UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 20192020
OR
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File Number: 001-38083
Magnolia Oil & Gas Corporation

Corporation
(Exact Name of Registrant as Specified in its Charter)
Delaware81-5365682
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
Nine Greenway Plaza, Suite 1300
77046
Houston,Texas
(Address of principal executive offices)(Zip Code)
Registrant’s telephone number, including area code: (713) (713) 842-9050
Securities registered pursuant to section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Class A Common Stock, par value $0.0001MGYNew York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer☒Accelerated filer☐
Large accelerated filer☒Accelerated filer☐
Non-accelerated filer☐Smaller reporting company☐
Emerging growth company☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒
As of November 4, 2019,2, 2020, there were 167,280,858165,500,753 shares of Class A Common Stock, $0.0001 par value per share, and 91,789,81485,789,814 shares of Class B Common Stock, $0.0001 par value per share, outstanding.



GLOSSARY OF CERTAIN OTHER TERMS

The following are definitions of certain other terms that are used in this Quarterly Report on Form 10-Q:

The Company or Magnolia. Magnolia Oil & Gas Corporation (either individually or together with its consolidated subsidiaries, as the context requires, including Magnolia Intermediate, Magnolia LLC, Magnolia Operating, and Magnolia Oil & Gas Finance Corp).

Magnolia Intermediate. Magnolia Oil & Gas Intermediate LLC.

Magnolia LLC. Magnolia Oil & Gas Parent LLC.

Magnolia LLC Units.Units representing limited liability company interests in Magnolia LLC.

Magnolia Operating. Magnolia Oil & Gas Operating LLC.

EnerVest. EnerVest Ltd.

Business Combination. The acquisition, which closed on July 31, 2018, of certain right, title, and interest in certain oil and natural gas assets located primarily in the Karnes County portion of the Eagle Ford Shale in South Texas; certain right, title, and interest in certain oil and natural gas assets located primarily in the Giddings area of the Austin Chalk; and a 35% membership interest in Ironwood Eagle Ford Midstream, LLC.

Class A Common Stock. Magnolia’s Class A Common Stock, par value $0.0001 per share.

Class B Common Stock. Magnolia’s Class B Common Stock, par value $0.0001 per share.

Giddings Assets. Certain right, title, and interest in certain oil and natural gas assets located primarily in the Giddings area of the Austin Chalk formation.

Issuers. Magnolia Operating and Magnolia Oil & Gas Finance Corp., a wholly owned subsidiary of Magnolia Operating.

Karnes County Assets.Certain right, title, and interest in certain oil and natural gas assets located primarily in the Karnes County portion of the Eagle Ford Shale in South Texas.

Karnes County Contributors. EnerVest Energy Institutional Fund XIV-A, L.P., a Delaware limited partnership, EnerVest Energy Institutional Fund XIV-WIC, L.P., a Delaware limited partnership, EnerVest Energy Institutional Fund XIV-2A, L.P., a Delaware limited partnership, EnerVest Energy Institutional Fund XIV-3A, L.P., a Delaware limited partnership, and EnerVest Energy Institutional Fund XIV-C, L.P., a Delaware limited partnership.

RBL Facility. Senior secured reserve-based revolving credit facility.

2026 Senior Notes. 6.0% Senior Notes due 2026.

Services Agreement. That certain Services Agreement, dated as of July 31, 2018, by and between the Company, Magnolia Operating, and EnerVest Operating LLC (“EVOC”), pursuant to which EVOC provides certain services to the Company as described in the agreement.

Stockholder Agreement. The Stockholder Agreement, dated as of July 31, 2018, by and between the Company and the Karnes County Contributors.


Table of Contents

Page
Page
PART I.
FINANCIAL INFORMATION
Item 1.
Financial Statements
Consolidated Balance Sheets (unaudited)
1
Consolidated and Combined Statements of Operations (unaudited)
2
Combined Statement of Changes in Parents' Net Investment (unaudited)
3
Consolidated Statements of Changes in Stockholders’ Equity (unaudited)
43
Consolidated and Combined Statements of Cash Flows (unaudited)
65
Notes to Consolidated Financial Statements (unaudited)
76
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
2417
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
3526
Item 4.
Controls and Procedures
3626
PART II.
OTHER INFORMATION
Item 1.Legal Proceedings
3627
Item 1.1A.Risk Factors
Legal Proceedings27
36
Item 1A.
Risk Factors
36
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
3728
Item 3.
Defaults Upon Senior Securities
3728
Item 4.
Mine Safety Disclosures
3728
Item 5.
Other Information
3728
Item 6.Exhibits
Exhibits29
38
Signatures
3830






PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Magnolia Oil & Gas Corporation
Consolidated Balance Sheets
(In thousands)
September 30, 2020December 31, 2019
ASSETS(Unaudited)(Audited)
CURRENT ASSETS
Cash and cash equivalents$148,533 $182,633 
Accounts receivable61,243 105,775 
Drilling advances473 299 
Other current assets4,613 4,511 
Total current assets214,862 293,218 
PROPERTY, PLANT AND EQUIPMENT
Oil and natural gas properties2,105,774 3,815,221 
Other4,063 3,087 
Accumulated depreciation, depletion and amortization(939,888)(701,551)
Total property, plant and equipment, net1,169,949 3,116,757 
OTHER ASSETS
Deferred financing costs, net6,632 8,390 
Equity method investment21,789 19,730 
Intangible assets, net12,973 23,851 
Other long-term assets8,074 4,460 
TOTAL ASSETS$1,434,279 $3,466,406 
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable$63,475 $79,428 
Other current liabilities (Note 8)
60,987 95,780 
Total current liabilities124,462 175,208 
LONG-TERM LIABILITIES
Long-term debt, net390,787 389,835 
Asset retirement obligations, net of current100,800 93,524 
Deferred taxes, net0 77,834 
Other long-term liabilities6,049 1,476 
Total long-term liabilities497,636 562,669 
COMMITMENTS AND CONTINGENCIES (Note 10)
STOCKHOLDERS’ EQUITY
Class A Common Stock, $0.0001 par value, 1,300,000 shares authorized, 168,676 shares issued and 165,576 shares outstanding in 2020 and 168,318 shares issued and 167,318 shares outstanding in 201917 17 
Class B Common Stock, $0.0001 par value, 225,000 shares authorized, 85,790 shares issued and outstanding in 2020 and 20199 9 
Additional paid-in capital1,709,043 1,703,362 
Treasury Stock, at cost, 3,100 shares and 1,000 shares in 2020 and 2019, respectively(23,240)(10,277)
Retained earnings (Accumulated deficit)(1,153,195)82,940 
Noncontrolling interest279,547 952,478 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY$1,434,279 $3,466,406 
  Successor
  September 30, 2019 December 31, 2018
ASSETS (Unaudited) (Audited)
CURRENT ASSETS    
      Cash and cash equivalents $164,489
 $135,758
Accounts receivable 120,664
 140,284
Drilling advances 2,055
 12,259
Other current assets 5,047
 4,058
Total current assets 292,255
 292,359
PROPERTY, PLANT AND EQUIPMENT    
Oil and natural gas properties 3,741,357
 3,250,742
Other 2,710
 360
Accumulated depreciation, depletion and amortization (563,901) (177,898)
Total property, plant and equipment, net 3,180,166
 3,073,204
OTHER ASSETS    
      Deferred financing costs, net 8,980
 10,731
      Equity method investment 19,482
 18,873
      Intangible assets, net 27,477
 38,356
      Other long-term assets 4,773
 —
TOTAL ASSETS $3,533,133
 $3,433,523
LIABILITIES AND STOCKHOLDERS’ EQUITY    
CURRENT LIABILITIES    
      Accounts payable and accrued liabilities $186,627
 $196,357
Other current liabilities 3,684
 1,004
Total current liabilities 190,311
 197,361
LONG-TERM LIABILITIES    
Long-term debt, net 389,528
 388,635
Asset retirement obligations, net of current 93,102
 84,979
Deferred taxes, net 74,200
 54,593
Other long-term liabilities 2,039
 —
Total long-term liabilities 558,869
 528,207
COMMITMENTS AND CONTINGENCIES (Note 16) 


 


STOCKHOLDERS’ EQUITY    
Class A Common Stock, $0.0001 par value, 1,300,000 shares authorized, 168,260 shares issued and 167,310 shares outstanding in 2019 and 156,333 shares issued and outstanding in 2018 17
 16
Class B Common Stock, $0.0001 par value, 225,000 shares authorized, 91,790 and 93,346 shares issued and outstanding in 2019 and 2018, respectively 9
 9
Additional paid-in capital 1,704,652
 1,641,237
Treasury Stock, at cost, 950 shares in 2019 (9,722) —
Retained earnings 74,823
 35,507
Noncontrolling interest 1,014,174
 1,031,186
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $3,533,133
 $3,433,523

The accompanying notes are an integral part to these consolidated financial statements.

1

Magnolia Oil & Gas Corporation
Consolidated and Combined Statements of Operations (Unaudited)
(In thousands, except per share data)
  Successor  Predecessor
  
Three Months Ended
September 30, 2019
 Nine Months Ended
September 30, 2019		 July 31, 2018 Through September 30, 2018  
July 1, 2018 Through
July 30, 2018
 
January 1, 2018
Through
July 30, 2018
REVENUES           
Oil revenues $207,840
 $584,009
 $143,202
  $68,487
 $399,124
Natural gas revenues 21,243
 71,208
 13,414
  3,646
 22,135
Natural gas liquids revenues 15,716
 51,215
 21,547
  4,754
 27,927
Total revenues 244,799
 706,432
 178,163
  76,887
 449,186
OPERATING EXPENSES           
Lease operating expenses 24,344
 70,755
 11,016
  3,681
 23,513
Gathering, transportation and processing 9,270
 26,016
 5,353
  2,240
 12,929
Taxes other than income 13,333
 40,825
 9,351
  2,087
 23,763
Exploration expense 3,924
 10,017
 11,221
  40
 492
Asset retirement obligation accretion 1,394
 4,095
 391
  21
 104
Depreciation, depletion and amortization 143,894
 385,942
 65,902
  23,157
 137,871
Amortization of intangible assets 3,626
 10,879
 2,418
  —
 —
General and administrative expenses 17,345
 52,648
 10,297
  1,701
 12,710
Transaction related costs —
 438
 22,366
  —
 —
Total operating costs and expenses 217,130
 601,615
 138,315
  32,927
 211,382
OPERATING INCOME 27,669
 104,817
 39,848
  43,960
 237,804
OTHER INCOME (EXPENSE)           
Income (loss) from equity method investee 92
 608
 309
  (345) 711
Interest expense, net (6,896) (21,611) (4,959)  —
 —
Gain (loss) on derivatives, net —
 —
 —
  3,865
 (18,127)
Other income (expense), net 21
 8
 (7,019)  24
 (50)
Total other income (expense) (6,783) (20,995) (11,669)  3,544
 (17,466)
INCOME BEFORE INCOME TAXES 20,886
 83,822
 28,179
  47,504
 220,338
Income tax expense 3,529
 12,449
 3,538
  766
 1,785
NET INCOME 17,357
 71,373
 24,641
  46,738
 218,553
LESS: Net income attributable to noncontrolling interest 6,810
 29,294
 18,465
  —
 —
NET INCOME ATTRIBUTABLE TO MAGNOLIA 10,547
 42,079
 6,176
  46,738
 218,553
LESS: Non-cash deemed dividend related to warrant exchange 2,763
 2,763
 —
  —
 —
NET INCOME ATTRIBUTABLE TO CLASS A COMMON STOCK $7,784
 $39,316
 $6,176
  $46,738
 $218,553
NET INCOME PER COMMON SHARE           
Basic $0.05
 $0.25
 $0.04
    

Diluted $0.05
 $0.24
 $0.04
     
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING           
Basic 166,872
 160,051
 151,992
    

Diluted 167,108
 161,488
 157,072
     

Three Months EndedNine Months Ended
September 30, 2020September 30, 2019September 30, 2020September 30, 2019
REVENUES
Oil revenues$95,677 $207,840 $311,153 $584,009 
Natural gas revenues14,895 21,243 44,238 71,208 
Natural gas liquids revenues10,495 15,716 29,880 51,215 
Total revenues121,067 244,799 385,271 706,432 
OPERATING EXPENSES
Lease operating expenses18,802 24,344 61,275 70,752 
Gathering, transportation, and processing5,771 9,270 20,579 26,016 
Taxes other than income7,331 13,333 22,874 40,825 
Exploration expense701 3,924 563,589 10,017 
Impairment of oil and natural gas properties0 0 1,381,258 0 
Asset retirement obligation accretion1,501 1,394 4,403 4,095 
Depreciation, depletion and amortization44,731 143,894 238,273 385,942 
Amortization of intangible assets3,626 3,626 10,879 10,879 
General and administrative expenses16,663 17,345 50,472 52,651 
Transaction related costs0 0 0 438 
Total operating costs and expenses99,126 217,130 2,353,602 601,615 
OPERATING INCOME (LOSS)21,941 27,669 (1,968,331)104,817 
OTHER INCOME (EXPENSE)
Income from equity method investee1,007 92 2,059 608 
Interest expense, net(7,333)(6,896)(21,345)(21,611)
Loss on derivatives, net(2,208)0 (2,208)0 
Other income (expense), net(51)21 (510)8 
Total other income (expense)(8,585)(6,783)(22,004)(20,995)
INCOME (LOSS) BEFORE INCOME TAXES13,356 20,886 (1,990,335)83,822 
Income tax expense (benefit)(339)3,529 (79,340)12,449 
NET INCOME (LOSS)13,695 17,357 (1,910,995)71,373 
LESS: Net income (loss) attributable to noncontrolling interest4,548 6,810 (674,860)29,294 
NET INCOME ATTRIBUTABLE TO MAGNOLIA9,147 10,547 (1,236,135)42,079 
LESS: Non-cash deemed dividend related to warrant exchange0 2,763 0 2,763 
NET INCOME (LOSS) ATTRIBUTABLE TO CLASS A COMMON STOCK$9,147 $7,784 $(1,236,135)$39,316 
NET INCOME (LOSS) PER SHARE OF CLASS A COMMON STOCK
Basic$0.05 $0.05 $(7.41)$0.25 
Diluted$0.05 $0.05 $(7.41)$0.24 
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
Basic166,467 166,872 166,728 160,051 
Diluted170,676 167,108 166,728 161,488 
The accompanying notes are an integral part of these consolidated financial statements.

2

Magnolia Oil & Gas Corporation
Combined StatementConsolidated Statements of Changes in Parents’ Net Investment Stockholders’ Equity (Unaudited)
(In thousands)

Class A
Common Stock		Class B
Common Stock		Additional Paid In CapitalTreasury StockRetained EarningsTotal Stockholders’ EquityNoncontrolling InterestTotal
Equity
SharesValueSharesValueSharesValue
Balance, December 31, 2018156,333 $16 93,346 $9 $1,641,237 0 $0 $35,507 $1,676,769 $1,031,186 $2,707,955 
Stock based compensation expense— — — — 2,432 — — — 2,432 — 2,432 
Changes in ownership interest adjustment— — — — (919)— — — (919)832 (87)
Final settlement adjustment related to Business Combination(496)— (1,556)— (6,095)— — — (6,095)(19,150)(25,245)
Contributions from noncontrolling interest owner— — — — — — — — — 8,809 8,809 
Net income— — — — — — — 13,026 13,026 9,687 22,713 
Balance, March 31, 2019155,837 $16 91,790 $9 $1,636,655 0 $0 $48,533 $1,685,213 $1,031,364 $2,716,577 
Stock based compensation expense— — — — 3,115 — — — 3,115 — 3,115 
Changes in ownership interest adjustment— — — — 108 — — — 108 634 742 
Common stock issued in connection with acquisition3,055 — — — 33,693 — — — 33,693 — 33,693 
Offering expenses incurred in connection with warrants exchange— — — — (1,055)— — — (1,055)— (1,055)
Distributions to noncontrolling interest owners— — — — — — — — — (227)(227)
Net income— — — — — — — 18,506 18,506 12,797 31,303 
Balance, June 30, 2019158,892 $16 91,790 $9 $1,672,516 0 $0 $67,039 $1,739,580 $1,044,568 $2,784,148 
Stock based compensation expense— — — — 2,829 — — — 2,829 — 2,829 
Changes in ownership interest adjustment— — — — 28,215 — — — 28,215 (36,715)(8,500)
Common stock issued in connection with warrants exchange9,179 1 — — 1,624 — — (2,763)(1,138)— (1,138)
Common stock issued related to stock based compensation, net189 — — — (532)— — — (532)— (532)
Common stock repurchased— — — — — 950 (9,722)— (9,722)— (9,722)
Distributions to noncontrolling interest owners— — — — — — — — — (489)(489)
Net income— — — — — — — 10,547 10,547 6,810 17,357 
Balance, September 30, 2019168,260 $17 91,790 $9 $1,704,652 950 $(9,722)$74,823 $1,769,779 $1,014,174 $2,783,953 

The accompanying notes are an integral part to these consolidated financial statements.
3

 Predecessor
BALANCE, DECEMBER 31, 2017$1,597,838
Parents’ contribution, net133,117
Net income85,366
Balance – March 31, 2018$1,816,321
Parents’ distributions, net(48,937)
Net income86,449
Balance – June 30, 2018$1,853,833
Parents’ distributions, net(21,539)
Net income46,738
Balance – July 30, 2018$1,879,032
Magnolia Oil & Gas Corporation
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)
(In thousands)

Class A
Common Stock		Class B
Common Stock		Additional Paid In CapitalTreasury
Stock		Retained Earnings/ Accumulated DeficitTotal Stockholders’ EquityNoncontrolling InterestTotal
Equity
SharesValueSharesValueSharesValue
Balance, December 31, 2019168,319 $17 85,790 $9 $1,703,362 1,000 $(10,277)$82,940 $1,776,051 $952,478 $2,728,529 
Stock based compensation expense— — — — 2,879 — — — 2,879 — 2,879 
Changes in ownership interest adjustment— — — — (1,793)— — — (1,793)1,793 0 
Common stock issued related to stock based compensation, net154 — — — (452)— — — (452)— (452)
Class A Common Stock repurchases— — — — — 1,000 (6,483)— (6,483)— (6,483)
Distributions to noncontrolling interest owners— — — — — — — — — (284)(284)
Net loss— — — — — — — (1,227,010)(1,227,010)(668,289)(1,895,299)
Balance, March 31, 2020168,473 $17 85,790 $9 $1,703,996 2,000 $(16,760)$(1,144,070)$543,192 $285,698 $828,890 
Stock based compensation expense— — — — 3,065 — — — 3,065 — 3,065 
Changes in ownership interest adjustment— — — — (907)— — — (907)907 0 
Common stock issued related to stock based compensation and other, net114 — — — (33)— — — (33)— (33)
Distributions to noncontrolling interest owners— — — — — — — — — (207)(207)
Net loss— — — — — — — (18,272)(18,272)(11,119)(29,391)
Balance, June 30, 2020168,587 $17 85,790 $9 $1,706,121 2,000 $(16,760)$(1,162,342)$527,045 $275,279 $802,324 
Stock based compensation expense— — — — 2,927 — — — 2,927 — 2,927 
Changes in ownership interest adjustment— — — — 175 — — — 175 (175)0 
Common stock issued related to stock based compensation and other, net89 — — — (180)— — — (180)— (180)
Class A Common Stock repurchases— — — — — 1,100 (6,480)— (6,480)— (6,480)
Distributions to noncontrolling interest owners— — — — — — — — — (105)(105)
Net income— — — — — — — 9,147 9,147 4,548 13,695 
Balance, September 30, 2020168,676 $17 85,790 $9 $1,709,043 3,100 $(23,240)$(1,153,195)$532,634 $279,547 $812,181 

The accompanying notes are an integral part to these consolidated financial statements.

4

Magnolia Oil & Gas Corporation
Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
Nine Months Ended
September 30, 2020September 30, 2019
CASH FLOWS FROM OPERATING ACTIVITIES
NET INCOME (LOSS)$(1,910,995)$71,373 
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation, depletion and amortization238,273 385,942 
Amortization of intangible assets10,879 10,879 
Exploration expense, non-cash561,629 536 
Impairment of oil and natural gas properties1,381,258 0 
Asset retirement obligation accretion4,403 4,095 
Amortization of deferred financing costs2,710 2,644 
Loss on derivatives, net2,208 0 
Deferred tax expense (benefit)(77,834)11,765 
Stock based compensation8,871 8,376 
Other(2,059)(512)
Changes in operating assets and liabilities:
Accounts receivable44,532 (6,937)
Accounts payable(15,953)16,034 
Accrued liabilities(15,468)(22,379)
Drilling advances(174)10,205 
Other assets and liabilities, net(1,281)(3,410)
Net cash provided by operating activities230,999 488,611 
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of EnerVest properties0 4,250 
Acquisitions, other(73,702)(93,221)
Additions to oil and natural gas properties(157,325)(351,467)
Changes in working capital associated with additions to oil and natural gas properties(18,972)(13,392)
Other investing(842)(247)
Net cash used in investing activities(250,841)(454,077)
CASH FLOW FROM FINANCING ACTIVITIES
Contributions from noncontrolling interest owners0 7,301 
Distributions to noncontrolling interest owners(594)(716)
Class A Common Stock repurchases(12,962)(9,722)
Other financing activities(702)(2,666)
Net cash used in financing activities(14,258)(5,803)
NET CHANGE IN CASH AND CASH EQUIVALENTS(34,100)28,731 
Cash and cash equivalents – Beginning of period182,633 135,758 
Cash and cash equivalents – End of period$148,533 $164,489 
SUPPLEMENTAL CASH FLOW INFORMATION:
Supplemental non-cash operating activity:
Cash paid (received) for income taxes$(724)$390 
Cash paid for interest25,445 25,687 
Supplemental non-cash investing and financing activity:
Accruals or liabilities for capital expenditures$21,750 $37,241 
Equity issuances in connection with acquisitions0 33,693 
Non-cash deemed dividend related to warrant exchange0 2,763 
Supplemental non-cash lease operating activity:
Right-of-use assets obtained in exchange for operating lease obligations$5,500 $6,720 
The accompanying notes are an integral part of these consolidated financial statements.











5

Magnolia Oil & Gas Corporation
Consolidated Statements of Changes in Stockholders’ Equity (Successor) (Unaudited)
(In thousands)
 Class A Common StockClass B Common StockClass F Common StockAdditional Paid In CapitalRetained EarningsTotal Stockholders’ EquityNoncontrolling InterestTotal Equity
 SharesValueSharesValueSharesValue     
Balance, July 30, 20183,052
$—
—
$—
16,250
$2
$8,370
$(3,588)$4,784
$—
$4,784
Class A Common Stock released from possible redemption61,948
6
—
—
—
—
619,473
—
619,479
—
619,479
Class A Common Stock redeemed(1)—
—
—
—
—
(9)—
(9)—
(9)
Conversion of Common Stock from Class F to Class A at closing of Business Combination16,250
2
—
—
(16,250)(2)—
—
—
—
—
Common stock issued as part of the Business Combination31,791
3
83,939
9
—
—
391,017
—
391,029
1,032,455
1,423,484
Common stock issued in private placement35,500
4
—
—
—
—
354,996
—
355,000
—
355,000
Earnout consideration issued as part for the Business Combination—
—
—
—
—
—
41,371
—
41,371
108,329
149,700
Non-compete consideration—
—
—
—
—
—
44,400
—
44,400
—
44,400
Changes in ownership interest adjustment—
—
—
—
—
—
206,966
—
206,966
(206,966)—
Changes in deferred tax liability—
—
—
—
—
—
(52,787)—
(52,787)—
(52,787)
Balance, July 31, 2018148,540
$15
83,939
$9
—
$—
$1,613,797
$(3,588)$1,610,233
$933,818
$2,544,051
Issuance of earnout share consideration Tranche I1,244
—
3,256
—
—
—
—
—
—
—
—
Issuance of earnout share consideration Tranche II1,244
—
3,256
—
—
—
—
—
—
—
—
Common stock issued in connection with Harvest Acquisition4,200
1
—
—
—
—
58,211
—
58,212
—
58,212
Net income—
—
—
—
—
—
—
6,176
6,176
18,465
24,641
Changes in ownership interest adjustment—
—
—
—
—
—
(39,366)—
(39,366)39,366
—
Changes in deferred tax liability—
—
—
—
—
—
15,263
—
15,263
—
15,263
Balance, September 30, 2018155,228
$16
90,451
$9
—
$—
$1,647,905
$2,588
$1,650,518
$991,649
$2,642,167

The accompanying notes are an integral part to these consolidated financial statements.



Magnolia Oil & Gas Corporation
Consolidated Statements of Changes in Stockholders’ Equity (Successor) (Unaudited)
(In thousands)
 Class A Common StockClass B Common StockAdditional Paid In CapitalTreasury StockRetained EarningsTotal Stockholders’ EquityNoncontrolling InterestTotal Equity
 SharesValueSharesValue SharesValue    
Balance, December 31, 2018156,333
$16
93,346
$9
$1,641,237
—
$—
$35,507
$1,676,769
$1,031,186
$2,707,955
Stock based compensation expense—
—
—
—
2,432
—
—
—
2,432
—
2,432
Changes in ownership interest adjustment—
—
—
—
(919)—
—
—
(919)832
(87)
Final settlement adjustment related to Business Combination(496)—
(1,556)—
(6,095)—
—
—
(6,095)(19,150)(25,245)
Contributions from noncontrolling interest owners—
—
—
—
—
—
—
—
—
8,809
8,809
Net income—
—
—
—
—
—
—
13,026
13,026
9,687
22,713
Balance, March 31, 2019155,837
$16
91,790
$9
$1,636,655
—
$—
$48,533
$1,685,213
$1,031,364
$2,716,577
Stock based compensation expense—
—
—
—
3,115
—
—
—
3,115
—
3,115
Changes in ownership interest adjustment—
—
—
—
108
—
—
—
108
634
742
Common stock issued in connection with acquisition3,055
—
—
—
33,693
—
—
—
33,693
—
33,693
Offering expenses incurred in connection with warrants exchange—
—
—
—
(1,055)—
—
—
(1,055)—
(1,055)
Distributions to noncontrolling interest owners—
—
—
—
—
—
—
—
—
(227)(227)
Net income—
—
—
—
—
—
—
18,506
18,506
12,797
31,303
Balance, June 30, 2019158,892
$16
91,790
$9
$1,672,516
—
$—
$67,039
$1,739,580
$1,044,568
$2,784,148
Stock based compensation expense—
—
—
—
2,829
—
—
—
2,829
—
2,829
Changes in ownership interest adjustment—
—
—
—
28,215
—
—
—
28,215
(36,715)(8,500)
Common stock issued in connection with warrants exchange9,179
1
—
—
1,624
—
—
(2,763)(1,138)—
(1,138)
Common stock issued related to stock based compensation, net189
—
—
—
(532)—
—
—
(532)—
(532)
Common stock repurchased—
—
—
—
—
950
(9,722)—
(9,722)—
(9,722)
Distributions to noncontrolling interest owners—
—
—
—
—
—
—
—
—
(489)(489)
Net income—
—
—
—
—
—
—
10,547
10,547
6,810
17,357
Balance, September 30, 2019168,260
$17
91,790
$9
$1,704,652
950
$(9,722)$74,823
$1,769,779
$1,014,174
$2,783,953

The accompanying notes are an integral part to these consolidated financial statements.



Magnolia Oil & Gas Corporation
Consolidated and Combined Statements of Cash Flows (Unaudited)(In thousands)
 Successor  Predecessor
 
Nine Months Ended
September 30, 2019
 
July 31, 2018 Through
September 30, 2018
  January 1, 2018 Through
July 30, 2018
CASH FLOWS FROM OPERATING ACTIVITIES      
Net income$71,373
 $24,641
  $218,553
Adjustments to reconcile net income to net cash provided by operating activities:      
Depreciation, depletion and amortization385,942
 65,902
  137,871
Amortization of intangible assets10,879
 2,418
  —
Exploration expense, non-cash536
 —
  —
Asset retirement obligations accretion expense4,095
 391
  104
Amortization of deferred financing costs2,644
 570
  —
Loss on derivatives, net—
 —
  18,127
Cash settlements of matured derivative contracts—
 —
  (27,617)
Deferred taxes11,765
 3,493
  324
Contingent consideration change in fair value

—
 6,700
  —
Stock based compensation8,376
 —
  —
Other(526) (218)  (796)
Changes in operating assets and liabilities:      
Accounts receivable(6,937) (77,500)  (61,405)
Prepaid expenses and other assets996
 (275)  —
Accounts payable and accrued liabilities(6,345) 64,511
  36
Drilling advances10,205
 (3,376)  —
Other assets and liabilities, net(4,392) 45
  (385)
Net cash provided by operating activities488,611
 87,302
  284,812
       
CASH FLOWS FROM INVESTING ACTIVITIES      
Proceeds withdrawn from Trust Account—
 656,078
  —
Acquisition of EnerVest properties4,250
 (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)  —
Other investing(247) —
  —
Net cash used in investing activities(454,077) (758,515)  (347,453)
       
CASH FLOW FROM FINANCING ACTIVITIES      
Parents’ contribution, net—
 —
  62,641
Contributions from noncontrolling interest owners7,301
 —
  —
Distributions to noncontrolling interest owners(716) —
  —
Issuance of common stock—
 355,000
  —
Proceeds from issuance of long term debt—
 400,000
  —
Repayments of deferred underwriting compensation—
 (22,750)  —
Cash paid for debt issuance costs—
 (23,336)  —
Common stock repurchased(9,722) —
  —
Other financing activities(2,666) (1,009)  —
Net cash provided by (used in) financing activities(5,803) 707,905
  62,641
       
NET CHANGE IN CASH AND CASH EQUIVALENTS28,731
 36,692
  —
Cash and cash equivalents – Beginning of period135,758
 23
  —
Cash and cash equivalents – End of period$164,489
 $36,715
  $—

The accompanying notes are an integral part of these consolidated financial statements.


Magnolia Oil & Gas Corporation
Notes to Consolidated Financial Statements
(Unaudited)

1. Description of Business and Basis of Presentation

Organization and General

Nature of Operations

Magnolia Oil & Gas Corporation (formerly TPG Pace Energy Holdings Corp.) (the “Company” or “Magnolia”) was incorporated in Delaware onFebruary 14, 2017.

On March 15, 2018, the Company formed 3 wholly owned subsidiaries: Magnolia Oil & Gas Parent LLC (“Magnolia LLC”), Magnolia Oil & Gas Intermediate LLC (“Magnolia Intermediate”), and Magnolia Oil & Gas Operating LLC (“Magnolia Operating”), all of which are Delaware limited liability companies formed in contemplation of the Business Combination (as defined herein).

Business Combination

On July 31, 2018 (the “Closing Date”), the Company and Magnolia LLC consummated the acquisition of the following:

certain right, title, and interest in certain oil and natural gas assets located primarily in the Karnes County portion of the Eagle Ford Shale in South Texas (the “Karnes County Assets” and, such business the “Karnes County Business”) pursuant to that certain Contribution and Merger Agreement (as subsequently amended, the “Karnes County Contribution Agreement”), by and among the Company, Magnolia LLC and certain affiliates (the “Karnes County Contributors”) of EnerVest Ltd. (“EnerVest”);

certain right, title, and interest in certain oil and natural gas assets located primarily in the Giddings Field of the Austin Chalk (the “Giddings Assets”) 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
a 35% membership interest (the “Ironwood Interests”) in Ironwood Eagle Ford Midstream LLC (“Ironwood”), a Texas limited liability company, which owns an Eagle Ford gathering system, pursuant to that certain Membership Interest Purchase Agreement (together with the transactions contemplated by the Karnes County Contribution Agreement and the Giddings Purchase Agreement, the “Business Combination Agreements,” and the transactions contemplated thereby, the “Business Combination”), by and among Magnolia LLC and certain affiliates of EnerVest (the “Ironwood Sellers”).

The Company consummated the Business Combination for an aggregate consideration of approximately $1.2 billion in cash, 31.8 million shares of the Company’s Class A Common Stock, par value $0.0001 per share (the “Class A Common Stock”), and 83.9 million shares of the Company’s Class B Common Stock, par value $0.0001 per share (the “Class B Common Stock”), and a corresponding number of units in Magnolia LLC (the “Magnolia LLC Units”), as well as certain earnout rights payable in a combination of cash and additional equity securities in the Company. In connection with the Business Combination, Magnolia issued and sold 35.5 million shares of Class A Common Stock in a private placement to certain qualified institutional buyers and accredited investors for gross proceeds of $355.0 million (the “PIPE Investment”). In addition, Magnolia Operating and Magnolia Oil & Gas Finance Corp., a wholly owned subsidiary of Magnolia Operating (“Finance Corp.” and, together with Magnolia Operating, the “Issuers”), issued and sold $400.0 million aggregate principal amount of 6.0% Senior Notes due 2026 (the “2026 Senior Notes”). The proceeds of the PIPE Investment and the offering of 2026 Senior Notes were used to fund a portion of the cash consideration required to effect the Business Combination.

Business Operations and Strategy

Magnolia is an independent oil and natural gas company engaged in the acquisition, development, exploration, and production of oil, natural gas, and NGLnatural gas liquid (“NGL”) reserves. The Company’s oil and natural gas properties are located primarily in Karnes County and the Giddings Fieldarea in South Texas where the Company targets the Eagle Ford Shale and 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.



Basis of Presentation

InThe accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles generally accepted in the United States of America (“GAAP”), the Company was the acquirer in the Business Combination and the Karnes County Business, the Giddings Assets, and the Ironwood Interests were the acquirees. The Karnes County Business including, as applicable, its ownership of the Ironwood Interests, was deemed the “Predecessor” for periods prior to the Business Combination, and does not include the consolidation of the Company and the Giddings Assets. Although the Karnes County Contributors are not under common control, each were managed by the same managing general partner, EnerVest, and as such, these Predecessor financial statements have been presented on a combined basis for financial reporting purposes.

For the periods on or after the Business Combination, the Company, including the combination of the Karnes County Business, the Giddings Assets, and the Ironwood Interests, is the “Successor.” The financial statements and certain footnote presentations separate the Company’s presentations into two distinct periods, the period before the consummation of the Business Combination, which includes the period from January 1, 2018 to July 30, 2018 (the “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 Business Combination was accounted for using the acquisition method of accounting and the Successor financial statements reflect a new basis of accounting that is based on the fair value of assets acquired and liabilities assumed. As a result of the inclusion of the Giddings Assets, the new basis of accounting, and certain other items that affect comparability, the Company’s financial information prior to the Business Combination is not comparable to its financial information subsequent to the Business Combination.

The assets, liabilities, revenues, expenses, and cash flows related to the Karnes County Business were not previously separately accounted for as a standalone legal entity and have been carved out of the overall assets, liabilities, revenues, expenses and cash flows from the Karnes County Contributors as appropriate. In addition, Parents’ Net Investment represents the Karnes County Contributors’ interest in the recorded net assets of the Karnes County Business and represents the cumulative net investment of the Karnes County Contributors’ in the Karnes County Business through the dates presented, inclusive of cumulative operating results.

The Karnes County Contributors utilized EnerVest’s centralized processes and systems for its treasury services and the Karnes County Business’ cash activity was commingled with other oil and gas assets that were not part of the Business Combination. As such, the net results of the cash transactions between the Karnes County Business and the Karnes County Contributors are reflected as Parents’ contributions and distributions in the accompanying Combined Statement of Changes in Parents’ Net Investment.

The Predecessor financial statements also include a portion of indirect costs for salaries and benefits, rent, accounting, legal services, and other expenses. In addition to the allocation of indirect costs, the financial statements reflect certain agreements executed by the Karnes County Contributors for the benefit of the Karnes County Business, including price risk management instruments. The allocations methodologies for significant allocated items include:

Corporate G&A - EnerVest, as managing general partner of the Karnes County Contributors, provided management, accounting, and advisory services to the Karnes County Contributors in exchange for a quarterly management fee based on the Karnes County Contributors’ investor commitments, which were used, in part, to acquire the Karnes County Business as well as other oil and natural properties that were not part of the Business Combination. As such, the management fee was allocated to the Karnes County Business using a ratio of asset acquisitions value to total asset acquisitions completed by the Karnes County Contributors, for the Predecessor Period.

Derivatives - Certain Karnes County Contributors entered into financial instruments to manage the Karnes County Business’ exposure to changes in commodity prices for the Karnes County Business as well as other oil and natural gas properties that were not part of the Business Combination, on a combined basis. The commodity derivative activity was allocated to the Karnes County Business using a ratio of expected crude oil and condensate, natural gas liquids (“NGLs”), and natural gas volumes produced, on an equivalents basis, by the Karnes County Business to the Karnes County Contributors’ total expected crude oil and condensate, NGLs, and natural gas produced, on an equivalents basis, for the Predecessor Period.

Indebtedness - The Karnes County Business did not historically have outstanding indebtedness, but its oil and natural gas properties were collateral to various credit facilities held by the Karnes County Contributors and/or EnerVest. Amounts outstanding on these credit facilities have not been allocated to the Karnes County Business as they were not directly attributable to the Karnes County Business.

Management believes the allocation methodologies used are reasonable and result in an allocation of the indirect costs and other items to operate the Karnes County Business as if it were a stand-alone entity. These allocations, however, may not be indicative of the cost of future operations or the amount of future allocations. Direct costs were included at the historical amounts related to each reported period.



The accompanying unaudited interim consolidated and combined financial statements have been prepared in accordance with GAAP and in accordance with the rules and regulations of the SEC.Securities and Exchange Commission (“SEC”) for interim financial reporting. Accordingly, certain information and disclosures normally included in annual financial statements prepared in accordance with GAAPan Annual Report on Form 10-K have been omitted. Certain amounts have been reclassified to conform to the current period presentation resulting from the adoption of ASU No. 2014-09, Revenue from Contracts with Customers. See Note 3 - Revenue Recognition for additional information. In the opinion of management, all adjustments, consisting of only normal recurring adjustments, considered necessary for a fair presentation have been included. Interim results are not necessarily indicative of results for the full year or any future periods. The unaudited interim consolidated financial statements including the Predecessor financial statements,and related notes included in this Quarterly Report should be read in conjunction with the informationCompany’s consolidated and combined financial statements and related notes included in or incorporated by reference from the Company’s Annual Report on Form 10-K for the fiscal yearperiod ended December 31, 2018.2019 (the “2019 Form 10-K”). Except as disclosed herein, there have been no material changes to the information disclosed in the notes to the consolidated and combined financial statements included in the Company’s 2019 Form 10-K.


In the opinion of management, all normal, recurring adjustments and accruals considered necessary to present fairly, in all material respects, the Company’s interim financial results, have been included. Operating results for the periods presented are not necessarily indicative of expected results for the full year.

Certain reclassifications of prior period financial statements have been made to conform to current reporting practices. The consolidated financial statements include the accounts of the Company and its subsidiaries after elimination of intercompany transactions and balances. The Company’s interests in oil and natural gas exploration and production ventures and partnerships are proportionately consolidated. The Company reflects a noncontrolling interest representing primarily the interest owned by the Karnes County Contributors through their ownership of Magnolia LLC Units in the consolidated financial statements. The noncontrolling interest is presented as a component of equity. See Note 12—Stockholders’ Equity for further discussion of the noncontrolling interest.

2. Summary of Significant Accounting Policies
    
As of September 30, 2019,2020, the Company’s significant accounting policies are consistent with those discussed in Note 2 - —Summary of Significant Accounting Policies of its consolidated and combined financial statements contained in the Company’s 2019 Form 10-K, with the exception of Accounts Receivable and Allowance for Expected Credit Losses and as noted below.

Accounts Receivable and Allowance for Expected Credit Losses

In June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments-Credit Losses (Topic 326): “Measurement of Credit Losses on Financial Instruments.” For public business entities, the new standard became effective for annual reporting periods beginning after December 15, 2019, including interim periods within that reporting period. Magnolia adopted this standard on January 1, 2020. The standard changes the impairment model for most financial assets and certain other instruments, including trade and other receivables, and requires entities to use a new forward-looking expected loss model that will result in earlier recognition of allowance for losses. The Company’s receivables consist mainly of trade receivables from commodity sales and joint interest billings due from owners on properties the Company operates. The majority of these receivables have payment terms of 30 days or less. For receivables due from joint interest owners, the Company generally has the ability to withhold future revenue disbursements to recover non-payment of joint interest billings. From an evaluation of the Company’s existing credit portfolio, historical credit losses have been de minimis and are expected to remain so in the future assuming no substantial changes to the business or creditworthiness of Magnolia’s business partners. As expected, there was no material impact on the Company’s unaudited consolidated financial statements or disclosures upon adoption of this ASU.

6

Recent Accounting Pronouncements

On August 26, 2020, the SEC adopted amendments to its rules in Regulation S-K to streamline the disclosures, which registrants are required to make about business, legal proceedings and risk factors and to add new requirements for disclosures about human capital resources. The amendments take a principles-based approach that gives registrants flexibility to tailor disclosures to their circumstances. The final rules become effective November 9, 2020 and will be incorporated in the Company’s Annual Report on Form 10-K for the fiscal year endedperiod ending December 31, 2018, with the exception of Accounting Standards Update (“ASU”) 2016-02, “Leases (Topic 842)” and as noted below.2020.

Leases

In February 2016, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2016-02, Leases, which requires lessees to recognize a right-of-use asset and a lease liability on their balance sheet for all leases, including operating leases, with a term of greater than 12 months. In July 2018,December 2019, the FASB issued ASU 2018-11,No. 2019-12, Income Taxes (Topic 740): “Simplifying the Accounting for Income Taxes,” which adds a transition option permitting entities to applyreduces the provisionscomplexity of the new standard at its adoption date instead of the earliest comparative period presented in the consolidated financial statements. Under this transition option, comparative reporting would not be required, and the provisions of the standard would be applied prospectively to leases in effect at the date of adoption. The Company elected the package of transition practical expedients providedaccounting for income taxes by the new standard that allow the Company to not reassess under the new standard its prior conclusions about lease identification, classification related to contracts that commenced prior to adoption, and to apply the standard prospectively to all new or modified land easements and rights-of-way. The Company has also elected a policy to not recognize right of use assets and lease liabilities related to short-term leases. The Company has lease agreements with lease and non-lease components, which are generally accounted for as a single lease component.

Magnolia adopted this standard on January 1, 2019 and recognized right of use assets and lease liabilities forremoving certain commitments primarily related to real estate, vehicles, and field equipment, while prior reporting periods are presented in accordance with historical accounting treatment under ASC Topic 840, Leases (“ASC 840”). The Company determines if an arrangement is a lease at inception. Operating leases are included in other long-term assets, other current liabilities, and other long-term liabilities in Magnolia’s consolidated balance sheet as of September 30, 2019. Operating lease right-of-use (“ROU”) assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Magnolia’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expenses for lease payments are recognized on a straight-line basis over the lease term. For more information, refer to Note 10 - Leases.
Recent Accounting Pronouncements
In June 2016 the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The standards update requires the use of a forward-looking “expected loss” model as opposedexceptions to the current “incurred loss” model.general principles and also simplifying areas such as separate entity financial statements and interim recognition of enactment of tax laws or rate changes. This standard is effective for interim and annual periods beginning after December 15, 2020 and shall be applied on either a prospective basis, a retrospective basis for all periods presented, or a modified retrospective basis through a cumulative-effect adjustment to retained earnings depending on which aspects of the Company in the first quarter of 2020.new standard are applicable to an entity. The Company is currently evaluating the neweffect of this standard, andbut does not believeexpect the adoption willof this guidance to have a material impact on the Company’s consolidatedits financial statements.position, cash flows, or result of operations.

In August 2018,May 2020, the FASB issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU 2018-15”). The amendments inSEC adopted final rules that amend the update align thefinancial statement disclosure requirements for capitalizing implementation costs incurred insignificant business acquisitions and dispositions. Among other changes, the final rules modify the significance tests and improve the disclosure requirements for acquired or to be acquired businesses and related pro forma financial information, the periods those financial statements must cover, and the form and content of the pro forma financial information. The final rules do not modify requirements for the acquisition and disposition of significant amounts of assets that do not constitute a hosting arrangement thatbusiness. The final rules are effective January 1, 2021, but earlier compliance is a service contractpermitted. The Company plans to comply with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software and hosting arrangements that include an internal-use software license. The Company early adopted ASU 2018-15 effective April 1, 2019, with prospective application. The adoption did not have a material impact on the Company’s consolidated financial statements.final rules during 2020, if applicable.



3. Revenue Recognition

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. This ASU and the associated subsequent amendments (collectively, “ASC 606”), superseded virtually all of the revenue recognition guidance in GAAP by requiring companies to recognize revenue using a five-step model. The core principle of the five-step model is that an entity will recognize revenue when it transfers control of goods or services to customers at an amount that reflects the consideration to which it expects to be entitled in exchange for those goods or services. Magnolia adopted this standard on December 31, 2018 for all Successor Periods using a modified retrospective approach.
There were no significant changes to the timing of revenue recognized for sales of production as a result of ASC 606. However, the new guidance resulted in certain changes to the classification of processing and other fees between revenue and gathering, transportation, and processing expense. The change also resulted in an increase to the production volumes and depreciation, depletion and amortization. The amounts included in the accompanying unaudited interim consolidated financial statements for the 2018 Successor Period were reclassified in order to conform to the current period presentation resulting from the adoption of ASC 606 and are considered immaterial. The Predecessor Period has not been restated and continues to be reported under the accounting standards in effect for that period.
Oil, Natural Gas, and NGL Revenues
Magnolia’s revenues include the sale of crude oil, natural gas, and NGLs. Oil, natural gas, and NGL sales are recognized as revenue when production is sold to a customer in fulfillment of performance obligations under the terms of agreed contracts. Performance obligations are primarily comprisecomprised of delivery of oil, natural gas, or NGLs at a delivery point, as negotiated within each contract. Each barrel of oil, million Btu of natural gas, gallon of NGLs, or other unit of measure is separately identifiable and represents a distinct performance obligation to which the transaction price is allocated.

The Company’s oil production is primarily sold under market-sensitive contracts that are typically priced at a differential to the New York Mercantile Exchange (“NYMEX”) price or at purchaser posted prices for the producing area. For oil contracts, the Company generally records sales based on the net amount received.

For natural gas contracts, the Company generally records wet gas sales (which consists of natural gas and NGLs based on end products after processing) at the wellhead or inlet of the gas processing plant (i.e., the point of control transfer) as revenues net of gathering, transportation, and processing expenses if the processor is the customer and there is no redelivery of commodities to the Company at the tailgate of the plant. Conversely, the Company generally records residual natural gas and NGL sales at the tailgate of the plant (i.e., the point of control transfer) on a gross basis along with the associated gathering, transportation, and processing expenses if the processor is a service provider and there is redelivery of one or several commodities to the Company at the tailgate of the plant. The facts and circumstances of an arrangement are considered and judgment is often required in making this determination. For processing contracts that require noncash consideration in exchange for processing services, the Company recognizes revenue and an equal gathering, transportation, and processing expense for commodities transferred to the service provider.
Contract Balances
Customers are invoiced once the Company’s performance obligations have been satisfied. Payment terms and conditions vary by contract type, although terms generally include a requirement of payment within 30 days. There are no judgments that significantly affect the amount or timing of revenue from contracts with customers. Accordingly,Additionally, the Company’s product sales contracts do not give rise to material contract assets or contract liabilities.

The Company’s receivables consist mainly of trade receivables from oilcommodity sales and natural gas purchasers and from joint interest billings due from owners on properties the Company operates. Receivables from contracts with customers totaled $113.2$52.3 million as of September 30, 20192020 and $100.1$100.4 million as of December 31, 2018. Accounts receivable are stated at the historical carrying amount net of write-offs and allowance for doubtful accounts. The Company routinely assesses the collectability of all material trade and other receivables. The Company’s receivables consist mainly of receivables from oil and natural gas purchasers and from joint interest owners on properties the Company operates. The Company accrues a reserve on a receivable when, based on the judgment of management, it is probable that a receivable will not be collected and the amount of any reserve may be reasonably estimated. The Company had 0 allowance for doubtful accounts as of September 30, 2019 or December 31, 2018.2019.
Disaggregation of Revenue
The Company has concluded that disaggregating revenue by product type appropriately depicts how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors and has reflected this disaggregation of revenue on the Company’s consolidated and combined statements of operations for all periods presented.


Performance Obligations
Performance obligations are satisfied at a point in time once control of the product has been transferred to the customer. The Company considers a variety of facts and circumstances in assessing the point of control transfer, including but not limited to: whether
7

the purchaser can direct the use of the hydrocarbons, the transfer of significant risks and rewards, the Company’s right to payment, and transfer of legal title.

The Company does not disclose the value of unsatisfied performance obligations for contracts as all contracts have either an original expected length of one year or less, or the entire future consideration is variable and allocated entirely to a wholly unsatisfied performance obligation.


4. Acquisitions

Acquisitions (Successor)
EnerVest Business Combination

As discussed in Note 1 - Description of Business and Basis of Presentation, on July 31, 2018, the Company consummated the Business Combination contemplated by the Business Combination Agreements. The Business Combination Agreements and the Business Combination were approved by the Company’s stockholders on July 17, 2018. At the closing of the Business Combination, the Karnes County Contributors received 83.9 million shares of the Company’s Class B Common Stock and an equivalent number of Magnolia LLC Units, which, together, are exchangeable on a 1-for-one basis for shares of the Company’s Class A Common Stock, subject to certain conditions; 31.8 million shares of Class A Common Stock; and approximately $911.5 million in cash. The Giddings Sellers received approximately $282.7 million in cash. The Ironwood Sellers received $25.0 million in cash in exchange for the Ironwood Interests. On March 29, 2019, Magnolia and EnerVest consummated the final settlement pursuant to the Contribution and Merger Agreement and as otherwise agreed to by the parties, with Magnolia receiving a net cash payment of $4.3 million and the Karnes County Contributors forfeiting to Magnolia 0.5 million shares of Class A Common Stock and 1.6 million shares of Class B Common Stock (and forfeiting a corresponding number of Magnolia LLC Units to Magnolia LLC).

The Business Combination has been accounted for using the acquisition method. The acquisition method of accounting is based on ASC 805 “Business Combinations,” and uses the fair value concepts defined in ASC 820. ASC 805 requires, among other things, that the assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date by the Company.

Contingent Consideration

Pursuant to the Karnes County Contribution Agreement, for a period of five years following the Closing Date, the Karnes County Contributors were entitled to receive an aggregate of up to 13.0 million additional shares of Class A Common Stock or shares of Class B Common Stock (and a corresponding number of Magnolia LLC Units) based on certain EBITDA and free cash flow or stock price thresholds. As of December 31, 2018, the Company had met the defined stock price thresholds and, as a result, the Company 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 (and a corresponding number of Magnolia LLC Units) to the Karnes County Contributors.

Pursuant to the Giddings Purchase Agreement, until December 31, 2021, the Giddings Sellers were entitled to receive an aggregate of up to $47.0 million in cash earnout payments based on certain net revenue thresholds. On September 28, 2018, the Company paid the Giddings Sellers a cash payment of $26.0 million to fully settle the earnout obligation.



The purchase consideration for the Business Combination was as follows:
(In thousands)

Purchase Consideration:

Cash consideration
$1,214,966
Stock consideration (1)

1,398,238
Fair value of contingent earnout purchase consideration (2)

169,000
Total purchase price consideration
$2,782,204

(1)At closing of the Business Combination, the Karnes County Contributors received 83.9 million shares of Class B Common Stock (and a corresponding number of Magnolia LLC Units) and 31.8 million shares of Class A Common Stock. On March 29, 2019, Magnolia and EnerVest consummated the final settlement pursuant to the Contribution and Merger Agreement as agreed to by the parties, with the Karnes County Contributors forfeiting an aggregate of 2.1 million shares of Class A and Class B Common Stock to Magnolia (and a corresponding number of Magnolia LLC Units).
(2)Pursuant to ASC 805, ASC 480, “Distinguishing Liabilities from Equity,” and ASC 815, “Derivatives and Hedging,” the Karnes County earnout consideration was valued at fair value as of the Closing Date and was classified in stockholders’ equity. The Giddings earnout was valued at fair value as of the Closing Date and was classified as a liability. The fair value of the earnouts was determined using the Monte Carlo simulation valuation method based on Level 3 inputs in the fair value hierarchy.

The following table summarizes the allocation of the purchase consideration to the assets acquired and liabilities assumed on the acquisition date:
(In thousands)  
Fair value of assets acquired  
Accounts receivable $61,790
Other current assets 2,853
Oil and natural gas properties (1)
 2,813,140
Ironwood equity investment 18,100
Total fair value of assets acquired 2,895,883
Fair value of liabilities assumed  
Accounts payable and other current liabilities (65,908)
Asset retirement obligations (34,132)
Deferred tax liability (13,639)
Fair value of net assets acquired $2,782,204

(1)The fair value measurements of oil and natural gas properties and asset retirement obligations are based on inputs that are not observable in the market and therefore represent Level 3 inputs. The fair values of oil and natural gas properties and asset retirement obligations were measured using valuation techniques that convert future cash flows to a single discounted amount. Significant inputs to the valuation of oil and natural gas properties included estimates of: (i) recoverable reserves; (ii) production rates; (iii) future operating and development costs; (iv) future commodity prices; and (v) a market-based weighted average cost of capital rate.

The Company incurred $24.8 million in transaction costs associated with the Business Combination. The Company also incurred a total of $23.5 million of debt issuance costs in connection with the consummation of the Business Combination related to the establishment of the RBL Facility (as defined herein) and the issuance of the 2026 Senior Notes.

Unaudited Pro Forma Operating Results

The following unaudited pro forma combined financial information has been prepared as if the Business Combination and other related transactions had taken place on January 1, 2017.

The information reflects pro forma adjustments based on available information and certain assumptions that the Company believes are reasonable, including depletion of the Company’s fair-valued proved oil and gas properties, and the estimated tax impacts of the pro forma adjustments. Additionally, pro forma net income attributable to Class A Common Stock excludes $34.3 million of transaction related costs, $11.0 million related to a one-time purchase of a seismic license continuation, and a $6.7 million loss related to the settlement of the Giddings earnout obligation.



The pro forma combined financial information has been included for comparative purposes and is not necessarily indicative of the results that might have actually occurred had the Business Combination taken place on January 1, 2017; furthermore, the financial information is not intended to be a projection of future results.
 (Unaudited Pro Forma)
(In thousands)
 
Three Months Ended
September 30, 2018
 
Nine Months Ended
September 30, 2018
Total revenues$267,659
 $723,768
Net income attributable to Class A Common Stock57,891
 151,316
Net income per share - basic0.39
 1.02
Net income per share - diluted0.38
 0.98


Non-Compete

2020 Acquisitions
On the Closing Date, the Company and EnerVest, separate and apart from the Business Combination, entered into a non-compete agreement (the “Non-Compete”) restricting EnerVest and certain of its affiliates from competing with the Company in certain counties comprising the Eagle Ford Shale following the Closing Date. An affiliate of EnerVest will have the right to receive 4.0 million shares of Class A Common Stock issuable in 2 tranches of 2.0 million shares in two and one half and four years from the Closing Date provided EnerVest does not compete with Magnolia in the Eagle Ford Shale until the later of July 31, 2022 or the date the Services Agreement with EnerVest Operating, LLC (“EVOC”), a wholly owned subsidiary of EnerVest, (the “Services Agreement”), is terminated. For more discussion on the Non-Compete, refer to Note 7 - Intangible Assets.
Harvest Acquisition

On August 31, 2018,February 21, 2020, the Company completed the acquisition of substantially all of Harvest Oil & Gas Corporation’s Southcertain non-operated oil and natural gas assets located in Karnes and DeWitt Counties, Texas, assets for approximately $133.3$69.7 million in cash and 4.2 million shares of Class A Common Stock for a total consideration of $191.5 million. The acquisition added an undivided working interest across a portion of Magnolia’s existing Karnes County Assets and all of the Company’s existing Giddings Assets. On March 14, 2019, Magnolia consummated the final settlement with Harvest receiving a cash payment of $1.4 million.cash. The transaction was accounted for as a business combination.an asset acquisition.

The following table summarizes the allocation of the purchase consideration to the assets acquired and liabilities assumed:
(In thousands)  
Fair value of assets acquired  
Other current assets $1,290
Oil and natural gas properties (1)
 201,337
Total fair value of assets acquired 202,627
Fair value of liabilities assumed  
Asset retirement obligations and other current liabilities (9,666)
Fair value of net assets acquired $192,961

(1)The fair value measurements of oil and natural gas properties and asset retirement obligations are based on inputs that are not observable in the market and therefore represent Level 3 inputs. The fair values of oil and natural gas properties and asset retirement obligations were measured using valuation techniques that convert future cash flows to a single discounted amount. Significant inputs to the valuation of oil and natural gas properties included estimates of: (i) recoverable reserves; (ii) production rates; (iii) future operating and development costs; (iv) future commodity prices; and (v) a market-based weighted average cost of capital rate. These inputs required significant judgments and estimates by management at the time of the valuation.

Certain Other2019 Acquisitions

On May 31, 2019, the Company completed the acquisition of certain oil and natural gas assets primarily located in the Company’sGonzales and Karnes County AssetsCounties for approximately $36.3 million in cash subject to customary closing adjustments, and approximately 3.1 million shares of the Company’s Class A Common Stock. The transaction was accounted for as an asset acquisition.

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 natural gas well located in St. Martin Parish, Louisiana and 31.1 million royalty trust units in the Gulf Coast Ultra Deep Royalty Trust from McMoRan


Oil & Gas, LLC. Highlander paid cash consideration of $50.9 million for such interests. MGY Louisiana LLC, a wholly owned subsidiary of Magnolia Operating, holds approximately 85% of the units in Highlander. The transaction was accounted for as an asset acquisition.

Acquisitions (Predecessor)
Subsequent GulfTex Acquisition

On March 1, 2018, the Predecessor acquired certain oil and natural gas properties located in the Eagle Ford Shale from GulfTex Energy III, L.P. and GulfTex Energy IV, L.P. for an adjusted purchase price of approximately $150.1 million, net of customary closing adjustments (the “Subsequent GulfTex Acquisition”).

The recognized fair value of identifiable assets and acquired liabilities assumed in connection with the Subsequent GulfTex Acquisition, is as follows:
(In thousands)  
Purchase price allocation:  
Accounts receivable $10,501
Proved oil and natural gas properties 118,572
Unproved oil and natural gas properties 22,802
Accounts payable and accrued liabilities (1,679)
Asset retirement obligations (57)
  $150,139


5. Derivative Instruments and Hedging Activities (Predecessor)

Magnolia currently utilizes natural gas costless collars to reduce its exposure to price volatility for a portion of its natural gas production volumes. The Company’s activities expose it to risks associated with changes in the market price of oil, natural gas, and NGLs. As such, future earnings are subject to fluctuation due to changes in the market price of oil, natural gas, and NGLs. The Company has not engaged in any hedging activities and does not expect to engage in any hedging activities with respect to the market risk to which the Company is exposed. The Karnes County Contributors, on behalf of the Predecessor, used derivatives to reduce the risk of volatility in the prices of oil, natural gas, and NGLs and their policies diddo not permit the use of derivativesderivative instruments for speculative purposes. The Company’s natural gas costless collar derivative contracts are indexed to the Houston Ship Channel. Under the Company’s costless collar contracts, each collar has an established floor price and ceiling price. When the settlement price is below the floor price, the counterparty is required to make a payment to the Company and when the settlement price is above the ceiling price, the Company is required to make a payment to the counterparty. When the settlement price is between the floor and the ceiling, there is no payment required.

The PredecessorCompany has elected not to designate any of its derivativesderivative instruments as hedging instruments. Accordingly, changes in the fair value of the Predecessor's derivatives wereCompany’s derivative instruments are recorded immediately to earnings as “Gain (loss)“Loss on derivatives, net” inon the combined statementsCompany’s consolidated statement of operations. DuringFor the periods from July 1 through Julythree and nine months ended September 30, 20182020, the Company recognized a $2.2 million unrealized loss related to its derivative instrument. There were 0 cash settlements or realized gains or losses on the Company’s derivative instruments during the three and January 1 through Julynine months ended September 30, 2018,2020 and 2019.

The Company had the Predecessor incurred a gain on derivativesfollowing outstanding derivative contracts in place as of $3.9 million and a loss on derivativesSeptember 30, 2020:

20202021
Natural gas costless collars:
Notional volume (MMBtu)4,600,000 12,150,000 
Weighted average floor price ($/MMBtu)$2.31 $2.31 
Weighted average ceiling price ($/MMBtu)$3.00 $3.00 

See Note 6—Fair Value Measurement for the fair value hierarchy of $18.1 million, respectively.the Company’s derivative contracts.

8

6. Fair Value Measurements

Certain of the Company’s assets and liabilities are carried at fair value and measured either on a recurring or non-recurringnonrecurring basis. The Company’s fair value measurements are based either on actual market data or assumptions that other market participants would use in pricing an asset or liability in an orderly transaction, using the valuation hierarchy prescribed by GAAP under ASCAccounting Standards Codification (“ASC”) 820.

The three levels of the fair value hierarchy under ASC 820 are as follows:

Level I - Quoted prices (unadjusted) in active markets for identical investments at the measurement date are used.

Level II - Pricing inputs are other than quoted prices included within Level I that are observable for the investment, either directly or indirectly. Level II pricing inputs include quoted prices for similar investments in active markets, quoted prices for identical or similar investments in markets that are not active, inputs other than quoted prices that are observable for the investment, and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level III - Pricing inputs are unobservable and include situations where there is little, if any, market activity for the investment. The inputs used in determination of fair value require significant judgment and estimation.


Recurring Fair Value Measurements

Fair Values - Recurring (Predecessor)Debt Obligations

The Predecessor’s derivatives consistedcarrying value and fair value of over-the-counter contractsthe financial instrument that wereis not tradedcarried at fair value in the accompanying consolidated balance sheet at September 30, 2020 and December 31, 2019 is as follows:
September 30, 2020December 31, 2019
(In thousands)Carrying Value Fair ValueCarrying Value Fair Value
 Long-term debt$390,787 $392,000 $389,835 $412,000 
The fair value of the 2026 Senior Notes at September 30, 2020 and December 31, 2019 is based on unadjusted quoted prices in an active market, which are considered a public exchange. AsLevel 1 input in the fair value hierarchy.

The Company has other financial instruments consisting primarily of these derivatives was based on inputs using market prices obtained from independent brokers or determined using quantitative modelsreceivables, payables, and other current assets and liabilities that used as their basis readily observable market parameters that are actively quoted and can be validated through external sources, including third-party pricing services, brokers and market transactions, the Predecessor categorized these derivatives as Level 2. The Predecessor valued these derivatives using the income approach using inputs such as the forward curve for commodity prices based on quoted market prices and prospective volatility factors related to changes in the forward curves. Estimates ofapproximate fair value were determined at discrete points in time based on relevant market data. Furthermore, fair values were adjusteddue to reflect the credit risk inherent in the transaction, which may have included amounts to reflect counterparty credit quality and/or the effectnature of the Predecessor’s creditworthiness.

Fair Values - Nonrecurring

Theinstrument and their relatively short maturities. Non-financial assets and liabilities initially measured at fair value measurements ofinclude assets acquired and liabilities assumed in a business combinationcombinations and asset retirement obligations.

Derivative Instruments

The fair value of the Company’s natural gas costless collar derivative instruments are measured using an industry-standard pricing model and are provided by a third party. The inputs used in the third-party pricing model include quoted forward prices for natural gas, the contracted volumes, volatility factors, and time to maturity, which are considered Level 2 inputs. The Company’s derivative instruments are recorded at fair value within “Other current liabilities” on the Company’s consolidated balance sheet as of September 30, 2020. These fair values are recorded by netting asset and liability positions with the same counterparty and are subject to contractual terms, which provide for net settlement. There are 0 long-term derivative assets or liabilities as of September 30, 2020 and there were 0 outstanding derivative instruments as of December 31, 2019.

9

The following table presents the classification of the outstanding derivative instruments and the fair value hierarchy table for the Company’s derivative assets and liabilities that are required to be measured at fair value on a recurring basis:

Fair Value Measurements Using
(In thousands)Level 1Level 2Level 3Total Fair ValueNettingCarrying Amount
September 30, 2020
Current assets:
Natural gas derivative instruments$0 $2,181 $0 $2,181 $(2,181)$0 
Current liabilities:
Natural gas derivative instruments$0 $4,389 $0 $4,389 $(2,181)$2,208 

See Note 5—Derivative Instruments for notional volumes and terms with the Company’s derivative contracts.

Nonrecurring Fair Value Measurements

The Company applies the provisions of the fair value measurement standard on a nonrecurring basis to its non-financial assets and liabilities, including oil and natural gas properties. These assets and liabilities are not measured at fair value on a recurring basis but are subject to fair value adjustments when facts and circumstances arise that indicate a need for remeasurement. 

During the first quarter of 2020, Magnolia recorded impairments of $1.9 billion related to proved and unproved properties as a result of a sharp decline in commodity prices. 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 acquisition dateCompany’s consolidated statement of operations. Proved and unproved properties that were impaired had aggregate fair values of $0.8 billion and $0.3 billion, respectively. The fair values of these oil and natural gas properties were measured using anthe income valuation techniqueapproach based on inputs that are not observable in the market, and therefore, represent Level 3 inputs. The Company calculated the estimated fair values of its oil and natural gas properties using a discounted future cash flow model. Significant inputs toassociated with the valuationcalculation of acquired oil and gas properties includesdiscounted future net cash flows include estimates of: (i) reserves; (ii) production rates; (iii) future operating and development costs; (iv)of future commodity prices includingbased on NYMEX strip pricing adjusted for price differentials; (v)differentials, estimates of proved oil and natural gas reserves and risk adjusted probable and possible reserves, estimates of future cash flows;expected operating and (vi)capital costs, and a market participant-basedparticipant based weighted average cost of capital rate. These inputs require significant judgmentsof 10% for proved property impairments and estimates by the Company’s management at the time of the valuation. Refer to Note 4 - Acquisitions 12% for additional information.unproved property impairments.

Deemed Dividend

In July 2019, the Company issued an aggregate of 9.2 million shares of Class A Common Stock in exchange for all of its warrants. The difference in fair value between the Class A Common Stock issued and the warrants exchanged was recorded as a non-cash deemed dividend for the incremental value provided to the holders of the warrants. The fair value of the non-cash deemed dividend related to the warrant exchange was determined based on unadjusted quoted prices in an active market, which are considered a Level 1 input in the fair value hierarchy. Refer to Note 11 - 12—Stockholders’ Equity for additional information.

Debt Obligations

The carrying value and fair value of the financial instrument that is not carried at fair value in the accompanying consolidated balance sheet as of September 30, 2019 is as follows:
  September 30, 2019
(In thousands) Carrying Value  Fair Value
 Long-term debt $389,528
 $404,000


The fair value of the 2026 Senior Notes at September 30, 2019 was based on unadjusted quoted prices in an active market, which are considered a Level 1 input in the fair value hierarchy.

The Company has other financial instruments consisting primarily of receivables, payables, and other current assets and liabilities that approximate fair value due to the nature of the instrument and their relatively short maturities. Non-financial assets and liabilities initially measured at fair value include assets acquired and liabilities assumed in the business combinations and asset retirement obligations.

7. Intangible Assets

Non-Compete Agreement

On the Closing Date,July 31, 2018, the Company and EnerVest, separate and apart from the Business Combination, entered into the Non-Compete,a non-compete agreement (the “Non-Compete”), which prohibits EnerVest and certain of its affiliates from competing with the Company in the Eagle Ford Shale (the “Market Area”) until the later of July 31, 2022 or the date the Services Agreement is terminated.2022. Under the Non-Compete, an affiliate of EnerVest will have the right to receive 4.0 million shares of Class A Common Stock in 2 tranches of 2.0 million shares in two and one half and four years from the Closing DateJuly 31, 2018 provided EnerVest does not compete in the Market Area.

The Company recorded an estimated cost of $44.4 million for the Non-Compete as intangible assets on the Company’s consolidated balance sheet. 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. The Company includes the amortization in “Amortization of intangible assets” on the Company’s consolidated statementstatements of operations.

10


(In thousands)September 30, 2020December 31, 2019
Non-compete intangible assets$44,400 $44,400 
Accumulated amortization(31,427)(20,549)
Intangible assets, net$12,973 $23,851 
Weighted average amortization period (in years)3.253.25
(In thousands)September 30, 2019
Non-compete intangible assets$44,400
Accumulated amortization(16,923)
Intangible assets, net$27,477
Weighted average amortization period (in years)3.25
8. Other Current Liabilities


8. Income Taxes

The Company estimates its annual effective tax rate in recording its quarterly provision for income taxes in the various jurisdictions in which Magnolia and its subsidiaries operate. The tax effects of statutory rate changes, significant unusual or infrequent items, and certain changes in the assessment of the realizability of deferred tax assets are excluded from the determinationfollowing table provides detail of the Company’s annual effective tax rate as such items are recognized as discrete items in the period in which they occur.

Income tax expense recordedother current liabilities for the period is based on applying an estimated annual effective income tax rate to the net income from January 1, 2019 through September 30, 2019. There were no significant unusual or infrequently occurring items that are required to be recorded as discrete items as of September 30, 2019. The computation of the annual estimated effective tax rate at each interim period requires certain estimates and significant judgment including, but not limited to, the Company’s expected operating income for the year, projections of the proportion of income earned and taxed in various jurisdictions, the effect of noncontrolling interest, permanent and temporary differences, and the likelihood of recovering deferred tax assets in the current year. The accounting estimates used to compute the income tax expense may change as new events occur, more experience is obtained, additional information becomes known, or as the tax environment changes. For the three and nine months ended September 30, 2019, the Company incurred U.S. federal income tax expense of approximately $3.1 million and $11.6 million, respectively. The Company’s annual effective tax rate for the three and nine months ended September 30, 2019 was 16.9% and 14.9%, respectively. The primary differences between the annual effective tax rate and the statutory rate of 21.0% are income attributable to noncontrolling interest and state taxes.periods presented:

(In thousands)September 30, 2020December 31, 2019
Accrued capital expenditures$21,750 $40,722 
Accrued general and administrative expenditures9,703 9,753 
Accrued ad valorem taxes7,027 8,741 
Other22,507 36,564 
Total Other current liabilities$60,987 $95,780 
The Company’s income tax provision consists of the following components:
 Successor  Predecessor
 (In thousands)Three Months Ended
September 30, 2019		 Nine Months Ended
September 30, 2019		 July 31, 2018
Through
September 30, 2018		  July 1, 2018
Through
July 30, 2018		 January 1, 2018 Through
July 30, 2018
Current:          
    Federal$—
 $—
 $—
  $—
 $—
    State115
 684
 45
  631
 1,461
 115
 684
 45
  631
 1,461
Deferred:          
    Federal3,135
 11,588
 3,493
  —
 —
    State279
 177
 —
  135
 324
 3,414
 11,765
 3,493
  135
 324
Total provision$3,529
 $12,449
 $3,538
  $766
 $1,785

The Company is subject to U.S. federal income tax, the margin tax in the state of Texas, and Louisiana corporate income tax. NaN amounts have been accrued for income tax uncertainties or interest and penalties as of September 30, 2019. The Company is currently not aware of any issues under review that could result in significant payments, accruals, or material deviation from its position. The Company’s tax years since its formation remain subject to possible income tax examinations by its major taxing authorities for all periods.



9. Long TermLong-term Debt

The Company’s debt is comprised of the following:
(In thousands)September 30, 2020December 31, 2019
Revolving credit facility$0 $0 
Senior Notes due 2026400,000 400,000 
Total long-term debt400,000 400,000 
Less: Unamortized deferred financing cost(9,213)(10,165)
Total debt, net$390,787 $389,835 
(In thousands) September 30, 2019
Revolving credit facility $—
6.0% Senior Notes due 2026 400,000
Total long-term debt 400,000
   
Less: Unamortized deferred financing cost (10,472)
Total debt, net $389,528


Credit Facility

In connection with the consummation of the Business Combination, Magnolia Operating entered into a senior secured reserve-based revolving credit facility (the “RBL Facility”)the RBL Facility among Magnolia Operating, as borrower, Magnolia Intermediate, as its holding company, the banks, financial institutions, and other lending institutions from time to time party thereto, as lenders, the other parties from time to time party thereto and Citibank, N.A., as administrative agent, collateral agent, issuing bank, and swingline lender, providing for maximum commitments in an aggregate principal amount of $1.0 billion with a letter of credit facility with a $100.0 million sublimit. The borrowing base as of September 30, 20192020 was $550.0$450.0 million. On October 15, 2020, Magnolia Operating entered into a Borrowing Base Redetermination Agreement and Amendment No. 2 to the RBL Facility, which provided for, among other things, the reaffirmation of the borrowing base at $450.0 million as part of the semi-annual scheduled redetermination. The RBL Facility is guaranteed by certain parent companies and subsidiaries of Magnolia LLC and is collateralized by certain of Magnolia Operating’s oil and natural gas properties and has a borrowing base subject to semi-annual redetermination.

Borrowings under the RBL Facility bear interest, at Magnolia Operating’s option, at a rate per annum equal to either the LIBOR rate or the alternative base rate plus the applicable margin. Additionally, Magnolia Operating is required to pay a commitment fee quarterly in arrears in respect of unused commitments under the RBL Facility. The applicable margin and the commitment fee rate are calculated based upon the utilization levels of the RBL Facility as a percentage of the borrowing base then in effect.

The RBL Facility contains certain affirmative and negative covenants customary for financings of this type, including compliance with a leverage ratio of less than 4.00 to 1.00 and, if the leverage ratio is in excess of 3.00 to 1.00, a current ratio of greater than 1.00 to 1.00. As of September 30, 2019,2020, the Company was in compliance with all covenants under the RBL Facility.
Deferred financing costs incurred in connection with securing the RBL Facility were $11.7 million, which are amortized on a straight-line basis over a period of five years and included in “Interest expense, net” in the Company’s consolidated statementstatements of operations. DuringThe Company recognized interest expense related to the RBL Facility of $1.0 million and $1.1 million for the three months ended September 30, 2020 and 2019, respectively, and $3.2 million and $3.4 million for the nine months ended September 30, 2020 and 2019, the Company recognized interest expense of $1.1 million and $3.4 million, respectively, related to the RBL Facility.respectively. The unamortized portion of the deferred financing costs are included in “Deferred financing costs, net” on the accompanying unaudited consolidated balance sheet as of September 30, 2019.2020.
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The Company did 0t have any outstanding borrowings under its RBL Facility as of September 30, 2019.2020.
2026 Senior Notes

On the Closing Date,July 31, 2018, the Issuers issued and sold $400.0 million aggregate principal amount of 2026 Senior Notes.Notes in a private placement under Rule 144A and Regulation S under the Securities Act of 1933. The 2026 Senior Notes were issued under the Indenture, dated as of the Closing DateJuly 31, 2018 (the “Indenture”), by and among the Issuers and Deutsche Bank Trust Company Americas, as trustee. The 2026 Senior Notes are guaranteed on a senior unsecured basis by the Company, Magnolia Operating, and Magnolia Intermediate and may be guaranteed by certain future subsidiaries of the Company. The 2026 Senior Notes will mature on August 1, 2026 and bear interest at the rate of 6.0% per annum.

At any time prior to August 1, 2021, the Issuers may, on any one or more occasions, redeem all or a part of the 2026 Senior Notes at a redemption price equal to 100% of the principal amount of the 2026 Senior Notes redeemed, plus a “make whole” premium on accrued and unpaid interest, if any, to, but excluding, the date of redemption. After August 1, 2021, the Issuers may redeem all or a part of the 2026 Senior Notes based on principal plus a set premium, as set forth in the Indenture, including any accrued and unpaid interest.

The Company incurred $11.8 million of deferred financing costs related to the issuance of the 2026 Senior Notes, which were capitalized,capitalized. These costs are amortized using the effective interest method over the term of the 2026 Senior Notes and are included in “Interest expense, net” in the Company’s consolidated statementstatements of operations. The unamortized portion of the deferred financing costs is included as a reduction to the carrying value of the 2026 Senior Notes, which have been recorded as Long-term“Long-term debt, netnet” on the consolidated balance sheet as of September 30, 2020. The Company recognized interest expense related to the 2026 Senior Notes of $6.3 million for each of the three months ended September 30, 2020 and 2019, and $19.0 million and $18.9 million for the nine months ended September 30, 2020 and 2019, respectively.

10. 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 Assets. The litigation is in the pre-trial 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, 2020, the Company does not believe the outcome of any such disputes or legal actions will have a material effect on its consolidated statements of operations, balance sheet, or cash flows. NaN amounts were accrued with respect to outstanding litigation at September 30, 2020 or September 30, 2019. During

Environmental Matters

The Company, as an owner or lessee and operator of oil and natural 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 natural 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. 

The coronavirus disease 2019 (“COVID-19”) pandemic and related economic repercussions have created significant volatility, uncertainty, and turmoil in the oil and natural gas industry. Oil demand has significantly deteriorated as a result of the virus outbreak and corresponding preventative measures taken around the world to mitigate the spread of the virus. 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 and reductions to its operating plans as a result of decreased prices and reduced storage capacity.
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Demand and pricing may again decline if there is a 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 Company’s industry and its business cannot be reasonably predicted at this time.

11. Income Taxes

The Company estimates its annual effective tax rate in recording its quarterly provision for income taxes in the various jurisdictions in which it operates. On March 27, 2020, the United States enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”).The CARES Act includes several significant business tax provisions that, among other things, allow businesses to carry back net operating losses (“NOL”) arising in 2018, 2019, and 2020 to the five prior tax years. Applying the NOL carryback provision resulted in an income tax benefit of $1.2 million during the nine months ended September 30, 2020. The difference in the U.S. federal statutory tax rate of 34% in 2017 compared to 21% in 2018 and thereafter resulted in a discrete benefit to the tax provision of approximately $0.4 million for the nine months ended September 30, 2020.

The income tax expense or benefit recorded for the period is based on applying an estimated annual effective income tax rate to the net income or loss for the three and nine months ended September 30, 2019,2020 and 2019. The computation of the Company recognized interest expense of $6.3 millionannual estimated effective tax rate at each interim period requires certain estimates and $18.9 million, respectively, relatedsignificant judgment including, but not limited to, the 2026 Senior Notes.



Affiliate Guarantors

Certain subsidiariesCompany’s expected operating income for the year, projections of the Company are guarantors underproportion of income earned and taxed in various jurisdictions, the termseffect of its Senior Notesnoncontrolling interest, permanent and RBL Facility.temporary differences, and the likelihood of recovering deferred tax assets in the current year. The parent guaranteesaccounting estimates used to compute the income tax expense or benefit may be released uponchange as new events occur, more experience is obtained, additional information becomes known, or as the request of Magnolia Operating. Magnolia’s consolidated financial statements reflect the financial position of these subsidiary guarantors. As the parent company, Magnolia has no independent operations. The guarantees are full and unconditional (except for customary release provisions) and joint and several. There are restrictions on dividends, distributions, loans, or other transfers of funds from the subsidiary guarantors to the Company.

10. Leases

Magnolia’s leases primarily consist of real estate, vehicles, and field equipment.tax environment changes. The Company’s leases have remaining lease terms of up to 8 years, some of which include options to renew or terminate the lease. The exercise of lease renewal options is at the Company’s sole discretion. Magnolia’s lease agreements do not contain any residual value guarantees or restrictive covenants.

As most of Magnolia’s leases do not provide an impliciteffective tax rate the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The Company used the incremental borrowing rate on January 1, 2019, for operating leases that commenced prior to that date.

(In thousands)September 30, 2019
Operating Leases 
     Operating lease assets$4,772
  
     Operating lease liabilities - current$2,724
     Operating lease liabilities - long-term2,039
Total operating lease liabilities$4,763
  
Weighted average remaining lease term (in years)2.0
Weighted average discount rate3.8%

For the three and nine months ended September 30, 2019, respectively, the Company incurred $0.9 million and $2.1 million of lease costs for operating leases included on the Company’s balance sheet, $5.9 million and $21.1 million for short-term lease costs and $0.6 million and $2.5 million for variable lease costs. Cash paid for amounts included in the measurement of lease liabilities in operating cash flows from operating leases for the nine months ended September 30, 2020 and 2019 was 4.0% and 14.9%, respectively. During the nine months ended September 30, 2020, the Company’s effective tax rate was primarily impacted by the reversal of its federal and state deferred tax liabilities and the federal and state deferred tax assets generated from losses related to non-cash impairments of the carrying value of the Company’s oil and natural gas properties, offset by the recognition of valuation allowances. The primary differences between the annual effective tax rate and the federal statutory tax rate of 21.0% are income attributable to noncontrolling interest, the recognition of a valuation allowance on federal and state deferred tax assets, and state taxes.

During the first quarter of 2020, the Company moved from a net deferred tax liability position to an estimated net deferred tax asset position resulting primarily from oil and natural gas impairments. As of September 30, 2020, the Company’s net deferred tax asset was $203.3 million. Management assessed whether it is $2.0more-likely-than-not that it will generate sufficient taxable income to realize its deferred income tax assets, including the investment in partnership and net operating loss carryforwards. In making this determination, the Company considered all available positive and negative evidence and made certain assumptions. The Company considered, among other things, the overall business environment, its historical earnings and losses, current industry trends, and its outlook for future years. As of September 30, 2020, the Company assessed the realizability of the deferred tax assets and recorded a full valuation allowance of $203.3 million.
Maturities
The Company’s income tax provision consists of lease liabilitiesthe following components:
Three Months EndedNine Months Ended
 (In thousands)September 30, 2020September 30, 2019September 30, 2020September 30, 2019
Current:
Federal$0 $0 $(1,167)$0 
State(339)115 (339)684 
 (339)115 (1,506)684 
Deferred:
Federal0 3,135 (71,792)11,588 
State0 279 (6,042)177 
 0 3,414 (77,834)11,765 
Income tax expense (benefit)$(339)$3,529 $(79,340)$12,449 
The Company is subject to U.S. federal income tax, the margin tax in the state of Texas, and Louisiana corporate income tax. NaN amounts have been accrued for income tax uncertainties or interest and penalties as of September 30, 20192020. The Company is currently not aware of any issues under the scope of ASC 842 are as follows:review that could result in significant payments, accruals, or material deviation from its position. The Company’s tax years since its formation remain subject to possible income tax examinations by its major taxing authorities for all periods.
(In thousands) 
Maturity of Lease Liabilities(1)
Operating Leases
2019 (remaining)$771
20202,653
20211,170
2022165
202398
After 202391
Total lease payments$4,948
Less: Interest(185)
Present value of lease liabilities$4,763

(1)As of December 31, 2018, minimum future contractual payments for long-term operating leases under the scope of ASC 840 were $881 thousand in 2019, $646 thousand in 2020, $198 thousand in 2021, $14 thousand in 2022, $15 thousand in 2023 and $63 thousand thereafter.


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11.12. Stockholders’ Equity

Class A Common Stock

In connection with the closing of the Business Combination, the Company increased the number of authorizedAt September 30, 2020, there were 168.7 million shares of Class A Common Stock to 1.3 billion. At September 30, 2019, there were 168.3issued and 165.6 million shares issued and 167.3 million shares outstanding of Class A Common Stock.Stock outstanding. The holders of Class A Common Stock and Class B Common Stock vote together as a single class on all matters and are entitled 1 vote for each share held.

There is no cumulative voting with respect to the election of directors, which results in the holders of more than 50% of the shares being able to elect all of the directors, subject to voting obligations under the Stockholder Agreement (defined below).Agreement. In the event of a liquidation, dissolution, or winding up of Magnolia Oil & Gas Corporation, the Company,holders of the common stockholdersClass A Common Stock are entitled to share ratably in all assets remaining available for distribution to them after payment of liabilities and after provision is made for each class of stock, if any, having preference over the common stock. The holders of the Class A Common Stock have no preemptive or other subscription rights, and there are no sinking fund provisions applicable to such shares.

Class B Common Stock

In connection with the closing of the Business Combination, the Company authorized 225.0 million shares of Class B Common Stock. At September 30, 2019,2020, there were 91.885.8 million shares of Class B Common Stock issued and outstanding. Holders of Class B Common Stock vote together as a single class with holders of Class A Common Stock on all matters properly submitted to a vote of the stockholders. The holders of Class B Common Stock generally have the right to exchange all or a portion of their Class B Common Stock, together with an equal number of Magnolia LLC Units, for the same number of shares of Class A Common Stock or, at Magnolia LLC’s option, an equivalent amount of cash. Upon the future redemption or exchange of Magnolia LLC Units held by any holder of Class B Common Stock, a corresponding number of shares of Class B Common Stock held by such holder of Class B Common Stock will be canceled. In the event of a liquidation, dissolution, or winding up of Magnolia LLC, the Company,holders of the common stockholdersClass B Common Stock, through their ownership of Magnolia LLC Units, are entitled to share ratably in all assets remaining available for distribution to them after payment of liabilities and after provision is made for each class of stock,units of Magnolia LLC, if any, having preference over the common stock.units. The holders of the Class B Common Stock have no preemptive or other subscription rights, and there are no sinking fund provisions applicable to such shares.

Warrants

On June 7, 2019, the Company commenced an exchange offer (the “Offer”) and consent solicitation (the “Consent Solicitation”), pursuant to which the Company (1) offered to holders of its warrants the opportunity to receive 0.29 shares of Class A Common Stock in exchange for each warrant validly tendered and (2) solicited the consent from the holders of its warrants to approve an amendment to the Company’s existing warrant agreement, by and between the Company and Continental Stock Transfer & Trust Company, to amend the agreement to provide the Company with the right to require any holder of the Company’s warrants to exchange their warrants for Class A Common Stock at an exchange ratio of 0.261 shares of Class A Common Stock for each whole warrant (the “Warrant Amendment”). Pursuant to the Offer, certain of the Company’s warrantholders, including directors and executive officers, agreed to tender their warrants and provide the corresponding consent to the Warrants Amendment in the Consent Solicitation by entering into a tender and support agreement with the Tender and Support Agreement (as defined below).

Company on June 7, 2019.

The Offer and Consent Solicitation expired on July 5, 2019.In connection with the closing of the Offer on July 10, 2019 and the subsequent exercise of the Company’s right to exchange all remaining warrants on July 25, 2019, the Company issued an aggregate of 9.2 million shares of Class A Common Stock in exchange for all of its 31.7 million warrants outstanding, which consisted of 21.7 million public warrants and 10.0 million private placement warrants.

As the fair value of the warrants exchanged in the Offer was less than the fair value of the Class A Common Stock issued, the companyCompany recorded a non-cash deemed dividend of $2.8 million for the incremental value provided to the warrant holders. The fair value of warrants and the Class A Common Stock was determined using unadjusted quoted prices in an active market, a Level 1 fair value input. The Company capitalized $2.2 million of expenses related to the Offer within additional“Additional paid-in capital.capital” on the Company’s consolidated balance sheet.

Share Repurchase Program

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. As of September 30, 2019,2020, the Company had repurchased 950 thousand3.1 million shares of Class A Common Stockunder the plan at a weighted average price of $10.23, for a total cost of approximately $9.7$23.2 million.


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Noncontrolling Interest

Noncontrolling interest in Magnolia’s consolidated subsidiaries include amounts attributable to Magnolia LLC Units that were issued to the Karnes County Contributors in connection with the Business Combination. The noncontrolling interest percentage is affected by various equity transactions such as issuances of Class A Common Stock, and the conversionexchange of Class B Common Stock to(and corresponding Magnolia LLC Units) for Class A Common Stock.Stock, or the cancellation of Class B Common Stock (and corresponding Magnolia LLC Units). As of September 30, 2019,2020, Magnolia owned approximately 64.6%66% of the interest in Magnolia LLC and the noncontrolling interest was 35.4%34%. In the first quarter of 2019, Magnolia Operating formed Highlander as a joint venture in whichwhere MGY Louisiana LLC, a wholly owned subsidiary of Magnolia Operating, holds approximately 85% of the units in Highlander, with the remaining 15% attributable to noncontrolling interest.

12. Supplemental Cash Flow Information

Supplemental cash flow disclosures are presented below:
 Successor  Predecessor
(In thousands)
Nine Months
Ended
September 30, 2019
 
July 31, 2018
Through
September 30, 2018
  January 1, 2018 Through
July 30, 2018
Supplemental non-cash operating activity:      
Cash paid for income taxes$390
 $—
  $336
Cash paid for interest25,687
 350
  —
Supplemental non-cash investing and financing activity:      
Accruals or liabilities for capital expenditures$37,241
 $45,242
  $38,028
Contingent Consideration issued in Business Combination—
 149,700
  —
Non-Compete agreement entered into in Business Combination—
 44,400
  —
Equity issuances in connection with acquisitions33,693
 1,481,695
  —
Non-cash deemed dividend related to warrant exchange2,763
 —
  —
Supplemental non-cash lease operating activity:      
Right-of-use assets obtained in exchange for operating lease obligations$6,720
 —
  —


13. Stock Based Compensation

On October 8, 2018, the Company’s board of directors adopted the “Magnolia Oil & Gas Corporation Long Term Incentive Plan” (the “Plan”), effective as of July 17, 2018. A total of 11.8 million shares of Class A Common Stock have been authorized for issuance under the Plan. The Company granted employeesgrants stock based compensation awards in the form of restricted stock units (“RSUs”) and performance stock units (“PSUs”) to eligible employees and directors to enhance the Company and its affiliates’ ability to attract, retain, and motivate persons who make important contributions to the Company and its affiliates by providing these individuals with equity ownership opportunities. Shares issued as a result of awards granted under the Plan are generally new shares of Class A Common Stock.

Stock based compensation expense is recognized net of forfeitures within general“General and administrative expenseexpenses” on the consolidated statementstatements of operations and was $2.9 million and $2.8 million for the three months ended September 30, 2020 and 2019, respectively, and $8.9 million and $8.4 million for the three and nine months ended September 30, 2019.2020 and 2019, respectively. The Company has elected to account for forfeitures of awards granted under the Plan as they occur in determining compensation expense.

Restricted Stock Units

The Company grants service-based RSU awards to employees and non-employee directors, which generally vest ratably over a three-year service period.period, in the case of awards to employees, and vest in full after one year, in the case of awards to directors. RSUs represent the right to receive shares of Class A Common Stock at the end of the vesting period equal to the number of RSUs granted.that vest. RSUs are subject to restrictions on transfer and are generally subject to a risk of forfeiture if the award recipient is no longerceases to be an employee or director of the Company for any reason prior to vesting of the award. Compensation expense for the service-based RSU awards is based upon the grant date market value of the award and such costs are recorded on a straight-line basis over the requisite service period for each separately vesting portion of the award, as if the award was, in-substance, multiple awards. Unrecognized compensation expense related to unvested restricted shares atRSUs as of September 30, 20192020 was $12.0$10.5 million, which the Company expects to recognize over a weighted average period of 2.11.7 years.



The table below summarizes restricted stock unitRSU activity for the three and nine months ended September 30, 2019.2020:
 Restricted Stock Units 
Weighted Average Grant Date
Fair Value
Unvested restricted stock units, beginning of period807,431
 $13.97
Granted585,659
 $12.33
Vested237,702
 $14.58
Forfeited—
 —
Unvested restricted stock units, end of period1,155,388
 $13.06


Three Months EndedNine Months Ended
September 30, 2020September 30, 2020
Restricted Stock UnitsWeighted Average Grant Date Fair ValueRestricted Stock UnitsWeighted Average Grant Date Fair Value
Unvested RSUs, beginning of period1,637,445 $10.02 1,099,901 $12.97 
Granted21,552 6.46 874,919 7.14 
Vested(110,548)14.43 (426,371)13.03 
Forfeited(27,678)10.07 (27,678)10.07 
Unvested RSUs, end of period1,520,771 $9.65 1,520,771 $9.65 
Performance Stock Units

During the nine months ended September 30, 2019,2020, the Company granted PSUs to certain employees, with eachemployees. Each PSU, representingto the extent earned, represents the contingent right to receive 1 share of Class A Common Stock. The number of shares of Class A Common Stock issuable upon vesting, however, ranges fromand the awardee may earn between 0 toand 150% of the target number of PSUs granted based on the total shareholder return (“TSR”) of the Class A Common Stock relative to the TSR achieved by a specific industry peer group over an approximatea three-year performance period, the last day of which is also the vesting date. In addition to the TSR conditions, vesting of the PSUs is subject to the awardee’s continued employment through the date of settlement of the PSUs, which will occur within 60 days following the end of the performance period. Unrecognized compensation expense related to unvested PSUs atas of September 30, 20192020 was $7.0$5.1 million, which the Company expects to recognize over a weighted average period of 2.11.6 years.
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The table below summarizes performance stock award and unitPSU activity for the three and nine months ended September 30, 2019.2020:
 Performance Stock Units Weighted Average Grant Date Fair Value
Unvested performance stock units, beginning of period475,312
 $14.58
Granted267,482
 $13.87
Vested33,333
 $14.58
Forfeited—
 —
Unvested performance stock units, end of period709,461
 $14.31


Three Months EndedNine Months Ended
September 30, 2020September 30, 2020
Performance Stock UnitsWeighted Average Grant Date Fair ValuePerformance Stock UnitsWeighted Average Grant Date Fair Value
Unvested PSUs, beginning of period1,086,419 $11.28 701,128 $14.31 
Granted0 0 401,958 6.14 
Vested(25,260)14.58 (41,927)14.58 
Forfeited(30,529)10.77 (30,529)10.77 
Unvested PSUs, end of period1,030,630 $11.22 1,030,630 $11.22 
The grant date fair valuevalues of the PSUs granted were $2.5 million and $3.7 million during the nine months ended September 30, 2020 and 2019, was $3.7 million,respectively, calculated using a Monte Carlo simulation. The following table summarizes the assumptions used to calculate the grant date fair value of these PSUs.
Nine Months Ended
Grant Date Fair Value AssumptionsSeptember 30, 2020September 30, 2019
Expected term (in years)2.85 - 2.672.67-2.85
Expected volatility33.61%33.50%31.58% - 31.58%33.61%
Risk-free interest rate2.48%1.16%2.29% - 2.29%2.48%




14. Earnings (Loss) Per Share

A reconciliation of the numerators and denominators of the basic and diluted per share computations follows. No such computation is necessary for the Predecessor Period as the Predecessor was not previously accounted for as a standalone legal entity and did not have publicly traded securities.follows:
(In thousands, except per share data)
Three Months Ended
September 30, 2019
 Nine Months Ended
September 30, 2019		 
July 31, 2018
 Through
 September 30, 2018
Basic:     
Net Income attributable to Class A Common Stock$7,784
 $39,316
 $6,176
Weighted average number of common shares outstanding during the period - basic166,872
 160,051
 151,992
Net income per common share - basic$0.05
 $0.25
 0.04
      
Diluted:     
Net Income attributable to Class A Common Stock$7,784
 $39,316
 $6,176
Weighted average number of common shares outstanding during the period - basic166,872
 160,051
 151,992
Add: Dilutive effect warrants and stock based compensation236
 1,437
 5,080
Weighted average number of common shares outstanding during the period - diluted167,108
 161,488
 157,072
Net income per common share - diluted$0.05
 $0.24
 $0.04

Three Months EndedNine Months Ended
(In thousands, except per share data)September 30, 2020September 30, 2019September 30, 2020September 30, 2019
Basic:
Net income (loss) attributable to Class A Common Stock$9,147 $7,784 $(1,236,135)$39,316 
Weighted average number of common shares outstanding during the period - basic166,467 166,872 166,728 160,051 
Net income (loss) per share of Class A Common Stock - basic$0.05 $0.05 $(7.41)$0.25 
Diluted:
Net income (loss) attributable to Class A Common Stock$9,147 $7,784 $(1,236,135)$39,316 
Weighted average number of common shares outstanding during the period - basic166,467 166,872 166,728 160,051 
Add: Dilutive effect warrants, stock based compensation, and other4,209 236 0 1,437 
Weighted average number of common shares outstanding during the period - diluted170,676 167,108 166,728 161,488 
Net income (loss) per share of Class A Common Stock - diluted$0.05 $0.05 $(7.41)$0.24 

The calculation for weighted average shares reflects shares outstanding over the reporting period based on the actual number of days the shares were outstanding. The Company excluded 85.8 million for the three and nine months ended September 30, 2020, 91.8 million for the three months ended September 30, 2019, and 92.3 million and 87.6 millionfor the nine months ended September 30, 2019 of weighted average shares of Class A Common Stock issuable upon conversionthe exchange of the Class B Common Stock (and the corresponding Magnolia LLC Units) for the three and nine months ended September 30, 2019 and for the period from July 31, 2018 through September 30, 2018, respectively, as the effect was anti-dilutive. In addition, the Company excluded 4.0 million contingent shares of Class A Common Stock issuable to an affiliate of EnerVest, provided EnerVest does not compete in the Market Area, and 0.2 million RSUs and PSU because the effect was anti-dilutive for the threenine months ended September 30, 2019 the effect of warrants were excluded because their inclusion would be anti-dilutive.2020.

15. Related Party Transactions

As of September 30, 2019,2020, EnerVest Energy Institutional Fund XIV-A, L.P., a Delaware limited partnership, and EnerVest Energy Institutional Fund XIV-C, L.P., a Delaware limited partnership, both of which are part of the Karnes County Contributors, each held more than 10% of the Company’s common stock and qualified as principal owners of the Company, as defined in ASC 850, “Related Party Disclosures.”

Amended and Restated Limited Liability Company Agreement of Magnolia LLC

On the Closing Date, the Company, Magnolia LLC, and certain of the Karnes County Contributors entered into Magnolia LLC’s amended and restated limited liability company agreement, which sets forth, among other things, the rights and obligations of the holders of units in Magnolia LLC. Under the Magnolia LLC Agreement, the Company is the sole managing member of Magnolia LLC.

Registration Rights Agreement

At the closing of the Business Combination, the Company entered into a registration rights agreement (the “Registration Rights Agreement”) with TPG Pace Energy Sponsor LLC, a Delaware limited liability company (“TPG Pace”), the Karnes County Contributors, and the Company’s 4 independent directors prior to the Business Combination (collectively, the “Holders”), pursuant to which the Company is obligated, subject to the terms thereof and in the manner contemplated thereby, to register for resale under the Securities Act all or any portion of the shares of Class A Common Stock that the Holders held as of July 31, 2018 and that they may have acquired or might acquire thereafter, including upon conversion, exchange, or redemption of any other security therefor. Under the Registration Rights Agreement, Holders also have “piggyback” registration rights exercisable at any time that allow them to include the shares of Class A Common Stock that they own in certain registrations initiated by the Company.

                Pursuant to the Registration Rights Agreement, the Company has filed and taken effective 2 registration statements on Form S-3, each of which registered, among others, the offering by the Holders of the shares of Class A Common Stock included therein.



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.

16
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 ongoing coronavirus disease 2019 (“COVID-19”) pandemic, including the effects of related public health concerns and the impact of continued 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 yearperiod ended December 31, 2018 filed with the SEC on February 27, 2019.2019 (the “2019 Form 10-K”).

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.

17

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 Fieldarea 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 and reductions to its operating plans as a result of decreased prices and reduced storage capacity. Demand and pricing may again decline if there is a 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. 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 third quarter and continued to operate one rig in the Giddings area. 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 of 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 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 relied on such persons having sufficient access to its information technology systems, including through telecommunication hardware, software, and networks. Magnolia's board of directors is continuing to monitor the unfolding COVID-19 pandemic very closely as well as the effect of working remotely on internal controls over financial reporting and information technology 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. As of October 1, 2020, the substantial majority of Magnolia employees have returned to the office.

18

Business Overview
As of September 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 net635,336 gross (437,128 net) acres in the Giddings Field.area. As of September 30, 2019,2020, Magnolia held an interest in approximately 1,6181,823 gross (1,189 net) wells, (1,128 net), with total production of 66.362.2 thousand barrels of oil equivalent per day (“Mboe/d”) for the nine months ended September 30, 2019.2020. In the third 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$7.41 per diluted common share, for the three and nine months ended September 30, 2019, respectively. Net income attributable to Class A Common Stock for the three and nine months ended September 30, 2019 was reduced by $2.8 million related to the non-cash deemed dividend 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 three and nine month 2019 Successor Periodmonths ended September 30, 2019, respectively.2020. As a result of the sharp decline in commodity prices during the nine months ended September 30, 2020, Magnolia recorded impairments of $1.9 billion related to proved and unproved 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 nine months ended September 30, 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. DuringAs of September 30, 2020, the Company had repurchased 3.1 million shares under the plan at an aggregate cost of $23.2 million.

On August 1, 2020, the Company provided written notice to EVOC of its intent to terminate the Services Agreement. Pursuant to the Services Agreement, EVOC will continue to provide services during the transition through August 1, 2021.

In the third quarter of 2020, the Company entered into costless collars for 4.6 million MMBtu and 12.2 million MMBtu of its natural gas production in the years ending December 31, 2020 and 2021, respectively, which reduce the Company’s exposure to natural gas price volatility for a portion of its expected natural gas production volumes. The Company has elected not to designate any of its derivative instruments as hedging instruments. Accordingly, changes in the fair value of the Company's derivative instruments are recorded immediately to earnings as “Loss on derivative instruments, net” on the Company’s consolidated statement of operations. For the three and nine months ended September 30, 2019,2020, the Company repurchased 950 thousand shares at a weighted average price of $10.23, for a total cost of approximately $9.7 million.recognized $2.2 million unrealized loss related to its derivative instruments.
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 $69.7 million in cash;

•On May 31, 2019, the Predecessor Period,Company completed the acquisition of certain oil and accordingly the results of operationsnatural gas assets primarily located in Karnes County 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;

•
On August 31, 2018, the Company acquired substantially all of the South Texas assets of Harvest Oil & Gas Corporation (the “Harvest Acquisition”) for approximately $133.3 million in cash and 4.2 million shares of the Company’s Class A Common Stock. The Harvest Acquisition added an undivided working interest across a portion of the Karnes County Assets and all of the Giddings Assets;

On February 5, 2019, Magnolia Operating formed a joint venture, Highlander Oil & Gas Holdings LLC (“Highlander”), to complete the acquisition of a 72% working interest in the Eocene-Tuscaloosa Zone, Ultra Deep Structure natural 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.



•
The financial results for the Successor Period reflect the adoption of ASU No. 2014-09, Revenue from Contracts with Customers, which the Company adopted on December 31, 2018 and applied to all periods presented in the Successor Period. The Predecessor Period continues to be reported under the accounting standards in effect for that period.

As a result of the factors listed above, the combined historical results of operations and period-to-period comparisons of these results and certain financial data may not be comparable or indicative of future results.
19


Three Months Ended September 30, 20192020 Compared to the Three Months Ended September 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.
  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.
  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)September 30, 2020September 30, 2019
Production:
Oil (MBbls)2,485 3,520 
Natural gas (MMcf)9,444 10,763 
NGLs (MBbls)937 1,245 
Total (Mboe)4,996 6,559 
Average daily production:
Oil (Bbls/d)27,016 38,261 
Natural gas (Mcf/d)102,653 116,989 
NGLs (Bbls/d)10,181 13,533 
Total (boe/d)54,306 71,292 
Revenues:
Oil revenues$95,677 $207,840 
Natural gas revenues14,895 21,243 
Natural gas liquids revenues10,495 15,716 
Total revenues$121,067 $244,799 
Average Price:
Oil (per barrel)$38.50 $59.05 
Natural gas (per Mcf)1.58 1.97 
NGLs (per barrel)11.20 12.62 
Oil revenues were 83%, 80%,79% and 89%85% of the Company’s total revenues for the three months ended September 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%,50% and 71%54% of total production volume for the three months ended September 30, 2020 and 2019, Successor Period,respectively. Oil revenues for the 2018 Successor Period, andthree months ended September 30, 2020 were $112.2 million lower than the Predecessor Period, respectively.three months ended September 30, 2019. A 35% decrease in average prices reduced third quarter 2020 revenues by $72.4 million compared to the same period in the prior year, while a 29% decrease in oil production reduced revenues by $39.8 million.

Natural gas revenues were 10%, 8%,12% and 5%9% of the Company's total revenues for the three months ended September 30, 2020 and 2019, Successor Period,respectively. Natural gas production was 31% and 27% of total production volume for the 2018 Successor Period,three months ended September 30, 2020 and the Predecessor Period,2019, respectively. Natural gas revenues for the 2019 Successor Periodthree months ended September 30, 2020 were $35.7$6.3 million higherlower than the three months ended September 30, 2019. A 20% decrease in average prices reduced third quarter 2020 revenues by $4.2 million compared to the combined 2018 Successor Period and Predecessor Period due to 136% moresame period in the prior year, while a 12% 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.

$2.1 million.

Natural gas liquids
NGL revenues were 7%, 12%,9% and 6% of the Company’s total revenues for the 2019 Successor Period, the 2018 Successor Period,three months ended September 30, 2020 and the Predecessor Period,2019, respectively. NGL production was 19%, 19%, and 14% of total production volume for each of the 2019 Successor Period, the 2018 Successor Period,three months ended September 30, 2020 and the Predecessor Period, respectively. Natural gas liquids2019. NGL revenues for the 2019 Successor Periodthree months ended September 30, 2020 were $5.2 million lower than the three months ended September 30, 2019. An 11% decrease in average prices reduced third quarter 2020 revenues by $1.7 million higher in the 2019 Successor Period compared to the combined 2018 Successor Period and Predecessor Period due to 91% higher production partially offset bysame period in the prior year, while a 46%25% decrease in average prices. The higherNGL production volumes are primarily attributable to the Successor’s inclusion of the Giddings Assets, recent acquisitions and continued development.reduced revenues by $3.5 million.

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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)September 30, 2020September 30, 2019
Operating Expenses:
Lease operating expenses$18,802 $24,344 
Gathering, transportation, and processing5,771 9,270 
Taxes other than income7,331 13,333 
Exploration expenses701 3,924 
Asset retirement obligation accretion1,501 1,394 
Depreciation, depletion and amortization44,731 143,894 
Amortization of intangible assets3,626 3,626 
General and administrative expenses16,663 17,345 
Total operating costs and expenses$99,126 $217,130 
Other Income (Expense):
Income from equity method investee$1,007 $92 
Interest expense, net(7,333)(6,896)
Loss on derivatives, net(2,208)— 
Other expense, net(51)21 
Total other expense$(8,585)$(6,783)
Average Operating Costs per boe:
Lease operating expenses$3.76 $3.71 
Gathering, transportation, and processing1.16 1.41 
Taxes other than income1.47 2.03 
Exploration expense0.14 0.60 
Asset retirement obligation accretion0.30 0.21 
Depreciation, depletion and amortization8.95 21.94 
Amortization of intangible assets0.73 0.55 
General and administrative expenses3.34 2.64 
  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 expenses were $3.91 per boe, $3.07 per boe, and $2.90 per boe for the 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 asthree months ended September 30, 2020 compared to the combined 2018 Successor Period and Predecessor Periodcorresponding 2019 period were $5.5 million lower primarily due to the inclusiona reduction of the Giddings Assets, recent acquisitions, 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 inclusion of the Giddings Assets as the Giddings Assets deliver less production per well than the Karnes County Assets,operating expenses associated with bringing fewer new wells online resulting in lease operating costs spread over fewer volumes.lower production.

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 September 30, 2020 were $3.5 million, or $1.44, $1.49, and $1.59 on a$0.25 per boe, basis. The $7.7 million higher costs inlower than the three months ended September 30, 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 morelower natural gas than the Karnes County Assetsproduction 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.prices.

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$6.0 million, $9.4 million, and $23.8 millionor $0.56 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 September 30, 2020 compared to the combined 2018 Successor Period and Predecessor Period arethree months ended September 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 for the 2019 Successor Period, the 2018 Successor Period, and the Predecessor Period, respectively. The lower costs per boerevenues following a 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. Exploration expenses of $10.0The exploration costs for the three months ended September 30, 2020 were $3.2 million, inor $0.46 per boe, lower than the three months ended September 30, 2019 Successor Period were $1.7primarily due to lower seismic surveying costs.

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Depreciation, depletion and amortization (“DD&A”) during the three months ended September 30, 2020 was $99.2 million, or $12.99 per boe, lower compared tothan the combined 2018 Successor Period and Predecessor Periodthree months ended September 30, 2019 primarily as a result of a one-time purchase of a seismic license continuation in connectionlower asset property balances associated with the Business Combinationproved property impairments recorded in the 2018 Successor Period.first quarter of 2020.

Asset retirement obligation accretion was higherGeneral and administrative (“G&A”) expenses during the three months ended September 30, 2020 were $0.7 million lower than the three months ended September 30, 2019 Successor Period as compared to the combined 2018 Successor and Predecessor Period. The $4.1 million asset retirement obligation accretion incurred during the 2019 Successor Period wasprimarily driven by renegotiating 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 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 $10.9 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 as intangible assets on the Company’s consolidated balance sheet. The $8.5 million higher amortization of intangible assets in the 2019 Successor Period as compared to the 2018 Successor Period is due to nine 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 was no amortization of intangible assets in the Predecessor Period.

G&A expenses were $52.6 million, $10.3 million, and $12.7 million for the 2019 Successor Period, the 2018 Successor Period, and the Predecessor Period, respectively. The $29.6 million higher G&A expenses and higher G&A expenses per boe incurred during the 2019 Successor Period compared to the combined 2018 Successor Period and Predecessor Period were primarily due to the Successor


incurringcertain additional G&A expenses related to fees payable to EVOCfee under the Services Agreement as well as increased salaries and wages and stock-based compensation costs.other corporate-wide cost cutting initiatives.

Interest expense, net was $21.6 million for the 2019 Successor Period, and $5.0 million for the 2018 Successor Period. Interest expense incurred in the 2019 Successor Period and 2018 Successor Period is due to interest and amortization of debt issuance costs related to the 2026 Senior Notes and the RBL Facility.

Loss on derivatives, net was $18.1a $2.2 million unrealized loss related to the Company’s natural gas costless collar entered into during the third quarter of 2020. There was no derivative activity in the corresponding 2019 period.

Nine Months Ended September 30, 2020 Compared to the Nine Months Ended September 30, 2019

Oil, Natural Gas and NGL Sales Revenues. The following table provides the components of Magnolia’s revenues for the Predecessor Period. Duringperiods 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.
Nine Months Ended
(In thousands, except per unit data)September 30, 2020September 30, 2019
Production:
Oil (MBbls)8,965 9,615 
Natural gas (MMcf)29,261 30,583 
NGLs (MBbls)3,213 3,389 
Total (Mboe)17,055 18,101 
Average daily production:
Oil (Bbls/d)32,718 35,220 
Natural gas (Mcf/d)106,790 112,026 
NGLs (Bbls/d)11,725 12,414 
Total (boe/d)62,241 66,305 
Revenues:
Oil revenues$311,153 $584,009 
Natural gas revenues44,238 71,208 
Natural gas liquids revenues29,880 51,215 
Total revenues$385,271 $706,432 
Average Price:
Oil (per barrel)$34.71 $60.74 
Natural gas (per Mcf)1.51 2.33 
NGLs (per barrel)9.30 15.11 
Oil revenueswere 81% and 83% of the Company’s total revenues for the nine months ended September 30, 2020 and 2019, Successor Periodrespectively. Oil production was 53% of total production volume for each of the nine months ended September 30, 2020 and 2019. Oil revenues for the 2018 Successor Period, Magnolia has not engagednine months ended September 30, 2020 were $272.9 million lower than the nine months ended September 30, 2019. A 43% decrease in any hedging activities with respectaverage prices reduced revenues for the nine months ended September 30, 2020 by $250.3 million compared to the market risksame period in the prior year, while a 7% decrease in oil production reduced revenue $22.6 million.

Natural gas revenues were 11% and 10% of the Company's total revenues for the nine months ended September 30, 2020 and 2019, respectively. Natural gas production was 28% of total production volume for each of the nine months ended September 30, 2020 and 2019. Natural gas revenues for the nine months ended September 30, 2020 were $27.0 million lower than the nine months ended September 30, 2019. A 35% decrease in average prices reduced revenues for the nine months ended September 30, 2020 by $25.0 million as compared to which the Company is exposed.same period in the prior year, while a 4% decrease in natural gas production reduced revenue $2.0 million.

22

NGL revenues were 8% and 7% of the Company’s total revenues for the nine months ended September 30, 2020 and 2019, respectively. NGL production was 19% of total production volume for each of the nine months ended September 30, 2020 and 2019. NGL revenues for the nine months ended were September 30, 2020 $21.3 million lower than the nine months ended September 30, 2019. A 38% decrease in average prices reduced revenues for the nine months ended September 30, 2020 by $19.7 million as compared to the same period in the prior year, while a 5% decrease in NGL production reduced revenue $1.6 million.

Operating Expenses and Other Income (Expense). The following table summarizes the Company’s operating expenses and other income (expense) for the periods indicated.
Nine Months Ended
(In thousands, except per unit data)September 30, 2020September 30, 2019
Operating Expenses:
Lease operating expenses$61,275 $70,752 
Gathering, transportation, and processing20,579 26,016 
Taxes other than income22,874 40,825 
Exploration expenses563,589 10,017 
Impairment of oil and natural gas properties1,381,258 — 
Asset retirement obligation accretion4,403 4,095 
Depreciation, depletion and amortization238,273 385,942 
Amortization of intangible assets10,879 10,879 
General and administrative expenses50,472 52,651 
Transaction related costs— 438 
Total operating costs and expenses$2,353,602 $601,615 
Other Income (Expense):
Income from equity method investee$2,059 $608 
Interest expense, net(21,345)(21,611)
Loss on derivatives, net(2,208)— 
Other expense, net(510)8 
Total other expense$(22,004)$(20,995)
Average Operating Costs per boe:
Lease operating expenses$3.59 $3.91 
Gathering, transportation, and processing1.21 1.44 
Taxes other than income1.34 2.26 
Exploration expense33.05 0.55 
Impairment of oil and natural gas properties80.99 — 
Asset retirement obligation accretion0.26 0.23 
Depreciation, depletion and amortization13.97 21.32 
Amortization of intangible assets0.64 0.60 
General and administrative expenses2.96 2.91 
Transaction related costs— 0.02 
Lease operating expenses for the nine months ended September 30, 2020 were $9.5 million, or $0.32 per boe, lower than the nine months ended September 30, 2019 primarily due to the suspension of completion activity and reduction of operating expenses associated with bringing fewer new wells online.

Gathering, transportation, and processing costs for the nine months ended September 30, 2020 were $5.4 million, or $0.23 per boe, lower than the nine months ended September 30, 2019 primarily due to lower natural gas production and prices.

Taxes other than income and related cost per boe were $18.0 million, or $0.92 per boe, lower for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 primarily due to a decrease in revenues following a decline in commodity prices.

23

Exploration costs for the nine months ended September 30, 2020 were $553.6 million, or $32.50 per boe, higher than the nine months ended September 30, 2019 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 6—Fair Value Measurements in the Company’s consolidated financial statements included in this Quarterly Report on Form 10-Q.

For the nine months ended September 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 6—Fair Value Measurements in the Company’s consolidated financial statements included in this Quarterly Report on Form 10-Q.

DD&A during the nine months ended September 30, 2020 was $147.7 million, or $7.35 per boe, lower than the nine months ended September 30, 2019 as a result of lower asset property balances associated with proved property impairments recorded in the first quarter of 2020.

G&A expenses during the nine months ended September 30, 2020 were $2.2 million lower than the nine months ended September 30, 2019 primarily driven by a decrease in professional service fees and a reduction in the fee under the Services Agreement as a result of corporate-wide cost cutting initiatives.

Loss on derivatives, net was a $2.2 million unrealized loss related to the Company’s natural gas costless collar entered into during the third quarter of 2020. There was no derivative activity in the corresponding 2019 period.

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 September 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 September 30, 2019,2020, the Company has $714.5had $598.5 million of liquidity comprised of the $550.0$450.0 million of borrowing base capacity of the RBL Facility, which was reaffirmed on October 15, 2020, and $164.5$148.5 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 September 30, 2019,2020, Magnolia had $164.5$148.5 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.


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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
  $—

Nine Months Ended
(In thousands)September 30, 2020September 30, 2019
Sources of cash and cash equivalents
Net cash provided by operating activities$230,999 $488,611 
Other— 11,551 
$230,999 $500,162 
Uses of cash and cash equivalents
Acquisitions, other$(73,702)$(93,221)
Additions to oil and natural gas properties(157,325)(351,467)
Changes in working capital associated with additions to oil and natural gas properties(18,972)(13,392)
Class A Common Stock repurchases(12,962)(9,722)
Other(2,138)(3,629)
(265,099)(471,431)
Decrease in cash and cash equivalents$(34,100)$28,731 
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$231.0 million and $284.8$488.6 million for the nine months ended September 30, 2020 and 2019, Successor Period, 2018 Successor Period, and Predecessor Period, respectively. CashDuring the nine months ended September 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,nine months ended September 30, 2020, the Company completed various leasehold and property acquisitions, forprimarily comprised of a total cash purchase price$69.7 million acquisition of certain non-operated oil and natural gas assets located in Karnes and DeWitt Counties, Texas. During the nine months ended September 30, 2019, the Company incurred $93.2 million of acquisition costs, comprised of the Highlander acquisition, and other acquisitions of additional oil and natural gas assets primarily located in Karnes County. The 2018 Successor Period activity of $135.7 million is primarily comprised of the Harvest Acquisition. The Predecessor Period activity of $150.1 million is comprised of the Subsequent GulfTex Acquisition.

Additions to oilOil and natural gas propertiesNatural Gas Properties

The following table sets forth the Company’s capital expenditures for the 2019 Successor Period:three and nine months ended September 30, 2020 and 2019:
Three Months EndedNine Months Ended
(In thousands)September 30, 2020September 30, 2019September 30, 2020September 30, 2019
Drilling and completion$27,425 $88,384 $155,308 $344,179 
Leasehold acquisition costs249 1,286 2,017 8,556 
Total capital expenditures$27,674 $89,670 $157,325 $352,735 
(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,September 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 Periodthree and nine months ended September 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.
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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

RepurchaseRepurchases 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 nine months ended September 30, 2020 and 2019, Successor Period, the Company repurchased 950 thousand2.1 million and 1.0 million shares at a weighted average price of $10.23, for a total cost of approximately $13.0 million and $9.7 million.million, respectively.

Off-Balance Sheet Arrangements

As of September 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 September 30, 2019,2020, the Company had no borrowings outstanding under the RBL Facility.

Commodity Price Risk
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 nine months ended September 30, 20192020 would have increased (decreased) the Company’s revenues by approximately $12.8$12.0 million on an annualized basis and a $0.10 per Mcf increase (decrease) in the weighted average natural gas price for the nine months ended September 30, 20192020 would have increased (decreased) Magnolia’s revenues by approximately $4.1$3.9 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 September 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 September 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.

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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 on2019 Form 10-K, for the year ended December 31, 2018.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.

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 ongoing 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 have been 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. As of October 1, 2020, the substantial majority of Magnolia employees have returned to the office.

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. If there is a resurgence of the outbreak across the United States and other locations across the world and the related social distancing guidelines, travel restrictions, and stay-at-home orders due to the COVID-19 pandemic and such resurgence reduces demand for oil and natural gas, 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. For example, 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 return, the Company may further shut in wells or curtail production.


27

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.

PeriodNumber of Shares of Class A Common Stock PurchasedAverage 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
July 1, 2020 - July 31, 2020— $— — 8,000,000 
August 1, 2020 - August 31, 202097,800 6.11 97,800 7,902,200 
September 1, 2020 - September 30, 20201,002,200 5.87 1,002,200 6,900,000 
Total1,100,000 $5.89 1,100,000 6,900,000 
(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.

PeriodNumber 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, 2019600,000
 10.07
 600,000
 9,400,000
September 1, 2019 - September 30, 2019350,000
 10.52 350,000
 9,050,000
Total950,000
 $10.23
 950,000
 9,050,000

(1)In August 2019, the Company’s Board of Directors authorized a share repurchase program of up to 10 million shares.
(2)On September 30, 2019, the Company repurchased 50,000 additional shares that did not settle until October 2, 2019 and are not included in the table above.


Item 3. Defaults Upon Senior Securities.Securities

None.

Item 4. Mine Safety Disclosures.Disclosures

Not applicable.

Item 5. Other Information.Information

None.

Not applicable.

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Item 6. Exhibits.Exhibits
The following exhibits are filed as part of, or incorporated by reference into, this Quarterly Report on Form 10-Q.

10-Q:
Exhibit
Number		Description
Exhibit
Number
Description
3.1*
3.1
3.23.2*
4.110.1**

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.
101.LAB**XBRL Taxonomy Extension Label Linkbase DocumentDocument.
101.PRE**XBRL Taxonomy Extension Presentation Linkbase DocumentDocument.
104**Cover Page Interactive Data File (embedded within the Inline XBRL document).

*Filed herewith.
**Furnished herewith.

*    Incorporated herein by reference as indicated.
**    Filed herewith.
***    Furnished herewith.

29


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.

MAGNOLIA OIL & GAS CORPORATION
MAGNOLIA OIL & GAS CORPORATION
Date: November 5, 20196, 2020By:/s/ Stephen Chazen
Stephen Chazen
Chief Executive Officer (Principal Executive Officer)
Date: November 5, 20196, 2020By:/s/ Christopher Stavros
Christopher Stavros
Chief Financial Officer (Principal Financial Officer)



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