Magnolia Oil & Gas Corporation — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Magnolia explores and produces oil, natural gas and NGLs, primarily in South Texas’s Karnes and Giddings areas, targeting the Eagle Ford Shale and Austin Chalk.
Financial and operating highlights
| Metric | Q3 2021 | Q3 2020 |
|---|---|---|
| Total revenue | $283.6 million | $121.1 million |
| Operating income | $171.5 million | $21.9 million |
| Net income | $159.9 million | $13.7 million |
| Net income attributable to Class A | $119.4 million; diluted EPS $0.67 | $9.1 million; diluted EPS $0.05 |
| Average production | 67,385 boe/d | 54,306 boe/d |
- Q3 revenue rose about 134% year over year, reflecting higher realized prices and higher production across oil, gas and NGLs. Average oil price was $68.44/bbl versus $38.50; natural gas was $3.75/Mcf versus $1.58; and NGLs were $31.60/bbl versus $11.20.
- Q3 operating margin was approximately 60% of revenue, compared with 18% in Q3 2020. Operating expenses were $112.1 million; DD&A was $48.0 million. Interest expense was $7.5 million.
- For the first nine months, revenue was $742.0 million versus $385.3 million, and net income was $367.6 million versus a $1.91 billion net loss. 2020 results included $1.4 billion of proved-property impairment and $563.6 million of exploration expense, largely reflecting the prior-year commodity-price decline. No impairment was recorded in 2021.
- Nine-month average production was 64,883 boe/d versus 62,241 boe/d. Oil output declined 7%, while natural gas and NGL output increased 8% and 28%, respectively.
- Nine-month operating cash flow was $527.9 million, compared with $231.0 million. Capital expenditures were $162.7 million, implying approximately $365.2 million of operating cash flow after capital expenditures. Cash increased $52.5 million to $245.0 million.
- At September 30, cash was $245.0 million and long-term debt, net, was $387.5 million; debt principal was $400.0 million. The RBL facility had no borrowings and a $450.0 million borrowing base, producing reported liquidity of $695.0 million. The company reported covenant compliance.
- Q3 capital expenditures were $68.4 million; the company operated a two-rig program. The board declared a $0.08-per-share dividend, paid September 1.
Material changes, outlook and risks
- Management said its plan is to spend within cash flow while maintaining low leverage. The two-rig program and short-term rig contracts provide flexibility to reduce or increase activity. The filing gives no numerical production, capital-spending or earnings guidance.
- During the first nine months, Magnolia repurchased 6.0 million Class A shares for approximately $73.8 million and repurchased/canceled 13.0 million Magnolia LLC units and corresponding Class B shares for $171.7 million. It had repurchased 11.5 million Class A shares cumulatively under its 20.0 million-share authorization as of quarter-end.
- The Services Agreement with EnerVest ended June 30, 2021; related transition and termination costs were $11.2 million for the nine months. The Non-Compete also ended June 30, accelerating $5.9 million of amortization; related cash payments totaled $42.1 million in 2021.
- The 2026 Senior Notes indenture was amended in April. The company expensed approximately $1.1 million in third-party fees and paid $5.0 million to noteholders, capitalized as deferred financing costs.
- Commodity prices are the principal market risk; management noted continued volatility and potential COVID-19-related effects on demand and pricing. Magnolia had settled all natural-gas collar contracts and had no derivatives outstanding at September 30.
- Two disclosed legal matters include a claim to a minority working interest in certain Karnes County assets, for which exposure was not reasonably estimable, and an appeal concerning a drilling permit. No litigation amounts were accrued; management did not expect the disputes to have a material effect. The company also noted it is not fully insured against environmental risks.
Investor verification priorities
- Check how much of the revenue and earnings recovery reflects commodity prices versus production growth, and assess sensitivity to future price changes.
- Review cash generation against capital spending, repurchases, LLC-unit purchases, dividends and remaining liquidity; these uses materially reduced cash available for other purposes.
- Confirm the RBL borrowing base, covenant headroom and debt terms, including the 6.0% notes due 2026.
- Monitor post-quarter exchanges of LLC units into Class A shares, the resulting ownership and dilution, and remaining repurchase authorization.
- Track the legal and environmental matters, and the operational and demand risks associated with COVID-19 and commodity-market volatility.