Magnolia Oil & Gas Corp. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Magnolia is an independent oil and gas producer focused on the Eagle Ford Shale and Austin Chalk in South Texas. Its results include the Karnes County and Giddings assets and acquisitions.
Key financial and operating metrics
- Q3 revenue: $244.8 million; operating income was $27.7 million. Net income was $17.4 million, including $6.8 million attributable to noncontrolling interests. Net income attributable to Magnolia was $10.5 million; after a $2.8 million non-cash deemed dividend from the warrant exchange, net income attributable to Class A common stock was $7.8 million, or $0.05 per diluted share.
- Nine-month revenue and earnings: Revenue was $706.4 million; operating income was $104.8 million; net income was $71.4 million. Net income attributable to Class A common stock was $39.3 million, or $0.24 per diluted share.
- Production: Q3 averaged 71.3 thousand barrels of oil equivalent per day, up 9.5% from Q2; oil was 53.7% of Q3 volumes. Nine-month production averaged 66.3 thousand boe/d.
- Cash flow and investment: Nine-month operating cash flow was $488.6 million. Cash additions to oil and gas properties were $364.9 million; reported capital expenditures were $352.7 million. Investing cash outflow was $454.1 million. Cash increased by $28.7 million to $164.5 million.
- Balance sheet and liquidity: Current assets were $292.3 million and current liabilities were $190.3 million. Long-term debt was $400.0 million gross and $389.5 million net of unamortized financing costs. The company had no revolver borrowings; its borrowing base was $550.0 million. Management reported total liquidity of $714.5 million.
- Share repurchases: The company repurchased 950,000 shares for approximately $9.7 million at a weighted average price of $10.23 under a program authorizing repurchases of up to 10 million shares.
Changes versus prior comparable period
- Direct comparisons with 2018 are limited: the 2019 Successor reflects the acquired Giddings assets, acquisition-date fair-value accounting and other transactions; the 2018 figures include separate Successor and Predecessor periods and do not represent the same asset base.
- In management’s comparison of Q3 2019 with the combined 2018 periods, total production was higher, while lower commodity prices weighed on revenue. Q3 average oil price was $59.05 per barrel versus $70.79 for the 2018 Successor period; natural gas was $1.97 per Mcf versus $2.51, and NGLs were $12.62 per barrel versus $31.78. These comparisons are also affected by differing periods and asset bases.
- For the first nine months, management said oil revenue rose by $41.7 million versus the combined 2018 periods, as 24% higher oil production more than offset a 13% lower average oil price. NGL revenue increased modestly as higher volumes offset lower prices.
Outlook, risks and unusual items
- No specific production, earnings or commodity-price guidance was provided. Management said cash on hand, operating cash flow and available RBL borrowing capacity should fund the capital budget and short-term liquidity needs. The company operated two drilling rigs in Q3 and said rig activity depends partly on commodity prices and its aim to keep spending within 60% of adjusted EBITDAX.
- Magnolia reported no commodity hedging and is exposed to volatile oil, gas and NGL prices. It estimated that a $1-per-barrel change in weighted-average oil prices would change annualized revenue by about $12.8 million; a $0.10-per-Mcf gas-price change would change annualized revenue by about $4.1 million.
- Other risks include drilling and reserve uncertainty, acquisition integration, capital availability, regulation, weather and possible asset impairment if prices or reserve estimates decline. Management warned that lower prices, negative reserve revisions or higher cost estimates could reduce asset values.
- A lawsuit involving claims to a minority working interest in certain Karnes County properties was in discovery; exposure was not reasonably estimable. Management did not expect legal matters to have a material effect. Environmental regulation and cleanup exposure remain, and the company said it is not fully insured against all environmental risks.
- Unusual items included the July exchange of all warrants for 9.2 million Class A shares, producing a $2.8 million non-cash deemed dividend; and the launch of a share-repurchase program. The company had no outstanding off-balance-sheet arrangements.
Important facts for investors to verify
- Whether production growth and operating costs—particularly lease operating costs per boe—remain consistent as the acquired asset base develops.
- How commodity prices, differentials and the absence of hedging affect realized revenue, cash flow and capital spending.
- Availability and terms of the $550 million borrowing base after future redeterminations, and compliance with credit-facility covenants.
- Reserve estimates, impairment sensitivity and the progress or outcome of the Karnes County working-interest litigation.
- How the noncontrolling interest and future exchanges of Class B shares and Magnolia LLC units affect Class A per-share results.