Magnolia Oil & Gas Corp. — 2019 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2019. Fourth-quarter figures are identified separately below. Magnolia is a South Texas oil and gas producer focused on the Eagle Ford Shale and Austin Chalk. Comparisons with 2018 require caution: the 2018 Successor and Predecessor periods reflect different ownership, assets and accounting bases following the July 2018 business combination.
Key financial and operating metrics
| Metric | 2019 | Comparison or context |
|---|---|---|
| Revenue | $936.1 million | Oil $772.0 million; natural gas $93.7 million; NGLs $70.4 million. Management reported higher volumes versus the combined 2018 periods, partly offset by lower realized prices. |
| Operating income | $127.5 million | Operating margin was approximately 13.6% (calculated). |
| Net income | $85.0 million | Includes $34.8 million attributable to noncontrolling interests. |
| Net income attributable to Magnolia Class A common stock | $47.4 million; $0.28 diluted EPS | Includes a $2.8 million non-cash deemed dividend related to the warrant exchange. |
| Operating cash flow | $647.6 million | Compared with $305.5 million for the July–December 2018 Successor Period; periods are not comparable in duration or scope. |
| Capital spending | $426.4 million | Drilling and completion $416.4 million; leasehold acquisition costs $10.0 million. Operating cash flow less this spending was approximately $221.3 million (calculated; before acquisitions, repurchases and other uses). |
| Cash and liquidity | $182.6 million cash; $732.6 million total liquidity | Total liquidity includes $550.0 million of RBL borrowing-base capacity. |
| Debt | $400.0 million principal | 6.0% Senior Notes due 2026; carrying value, net of financing costs, was $389.8 million. No RBL borrowings were outstanding. |
| Production | 66.8 Mboe/d average | Approximately 52.8% oil, 28.2% natural gas and 19.0% NGLs. |
| Proved reserves | 109.3 MMboe | 86.8 MMboe proved developed and 22.5 MMboe proved undeveloped. |
Fourth-quarter and period changes
- Fourth-quarter revenue was $229.7 million, operating income $22.7 million and net income $13.6 million. Net income attributable to Class A common stock was $8.1 million, or $0.05 per basic and diluted share.
- Against the third quarter of 2019, revenue declined from $244.8 million to $229.7 million, operating income from $27.7 million to $22.7 million, and net income from $17.4 million to $13.6 million.
- For full-year 2019, oil, natural gas and NGL realized prices were respectively $60.00/Bbl, $2.27/Mcf and $15.17/Bbl. Each was below the corresponding 2018 Successor-period average shown in the filing; the periods are not directly comparable.
- DD&A was $523.6 million, including the effect of acquisition accounting and the new fair-value basis established at the 2018 business combination. Management cited that basis, acquisitions and lower proved reserves as drivers of higher DD&A versus the combined 2018 periods.
- Year-end standardized measure of discounted future net cash flows was $1.625 billion, down from $1.878 billion at year-end 2018. The filing attributes a substantial negative change to prices and production costs, partly offset by extensions, discoveries and improved recovery.
Outlook, risks and unusual items
- Management’s stated strategy emphasizes organic production growth, high full-cycle margins, disciplined capital investment and maintaining a strong, low-leverage balance sheet. The filing does not provide formal numerical production, revenue or earnings guidance.
- Magnolia operated one rig in Karnes County and one in the Giddings Field. Management said drilling activity and spending are influenced by commodity prices and a strategy of keeping spending within 60% of adjusted EBITDAX.
- The company had no commodity hedges and stated it did not expect to hedge, leaving revenue and cash flow exposed to oil, gas and NGL price declines. A $1/Bbl oil-price move would change annualized revenue by about $12.9 million; a $0.10/Mcf gas-price move by about $4.1 million, all else equal.
- Customer concentration is significant: two purchasers represented 43.3% and 18.5% of 2019 combined hydrocarbon revenue. The company also relies on third-party gathering, processing and transportation infrastructure and on EnerVest Operating under a services agreement.
- Other principal risks include drilling and reserve-estimation uncertainty, South Texas geographic concentration, environmental and hydraulic-fracturing regulation, water availability, potential impairment from lower prices, and access to capital. The company reported no proved-property impairment in 2019.
- A Karnes County working-interest lawsuit remained in pre-trial stages; the exposure was not reasonably estimable. Management did not expect the ordinary-course legal matters to materially affect results, and no litigation accrual was recorded at year-end.
- In 2019 Magnolia repurchased 1.0 million Class A shares for approximately $10.3 million and separately repurchased and canceled 6.0 million LLC units and corresponding Class B shares for $69.1 million, increasing its ownership of Magnolia LLC from 64.6% to 66.1%. A subsequent Karnes and DeWitt counties acquisition closed February 21, 2020 for $71.3 million cash, subject to customary adjustments.
- The independent auditor gave unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Investor verification priorities
- Review the full-year and quarterly statements, and distinguish 2018 Successor from Predecessor results before making year-over-year comparisons.
- Check realized commodity prices, production trends, capital spending and cash generation against the company’s stated capital discipline, particularly given the absence of hedging.
- Assess reserve additions and revisions, the planned development of the 22.5 MMboe of proved undeveloped reserves, and the decline in the standardized measure.
- Verify the available RBL capacity, covenant compliance, Senior Notes terms and liquidity after the 2020 acquisition and other capital returns.
- Monitor purchaser concentration, EnerVest operating-service arrangements, transportation commitments and the status of the disclosed legal matter.