Magnolia Oil & Gas Corporation — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Unless stated otherwise, dollar figures below are in millions. Magnolia is an independent oil and gas producer focused on the Eagle Ford and Austin Chalk in South Texas.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $82.8 | $243.0 | $264.2 | $461.6 |
| Operating income (loss) | $(25.9) | $43.6 | $(1,990.3) | $77.1 |
| Net income (loss) | $(29.4) | $31.3 | $(1,924.7) | $54.0 |
| Net income (loss) attributable to Class A | $(18.3) | $18.5 | $(1,245.3) | $31.5 |
| Class A diluted EPS | $(0.11) | $0.12 | $(7.46) | $0.20 |
- Q2 operating loss was approximately 31% of revenue, versus an operating margin of approximately 18% in Q2 2019. The six-month loss chiefly reflects a first-quarter $1.9 billion impairment of proved and unproved properties following the sharp commodity-price decline.
- Q2 total production averaged 64.1 thousand barrels of oil equivalent per day (Mboe/d), down from 65.1 Mboe/d a year earlier. For the first half, production averaged 66.3 Mboe/d, up from 63.8 Mboe/d.
- Q2 realized prices fell sharply year over year: oil to $19.68 per barrel from $64.13; natural gas to $1.35 per Mcf from $2.25; and NGLs to $7.92 per barrel from $14.96. Total revenue declined about 66%, with price declines the principal driver.
- Q2 operating costs included lease operating expense of $3.14/boe, gathering and processing of $1.16/boe, and G&A of $2.69/boe. DD&A was $8.71/boe, down from $21.28, primarily because the impairment reduced the asset base.
- First-half operating cash flow was $165.8, down from $309.4 in 2019. Capital expenditures were $129.7, compared with $263.1; operating cash flow less capital expenditures was $36.2 before acquisitions and other investing uses. Cash declined by $65.8 to $116.9.
- At June 30, cash was $116.9 and current assets were $182.5 versus current liabilities of $120.3. Debt consisted of $400.0 principal amount of 6.0% senior notes due 2026, carried net at $390.5; there were no RBL borrowings. The $450.0 RBL borrowing base plus cash provided reported liquidity of $566.9. The company reported compliance with facility covenants.
- Total assets fell to $1,413.1 from $3,466.4 at year-end 2019, largely reflecting the impairment. Magnolia recorded a $206.3 deferred tax asset with a full valuation allowance.
Material changes and management commentary
- COVID-19, reduced oil demand and market oversupply drove price volatility, lower revenue, and the impairment charge. The company had no commodity hedges as of June 30.
- Magnolia spent $28.3 on capital expenditures in Q2 and $129.7 in the first half. It brought no operated wells online in Q2 and operated one rig in the Giddings assets. Management said it planned to spend within cash flow, while retaining flexibility to adjust activity and assessing whether to bring wells online later in 2020.
- The company temporarily shut in some low-producing wells; many had returned to production, with no significant net-production impact reported. Management warned that further curtailments could occur if low prices persist.
- Management cited cost reductions, including lower employee compensation and vendor costs. Q2 G&A declined to $15.7 from $19.1 year over year.
- On August 1, 2020, Magnolia gave notice of its intent to terminate its EnerVest Services Agreement, effective November 1 unless withdrawn; services are to continue during transition through August 1, 2021.
- Magnolia acquired non-operated Karnes and DeWitt County assets for approximately $72.0 in cash in February 2020. It repurchased no shares in Q2; first-half repurchases were 1.0 million shares for $6.5.
Risks, contingencies, and unusual items
- Management said the duration and business effects of COVID-19, commodity prices, demand, storage availability, and any recovery were highly uncertain. Lower prices could further reduce cash flow, borrowing capacity, reserves, and property values, and could prompt additional shut-ins or reduced investment.
- The company reported no hedging, making results directly exposed to oil, gas, and NGL prices. It also noted dependence on third-party transportation, processing, and storage capacity.
- Environmental obligations may arise, and the company is not fully insured for environmental risks. A lawsuit involving claims to a minority working interest in certain Karnes assets remained in pre-trial proceedings; exposure was not reasonably estimable, was retained by the Karnes County Contributors, and no litigation amount was accrued.
- The $1.9 billion impairment used Level 3 discounted-cash-flow estimates, including commodity prices, reserves, costs, and discount rates; those assumptions are significant and uncertain.
- No quantified earnings or production guidance was provided. Management said current cash, operating cash flow, and available liquidity were expected to meet requirements, but it would reassess needs if market conditions deteriorated.
Important facts for investors to verify
- Whether realized commodity prices, demand, and production recover, and how they affect cash generation and further impairment risk.
- Whether the $450.0 million borrowing base remains available following future redeterminations and whether liquidity remains sufficient under prolonged weak markets.
- The assumptions behind the property impairment and the recoverability of the deferred tax asset, which is fully valuation-allowed.
- The pace of drilling, well restarts or additional shut-ins, and capital spending relative to operating cash flow.
- The effect and execution of the Services Agreement transition, as well as developments in the Karnes County litigation and environmental exposures.