depressed based on over-supply, decreasing demand, and a potential global economic recession, as
is evidenced by lower prices in the forward curve for oil for several years. Sustained periods of lower commodity prices, or further decreases, may reduce Magnolia’s cash flow and borrowing ability and may result in write-downs of the carrying value of its properties. If Magnolia is unable to obtain needed capital or financing on satisfactory terms, its ability to develop future reserves could be adversely affected. Also, using lower prices in estimating proved reserves may result in a reduction in proved reserves volumes due to economic limits. In addition, sustained periods with lower oil and natural gas prices may adversely affect drilling economics and Magnolia’s ability to raise capital, which may require it to re-evaluate and postpone or eliminate its development program, and result in the reduction of some proved undeveloped reserves and related standardized measure. If Magnolia curtails its drilling program, the Company may be unable to hold leases that are scheduled to expire, which may further reduce reserves. In the second quarter of 2020, the Company temporarily shut in some low producing wells due to depressed commodity prices. Additionally, some of the Company’s non-operated wells were shut in. Many of the wells have returned to production and there was not a significant impact on net production, however, should sustained periods of lower oil and natural gas prices persist, the Company may further shut in wells or curtail production.
As a result, a substantial or extended decline in commodity prices may materially and adversely affect Magnolia’s future business, financial condition, results of operations, liquidity, and ability to finance planned capital expenditures. Furthermore, to the extent the COVID-19 pandemic adversely affects the Company’s business and financial results, it may also have the effect of heightening many of the other risks set forth in Part I, Item 1A - Risk Factors in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019.
The marketability of Company production is dependent upon market demand, vehicles, transportation and storage facilities, and other facilities, most of which the Company does not control. If these vehicles or facilities are unavailable, or if the Company is unable to access such vehicles or facilities on commercially reasonable terms, operations could be interrupted, production could be curtailed or shut in, and revenues could be reduced.
The marketing of oil, natural gas, and NGL production depends in large part on the availability, proximity, and capacity of trucks, pipelines, and storage facilities, gas gathering systems, and other transportation, processing, and refining facilities, as well as the existence of adequate markets. Because of the significantly reduced demand for oil and natural gas as a result of the COVID-19 pandemic and the current oversupply of oil and natural gas in the market, available storage and transportation capacity for the Company’s production may be limited or unavailable in the future. If there is insufficient capacity, if the capacity is unavailable to the Company, or if the capacity is unavailable on commercially reasonable terms, the prices Magnolia receives for its production could be significantly depressed.
As a result of continued or further storage and/or market shortages, the Company could be forced to temporarily shut in some or all of its production or delay or discontinue drilling plans and commercial production following a discovery of hydrocarbons while the Company constructs or purchases its own facilities or system. If the Company is forced to shut in production, it may incur greater costs to bring the associated production back online. Potential cost increases associated with bringing wells back online may be significant enough that such wells may become non-economic at low commodity price levels, which may lead to decreases in proved reserve estimates and potential impairments and associated charges to earnings. If the Company is able to bring wells back online, there is no assurance that such wells will be as productive following recommencement as they were prior to being shut in. In the second quarter of 2020, the Company temporarily shut in some low producing wells due to depressed commodity prices. Additionally, some of the Company’s non-operated wells were shut in. Many of the wells have returned to production and there was not a significant impact on net production, however, should sustained periods of lower oil and natural gas prices persist, the Company may further shut in wells or curtail production.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.Proceeds
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)Period | In August 2019, the Company’s BoardNumber of Directors authorized a share repurchase programShares of up to 10 million shares.Class A Common Stock Purchased |
| Average Price Paid per Share | | Total Number of Shares of Class A Common Stock Purchased as Part of Publicly Announced Program (1) | | Maximum Number of Shares of Class A Common Stock that May Yet be Purchased Under the Program |
(2)April 1, 2020 - April 30, 2020 | On September— | | | $ | — | | | — | | | 8,000,000 | |
May 1, 2020 - May 31, 2020 | — | | | — | | | — | | | 8,000,000 | |
June 1, 2020 - June 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.2020 | — | | | — | | | — | | | 8,000,000 | |
Total | — | | | $ | — | | | — | | | 8,000,000 | |
(1)In August 2019, the Company’s board of directors authorized a share repurchase program of up to 10 million shares of Class A Common Stock. The program does not require purchases to be made within a particular time frame.
Item 3. Defaults Upon Senior Securities.Securities
None.
Item 4. Mine Safety Disclosures.Disclosures
Not applicable.
Item 5. Other Information.Information
None.
Item 6. Exhibits.Exhibits
The following exhibits are filed as part of, or incorporated by reference into, this Quarterly Report on Form 10-Q.
| | | | | | | | |
Exhibit Number | | Description |
| | |
Exhibit
Number 3.1* | | Description |
| | |
3.1 | | |
| | |
3.23.2* | | |
| | |
4.110.1* | |
|
| | |
31.1*10.2* | | |
| | |
31.1** | | |
| | |
31.2** | | |
| | |
32.1*** | | |
| | |
101.INS** | | XBRL Instance DocumentDocument. |
| | |
101.SCH** | | XBRL Taxonomy Extension Schema DocumentDocument. |
| | |
101.CAL** | | XBRL Taxonomy Extension Calculation Linkbase DocumentDocument. |
| | |
101.DEF** | | XBRL Taxonomy Extension Definition Linkbase DocumentDocument. |
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101.LAB** | | XBRL Taxonomy Extension Label Linkbase DocumentDocument. |
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101.PRE** | | XBRL Taxonomy Extension Presentation Linkbase DocumentDocument. |
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104** | | Cover Page Interactive Data File (embedded within the Inline XBRL document). |
* Incorporated herein by reference as indicated. ** Filed herewith.
*** Furnished herewith.
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 | |
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Date: August 6, 2020 | | MAGNOLIA OIL & GAS CORPORATION |
By: | | | |
Date: November 5, 2019 | | By: | /s/ Stephen Chazen |
| | | Stephen Chazen |
| | | Chief Executive Officer (Principal Executive Officer) |
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Date: November 5, 2019August 6, 2020 | | By: | /s/ Christopher Stavros |
| | | Christopher Stavros |
| | | Chief Financial Officer (Principal Financial Officer) |