UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
For the quarterly period ended June 30, 2022
OR
For the transition period from ___________ to ___________
Commission File Number: 001-38083
(Exact Name of Registrant as Specified in its Charter)
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||||||||
| (Address of principal executive offices) | (Zip Code) | ||||||||||
Registrant’s telephone number, including area code: (713 ) 842-9050
| Securities registered pursuant to section 12(b) of the Act: | ||||||||
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
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.
| ☒ | 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 July 29, 2022, there were 188,853,781 shares of Class A Common Stock, $0.0001 par value per share, and 28,710,432 shares of Class B Common Stock, $0.0001 par value per share, outstanding.
GLOSSARY OF CERTAIN TERMS AND CONVENTIONS USED HEREIN
The following are definitions of certain other terms and conventions 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.
“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 formation in South Texas.
“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.
“Business Combination.” The acquisition, which closed on July 31, 2018, of the Karnes County Assets; the Giddings Assets; 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.
“Issuers.” Magnolia Operating and Magnolia Oil & Gas Finance Corp., a wholly owned subsidiary of Magnolia Operating, as it relates to the 2026 Senior Notes.
“Magnolia LLC Unit Holders.” 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-AIV, 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, as amended, dated as of July 31, 2018, by and between the Company, Magnolia Operating, and EnerVest Operating, L.L.C. (“EVOC”), pursuant to which EVOC provided certain services to the Company.
“Stockholder Agreement.” The Stockholder Agreement, dated as of July 31, 2018, by and between the Company and the other parties thereto.
“Non-Compete.” That certain Non-Competition Agreement, dated July 31, 2018, between the Company and EnerVest, pursuant to which EnerVest and certain of its affiliates were restricted from competing with the Company in certain counties comprising the Eagle Ford Shale.
Table of Contents
| Page | ||||||||||||||
| PART I. | FINANCIAL INFORMATION | |||||||||||||
| Item 1. | Financial Statements | |||||||||||||
| Item 2. | ||||||||||||||
| Item 3. | ||||||||||||||
| Item 4. | ||||||||||||||
| PART II. | OTHER INFORMATION | |||||||||||||
| Item 1. | ||||||||||||||
| Item 1A. | ||||||||||||||
| Item 2. | ||||||||||||||
| Item 3. | ||||||||||||||
| Item 4. | ||||||||||||||
| Item 5. | ||||||||||||||
| Item 6. | ||||||||||||||
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
Magnolia Oil & Gas Corporation
Consolidated Balance Sheets
(In thousands)
| June 30, 2022 | December 31, 2021 | |||||||||||||
| ASSETS | (Unaudited) | (Audited) | ||||||||||||
| CURRENT ASSETS | ||||||||||||||
Cash and cash equivalents | $ | $ | ||||||||||||
Accounts receivable | ||||||||||||||
Drilling advances | ||||||||||||||
Other current assets | ||||||||||||||
| Total current assets | ||||||||||||||
| PROPERTY, PLANT AND EQUIPMENT | ||||||||||||||
| Oil and natural gas properties | ||||||||||||||
| Other | ||||||||||||||
| Accumulated depreciation, depletion and amortization | ( | ( | ||||||||||||
| Total property, plant and equipment, net | ||||||||||||||
| OTHER ASSETS | ||||||||||||||
| Deferred financing costs, net | ||||||||||||||
| Other long-term assets | ||||||||||||||
| Total other assets | ||||||||||||||
| TOTAL ASSETS | $ | $ | ||||||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||
| CURRENT LIABILITIES | ||||||||||||||
| Accounts payable | $ | $ | ||||||||||||
Other current liabilities (Note 7) | ||||||||||||||
| Total current liabilities | ||||||||||||||
| LONG-TERM LIABILITIES | ||||||||||||||
| Long-term debt, net | ||||||||||||||
| Asset retirement obligations, net of current | ||||||||||||||
| Other long-term liabilities | ||||||||||||||
| Total long-term liabilities | ||||||||||||||
COMMITMENTS AND CONTINGENCIES (Note 9) | ||||||||||||||
| STOCKHOLDERS’ EQUITY | ||||||||||||||
Class A Common Stock, $ | ||||||||||||||
Class B Common Stock, $ | ||||||||||||||
| Additional paid-in capital | ||||||||||||||
Treasury Stock, at cost, | ( | ( | ||||||||||||
| Accumulated deficit | ( | ( | ||||||||||||
| Noncontrolling interest | ||||||||||||||
| Total equity | ||||||||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | $ | ||||||||||||
The accompanying notes are an integral part to these consolidated financial statements.
1
Magnolia Oil & Gas Corporation
Consolidated Statements of Operations (Unaudited)
(In thousands, except per share data)
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| June 30, 2022 | June 30, 2021 | June 30, 2022 | June 30, 2021 | ||||||||||||||||||||
| REVENUES | |||||||||||||||||||||||
| Oil revenues | $ | $ | $ | $ | |||||||||||||||||||
| Natural gas revenues | |||||||||||||||||||||||
| Natural gas liquids revenues | |||||||||||||||||||||||
| Total revenues | |||||||||||||||||||||||
| OPERATING EXPENSES | |||||||||||||||||||||||
| Lease operating expenses | |||||||||||||||||||||||
| Gathering, transportation and processing | |||||||||||||||||||||||
| Taxes other than income | |||||||||||||||||||||||
| Exploration expenses | |||||||||||||||||||||||
| Asset retirement obligations accretion | |||||||||||||||||||||||
| Depreciation, depletion and amortization | |||||||||||||||||||||||
| Amortization of intangible assets | |||||||||||||||||||||||
| General and administrative expenses | |||||||||||||||||||||||
| Total operating expenses | |||||||||||||||||||||||
| OPERATING INCOME | |||||||||||||||||||||||
| OTHER INCOME (EXPENSE) | |||||||||||||||||||||||
| Interest expense, net | ( | ( | ( | ( | |||||||||||||||||||
| Loss on derivatives, net | ( | ( | |||||||||||||||||||||
| Other income (expense), net | ( | ||||||||||||||||||||||
| Total other expense, net | ( | ( | ( | ( | |||||||||||||||||||
| INCOME BEFORE INCOME TAXES | |||||||||||||||||||||||
| Income tax expense | |||||||||||||||||||||||
| NET INCOME | |||||||||||||||||||||||
| LESS: Net income attributable to noncontrolling interest | |||||||||||||||||||||||
| NET INCOME ATTRIBUTABLE TO CLASS A COMMON STOCK | $ | $ | $ | $ | |||||||||||||||||||
| NET INCOME PER SHARE OF CLASS A COMMON STOCK | |||||||||||||||||||||||
| Basic | $ | $ | $ | $ | |||||||||||||||||||
| Diluted | $ | $ | $ | $ | |||||||||||||||||||
| WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
2
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 Capital | Treasury Stock | Accumulated Deficit | Total Stockholders’ Equity | Noncontrolling Interest | Total Equity | ||||||||||||||||||||||||||||
| For the Three Months Ended June 30, 2021 | Shares | Value | Shares | Value | Shares | Value | |||||||||||||||||||||||||||||
| Balance, March 31, 2021 | $ | $ | $ | $ | ( | $ | ( | $ | $ | $ | |||||||||||||||||||||||||
| Stock based compensation expense, net of forfeitures | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||
| Changes in ownership interest adjustment | — | — | — | — | ( | — | — | — | ( | ||||||||||||||||||||||||||
| Common stock issued related to stock based compensation and other, net | — | — | — | ( | — | — | — | ( | ( | ( | |||||||||||||||||||||||||
| Class A Common Stock repurchases | — | — | — | — | — | ( | — | ( | — | ( | |||||||||||||||||||||||||
| Class B Common Stock purchase and cancellation | — | — | ( | ( | — | — | — | — | ( | ( | |||||||||||||||||||||||||
| Non-compete settlement | — | — | — | — | ( | — | — | — | ( | ( | ( | ||||||||||||||||||||||||
| Conversion of Class B Common Stock to Class A Common Stock | — | ( | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||
| Distributions to noncontrolling interest owners | — | — | — | — | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||
| Balance, June 30, 2021 | $ | $ | $ | $ | ( | $ | ( | $ | $ | $ | |||||||||||||||||||||||||
| For the Three Months Ended June 30, 2022 | |||||||||||||||||||||||||||||||||||
| Balance, March 31, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | $ | $ | |||||||||||||||||||||||||
| Stock based compensation expense, net of forfeitures | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||
| Changes in ownership interest adjustment | — | — | — | — | ( | — | — | — | ( | ||||||||||||||||||||||||||
| Common stock issued related to stock based compensation and other, net | — | — | — | ( | — | — | — | ( | ( | ( | |||||||||||||||||||||||||
| Class A Common Stock repurchases | — | — | — | — | — | ( | — | ( | ( | ||||||||||||||||||||||||||
| Class B Common Stock purchase and cancellation | — | — | ( | — | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||
| Conversion of Class B Common Stock to Class A Common Stock | ( | ( | — | — | — | — | — | ||||||||||||||||||||||||||||
| Distributions to noncontrolling interest owners | — | — | — | — | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||
| Balance, June 30, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | $ | $ | |||||||||||||||||||||||||
The accompanying notes are an integral part to these consolidated financial statements.
3
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 Capital | Treasury Stock | Accumulated Deficit | Total Stockholders’ Equity | Noncontrolling Interest | Total Equity | ||||||||||||||||||||||||||||
For the Six Months Ended June 30, 2021 | Shares | Value | Shares | Value | Shares | Value | |||||||||||||||||||||||||||||
| Balance, December 31, 2020 | $ | $ | $ | $ | ( | $ | ( | $ | $ | $ | |||||||||||||||||||||||||
| Stock based compensation expense, net of forfeitures | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||
| Changes in ownership interest adjustment | — | — | — | — | ( | — | — | — | ( | ||||||||||||||||||||||||||
| Common stock issued related to stock based compensation and other, net | — | — | — | ( | — | — | — | ( | ( | ( | |||||||||||||||||||||||||
| Class A Common Stock repurchases | — | — | — | — | — | ( | — | ( | — | ( | |||||||||||||||||||||||||
| Class B Common Stock purchase and cancellation | — | — | ( | ( | — | — | — | — | ( | ( | |||||||||||||||||||||||||
| Non-compete settlement | — | — | — | ( | — | — | — | ( | ( | ( | |||||||||||||||||||||||||
| Conversion of Class B Common Stock to Class A Common Stock | ( | ( | — | — | — | — | — | — | |||||||||||||||||||||||||||
| Distributions to noncontrolling interest owners | — | — | — | — | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||
| Balance, June 30, 2021 | $ | $ | $ | $ | ( | $ | ( | $ | $ | $ | |||||||||||||||||||||||||
For the Six Months Ended June 30, 2022 | |||||||||||||||||||||||||||||||||||
| Balance, December 31, 2021 | $ | $ | $ | $ | ( | $ | ( | $ | $ | $ | |||||||||||||||||||||||||
| Stock based compensation expense, net of forfeitures | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||
| Changes in ownership interest adjustment | — | — | — | — | ( | — | — | — | ( | ||||||||||||||||||||||||||
| Common stock issued related to stock based compensation and other, net | — | — | — | ( | — | — | — | ( | ( | ( | |||||||||||||||||||||||||
| Class A Common Stock repurchases | — | — | — | — | — | ( | — | ( | — | ( | |||||||||||||||||||||||||
| Class B Common Stock purchase and cancellation | — | — | ( | — | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||
| Conversion of Class B Common Stock to Class A Common Stock | ( | ( | — | — | — | — | — | — | |||||||||||||||||||||||||||
| Distributions to noncontrolling interest owners | — | — | — | — | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||
Dividends declared ($ | — | — | — | — | ( | — | — | — | ( | — | ( | ||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||
| Balance, June 30, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | $ | $ | |||||||||||||||||||||||||
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)
| Six Months Ended | ||||||||||||||
| June 30, 2022 | June 30, 2021 | |||||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||||||||
| NET INCOME | $ | $ | ||||||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||
| Depreciation, depletion and amortization | ||||||||||||||
| Amortization of intangible assets | ||||||||||||||
| Asset retirement obligations accretion | ||||||||||||||
| Amortization of deferred financing costs | ||||||||||||||
| Unrealized loss on derivatives, net | ||||||||||||||
| Stock based compensation | ||||||||||||||
| Other | ( | |||||||||||||
| Changes in operating assets and liabilities: | ||||||||||||||
| Accounts receivable | ( | ( | ||||||||||||
| Accounts payable | ||||||||||||||
| Accrued liabilities | ( | |||||||||||||
| Drilling advances | ||||||||||||||
| Other assets and liabilities, net | ( | |||||||||||||
| Net cash provided by operating activities | ||||||||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||||||||
| Acquisitions | ( | ( | ||||||||||||
| Additions to oil and natural gas properties | ( | ( | ||||||||||||
| Changes in working capital associated with additions to oil and natural gas properties | ||||||||||||||
| Other investing | ( | ( | ||||||||||||
| Net cash used in investing activities | ( | ( | ||||||||||||
| CASH FLOW FROM FINANCING ACTIVITIES | ||||||||||||||
| Class A Common Stock repurchases | ( | ( | ||||||||||||
| Class B Common Stock purchases and cancellations | ( | ( | ||||||||||||
| Non-compete settlement | ( | |||||||||||||
| Dividends paid | ( | |||||||||||||
| Cash paid for debt modification | ( | ( | ||||||||||||
| Distributions to noncontrolling interest owners | ( | ( | ||||||||||||
| Other financing activities | ( | ( | ||||||||||||
| Net cash used in financing activities | ( | ( | ||||||||||||
| NET CHANGE IN CASH AND CASH EQUIVALENTS | ( | |||||||||||||
| Cash and cash equivalents – Beginning of period | ||||||||||||||
| Cash and cash equivalents – End of period | $ | $ | ||||||||||||
| SUPPLEMENTAL CASH FLOW INFORMATION: | ||||||||||||||
| Supplemental cash items: | ||||||||||||||
| Cash paid for income taxes | $ | $ | ||||||||||||
| Cash paid for interest | ||||||||||||||
| Supplemental non-cash investing and financing activity: | ||||||||||||||
| Accruals or liabilities for capital expenditures | $ | $ | ||||||||||||
| Supplemental non-cash lease operating activity: | ||||||||||||||
| Right-of-use assets obtained in exchange for operating lease obligations | $ | $ | ||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
5
Magnolia Oil & Gas Corporation
Notes to Consolidated Financial Statements
1. Description of Business and Basis of Presentation
Organization and Nature of Operations
Magnolia Oil & Gas Corporation (the “Company” or “Magnolia”) is an independent oil and natural gas company engaged in the acquisition, development, exploration, and production of oil, natural gas, and natural gas liquid (“NGL”) reserves. The Company’s oil and natural gas properties are located primarily in Karnes County and the Giddings area 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
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial reporting. Accordingly, certain disclosures normally included in an Annual Report on Form 10-K have been omitted. The consolidated financial statements and related notes included in this Quarterly Report should be read in conjunction with the Company’s consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the period ended December 31, 2021 (the “2021 Form 10-K”). Except as disclosed herein, there have been no material changes to the information disclosed in the Notes to the Consolidated Financial Statements included in the Company’s 2021 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.
2. Summary of Significant Accounting Policies
As of June 30, 2022, the Company’s significant accounting policies are consistent with those discussed in Note 1—Organization and Summary of Significant Accounting Policies of its consolidated financial statements contained in the Company’s 2021 Form 10-K.
3. Revenue Recognition
6
4. Derivative Instruments
The Company settled all of its natural gas costless collar derivative contracts by September 30, 2021. From September 30, 2020 to September 30, 2021, Magnolia utilized natural gas costless collars to reduce its exposure to price volatility for a portion of its natural gas production volumes. The Company’s policies do not permit the use of derivative instruments for speculative purposes. Under the Company’s costless collar contracts, each collar had an established floor price and ceiling price. When the settlement price was below the floor price, the counterparty was required to make a payment to the Company and when the settlement price was above the ceiling price, the Company was required to make a payment to the counterparty.
The Company elected not to designate any of its derivative instruments as hedging instruments. Accordingly, changes in the fair value of the Company’s derivative instruments were recorded immediately to earnings as “Loss on derivatives, net” on the Company’s consolidated statements of operations.
The following table summarizes the effects of derivative instruments on the Company’s consolidated statements of operations during the three and six months ended June 30, 2022 and 2021:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| (In thousands) | June 30, 2022 | June 30, 2021 | June 30, 2022 | June 30, 2021 | |||||||||||||||||||
| Derivative settlements, realized loss | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Unrealized loss on derivatives | ( | ( | |||||||||||||||||||||
| Loss on derivatives, net | $ | $ | ( | $ | $ | ( | |||||||||||||||||
The Company had no outstanding derivative contracts in place as of June 30, 2022.
5. Fair Value Measurements
Certain of the Company’s assets and liabilities are carried at fair value and measured either on a recurring or nonrecurring 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 Accounting Standards Codification (“ASC”) 820.
The three levels of the fair value hierarchy under ASC 820 are as follows:
Level 1 - Quoted prices (unadjusted) in active markets for identical investments at the measurement date are used.
Level 2 - Pricing inputs are other than quoted prices included within Level 1 that are observable for the investment, either directly or indirectly. Level 2 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 3 - 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
The carrying value and fair value of the financial instrument that is not carried at fair value in the accompanying consolidated balance sheets at June 30, 2022 and December 31, 2021 is as follows:
| June 30, 2022 | December 31, 2021 | ||||||||||||||||||||||
| (In thousands) | Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||||||||||||
| Long-term debt | $ | $ | $ | $ | |||||||||||||||||||
The fair value of the 2026 Senior Notes at June 30, 2022 and December 31, 2021 is based on unadjusted quoted prices in an active market, which is 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 instruments and their relatively short maturities. Non-financial assets and
7
liabilities initially measured at fair value include assets acquired and liabilities assumed in business combinations and asset retirement obligations.
Nonrecurring Fair Value Measurements
Certain of the Company’s assets and liabilities are measured at fair value on a nonrecurring basis. Specifically, stock based compensation is not measured at fair value on an ongoing basis but is subject to fair value calculations in certain circumstances. For further detail, see Note 12—Stock Based Compensation in the Notes to the Consolidated Financial Statements. There were no other nonrecurring fair value measurements as of June 30, 2022 or December 31, 2021.
6. Intangible Assets
Non-Compete Agreement
On July 31, 2018 (the “Closing Date”), the Company and EnerVest, separate and apart from the Business Combination, entered into the Non-Compete, which prohibited EnerVest and certain of its affiliates from competing with the Company in the Eagle Ford Shale until July 31, 2022 (“Prohibited Period End Date”). In January 2021, the Company amended the Non-Compete such that, rather than delivering an aggregate of 4.0 million shares of Class A Common Stock upon the two and one-half year and the four year anniversaries of the Closing Date, the Company would deliver (i) the cash value of approximately 2.0 million shares of Class A Common Stock and approximately 0.4 million shares of Class A Common Stock on the two and one-half year anniversary of the Closing Date and (ii) an aggregate of 1.6 million shares of Class A Common Stock on the four year anniversary of the Closing Date, in each case subject to the terms and conditions of the Non-Compete. On February 1, 2021, as consideration for compliance with the Non-Compete, the Company paid $17.2 million in cash and issued 0.4 million shares of Class A Common Stock.
On June 30, 2021, the Company amended the Prohibited Period End Date to terminate on June 30, 2021 and paid $24.9 million in cash in lieu of delivering the remaining 1.6 million shares of Class A Common Stock (the “Second Non-Compete Amendment”). The Second Non-Compete Amendment resulted in the Company accelerating the amortization of the remaining intangible assets. The Company includes the amortization in “Amortization of intangible assets” on the Company’s consolidated statements of operations.
7. Other Current Liabilities
The following table provides detail of the Company’s other current liabilities for the periods presented:
| (In thousands) | June 30, 2022 | December 31, 2021 | |||||||||
| Accrued capital expenditures | $ | $ | |||||||||
| Accrued production taxes | |||||||||||
| Other | |||||||||||
| Total other current liabilities | $ | $ | |||||||||
8. Long-term Debt
The Company’s long-term debt is comprised of the following:
| (In thousands) | June 30, 2022 | December 31, 2021 | |||||||||
| Revolving credit facility | $ | $ | |||||||||
Senior Notes due 2026 | |||||||||||
| Total long-term debt | |||||||||||
| Less: Unamortized deferred financing cost | ( | ( | |||||||||
| Long-term debt, net | $ | $ | |||||||||
Credit Facility
In connection with the consummation of the Business Combination, the RBL Facility was entered into by and 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
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administrative agent, collateral agent, issuing bank, and swingline lender. On February 16, 2022, Magnolia Operating, as borrower, amended and restated the RBL Facility (“Amended and Restated RBL Facility”) in its entirety, providing for maximum commitments in an aggregate principal amount of $1.0 billion with a letter of credit facility with a $50.0 million sublimit, with an initial borrowing base of $450.0 million. The Amended and Restated RBL Facility, maturing in February 2026, 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.
Borrowings under the Amended and Restated RBL Facility bear interest, at Magnolia Operating’s option, at a rate per annum equal to either the term SOFR 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 Amended and Restated RBL Facility. The applicable margin and the commitment fee rate are calculated based upon the utilization levels of the Amended and Restated RBL Facility as a percentage of unused lender commitments then in effect.
The Amended and Restated RBL Facility contains certain affirmative and negative covenants customary for financings of this type, including compliance with a leverage ratio of less than 3.50 to 1.00 and a current ratio of greater than 1.00 to 1.00. As of June 30, 2022, the Company was in compliance with all covenants under the Amended and Restated RBL Facility. The Company incurred approximately $5.5 million of lender and transaction fees related to the modification of which $5.1 million were recorded as deferred financing costs and will be amortized prospectively over the remaining term of the Amended and Restated RBL Facility and $0.4 million of which were expensed and are reflected in “Interest expense, net” on the Company’s consolidated statements of operations for the six months ended June 30, 2022.
Deferred financing costs in connection with the Amended and Restated RBL Facility are amortized on a straight-line basis over a period of four years from February 2022 to February 2026 and included in “Interest expense, net” in the Company’s consolidated statements of operations. The Company recognized interest expense related to the Amended and Restated RBL Facility and the RBL Facility, as applicable, of $1.0 3.7 million and $2.0 million for the six months ended June 30, 2022 and 2021, respectively. The unamortized portion of the deferred financing costs is included in “Deferred financing costs, net” on the accompanying consolidated balance sheet as of June 30, 2022.
The Company did no t have any outstanding borrowings under the Amended and Restated RBL Facility as of June 30, 2022.
2026 Senior Notes
On July 31, 2018, the Issuers issued and sold $400.0 million aggregate principal amount of 2026 Senior Notes in a private placement under Rule 144A and Regulation S under the Securities Act of 1933, as amended. The 2026 Senior Notes were issued under the Indenture, dated as of July 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.
On April 5, 2021, the terms of the Indenture were amended to modify, among other things, the criteria used by the Company to make Restricted Payments (as defined in the Indenture). The amendment to the Indenture was accounted for as a debt modification. Costs incurred with third parties directly related to the modification were expensed as incurred. The Company incurred approximately $1.1 million of transaction fees in the second quarter of 2021 related to the modification which were expensed. The Company also paid $5.0 million in fees to holders of the 2026 Senior Notes, which fees are recorded as deferred financing costs and amortized using the new effective interest rate applied prospectively over the remaining term of the 2026 Senior Notes.
Deferred financing costs related to the issuance of, and the amendment to the Indenture governing, the 2026 Senior Notes 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 statements 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 has been recorded as “Long-term debt, net” on the Company’s consolidated balance sheet as of June 30, 2022. The Company recognized interest expense related to the 2026 Senior Notes of $6.6 million and $7.7 million for the three months ended June 30, 2022 and 2021, respectively, and $13.1 million and $14.0 million for the six months ended June 30, 2022 and 2021, respectively.
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9. Commitments and Contingencies
Legal Matters
From time to time, the Company is or may become involved in litigation in the ordinary course of business.
Certain of the Magnolia LLC Unit Holders and EnerVest Energy Institutional Fund XIV-C, L.P. (collectively the “Co-Defendants”) 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 Co-Defendants retained all such liability in connection with the Business Combination.
A mineral owner in a Magnolia operated well in Karnes County, Texas filed a complaint with the Texas Railroad Commission (the “Commission”) challenging the validity of the permit to drill such well by questioning the long-standing process by which the Commission granted the permit. After the Commission affirmed the granting of the permit, and after judicial review of the Commission’s order by the 53rd Judicial District Court Travis County, Texas (the “District Court”), the District Court reversed and remanded the Commission’s order. The Commission and Magnolia have appealed the District Court’s judgment to the Third Court of Appeals in Austin, Texas.
At June 30, 2022, 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. No
Environmental Matters
The Company, as an owner or lessee and operator of oil and natural gas properties, is subject to various federal, state, and local laws and regulations relating to discharge of materials into, and the protection of, the environment. These laws and regulations may, among other things, impose liability on a 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 an 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 and domestic political environments, 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. While oil and natural gas prices have increased since 2020, the extent of any further impact of the pandemic, including the emergence and spread of variant strains of COVID-19, on the Company’s industry and business cannot be reasonably predicted at this time. Further, Russia’s invasion of Ukraine in the first quarter of 2022, and global sanctions placed on Russia in response, have had and may continue to have a global impact on supply and demand for oil and natural gas. Magnolia continues to monitor any impacts from the Russia-Ukraine war on the global markets for its commodities.
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10. Income Taxes
The Company’s income tax provision consists of the following components:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| (In thousands) | June 30, 2022 | June 30, 2021 | June 30, 2022 | June 30, 2021 | |||||||||||||||||||
| Current: | |||||||||||||||||||||||
| Federal | $ | $ | $ | $ | |||||||||||||||||||
| State | |||||||||||||||||||||||
| Deferred: | |||||||||||||||||||||||
| Federal | |||||||||||||||||||||||
| State | |||||||||||||||||||||||
| Income tax expense | $ | $ | $ | $ | |||||||||||||||||||
The Company is subject to U.S. federal income tax, margin tax in the state of Texas, and Louisiana corporate income tax. The Company estimates its annual effective tax rate in recording its quarterly provision for income taxes in the various jurisdictions in which it operates. The Company’s effective tax rate for the three months ended June 30, 2022 and 2021 was 8.5 % and 2.0 %, respectively. The Company’s effective tax rate for the six months ended June 30, 2022 and 2021 was 8.3 % and 1.3 %, respectively. As a result of impairments in the first quarter of 2020, the Company established full valuation allowances on the federal and state deferred tax assets, which resulted in additional differences between the effective tax rate and the statutory rate as of June 30, 2022 and June 30, 2021. The primary differences between the annual effective tax rate and the statutory rate of 21.0% are income attributable to noncontrolling interest, state taxes, and valuation allowances.
As of June 30, 2022, the Company did no t have an accrued liability for uncertain tax positions and does not anticipate recognition of any significant liabilities for uncertain tax positions during the next 12 months. For the six months ended June 30, 2022, no
During the six months ended June 30, 2022, the Magnolia LLC Unit Holders redeemed 14.6
As of June 30, 2022, the Company’s net deferred tax asset was $198.4 million. Management assessed whether it is more-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 June 30, 2022, the Company assessed the realizability of the deferred tax assets and recorded a full valuation allowance of $198.4 million.
As commodity prices have improved during 2021 and 2022, Magnolia has begun to sustain a level of increased profitability such that, net of its net operating loss, Magnolia is beginning to project modest taxable income. Should this continue, increased weight will be given to positive operating results, along with projections of future taxable income, in determining whether future taxable income will be sufficient to provide for realization of the Company’s deferred tax assets, and if so, this new evidence may result in a change in estimate of the Company’s valuation allowance in the next 12 months.
11. Stockholders’ Equity
Class A Common Stock
At June 30, 2022, there were 208.7 million shares of Class A Common Stock issued and 190.4 million shares of Class A Common 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 one
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results in the holders of more than 50% of the Company’s outstanding common shares being able to elect all of the directors, subject to voting obligations under the Stockholder Agreement. In the event of a liquidation, dissolution, or winding up of the Company, the holders of the Class 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
At June 30, 2022, there were 28.7
Share Repurchases
The Company’s board of directors has authorized a share repurchase program of up to 30.0 million shares of Class A Common Stock. The program does not require purchases to be made within a particular time frame. As of June 30, 2022, the Company had repurchased 17.7 million shares under the program at a cost of $246.3 million.
During the six months ended June 30, 2022, the Company also repurchased 0.6 million shares of Class A Common Stock for $11.6 million from EnerVest Energy Institutional Fund XIV-C, L.P. outside of the share repurchase program.
During the six months ended June 30, 2022 Magnolia LLC repurchased and subsequently canceled 5.9 138.8 million of cash consideration (the “Class B Common Stock Repurchases”). During the same period, the Magnolia LLC Unit Holders redeemed 14.6
During the six months ended June 30, 2021 Magnolia LLC repurchased and subsequently canceled 10.0 122.5 million of cash consideration (the “Class B Common Stock Repurchases”). During the same period, the Magnolia LLC Unit Holders redeemed 15.3
Magnolia did not receive any proceeds from the sale of shares of Class A Common Stock by the Magnolia LLC Unit Holders. Magnolia funded the Class B Common Stock Repurchases with cash on hand.
Dividends and Distributions
Distributions
On February 3, 2022, Magnolia LLC declared a cash distribution of $0.20 per Magnolia LLC Unit totaling $45.9 million, of which $37.3 million was distributed to the Company and $8.6 million was distributed to the Magnolia LLC Unit Holders.
On August 2, 2021, Magnolia LLC declared a cash distribution of $0.08 per Magnolia LLC Unit totaling $19.0 million, of which $14.2 million was distributed to the Company and $4.8 million was distributed to the Magnolia LLC Unit Holders.
The distributions to the Magnolia LLC Unit Holders were recorded as a reduction of noncontrolling interest on the Company’s consolidated balance sheets as of June 30, 2022 and December 31, 2021.
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Dividends
On February 3, 2022, the Company’s board of directors declared a semi-annual cash dividend of $0.20 per share of Class A Common Stock totaling approximately $37.3 million. The dividend was paid on March 1, 2022 to shareholders of record as of the close of business on February 14, 2022.
On August 2, 2021, the Company’s board of directors declared a semi-annual interim cash dividend of $0.08 per share of Class A Common Stock totaling approximately $14.2 million. The dividend was paid on September 1, 2021 to shareholders of record as of the close of business on August 12, 2021.
Dividends in excess of retained earnings are recorded as a reduction of additional paid-in capital. The $37.3 million and $14.2 million dividends declared during the first quarter of 2022 and the third quarter of 2021, respectively, were recorded as a reduction of additional paid-in capital on the Company’s consolidated balance sheets as of June 30, 2022 and December 31, 2021.
Noncontrolling Interest
Noncontrolling interest in Magnolia’s consolidated subsidiaries includes amounts attributable to Magnolia LLC Units that were issued to the Magnolia LLC Unit Holders in connection with the Business Combination. The noncontrolling interest percentage is affected by various equity transactions such as issuances and repurchases of Class A Common Stock, the exchange of Class B Common Stock (and corresponding Magnolia LLC Units) for Class A Common Stock, or the cancellation of Class B Common Stock (and corresponding Magnolia LLC Units). As of June 30, 2022, Magnolia owned approximately 86.9 % of the interest in Magnolia LLC and the noncontrolling interest was approximately 13.1 %.
In the first quarter of 2019, Magnolia Operating formed Highlander Oil & Gas Holdings LLC (“Highlander”) as a joint venture whereby MGY Louisiana LLC, a wholly owned subsidiary of Magnolia Operating, holds approximately 84.7 % of the units of Highlander, with the remaining 15.3 % attributable to noncontrolling interest.
12. Stock Based Compensation
On October 8, 2018, the Company’s board of directors adopted the “Magnolia Oil & Gas Corporation Long Term Incentive Plan” (as amended, the “Plan”), effective as of July 17, 2018. A total of 16.8 million shares of Class A Common Stock have been authorized for issuance under the Plan as of June 30, 2022. The Company grants stock based compensation awards in the form of restricted stock units (“RSU”), performance stock units (“PSU”), and performance restricted stock units (“PRSU”) 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 and administrative expenses” and “Lease operating expenses” on the consolidated statements of operations and was $3.5 6.4 million and $6.2 million for the six months ended June 30, 2022 and 2021, respectively. The Company has elected to account for forfeitures of awards granted under the Plan as they occur in determining compensation expense.
The following table presents a summary of Magnolia’s unvested RSU, PSU, and PRSU activity for the three months ended June 30, 2022.
| Restricted Stock Units | Performance Stock Units | Performance Restricted Stock Units | |||||||||||||||||||||||||||||||||
| Units | Weighted Average Grant Date Fair Value | Units | Weighted Average Grant Date Fair Value | Units | Weighted Average Grant Date Fair Value | ||||||||||||||||||||||||||||||
| Unvested at March 31, 2022 | $ | $ | $ | ||||||||||||||||||||||||||||||||
| Granted | |||||||||||||||||||||||||||||||||||
| Vested | ( | ( | |||||||||||||||||||||||||||||||||
| Forfeited | ( | ||||||||||||||||||||||||||||||||||
| Unvested at June 30, 2022 | $ | $ | $ | ||||||||||||||||||||||||||||||||
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The following table presents a summary of Magnolia’s unvested RSU, PSU, and PRSU activity for the six months ended June 30, 2022.
| Restricted Stock Units | Performance Stock Units | Performance Restricted Stock Units | |||||||||||||||||||||||||||||||||
| Units | Weighted Average Grant Date Fair Value | Units | Weighted Average Grant Date Fair Value | Units | Weighted Average Grant Date Fair Value | ||||||||||||||||||||||||||||||
| Unvested at December 31, 2021 | $ | $ | $ | ||||||||||||||||||||||||||||||||
| Granted | |||||||||||||||||||||||||||||||||||
Granted for performance multiple(1) | |||||||||||||||||||||||||||||||||||
| Vested | ( | ( | ( | ||||||||||||||||||||||||||||||||
| Forfeited | ( | ( | |||||||||||||||||||||||||||||||||
| Unvested at June 30, 2022 | $ | $ | $ | ||||||||||||||||||||||||||||||||
(1) Upon completion of the performance period for the PSUs granted in 2019, a performance multiple of 150 % was applied to each of the grants resulting in additional grants of PSUs in 2022.
Restricted Stock Units
The Company grants service-based RSU awards to employees, which generally vest ratably over a three-year or four-year service period, and to non-employee directors, which vest in full after one year . 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 that vest. RSUs are subject to restrictions on transfer and are generally subject to a risk of forfeiture if the award recipient ceases to be an employee or director of the Company 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. The aggregate fair value of RSUs that vested during the six months ended June 30, 2022 and 2021 was $10.2 million and $5.8 million, respectively. Unrecognized compensation expense related to unvested RSUs as of June 30, 2022 was $9.6 million, which the Company expects to recognize over a weighted average period of 2.6 years.
Performance Stock Units and Performance Restricted Stock Units
The Company grants PRSUs to certain employees. Each PRSU represents the contingent right to receive one share of Class A Common Stock once the PRSU is both vested and earned. PRSUs generally vest either ratably over a three-year service period or at the end of a three-year service period, in each case, subject to the recipient’s continued employment or service through each applicable vesting date. Each PRSU is earned based on whether Magnolia’s stock price achieves a target average stock price for any 20 consecutive trading days during the five-year performance period. If PRSUs are not earned by the end of the five-year performance period (“Performance Condition”), the PRSUs will be forfeited and no shares of Class A Common Stock will be issued, even if the vesting conditions have been met. Compensation expense for the PRSU awards is based upon grant date fair market value of the award, calculated using a Monte Carlo simulation, as presented below, 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, as applicable. The aggregate fair value of PRSU awards that vested during the six months ended June 30, 2022 was $4.8 million. Unrecognized compensation expense related to unvested PRSUs as of June 30, 2022 was $12.9 million, which the Company expects to recognize over a weighted average period of 2.4 years.
The Company grants PSUs to certain employees. Each PSU, to the extent earned, represents the contingent right to receive one share of Class A Common Stock and the awardee may earn between zero and 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 a 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. The aggregate fair value of PSU awards that vested during the six months ended June 30, 2022 and 2021 was $5.5 million and $0.2 million, respectively. Unrecognized compensation expense related to unvested PSUs as of June 30, 2022 was $0.3 million, which the Company expects to recognize over a weighted average period of 0.6 years.
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The grant date fair values of the PRSUs granted during the six months ended June 30, 2022 and 2021, were $9.7 million and $9.5 million, respectively. Since the Performance Condition for the PRSUs granted in 2022 and 2021 were met on March 28, 2022 and March 17, 2021, respectively, the fair value of the PRSUs granted after the Performance Condition were met were based upon the grant date market value of the award. The fair values of the awards granted prior to the date the Performance Condition was met were determined using a Monte Carlo simulation. The following table summarizes the Monte Carlo simulation assumptions used to calculate the grant date fair value of the PRSUs in 2022 and 2021.
| Six Months Ended | |||||||||||
| PRSU Grant Date Fair Value Assumptions | June 30, 2022 | June 30, 2021 | |||||||||
Expected term (in years) | |||||||||||
| Expected volatility | |||||||||||
| Risk-free interest rate | |||||||||||
| Dividend yield | |||||||||||
13. Earnings Per Share
The Company’s unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are deemed participating securities, and therefore dividends and net income allocated to such awards have been deducted from earnings in computing basic and diluted net income per share under the two-class method. Diluted net income per share attributable to common stockholders is calculated under both the two-class method and the treasury stock method and the more dilutive of the two calculations is presented.
The components of basic and diluted net income per share attributable to common stockholders are as follows:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| (In thousands, except per share data) | June 30, 2022 | June 30, 2021 | June 30, 2022 | June 30, 2021 | |||||||||||||||||||
| Basic: | |||||||||||||||||||||||
| Net income attributable to Class A Common Stock | $ | $ | $ | $ | |||||||||||||||||||
| Less: Dividends and net income allocated to participating securities | |||||||||||||||||||||||
| Net income, net of participating securities | $ | $ | $ | $ | |||||||||||||||||||
| Weighted average number of common shares outstanding during the period - basic | |||||||||||||||||||||||
Net income per share of Class A Common Stock - basic | $ | $ | $ | $ | |||||||||||||||||||
| Diluted: | |||||||||||||||||||||||
| Net income attributable to Class A Common Stock | $ | $ | $ | $ | |||||||||||||||||||
| Less: Dividends and net income allocated to participating securities | |||||||||||||||||||||||
| Net income, net of participating securities | $ | $ | $ | $ | |||||||||||||||||||
| Weighted average number of common shares outstanding during the period - basic | |||||||||||||||||||||||
| Add: Dilutive effect of stock based compensation and other | |||||||||||||||||||||||
| Weighted average number of common shares outstanding during the period - diluted | |||||||||||||||||||||||
Net income per share of Class A Common Stock - diluted | $ | $ | $ | $ | |||||||||||||||||||
For the three months ended June 30, 2022 and 2021, the Company excluded 33.8 million and 66.1 million, respectively, of weighted average shares of Class A Common Stock issuable upon the exchange of Class B Common Stock (and corresponding Magnolia LLC Units) as the effect was anti-dilutive. For the six months ended June 30, 2022 and 2021, the Company excluded 39.0 million and 73.1 million, respectively, weighted average shares of Class A Common Stock issuable upon the exchange of Class B Common Stock (and corresponding Magnolia LLC Units), as the effect was anti-dilutive.
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14. Related Party Transactions
15. Subsequent Events
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
FORWARD-LOOKING STATEMENTS
This report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). 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 economic effects of the COVID-19 pandemic and actions taken by federal, state and local governments and other third parties in response to the pandemic;
•legislative, regulatory, or policy changes, including those following the change in presidential administrations;
•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;
•geopolitical and business conditions in key regions of the world;
•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;
•cyber attacks;
•the occurrence of property acquisitions or divestitures;
•the integration of acquisitions; and
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•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 the reports that we have filed and may file with the Securities and Exchange Commission, including the Company’s Annual Report on Form 10-K for the period ended December 31, 2021 (the “2021 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.
Overview
Magnolia Oil & Gas Corporation (the “Company” or “Magnolia”) is an independent oil and natural gas company engaged in the acquisition, development, exploration, and production of oil, natural gas, and 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 area 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. The Company’s allocation of capital prioritizes reinvesting in its business to achieve moderate and predictable annual volume growth, balanced with returning capital to its shareholders through dividends and share repurchases.
Magnolia’s business model prioritizes free cash flow, financial stability, and prudent capital allocation. The Company’s ongoing plan is to spend within cash flow on drilling and completing wells while maintaining low leverage. As of June 30, 2022, Magnolia operated one rig exclusively in the Giddings area, and one rig in both the Karnes and Giddings areas. The Company’s gradual and measured approach toward both the appraisal and development of the Giddings area has created operating efficiencies leading to higher production growth this year.
COVID-19 Pandemic and Market Conditions Update
The COVID-19 pandemic and related economic repercussions have created significant volatility, uncertainty, and turmoil in the oil and natural gas industry. As the global economy continues to recover from the effects of the COVID-19 pandemic, economic indicators have continued to strengthen. However, the economy has begun to experience elevated inflation levels as a result of global supply and demand imbalances. Inflationary pressures and labor shortages could result in further increases to our operating and capital costs.
Business Overview
As of June 30, 2022, Magnolia’s assets in South Texas included 43,475 gross (23,767 net) acres in the Karnes area, and 638,360 gross (447,924 net) acres in the Giddings area. As of June 30, 2022, Magnolia held an interest in approximately 2,060 gross (1,317 net) wells, with total production of 74.2 thousand and 73.0 thousand barrels of oil equivalent per day for the three and six months ended June 30, 2022, respectively. During the second quarter of 2022, Magnolia was running a two-rig program. One rig drilled multi-well development pads exclusively in the Giddings area. The second rig drilled a mix of wells in both the Karnes and Giddings areas.
Magnolia recognized net income attributable to Class A Common Stock of $250.6 million and $416.6 million, or $1.32 and $2.22 per diluted common share, for the three and six months ended June 30, 2022, respectively. Magnolia recognized net income of $299.9 million and $508.5 million, which includes a noncontrolling interest of $49.3 million and $91.9 million related to the Magnolia LLC Units (and corresponding shares of Class B Common Stock) held by certain affiliates of EnerVest, for the three and six months ended June 30, 2022, respectively.
On February 3, 2022, the Company’s board of directors declared a semi-annual cash dividend of $0.20 per share of Class A Common Stock totaling approximately $37.3 million. The dividend was paid on March 1, 2022 to shareholders of record as of the close of business on February 14, 2022.
The Company’s board of directors has authorized a share repurchase program of up to 30.0 million shares. The program does not require purchases to be made within a particular time frame. As of June 30, 2022, the Company had repurchased 17.7 million shares under the program at a cost of $246.3 million and had 12.3 million shares of Class A Common Stock remaining under its current repurchase authorization.
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During the six months ended June 30, 2022, the Company also repurchased 0.6 million shares of Class A Common Stock for $11.6 million from EnerVest Energy Institutional Fund XIV-C, L.P. outside of the share repurchase program.
During the six months ended June 30, 2022, Magnolia LLC repurchased and subsequently canceled 5.9 million Magnolia LLC Units with an equal number of shares of corresponding Class B Common Stock for $138.8 million of cash consideration (the “Class B Common Stock Repurchases”). Magnolia funded the Class B Common Stock Repurchases with cash on hand. During the same period, the Magnolia LLC Unit Holders redeemed 14.6 million Magnolia LLC Units (and a corresponding number of shares of Class B Common Stock) for an equivalent number of shares of Class A Common Stock and subsequently sold these shares to the public. Magnolia did not receive any proceeds from the sale of shares of Class A Common Stock by the Magnolia LLC Unit Holders. As of June 30, 2022, Magnolia owned approximately 86.9% of the interest in Magnolia LLC and the noncontrolling interest was approximately 13.1%.
Results of Operations
Factors Affecting the Comparability of the Historical Financial Results
Magnolia’s historical financial condition and results of operations for the periods presented may not be comparable, either from period to period or going forward, as a result of the following factors:
•On February 16, 2022, Magnolia Operating, as borrower, amended and restated the RBL Facility (“Amended and Restated RBL Facility”) in its entirety, which will now mature in February 2026.
•During the second quarter of 2021, the Company amended the term of the Services Agreement to end on June 30, 2021.
•During the second quarter of 2021, the Company amended the Non-Compete (the “Second Non-Compete Amendment”), which modified the term of the Non-Compete to end on June 30, 2021.
•The 2026 Senior Notes issued under the Indenture, dated as of July 31, 2018, were amended on April 5, 2021. This debt modification included approximately $1.1 million of one-time transaction fees which were expensed and $5.0 million in fees paid to holders of the 2026 Senior Notes, which were reflected as deferred financing costs reducing Long-term debt and will be amortized over the remaining term of the 2026 Senior Notes.
As a result of the factors listed above, the 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.
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Three Months Ended June 30, 2022 Compared to the Three Months Ended June 30, 2021
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.
| Three Months Ended | ||||||||||||||
| (In thousands, except per unit data) | June 30, 2022 | June 30, 2021 | ||||||||||||
| Production: | ||||||||||||||
| Oil (MBbls) | 3,019 | 2,903 | ||||||||||||
| Natural gas (MMcf) | 12,464 | 9,947 | ||||||||||||
| NGLs (MBbls) | 1,656 | 1,349 | ||||||||||||
| Total (Mboe) | 6,752 | 5,910 | ||||||||||||
| Average daily production: | ||||||||||||||
| Oil (Bbls/d) | 33,178 | 31,897 | ||||||||||||
| Natural gas (Mcf/d) | 136,966 | 109,313 | ||||||||||||
| NGLs (Bbls/d) | 18,194 | 14,830 | ||||||||||||
| Total (boe/d) | 74,200 | 64,946 | ||||||||||||
| Revenues: | ||||||||||||||
| Oil revenues | $ | 332,791 | $ | 188,701 | ||||||||||
| Natural gas revenues | 85,345 | 33,314 | ||||||||||||
| Natural gas liquids revenues | 66,513 | 30,035 | ||||||||||||
| Total revenues | $ | 484,649 | $ | 252,050 | ||||||||||
| Average Price: | ||||||||||||||
| Oil (per barrel) | $ | 110.22 | $ | 65.01 | ||||||||||
| Natural gas (per Mcf) | 6.85 | 3.35 | ||||||||||||
| NGLs (per barrel) | 40.17 | 22.26 | ||||||||||||
Oil revenues were 69% and 75% of the Company’s total revenues for the three months ended June 30, 2022 and 2021, respectively. Oil production was 45% and 49% of total production volume for the three months ended June 30, 2022 and 2021, respectively. Oil revenues for the three months ended June 30, 2022 were $144.1 million higher than the three months ended June 30, 2021. A 70% increase in average prices increased second quarter 2022 revenues by $131.2 million compared to the same period in the prior year, while a 4% increase in oil production increased revenues by $12.9 million.
Natural gas revenues were 17% and 13% of the Company’s total revenues for the three months ended June 30, 2022 and 2021, respectively. Natural gas production was 31% and 28% of total production volume for the three months ended June 30, 2022 and 2021, respectively. Natural gas revenues for the three months ended June 30, 2022 were $52.0 million higher than the three months ended June 30, 2021. A 104% increase in average prices increased second quarter 2022 revenues by $34.8 million compared to the same period in the prior year, while a 25% increase in natural gas production increased revenues by $17.2 million.
NGL revenues were 14% and 12% of the Company’s total revenues for the three months ended June 30, 2022 and 2021, respectively. NGL production was 24% and 23% of total production volume for the three months ended June 30, 2022 and 2021, respectively. NGL revenues for the three months ended June 30, 2022 were $36.5 million higher than the three months ended June 30, 2021. An 81% increase in average prices increased second quarter 2022 revenues by $24.2 million compared to the same period in the prior year, while a 23% increase in NGL production increased revenues by $12.3 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) | June 30, 2022 | June 30, 2021 | ||||||||||||
| Operating Expenses: | ||||||||||||||
| Lease operating expenses | $ | 32,604 | $ | 21,971 | ||||||||||
| Gathering, transportation and processing | 16,381 | 10,287 | ||||||||||||
| Taxes other than income | 27,411 | 13,812 | ||||||||||||
| Exploration expenses | 3,408 | 62 | ||||||||||||
| Asset retirement obligations accretion | 802 | 1,405 | ||||||||||||
| Depreciation, depletion and amortization | 57,254 | 43,332 | ||||||||||||
| Amortization of intangible assets | — | 7,233 | ||||||||||||
| General and administrative expenses | 18,530 | 24,757 | ||||||||||||
| Total operating expenses | $ | 156,390 | $ | 122,859 | ||||||||||
| Other Income (Expense): | ||||||||||||||
| Interest expense, net | $ | (7,017) | $ | (8,752) | ||||||||||
| Loss on derivatives, net | — | (2,004) | ||||||||||||
| Other income, net | 6,538 | 135 | ||||||||||||
| Total other expense, net | $ | (479) | $ | (10,621) | ||||||||||
| Average Operating Costs per boe: | ||||||||||||||
| Lease operating expenses | $ | 4.83 | $ | 3.72 | ||||||||||
| Gathering, transportation and processing | 2.43 | 1.74 | ||||||||||||
| Taxes other than income | 4.06 | 2.34 | ||||||||||||
| Exploration expenses | 0.50 | 0.01 | ||||||||||||
| Asset retirement obligations accretion | 0.12 | 0.24 | ||||||||||||
| Depreciation, depletion and amortization | 8.48 | 7.33 | ||||||||||||
| Amortization of intangible assets | — | 1.22 | ||||||||||||
| General and administrative expenses | 2.74 | 4.19 | ||||||||||||
Lease operating expenses are 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 for the three months ended June 30, 2022 were $10.6 million, or $1.11 per boe, higher compared to the corresponding 2021 period, due to an increase in costs including operating and maintenance costs, workover activities and additional non-operated activities.
Gathering, transportation and processing costs are costs incurred to deliver oil, natural gas, and NGLs to the market. These expenses can vary based on the volume of oil, natural gas, and NGLs produced as well as the cost of commodity processing. The gathering, transportation and processing costs for the three months ended June 30, 2022 were $6.1 million, or $0.69 per boe, higher than the three months ended June 30, 2021, primarily due to increased natural gas production and higher 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 for the three months ended June 30, 2022 were $13.6 million, or $1.72 per boe, higher compared to the three months ended June 30, 2021, primarily due to an increase in oil, natural gas, and NGL revenues.
Exploration expenses are geological and geophysical costs that include seismic surveying costs, costs of expired or abandoned leases, and delay rentals. The exploration expenses for the three months ended June 30, 2022 were $3.3 million, or $0.49 per boe, higher than the three months ended June 30, 2021, due to the purchase of seismic licenses and increased seismic surveying costs.
Depreciation, depletion and amortization (“DD&A”) during the three months ended June 30, 2022 was $13.9 million, or $1.15 per boe, higher than the three months ended June 30, 2021 due to increased production and a higher depreciable cost basis.
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For the three months ended June 30, 2022, the Company did not recognize any amortization of intangible assets, because the intangible assets were fully amortized in June 2021 as a result of the termination of the Non-Compete. During the three months ended June 30, 2021, the Company recognized $7.2 million of amortization of intangible assets.
General and administrative expenses during the three months ended June 30, 2022 were $6.2 million, or $1.45 per boe, lower than the three months ended June 30, 2021, primarily driven by the reduction in costs due to the termination of the Services Agreement on June 30, 2021, partially offset by higher corporate payroll expenses related to increased employee headcount.
Other income, net, during the three months ended June 30, 2022 was $6.4 million higher than the three months ended June 30, 2021, primarily driven by the receipt of an earnout payment in the second quarter of 2022 associated with the sale of the Company’s 35% membership interest in Ironwood Eagle Ford Midstream, LLC in 2020.
Six Months Ended June 30, 2022 Compared to the Six Months Ended June 30, 2021
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.
| Six Months Ended | ||||||||||||||
| (In thousands, except per unit data) | June 30, 2022 | June 30, 2021 | ||||||||||||
| Production: | ||||||||||||||
| Oil (MBbls) | 5,835 | 5,495 | ||||||||||||
| Natural gas (MMcf) | 24,842 | 20,188 | ||||||||||||
| NGLs (MBbls) | 3,242 | 2,654 | ||||||||||||
| Total (Mboe) | 13,217 | 11,514 | ||||||||||||
| Average daily production: | ||||||||||||||
| Oil (Bbls/d) | 32,239 | 30,361 | ||||||||||||
| Natural gas (Mcf/d) | 137,247 | 111,536 | ||||||||||||
| NGLs (Bbls/d) | 17,911 | 14,661 | ||||||||||||
| Total (boe/d) | 73,024 | 63,611 | ||||||||||||
| Revenues: | ||||||||||||||
| Oil revenues | $ | 595,459 | $ | 335,659 | ||||||||||
| Natural gas revenues | 141,925 | 68,977 | ||||||||||||
| Natural gas liquids revenues | 125,105 | 56,521 | ||||||||||||
| Total revenues | $ | 862,489 | $ | 461,157 | ||||||||||
| Average Price: | ||||||||||||||
| Oil (per barrel) | $ | 102.04 | $ | 61.08 | ||||||||||
| Natural gas (per Mcf) | 5.71 | 3.42 | ||||||||||||
| NGLs (per barrel) | 38.59 | 21.30 | ||||||||||||
Oil revenues were 69% and 73% of the Company’s total revenues for the six months ended June 30, 2022 and 2021, respectively. Oil production was 44% and 48% of total production volume for the six months ended June 30, 2022 and 2021, respectively. Oil revenues for the six months ended June 30, 2022 were $259.8 million higher than the six months ended June 30, 2021. A 67% increase in average prices increased revenues by $225.1 million during the six months ended June 30, 2022 compared to the same period in the prior year, while a 6% increase in oil production increased revenues by $34.7 million.
Natural gas revenues were 16% and 15% of the Company’s total revenues for the six months ended June 30, 2022 and 2021, respectively. Natural gas production was 31% and 29% of total production volume for the six months ended June 30, 2022 and 2021, respectively. Natural gas revenues for the six months ended June 30, 2022 were $72.9 million higher than the six months ended
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June 30, 2021. A 67% increase in average prices increased revenues by $46.4 million during the six months ended June 30, 2022 compared to the same period in the prior year, while a 23% increase in natural gas production increased revenues by $26.5 million.
NGL revenues were 15% and 12% of the Company’s total revenues for the six months ended June 30, 2022 and 2021, respectively. NGL production was 25% and 23% of total production volume for the six months ended June 30, 2022 and 2021, respectively. NGL revenues for the six months ended June 30, 2022 were $68.6 million higher than the six months ended June 30, 2021. An 81% increase in average prices increased revenues by $45.9 million during the six months ended June 30, 2022 compared to the same period in the prior year, while a 22% increase in NGL production increased revenues by $22.7 million.
Operating Expenses and Other Income (Expense). The following table summarizes the Company’s operating expenses and other income (expense) for the periods indicated.
| Six Months Ended | ||||||||||||||
| (In thousands, except per unit data) | June 30, 2022 | June 30, 2021 | ||||||||||||
| Operating Expenses: | ||||||||||||||
| Lease operating expenses | $ | 61,348 | $ | 41,363 | ||||||||||
| Gathering, transportation and processing | 32,221 | 20,530 | ||||||||||||
| Taxes other than income | 48,293 | 24,574 | ||||||||||||
| Exploration expenses | 8,946 | 2,124 | ||||||||||||
| Asset retirement obligations accretion | 1,590 | 2,736 | ||||||||||||
| Depreciation, depletion and amortization | 110,360 | 86,275 | ||||||||||||
| Amortization of intangible assets | — | 9,346 | ||||||||||||
| General and administrative expenses | 35,601 | 45,122 | ||||||||||||
| Total operating expenses | $ | 298,359 | $ | 232,070 | ||||||||||
| Other Income (Expense): | ||||||||||||||
| Interest expense, net | $ | (16,374) | $ | (16,046) | ||||||||||
| Loss on derivatives, net | — | (2,486) | ||||||||||||
| Other income (expense), net | 6,744 | (94) | ||||||||||||
| Total other expense, net | $ | (9,630) | $ | (18,626) | ||||||||||
| Average Operating Costs per boe: | ||||||||||||||
| Lease operating expenses | $ | 4.64 | $ | 3.59 | ||||||||||
| Gathering, transportation and processing | 2.44 | 1.78 | ||||||||||||
| Taxes other than income | 3.65 | 2.13 | ||||||||||||
| Exploration expenses | 0.68 | 0.18 | ||||||||||||
| Asset retirement obligations accretion | 0.12 | 0.24 | ||||||||||||
| Depreciation, depletion and amortization | 8.35 | 7.49 | ||||||||||||
| Amortization of intangible assets | — | 0.81 | ||||||||||||
| General and administrative expenses | 2.69 | 3.92 | ||||||||||||
Lease operating expenses for the six months ended June 30, 2022 were $20.0 million, or $1.05 per boe, higher compared to the corresponding 2021 period, due to an increase in costs including operating and maintenance costs, workover activities, and additional non-operated activities.
The gathering, transportation and processing costs for the six months ended June 30, 2022 were $11.7 million, or $0.66 per boe, higher than the six months ended June 30, 2021, primarily due to increased natural gas production and higher prices.
Taxes other than income for the six months ended June 30, 2022 were $23.7 million, or $1.52 per boe, higher compared to the six months ended June 30, 2021, primarily due to an increase in oil, natural gas, and NGL revenues.
The exploration expenses for the six months ended June 30, 2022 were $6.8 million, or $0.50 per boe, higher than the six months ended June 30, 2021, due to the purchase of seismic licenses and increased seismic surveying costs.
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DD&A during the six months ended June 30, 2022 was $24.1 million, or $0.86 per boe, higher than the six months ended June 30, 2021 due to increased production and a higher depreciable cost basis.
For the six months ended June 30, 2022, the Company did not recognize any amortization of intangible assets, because the intangible assets were fully amortized in June 2021 as a result of the termination of the Non-Compete. During the six months ended June 30, 2021, the Company recognized $9.3 million of amortization of intangible assets.
General and administrative expenses during the six months ended June 30, 2022 were $9.5 million, or $1.23 per boe, lower than the six months ended June 30, 2021, primarily driven by the reduction in costs due to the termination of the Services Agreement on June 30, 2021, partially offset by higher corporate payroll expenses related to increased employee headcount.
Other income (expense), net, during the six months ended June 30, 2022 was $6.7 million. This is primarily comprised of the receipt of an earnout payment in the second quarter of 2022 associated with the sale of the Company’s 35% membership interest in Ironwood Eagle Ford Midstream, LLC in 2020.
Liquidity and Capital Resources
Magnolia’s primary source of liquidity and capital has been its cash flows from operations. The Company’s primary uses of cash have been for development of the Company’s oil and natural gas properties, returning capital to shareholders, bolt-on acquisitions of oil and natural gas properties, and general working capital needs.
The Company may also utilize borrowings under other various financing sources available to it, including its Amended and Restated 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.
As of June 30, 2022, the Company had $400.0 million of principal debt related to the 2026 Senior Notes outstanding and no outstanding borrowings related to the Amended and Restated RBL Facility. As of June 30, 2022, the Company had $951.9 million of liquidity comprised of the $450.0 million of borrowing base capacity of the Amended and Restated RBL Facility, and $501.9 million of cash and cash equivalents.
Cash and Cash Equivalents
At June 30, 2022, Magnolia had $501.9 million of cash and cash equivalents. The Company’s cash and cash equivalents are maintained with various financial institutions in the United States. Deposits with these institutions may exceed the amount of insurance provided on such deposits. However, the Company regularly monitors the financial stability of such 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 and cash equivalents for the periods presented:
| Six Months Ended | ||||||||||||||
| (In thousands) | June 30, 2022 | June 30, 2021 | ||||||||||||
| Sources of cash and cash equivalents | ||||||||||||||
| Net cash provided by operating activities | $ | 618,004 | $ | 306,031 | ||||||||||
| Uses of cash and cash equivalents | ||||||||||||||
| Acquisitions | $ | (4,347) | $ | (9,409) | ||||||||||
| Additions to oil and natural gas properties | (207,461) | (94,356) | ||||||||||||
| Changes in working capital associated with additions to oil and natural gas properties | 25,494 | 11,814 | ||||||||||||
| Class A Common Stock repurchases | (92,155) | (44,328) | ||||||||||||
| Class B Common Stock purchases and cancellations | (138,753) | (122,531) | ||||||||||||
| Non-compete settlement | — | (42,074) | ||||||||||||
| Dividends paid | (37,176) | — | ||||||||||||
| Distributions to noncontrolling interest owners | (16,243) | (431) | ||||||||||||
| Other | (12,454) | (6,995) | ||||||||||||
| (483,095) | (308,310) | |||||||||||||
| Net change in cash and cash equivalents | $ | 134,909 | $ | (2,279) | ||||||||||
Sources of Cash and Cash Equivalents
Net Cash Provided by Operating Activities
Operating cash flows are the Company’s primary source of liquidity and are impacted, in the short- 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, with the exception of certain non-cash expenses such as DD&A, stock based compensation, amortization of deferred financing costs, the non-cash portion of exploration expenses, and asset retirement obligations accretion.
Net cash provided by operating activities totaled $618.0 million and $306.0 million for the six months ended June 30, 2022 and 2021, respectively. During the six months ended June 30, 2022, cash provided by operating activities was positively impacted by increased oil, natural gas, and NGL prices, partially offset by higher operating expenses and income tax payments.
Uses of Cash and Cash Equivalents
Acquisitions
The Company made individually insignificant bolt-on acquisitions during each of the six months ended June 30, 2022 and 2021.
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Additions to Oil and Natural Gas Properties
The following table sets forth the Company’s capital expenditures for the periods presented:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| (In thousands) | June 30, 2022 | June 30, 2021 | June 30, 2022 | June 30, 2021 | |||||||||||||||||||
| Drilling and completion | $ | 122,018 | $ | 53,808 | $ | 205,375 | $ | 92,658 | |||||||||||||||
| Leasehold acquisition costs | 1,213 | 382 | 2,086 | 1,698 | |||||||||||||||||||
| Total capital expenditures | $ | 123,231 | $ | 54,190 | $ | 207,461 | $ | 94,356 | |||||||||||||||
During the second quarter of 2022, Magnolia was running a two-rig program. One rig drilled multi-well development pads in the Giddings area. The second rig drilled a mix of wells in both the Karnes and Giddings areas. The number of operated drilling rigs is largely dependent on commodity prices and the Company’s strategy of maintaining spending to accommodate the Company’s business model.
Capital Requirements
The Company’s board of directors has authorized a share repurchase program of up to 30.0 million shares of Class A Common Stock. The program does not require purchases to be made within a particular time frame and whether the Company undertakes these additional repurchases is ultimately subject to numerous considerations, market conditions, and other factors. During the six months ended June 30, 2022 and 2021, the Company repurchased 3.6 million and 4.0 million shares for a total cost of approximately $81.7 million and $44.3 million, respectively.
During the six months ended June 30, 2022, the Company also repurchased 0.6 million shares of Class A Common Stock for $11.6 million from EnerVest Energy Institutional Fund XIV-C, L.P. outside of the share repurchase program.
During the six months ended June 30, 2022 and 2021, Magnolia LLC repurchased and subsequently canceled 5.9 million and 10.0 million Magnolia LLC Units with an equal number of shares of corresponding Class B Common Stock for $138.8 million and $122.5 million of cash consideration, respectively. As of June 30, 2022, Magnolia owned approximately 86.9% of the interest in Magnolia LLC and the noncontrolling interest was approximately 13.1%.
In January 2021, the Company amended the Non-Compete such that, rather than delivering an aggregate of 4.0 million shares of Class A Common Stock upon the two and one-half year and the four year anniversaries of July 31, 2018 (the “Closing Date”), the Company would deliver (i) the cash value of approximately 2.0 million shares of Class A Common Stock and approximately 0.4 million shares of Class A Common Stock on the two and one-half year anniversary of the Closing Date and (ii) an aggregate of 1.6 million shares of Class A Common Stock on the four year anniversary of the Closing Date, in each case subject to the terms and conditions of the Non-Compete. On February 1, 2021, as consideration for compliance with the Non-Compete, the Company paid $17.2 million in cash and issued 0.4 million shares of Class A Common Stock. On June 30, 2021, as part of the Second Non-Compete Amendment, the Company paid $24.9 million in cash in lieu of delivering the remaining 1.6 million shares of Class A Common Stock.
On February 3, 2022, the Company’s board of directors declared a cash dividend of $0.20 per share of Class A Common Stock totaling $37.3 million, of which $37.2 million was paid as of June 30, 2022. In addition, $8.6 million was distributed to the Magnolia LLC Unit Holders. The amount and frequency of future dividends is subject to the discretion of the Company’s board of directors and primarily depends on earnings, capital expenditures, debt covenants, and various other factors.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
For variable rate debt, interest rate changes generally do not affect the fair market value of such debt, but do impact future earnings and cash flows, assuming other factors are held constant. The Company is subject to market risk exposure related to changes in interest rates on borrowings under the Amended and Restated RBL Facility. Interest on borrowings under the Amended and Restated RBL Facility is based on the SOFR rate or alternative base rate plus an applicable margin. At June 30, 2022, the Company had no borrowings outstanding under the Amended and Restated RBL Facility.
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Commodity Price Risk
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. A $1.00 per barrel increase (decrease) in the weighted average oil price for the six months ended June 30, 2022 would have increased (decreased) the Company’s revenues by approximately $11.7 million on an annualized basis and a $0.10 per Mcf increase (decrease) in the weighted average natural gas price for the six months ended June 30, 2022 would have increased (decreased) the Company’s revenues by approximately $5.0 million on an annualized basis.
Item 4. Controls and 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 its 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 June 30, 2022. Based on such evaluation, Magnolia’s principal executive officer and principal financial officer have concluded that as of such date, the Company’s 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 for 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 in Internal Control over Financial Reporting
There were no changes in the system of internal control over financial reporting (as defined in Rule 13a-15(f) and Rule 15d-15(f) under the Exchange Act) during the quarter ended June 30, 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See Part I, Item 1, Note 9—Commitments and Contingencies to the consolidated financial statements, which is incorporated herein by reference.
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
Please refer to Part I, Item 1A - Risk Factors of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021 (“2021 Form 10-K”), and Part I, Item 3 - Quantitative and Qualitative Disclosures About Market Risk of this Quarterly Report on Form 10-Q. Any of these factors 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 2021 Form 10-K. 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.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table sets forth the Company’s share repurchase activities for each period presented:
| Period | Number of Shares of Class A Common Stock Purchased | Average Price Paid per Share | Total Number of Shares of Class A Common Stock Purchased as Part of Publicly Announced Program | Maximum Number of Shares of Class A Common Stock that May Yet Be Purchased Under the Program (1) | |||||||||||||||||||
January 1, 2022 - March 31, 2022 (2) | 2,050,815 | $ | 21.85 | 1,500,000 | 14,332,455 | ||||||||||||||||||
| April 1, 2022 - April 30, 2022 | 260,254 | 23.22 | 260,254 | 14,072,201 | |||||||||||||||||||
May 1, 2022 - May 31, 2022 | 855,500 | 23.15 | 855,500 | 13,216,701 | |||||||||||||||||||
| June 1, 2022 - June 30, 2022 | 949,246 | 23.78 | 949,246 | 12,267,455 | |||||||||||||||||||
| Total | 4,115,815 | $ | 22.65 | 3,565,000 | 12,267,455 | ||||||||||||||||||
(1)The Company’s board of directors has authorized a share repurchase program of up to 30.0 million shares of Class A Common Stock. The program does not require purchases to be made within a particular time frame.
(2)The Company repurchased 0.6 million shares of Class A Common Stock for $11.6 million in a privately negotiated transaction with EnerVest Energy Institutional Fund XIV-C, L.P. outside of the share repurchase program.
During the six months ended June 30, 2022, outside of the share repurchase program, Magnolia LLC repurchased and subsequently canceled a total of 5.9 million Magnolia LLC Units with an equal number of shares of corresponding Class B Common Stock for cash consideration of $138.8 million at an average price of $23.32 per share. There is no public market for the Class B Common Stock. For further detail, see Note 11—Stockholders’ Equity in the Notes to the Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Not applicable.
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Item 6. Exhibits
The following exhibits are filed as part of, or incorporated by reference into, this Quarterly Report on Form 10-Q:
| Exhibit Number | Description | |||||||
| 3.1* | ||||||||
| 3.2* | ||||||||
| 31.1** | ||||||||
| 31.2** | ||||||||
| 32.1*** | ||||||||
| 101.INS** | XBRL Instance Document. | |||||||
| 101.SCH** | XBRL Taxonomy Extension Schema Document. | |||||||
| 101.CAL** | XBRL Taxonomy Extension Calculation Linkbase Document. | |||||||
| 101.DEF** | XBRL Taxonomy Extension Definition Linkbase Document. | |||||||
| 101.LAB** | XBRL Taxonomy Extension Label Linkbase Document. | |||||||
| 101.PRE** | XBRL Taxonomy Extension Presentation Linkbase Document. | |||||||
| 104** | Cover Page Interactive Data File (embedded within the Inline XBRL and contained in Exhibit 101). | |||||||
* Incorporated herein by reference as indicated.
** Filed herewith.
*** Furnished herewith.
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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 | |||||||||||
| Date: August 3, 2022 | By: | /s/ Stephen Chazen | |||||||||
| Stephen Chazen | |||||||||||
| Chief Executive Officer (Principal Executive Officer) | |||||||||||
| Date: August 3, 2022 | By: | /s/ Christopher Stavros | |||||||||
| Christopher Stavros | |||||||||||
| Chief Financial Officer (Principal Financial Officer) | |||||||||||
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TABLE OF CONTENTS
Part I, Item 3 - Quantitative and Qualitative Disclosures About Market RiskItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsNote 11 Stockholders EquityItem 3. Defaults Upon Senior SecuritiesItem 4. Mine Safety DisclosuresItem 5. Other InformationItem 6. Exhibits