Magnolia Oil & Gas Corp. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Amounts below are in millions of dollars unless stated otherwise. Magnolia’s 2019 results are the “Successor” period following its July 2018 business combination; 2018 results are “Predecessor” results. The filing cautions that these periods are not directly comparable because the assets, accounting basis, and corporate structure differ.
Business context
Magnolia explores for and produces oil, natural gas, and NGLs, principally in South Texas’s Karnes County and Giddings Field. At June 30, 2019, it reported 21,516 net acres in Karnes and nearby counties and 428,481 net acres in the Giddings Field. Q2 production averaged 65.1 thousand barrels of oil equivalent per day (Mboe/d), up 4% from Q1 2019; oil accounted for 54% of Q2 volumes.
Key financial results
| Metric | Q2 2019 | Six months 2019 |
|---|---|---|
| Total revenue | $243.0 | $461.6 |
| Operating income | $43.6 | $77.1 |
| Net income | $31.3 | $54.0 |
| Net income attributable to Class A common stock | $18.5 | $31.5 |
| Diluted earnings per Class A share | $0.12 | $0.20 |
| Operating cash flow | Not separately stated | $309.4 |
| Capital additions to oil and gas properties | Not separately stated | $267.3 |
For the six months, investing cash use was $355.2 million, including $267.3 million of property additions and approximately $87.7 million of acquisitions. Cash declined by $39.0 million during the period to $96.7 million. The filing does not provide a clear quarterly cash-flow figure.
Q2 revenue comprised $204.5 million oil, $22.6 million natural gas, and $15.9 million NGL revenue. Average realized prices were $64.13 per barrel of oil, $2.25 per Mcf of gas, and $14.96 per barrel of NGLs. Q2 operating expenses totaled $199.3 million; DD&A was $126.1 million. The resulting operating margin was approximately 18% of revenue, calculated from reported figures.
Changes versus prior comparable period
Q2 revenue increased from $200.0 million in Q2 2018 to $243.0 million in Q2 2019, while net income decreased from $86.4 million to $31.3 million. These comparisons are not like-for-like: 2019 includes Giddings and later acquisitions, reflects purchase-accounting valuations and related higher DD&A, and includes corporate taxes and interest expense. Q2 production was 65.1 Mboe/d versus 39.6 Mboe/d in the 2018 predecessor period, also reflecting the expanded asset base. Oil prices and NGL prices were lower year over year; production growth drove higher revenues. The predecessor period included a $14.8 million derivative loss, while Magnolia reported no hedging activity in 2019.
For the six months, operating cash flow was $309.4 million versus $235.7 million in the 2018 predecessor period. Management attributed the increase primarily to production from Giddings, acquisitions, and continued development.
Debt, liquidity, and capital
At June 30, Magnolia had $400.0 million of 6.0% senior notes due 2026, reported as $389.2 million net of unamortized financing costs, and no borrowings under its revolving credit facility. The facility had a $550.0 million borrowing base; cash plus that capacity totaled $646.7 million of stated liquidity. Magnolia reported compliance with its credit-facility covenants. Operating cash flow exceeded six-month property additions by approximately $42.1 million, before acquisitions and other cash uses.
On August 6, 2019, the board authorized repurchases of up to 10 million shares, with no required purchase timeframe. In July, the company exchanged all warrants for 9.2 million Class A shares; it expected to record a non-cash deemed dividend of less than $3.0 million in Q3 2019.
Outlook, risks, and unusual items
- Management said cash on hand, operating cash flow, and available revolver capacity should be adequate for the capital budget and short-term liquidity needs. The filing provides no quantified production, earnings, or capital-spending guidance.
- Magnolia’s strategy emphasizes organic production growth, operating margins, short-payback capital investment, free cash flow, and a strong balance sheet. It stated that it does not hedge and does not expect to hedge commodity-price exposure.
- Commodity prices are the principal market risk. Management estimated that a $1 per barrel oil-price change would affect annualized revenue by about $12.2 million, and a $0.10 per Mcf natural-gas-price change by about $4.0 million, based on first-half production.
- Management identified potential impairment exposure from lower commodity prices, reserve revisions, higher future costs, or significant asset sales. Other disclosed risks include drilling, acquisition integration, regulation, capital availability, weather, and market conditions.
- A lawsuit alleges that plaintiffs are entitled to a minority working interest in certain Karnes properties. The matter was in discovery; the exposure was not reasonably estimable, and the relevant contributors retained the liability. The company said it did not expect legal matters to materially affect its financial statements.
- Environmental regulation and cleanup liabilities are potential exposures; Magnolia stated that its insurance does not cover all environmental risks. The filing reported no off-balance-sheet arrangements and no material changes to previously disclosed risk factors.
- Comparability is affected by the 2018 business combination, acquisitions, purchase accounting, and changes in tax and financing structure. The company’s financial information before and after the transaction should not be treated as directly comparable.
Important facts for investors to verify
- How much of reported production and revenue growth reflects acquired assets versus organic development, and whether Q2 production trends continued after June.
- Whether realized commodity prices, especially oil and NGL prices, and the absence of hedging materially affect future cash flow.
- Capital spending and acquisition requirements relative to operating cash flow, cash balances, and actual revolver availability after borrowing-base redeterminations.
- The effect of purchase-accounting DD&A, G&A and EnerVest service fees, and interest costs on sustainable margins and Class A earnings.
- Execution and financial effects of the authorized share-repurchase program and the July warrant exchange, including the resulting share count and dilution.
- Any developments in the Karnes property litigation, environmental matters, reserve estimates, or impairment indicators.