Magnolia Oil & Gas Corporation — Q2 2021 Form 10-Q
Business context and period: This unaudited quarterly report covers the three and six months ended June 30, 2021. Magnolia is an independent oil and gas producer focused on the Eagle Ford and Austin Chalk in South Texas.
Financial performance and position
Amounts below are in millions, except per-share, production and price data.
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue | $250.7 | $82.8 | $458.4 | $264.2 |
| Operating income (loss) | $129.2 | $(25.9) | $229.1 | $(1,990.3) |
| Net income (loss) | $116.2 | $(29.4) | $207.7 | $(1,924.7) |
| Net income attributable to Class A | $84.4 | $(18.3) | $147.7 | $(1,245.3) |
| Diluted earnings (loss) per Class A share | $0.48 | $(0.11) | $0.85 | $(7.46) |
- Revenue drivers: Q2 average prices were $64.80/bbl oil, $3.28/Mcf gas and $22.26/bbl NGL, versus $19.68, $1.35 and $7.92, respectively, a year earlier. Q2 production averaged 64.9 thousand boe/d versus 64.1 thousand. For the first half, production averaged 63.6 thousand boe/d versus 66.3 thousand; oil volumes declined 15%, partly offset by higher gas and NGL volumes.
- Cash flow and spending: First-half cash from operations was $306.0 million, versus $165.8 million. Capital expenditures were $94.4 million; acquisitions used $9.4 million. Cash decreased $2.3 million to $190.3 million after financing outflows, including $44.3 million of Class A repurchases, $122.5 million for Class B-related unit repurchases, and $42.1 million of Non-Compete settlement payments.
- Liquidity and debt: Cash was $190.3 million; the company reported total liquidity of $640.3 million, including $450.0 million of RBL borrowing-base capacity. It had no RBL borrowings and $400.0 million principal outstanding on 6.0% senior notes due 2026 (carrying value, net of financing costs, $387.0 million). It was in compliance with credit-facility covenants.
- Balance sheet: Current assets were $312.9 million and current liabilities $167.9 million at June 30, 2021. Accounts receivable was $119.2 million, up from $81.6 million at year-end 2020.
Material changes and unusual items
- Results improved sharply year over year, principally because commodity prices recovered. The 2020 comparison is also distorted by approximately $1.9 billion of first-half property impairments and exploration expense related to the prior-year commodity-price decline; Magnolia recorded no impairment in first-half 2021.
- Q2 2021 operating expenses included $7.2 million of intangible amortization, reflecting accelerated amortization after the Non-Compete ended June 30. Magnolia paid $24.9 million in cash in June instead of issuing the remaining 1.6 million shares; it had also paid $17.2 million and issued 0.4 million shares in February.
- The Services Agreement with EnerVest ended June 30, 2021. Related termination and transition costs were $11.2 million for the first half and contributed to higher G&A.
- An April 2021 amendment to the 2026 notes’ indenture generated $1.1 million of expensed third-party fees and $5.0 million paid to noteholders, capitalized as deferred financing costs. First-half interest expense was $16.0 million, including these and other impacts.
- Natural-gas collars produced a $2.5 million first-half derivative loss, including $2.3 million unrealized loss. The company had 3.1 million MMBtu of 2021 collar volume, with weighted-average floor and ceiling prices of $2.31 and $3.00/MMBtu.
Outlook, risks and contingencies
- No quantified production, revenue or earnings guidance is provided. Management said it expects cash, operating cash flow and available liquidity to meet cash requirements, and plans to spend within cash flow while maintaining low leverage. Magnolia operated primarily one Giddings rig in the first half and added a second rig at the end of Q2; management emphasized flexibility to adjust activity and the absence of long-term drilling or service commitments.
- Key risks include volatile oil, gas and NGL prices, demand and supply changes, COVID-19-related disruption, regulatory changes, operational and drilling risks, weather, inflation, and access to capital. Management estimated that a $1/bbl change in average oil price would change annualized revenue by about $11 million, and a $0.10/Mcf gas-price change by about $4 million.
- Two disclosed legal matters include a claim seeking 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 accrual was recorded; management did not expect the matters to materially affect the company. Environmental liabilities are possible, and insurance does not cover all environmental risks.
- On August 2, 2021, the board declared a semiannual $0.08-per-share cash dividend, payable September 1 to holders of record August 12. This was a subsequent event, not a Q2-period payment.
Investor verification priorities
- Confirm whether the sharp year-over-year earnings recovery is supported by sustainable commodity prices, given lower first-half oil production.
- Review the cash impact of share and LLC-unit repurchases, Non-Compete settlements, and the dividend against the company’s stated cash-flow discipline.
- Verify the $450 million borrowing base, covenant headroom and 2026 note obligations, including the effect of the indenture amendment.
- Track production, capital spending and the economics of the additional Giddings rig, as no numerical forward guidance was supplied.
- Monitor the unresolved legal matters, environmental exposure, and commodity-price and derivative risks.