Magnolia Oil & Gas Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Amounts below are in millions of dollars unless noted. The quarter is reported as the “Successor” period; Q1 2018 is the “Predecessor” period.
Business context
Magnolia explores for and produces oil, natural gas and NGLs, primarily in South Texas’s Karnes County and Giddings Field. At quarter-end it reported 17,330 net acres in the Karnes area and 439,342 net acres in the Giddings Field. Average production was 62,413 boe/d; the company operated three rigs during the quarter and ended with two, and brought 18 gross operated horizontal wells online.
Q1 2019 included the acquired Giddings assets and a new acquisition-accounting basis. Q1 2018 covered only the Karnes County predecessor business, excluded Giddings, and was not taxed as a standalone corporation. Consequently, year-over-year comparisons are not directly comparable.
Financial and operating results
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $218.7 | $172.3 |
| Operating income | $33.5 | $92.5 |
| Net income | $22.7 | $85.4 |
| Net income attributable to Class A | $13.0; $0.08 per diluted share | $85.4; per-share comparison not presented |
| Cash from operating activities | $116.6 | $104.6 |
| Cash used in investing activities | $(183.3) | $(237.7) |
Revenue rose about 27%, primarily reflecting higher production from acquired assets, acquisitions and development, partly offset by lower realized oil and NGL prices. Production increased from 36,256 to 62,413 boe/d. Average oil price was $59.07/bbl versus $65.27; natural gas was $2.80/Mcf versus $2.90; NGLs were $18.12/bbl versus $23.29.
Operating income and net income were lower despite higher revenue. Q1 2019 included higher DD&A under the acquisition-date fair-value basis ($115.9 versus $51.4), intangible amortization ($3.6), interest expense ($7.4), and G&A ($16.2 versus $5.7). The predecessor’s Q1 2018 results included a $7.2 derivative loss; Magnolia says it does not hedge and does not expect to hedge. Operating margin was approximately 15.3% in Q1 2019 (calculated as operating income divided by revenue); the reported-period comparison is substantially affected by the accounting and asset-scope differences.
Operating cash flow exceeded net income largely because of noncash DD&A and other adjustments. Property additions were $134.4; operating cash flow less property additions was approximately negative $17.9, before acquisition spending. Investing cash outflows included approximately $49.1 of acquisitions and $134.4 of property additions. Cash declined from $135.8 at year-end to $76.3.
Balance sheet, debt and liquidity
- Cash: $76.3; current assets: $203.2; current liabilities: $184.5.
- Total assets: $3,438.0; total equity: $2,716.6.
- Debt: $400.0 principal under 6.0% senior notes due August 2026; carrying value net of financing costs was $388.9. No revolving-credit borrowings were outstanding.
- The RBL facility had a $550.0 borrowing base at March 31, 2019. Management reported $626.3 of liquidity, comprising cash and borrowing-base capacity. The company was in compliance with facility covenants.
- Quarter-end operating lease liabilities were $2.0. The company adopted the new lease standard on January 1, 2019.
Outlook, risks and unusual items
No numerical production, capital-spending or earnings guidance is provided in the supplied filing text. Management said cash, operating cash flow and RBL availability were expected to be adequate for the capital budget and short-term liquidity needs. Its stated strategy emphasizes organic production growth, operating margins, capital efficiency, free cash flow after capital expenditures and a low-leverage balance sheet.
- Commodity prices are the principal market risk; prices are volatile and Magnolia had no hedging program. Management estimated that a $1/bbl change in average oil price would change annualized revenue by about $11.6, and a $0.10/Mcf gas-price change by about $3.9.
- In Q1 the company formed Highlander, in which it held approximately 85%, to acquire a 72% working interest in a Louisiana gas well and royalty trust units for approximately $51.9.
- The EnerVest business-combination final settlement in March included a $4.3 net cash payment to Magnolia and forfeiture of shares and LLC units by the contributors. A Harvest acquisition final settlement also occurred in March.
- A lawsuit alleges entitlement to a minority working interest in certain Karnes properties. Exposure was not reasonably estimable; the filing says the Karnes County Contributors retained the liability and management did not expect legal matters to materially affect results.
- Environmental laws may impose cleanup or pollution liability; the company stated that its customary insurance does not cover all environmental risks. The filing reported no material changes to previously disclosed risk factors and no off-balance-sheet arrangements.
Important facts for investors to verify
- How much of the revenue and production growth reflects acquisitions versus organic development, given the non-comparable predecessor period.
- Whether operating costs per boe, DD&A and the new asset base support attractive returns as acquired assets are developed.
- Capital spending, acquisition requirements and operating cash flow relative to the company’s goal of generating free cash flow after capital expenditures.
- Commodity-price sensitivity and the implications of operating without hedges.
- RBL borrowing-base redeterminations, covenant headroom and the terms and refinancing risks of the 2026 notes.
- Developments in the Karnes property litigation, environmental exposure and outstanding earnout or other acquisition obligations.