Magnolia Oil & Gas Corp. — Q1 2021 Form 10-Q
Business context and period. The filing covers the three months ended March 31, 2021. Magnolia is an independent oil and gas producer focused on the Eagle Ford Shale and Austin Chalk in South Texas. It reported one operating segment and ran one rig in the Giddings area.
Key financial and operating results
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Revenue | $207.7 million | $181.4 million |
| Operating income (loss) | $99.9 million | $(1,964.3) million |
| Net income (loss) | $91.5 million | $(1,895.3) million |
| Net income attributable to Class A | $63.2 million | $(1,227.0) million |
| Class A EPS, basic / diluted | $0.38 / $0.37 | $(7.34) / $(7.34) |
| Operating cash flow | $118.2 million | $134.9 million |
| Capital expenditures | $40.2 million | $101.4 million |
| Cash and cash equivalents, quarter-end | $178.2 million | $146.5 million |
| Long-term debt, net | $391.4 million | $391.1 million |
Q1 2021 operating margin was approximately 48% (operating income divided by revenue); comparison with Q1 2020 is not meaningful because of unusually large prior-year impairments. Operating cash flow less capital expenditures was approximately $78.0 million in Q1 2021, versus $33.5 million in Q1 2020.
- Revenue and production: Total revenue increased 14% year over year. Average production was 62,262 boe/d, down 9% from 68,360 boe/d. Oil production fell 23%, while natural gas and NGL production rose 3% and 14%, respectively.
- Prices: Average realized oil price rose 24% to $56.47/bbl; natural gas rose 111% to $3.39/Mcf; and NGLs rose 123% to $20.31/bbl. Higher gas and NGL prices more than offset lower oil revenue.
- Expenses: Lease operating expense fell to $19.4 million from $24.2 million. DD&A fell to $42.9 million from $142.7 million, largely reflecting reduced property carrying values after 2020 impairments. G&A rose to $20.4 million from $18.1 million.
- Liquidity and debt: Magnolia reported $628.2 million of liquidity, comprising $178.2 million cash and $450.0 million of RBL borrowing-base capacity. It had $400.0 million principal outstanding on 6.0% senior notes due 2026 and no RBL borrowings. The company reported compliance with its credit-facility covenants.
Material changes and unusual items
- Q1 2020 included approximately $1.9 billion of oil and gas property impairments and exploration expense, following the sharp commodity-price decline. No impairments were recorded in Q1 2021; this is the primary reason reported earnings swung to profit.
- Cash used in investing activities was $42.9 million, compared with $163.8 million in Q1 2020, when Magnolia made a $69.7 million asset acquisition and had higher capital spending.
- Financing cash outflows included $20.3 million of Class A share repurchases, a $50.8 million repurchase and cancellation of 5.0 million LLC units and corresponding Class B shares, and a $17.2 million cash payment under the amended non-compete agreement. Cash declined $14.4 million during the quarter.
- EnerVest exchanged 14.2 million LLC units and corresponding Class B shares for Class A shares and sold shares in a secondary offering. Magnolia received no proceeds from EnerVest’s share sales. At quarter-end Magnolia owned approximately 72.6% of Magnolia LLC; noncontrolling interest was 27.4%.
Outlook, risks and contingencies
Magnolia provided no specific numerical production, revenue, earnings, or capital-spending guidance in the supplied filing text. Management said its plan was to spend within cash flow while maintaining low leverage, and described its one-rig program and short-term rig contract as providing flexibility to reduce or increase activity. Management expected cash, operating cash flow, and available liquidity to meet cash requirements.
- Results remain highly exposed to volatile oil, natural gas, and NGL prices, which depend on supply, demand, economic conditions, regulation, and other factors. The filing also identifies COVID-19-related market uncertainty, drilling and operational risks, capital availability, weather, and cyber risks.
- A lawsuit involving claims to a minority working interest in certain Karnes County assets was in the pre-trial stage. Exposure was not reasonably estimable; the Karnes County Contributors retained the liability, and Magnolia recorded no litigation accrual. Management did not expect pending matters to materially affect results or financial position.
- Magnolia is not fully insured against environmental risks. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Investor verification checklist
- Confirm the sustainability of higher realized commodity prices and the effect of lower oil production on revenue and cash generation.
- Review the assumptions behind planned drilling activity, capital spending, and management’s expectation that liquidity will cover requirements.
- Track RBL borrowing-base redeterminations, covenant headroom, and the 2026 notes’ interest and maturity obligations.
- Assess continuing capital returns and ownership changes, including remaining authorization under the 20 million-share repurchase program and the noncontrolling-interest structure.
- Monitor the Karnes County litigation, environmental exposures, and commodity-price and COVID-19 risks; the filing states litigation exposure is not clearly quantifiable.