Magnolia Oil & Gas Corporation — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. At that date, the company was still a special purpose acquisition company (formerly TPG Pace Energy Holdings Corp.); the EnerVest oil and gas asset acquisition closed on July 31, 2018. Accordingly, the quarter’s financial statements do not include the acquired assets’ operating results.
Financial results and liquidity
- Revenue: $0 for the three- and six-month periods. The company had not begun oil and gas operations; income consisted of interest on trust-account investments.
- Net result: Q2 net loss was $3.36 million, versus net income of $0.29 million in Q2 2017. Six-month net loss was $4.90 million, versus net income of $0.25 million from inception through June 30, 2017. Q2 and six-month loss per share were $0.04 and $0.06, respectively, versus income per share of $0.01 in the 2017 comparisons.
- Expenses and interest: Q2 operating expenses were $6.86 million, including $6.58 million in professional and other expenses; six-month operating expenses were $10.89 million. Interest income was $2.61 million for Q2 and $4.68 million for six months.
- Cash flow: Six-month operating cash use was $0.77 million; financing provided $0.16 million, and cash fell by $0.61 million to $0.24 million. These figures reflect the pre-acquisition SPAC period, not the combined operating business.
- Balance sheet at June 30: Total assets were $658.81 million, including $655.32 million in trust investments. Current liabilities were $11.58 million; working capital was negative $11.23 million. Stockholders’ equity was $5.00 million. The company had a $1.00 million non-interest-bearing Sponsor loan and $22.75 million of deferred underwriting compensation; it reported no long-term debt at quarter-end.
- Margins and operating cash generation: Not meaningful for this period because there was no revenue or oil and gas operating activity.
Material changes and subsequent transaction
- Q2 expenses rose substantially from 2017, principally in connection with identifying, evaluating, and completing the planned business combination. The company’s loss replaced prior-period income, which had been supported by trust-account interest and lower expenses.
- On July 31, 2018, the company completed acquisitions of Eagle Ford assets in Karnes County, Austin Chalk assets in the Giddings Field, and an approximately 35% interest in an Eagle Ford gathering system. The filing reports approximately $912 million cash consideration for Karnes County assets, $283 million for Giddings assets, and $25 million for the midstream interest, subject to adjustments. Seller consideration also included equity.
- At closing, the company raised $355 million through a private placement of 35.5 million Class A shares. Magnolia Operating also entered a $1.0 billion reserve-based lending facility with an initial borrowing base of $550 million, and issued $400 million of 6.0% senior notes due 2026. These are post-quarter-end financing arrangements, not June 30 balances.
- The acquisition includes contingent consideration: up to 13 million additional shares tied to specified performance or stock-price thresholds and up to $47 million of Giddings cash earn-outs based on net-revenue thresholds. The company was still evaluating purchase accounting and the initial purchase price allocation when the filing was issued.
Outlook, risks, and other items
- The filing gives no production, revenue, earnings, or capital-spending guidance for the combined company.
- The RBL facility includes customary restrictions and, for quarters ending on or after December 31, 2018, a maximum total-debt-to-EBITDAX ratio of 4.00:1.00. If that ratio exceeds 3.00:1.00, a minimum current-assets-to-current-liabilities ratio of 1.00:1.00 also applies.
- The company identified no material change to previously disclosed risk factors beyond those in its July 2018 proxy statement. It reported no legal proceedings and no off-balance-sheet financing arrangements as of the filing’s discussion.
- Management concluded disclosure controls and procedures were effective as of June 30, 2018, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Post-closing operating results, production, realized commodity prices, margins, and cash flows; none are represented by this pre-acquisition quarter.
- Final purchase-price adjustments, purchase accounting, and opening combined-company balance sheet.
- Actual RBL borrowings, availability under the $550 million borrowing base, and compliance with debt covenants.
- Potential dilution from seller equity, warrants, and performance-based share issuances, as well as the timing and amount of earn-outs.
- How the combined company’s liquidity and debt service needs compare with its operating cash generation and capital requirements.