Filing summary: 2018 Q1
Entity note: The supplied 10-Q is for TPG Pace Energy Holdings Corp., a blank-check company, not Magnolia Oil & Gas Corp. It reports no oil-and-gas operations or operating revenue for the quarter. Magnolia Oil & Gas Operating LLC was a subsidiary name adopted after quarter-end, on May 9, 2018.
Business context and reporting period
The unaudited filing covers the three months ended March 31, 2018. TPG Pace was pursuing a proposed acquisition of oil and gas assets in South Texas: Karnes County Eagle Ford assets, Giddings Field Austin Chalk assets, and an approximately 35% interest in an Eagle Ford gathering system. The transaction had not closed by quarter-end.
Financial results and liquidity
- Revenue: $0. Net loss: $1.54 million, or $0.02 per share. The filing’s comparison is the period from inception on February 14, 2017 to March 31, 2017, when net loss was $41,081; this is not a full comparable quarter.
- Operating expenses were $4.03 million, including $4.01 million of professional fees and other expenses. Trust investment interest income was $2.07 million; income tax benefit was $410,000.
- Operating cash outflow was $265,018. Cash outside the trust was $571,738, down from $851,466 at December 31, 2017. Investments held in the trust totaled $654.91 million.
- Current liabilities were $5.96 million and negative working capital was $5.24 million. Total liabilities were $28.71 million, including $22.75 million of deferred underwriting compensation payable only if a business combination closes. The company reported no long-term debt at quarter-end.
- Stockholders’ equity was $5.00 million. Approximately 62.28 million of 65 million public Class A shares were classified as redeemable temporary equity at $10 per share.
- No operating margin was reported because the company had no revenue or operating business.
Material changes, transaction financing, and outlook
- In March 2018, the company signed agreements for the proposed acquisitions. Stated consideration included approximately $2.09 billion for Karnes County assets, with at least $610 million in cash and the remainder in stock; approximately $308 million in cash for Giddings; and $25 million in cash for the Ironwood interest. Potential earnouts include up to $47 million in cash for Giddings and up to 13 million additional shares for Karnes County. These amounts are subject to adjustments and conditions.
- Closing was conditional on, among other matters, stockholder approval and at least $610 million of available cash. The company also disclosed committed financing of a revolving borrowing-base facility with a $1.0 billion aggregate amount and a $500 million senior bridge facility, reduced by any senior-note proceeds. The revolving facility’s stated closing availability was $385 million, with an initial borrowing base of $550 million. These were commitments, not quarter-end borrowings.
- A $1.5 million share subscription by the CEO and a $1.0 million subscription by TPG Holdings were described in the filing; the broader transaction financing discussion also refers to a PIPE investment. Verify the definitive subscription terms and total proceeds in the transaction documents.
- Management stated that the company had 24 months from the May 10, 2017 IPO closing to complete a business combination. If unsuccessful, it would generally redeem public shares and liquidate, subject to applicable requirements.
- Management said it expected further transaction and operating expenses and warned that funding might be needed before closing. The filing states that the funding uncertainty raised substantial doubt about the company’s ability to continue as a going concern.
- After quarter-end, the sponsor lent the company $1.0 million under a non-interest-bearing note, payable by May 10, 2019 or at business-combination closing, whichever comes first. No financial outlook or production guidance was provided.
Risks, contingencies, and other notable items
- The proposed transactions were subject to customary conditions, interdependent closings, and termination rights; the filing does not establish that they ultimately closed.
- The company’s trust funds were restricted principally to a business combination, redemptions, taxes, and permitted working-capital withdrawals. Public stockholder redemptions could affect cash available for closing.
- The sponsor’s indemnity for certain claims against trust funds may be difficult to collect: the company had not verified the sponsor’s ability to pay and believed its assets consisted of company securities.
- The company reported no legal proceedings, no material changes to previously disclosed risk factors, and effective disclosure controls as of March 31, 2018.
Important facts for investors to verify
- Confirm the correct issuer: this is TPG Pace Energy Holdings’ SPAC filing, not Magnolia Oil & Gas Corp.’s operating-company 10-Q.
- Review the final proxy, transaction agreements, and subsequent filings for closing status, purchase-price adjustments, seller elections, earnouts, and redemption levels.
- Verify actual available cash and the final terms and funding of the revolving facility, bridge facility, senior notes, and PIPE.
- Assess whether the company’s liquidity and sponsor funding were sufficient to meet obligations if the transaction was delayed or did not close.