Magnolia Oil & Gas Corporation — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Magnolia explores and produces oil, natural gas and NGLs, primarily in South Texas. Amounts below are in millions of dollars unless noted.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $121.1 | $244.8 | $385.3 | $706.4 |
| Operating income (loss) | $21.9 | $27.7 | $(1,968.3) | $104.8 |
| Net income (loss) attributable to Magnolia | $9.1 | $10.5 | $(1,236.1) | $42.1 |
| Class A diluted EPS | $0.05 | $0.05 | $(7.41) | $0.24 |
| Cash from operations | Not provided for quarter | Not provided for quarter | $231.0 | $488.6 |
- Q3 operating margin was approximately 18%; the comparable prior-year margin was approximately 11%. The comparison reflects, among other factors, substantially lower DD&A following the first-quarter property impairments.
- Nine-month 2020 results included $1.4 billion of proved-property impairment and $0.6 billion of unproved-property impairment, largely associated with the sharp commodity-price decline. The charges were non-cash and drove the reported loss.
- Cash and cash equivalents were $148.5 at September 30, 2020, down from $182.6 at December 31, 2019. Current assets were $214.9 and current liabilities $124.5.
- Debt was $400.0 principal on 6.0% senior notes due 2026; net carrying value was $390.8. There were no RBL borrowings. The $450.0 borrowing base was reaffirmed October 15, 2020; reported liquidity, including cash and borrowing capacity, was $598.5. The company reported covenant compliance.
- Nine-month capital expenditures were $157.3. Operating cash flow less capital expenditures was approximately $73.7, a simple cash-flow proxy; it excludes acquisitions and other investing uses. Cash declined by $34.1 during the period.
Changes versus comparable periods
- Q3 revenue fell about 51% year over year. Average oil price declined 35% to $38.50/bbl and oil production fell 29%; total daily production decreased to 54,306 boe/d from 71,292 boe/d.
- For the first nine months, revenue fell about 45%. Average oil price was $34.71/bbl versus $60.74; average daily production was 62,241 boe/d versus 66,305.
- Nine-month operating cash flow fell to $231.0 from $488.6. Capital expenditures also declined, to $157.3 from $352.7.
- Q3 2020 included a $2.2 unrealized derivative loss; no derivative activity was reported in the comparable 2019 period.
Outlook, commentary and risks
- No numerical production, revenue or earnings guidance is provided. Management said it intends to spend within cash flow, maintain low leverage and retain flexibility to adjust activity. It expected cash, operating cash flows and available liquidity to meet requirements, while noting sustained market deterioration could require additional liquidity.
- Magnolia operated one rig in Giddings and brought no operated wells online in Q3. It cited no contractual drilling obligations, a short-term rig contract and most acreage being held by production as sources of flexibility. Cost reductions included lower corporate salaries, renegotiation of the EnerVest Services Agreement fee and vendor savings. Magnolia gave notice to terminate that agreement, with services continuing during transition through August 1, 2021.
- COVID-19, oil and gas oversupply, commodity-price volatility, reduced demand and possible limits on storage or transportation could pressure prices, operations and liquidity; production curtailments or further shut-ins may result. Some low-producing and non-operated wells had been shut in earlier in 2020, with many returning to production.
- The company recorded a $203.3 deferred tax asset and a full valuation allowance. A Karnes County working-interest lawsuit remained in pre-trial proceedings; exposure was not reasonably estimable, and no litigation accrual was recorded. Management did not expect outstanding disputes to materially affect results, but environmental risks are not fully insured.
Important facts for investors to verify
- How commodity prices, differentials and production volumes evolve, and whether COVID-related demand, storage or transportation constraints lead to further curtailments.
- The assumptions behind the $1.9 billion property impairments and their effect on future DD&A, reserve values and operating results.
- Cash generation relative to capital spending, acquisitions and share repurchases; the company repurchased 2.1 million shares for $13.0 during the first nine months.
- Availability and terms of the $450.0 RBL borrowing base, covenant headroom and the company’s ability to maintain liquidity under weaker market conditions.
- Realizability of deferred tax assets, developments in the working-interest litigation, and the transition from the EnerVest Services Agreement.