0001698990-20-000037.txt : 20201106 0001698990-20-000037.hdr.sgml : 20201106 20201106162104 ACCESSION NUMBER: 0001698990-20-000037 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 68 CONFORMED PERIOD OF REPORT: 20200930 FILED AS OF DATE: 20201106 DATE AS OF CHANGE: 20201106 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Magnolia Oil & Gas Corp CENTRAL INDEX KEY: 0001698990 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 815365682 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-38083 FILM NUMBER: 201294708 BUSINESS ADDRESS: STREET 1: NINE GREENWAY PLAZA STREET 2: SUITE 1300 CITY: HOUSTON STATE: TX ZIP: 77046 BUSINESS PHONE: 713-842-9050 MAIL ADDRESS: STREET 1: NINE GREENWAY PLAZA STREET 2: SUITE 1300 CITY: HOUSTON STATE: TX ZIP: 77046 FORMER COMPANY: FORMER CONFORMED NAME: Magnolia Oil & Gas DATE OF NAME CHANGE: 20180801 FORMER COMPANY: FORMER CONFORMED NAME: TPG Pace Energy Holdings Corp. DATE OF NAME CHANGE: 20170224 10-Q 1 mgy-20200930.htm 10-Q mgy-20200930
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2020
OR
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File Number: 001-38083
Magnolia Oil & Gas Corporation
(Exact Name of Registrant as Specified in its Charter)
Delaware81-5365682
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
Nine Greenway Plaza, Suite 1300
77046
Houston,
Texas
(Address of principal executive offices)(Zip Code)
Registrant’s telephone number, including area code: (713) 842-9050
Securities registered pursuant to section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Class A Common Stock, par value $0.0001MGYNew York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.




Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  
As of November 2, 2020, there were 165,500,753 shares of Class A Common Stock, $0.0001 par value per share, and 85,789,814 shares of Class B Common Stock, $0.0001 par value per share, outstanding.



GLOSSARY OF CERTAIN OTHER TERMS

The following are definitions of certain other terms that are used in this Quarterly Report on Form 10-Q:

The Company or Magnolia. Magnolia Oil & Gas Corporation (either individually or together with its consolidated subsidiaries, as the context requires, including Magnolia Intermediate, Magnolia LLC, Magnolia Operating, and Magnolia Oil & Gas Finance Corp).

Magnolia Intermediate. Magnolia Oil & Gas Intermediate LLC.

Magnolia LLC. Magnolia Oil & Gas Parent LLC.

Magnolia LLC Units. Units representing limited liability company interests in Magnolia LLC.

Magnolia Operating. Magnolia Oil & Gas Operating LLC.

EnerVest. EnerVest Ltd.

Business Combination. The acquisition, which closed on July 31, 2018, of certain right, title, and interest in certain oil and natural gas assets located primarily in the Karnes County portion of the Eagle Ford Shale in South Texas; certain right, title, and interest in certain oil and natural gas assets located primarily in the Giddings area of the Austin Chalk; and a 35% membership interest in Ironwood Eagle Ford Midstream, LLC.

Class A Common Stock. Magnolia’s Class A Common Stock, par value $0.0001 per share.

Class B Common Stock. Magnolia’s Class B Common Stock, par value $0.0001 per share.

Giddings Assets. Certain right, title, and interest in certain oil and natural gas assets located primarily in the Giddings area of the Austin Chalk formation.

Issuers. Magnolia Operating and Magnolia Oil & Gas Finance Corp., a wholly owned subsidiary of Magnolia Operating.

Karnes County Assets. Certain right, title, and interest in certain oil and natural gas assets located primarily in the Karnes County portion of the Eagle Ford Shale in South Texas.

Karnes County Contributors. EnerVest Energy Institutional Fund XIV-A, L.P., a Delaware limited partnership, EnerVest Energy Institutional Fund XIV-WIC, L.P., a Delaware limited partnership, EnerVest Energy Institutional Fund XIV-2A, L.P., a Delaware limited partnership, EnerVest Energy Institutional Fund XIV-3A, L.P., a Delaware limited partnership, and EnerVest Energy Institutional Fund XIV-C, L.P., a Delaware limited partnership.

RBL Facility. Senior secured reserve-based revolving credit facility.

2026 Senior Notes. 6.0% Senior Notes due 2026.

Services Agreement. That certain Services Agreement, dated as of July 31, 2018, by and between the Company, Magnolia Operating, and EnerVest Operating LLC (“EVOC”), pursuant to which EVOC provides certain services to the Company as described in the agreement.

Stockholder Agreement. The Stockholder Agreement, dated as of July 31, 2018, by and between the Company and the Karnes County Contributors.



Table of Contents
Page
PART I.FINANCIAL INFORMATION
Item 1.
Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Operations (unaudited)
Consolidated Statements of Changes in Stockholders’ Equity (unaudited)
Consolidated Statements of Cash Flows (unaudited)
Notes to Consolidated Financial Statements (unaudited)
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.Quantitative and Qualitative Disclosures About Market Risk
Item 4.Controls and Procedures
PART II.OTHER INFORMATION
Item 1.Legal Proceedings
Item 1A.Risk Factors
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.Defaults Upon Senior Securities
Item 4.Mine Safety Disclosures
Item 5.Other Information
Item 6.Exhibits
Signatures






PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Magnolia Oil & Gas Corporation
Consolidated Balance Sheets
(In thousands)
September 30, 2020December 31, 2019
ASSETS(Unaudited)(Audited)
CURRENT ASSETS
Cash and cash equivalents
$148,533 $182,633 
Accounts receivable
61,243 105,775 
Drilling advances
473 299 
Other current assets
4,613 4,511 
Total current assets214,862 293,218 
PROPERTY, PLANT AND EQUIPMENT
Oil and natural gas properties2,105,774 3,815,221 
Other4,063 3,087 
Accumulated depreciation, depletion and amortization(939,888)(701,551)
Total property, plant and equipment, net1,169,949 3,116,757 
OTHER ASSETS
Deferred financing costs, net6,632 8,390 
Equity method investment21,789 19,730 
Intangible assets, net12,973 23,851 
Other long-term assets8,074 4,460 
TOTAL ASSETS$1,434,279 $3,466,406 
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable$63,475 $79,428 
Other current liabilities (Note 8)
60,987 95,780 
Total current liabilities124,462 175,208 
LONG-TERM LIABILITIES
Long-term debt, net390,787 389,835 
Asset retirement obligations, net of current100,800 93,524 
Deferred taxes, net 77,834 
Other long-term liabilities6,049 1,476 
Total long-term liabilities497,636 562,669 
COMMITMENTS AND CONTINGENCIES (Note 10)
STOCKHOLDERS’ EQUITY
Class A Common Stock, $0.0001 par value, 1,300,000 shares authorized, 168,676 shares issued and 165,576 shares outstanding in 2020 and 168,318 shares issued and 167,318 shares outstanding in 2019
17 17 
Class B Common Stock, $0.0001 par value, 225,000 shares authorized, 85,790 shares issued and outstanding in 2020 and 2019
9 9 
Additional paid-in capital1,709,043 1,703,362 
Treasury Stock, at cost, 3,100 shares and 1,000 shares in 2020 and 2019, respectively
(23,240)(10,277)
Retained earnings (Accumulated deficit)(1,153,195)82,940 
Noncontrolling interest279,547 952,478 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY$1,434,279 $3,466,406 

The accompanying notes are an integral part to these consolidated financial statements.
1


Magnolia Oil & Gas Corporation
Consolidated Statements of Operations (Unaudited)
(In thousands, except per share data)
Three Months EndedNine Months Ended
September 30, 2020September 30, 2019September 30, 2020September 30, 2019
REVENUES
Oil revenues$95,677 $207,840 $311,153 $584,009 
Natural gas revenues14,895 21,243 44,238 71,208 
Natural gas liquids revenues10,495 15,716 29,880 51,215 
Total revenues121,067 244,799 385,271 706,432 
OPERATING EXPENSES
Lease operating expenses18,802 24,344 61,275 70,752 
Gathering, transportation, and processing5,771 9,270 20,579 26,016 
Taxes other than income7,331 13,333 22,874 40,825 
Exploration expense701 3,924 563,589 10,017 
Impairment of oil and natural gas properties  1,381,258  
Asset retirement obligation accretion1,501 1,394 4,403 4,095 
Depreciation, depletion and amortization44,731 143,894 238,273 385,942 
Amortization of intangible assets3,626 3,626 10,879 10,879 
General and administrative expenses16,663 17,345 50,472 52,651 
Transaction related costs   438 
Total operating costs and expenses99,126 217,130 2,353,602 601,615 
OPERATING INCOME (LOSS)21,941 27,669 (1,968,331)104,817 
OTHER INCOME (EXPENSE)
Income from equity method investee1,007 92 2,059 608 
Interest expense, net(7,333)(6,896)(21,345)(21,611)
Loss on derivatives, net(2,208) (2,208) 
Other income (expense), net(51)21 (510)8 
Total other income (expense)(8,585)(6,783)(22,004)(20,995)
INCOME (LOSS) BEFORE INCOME TAXES13,356 20,886 (1,990,335)83,822 
Income tax expense (benefit)(339)3,529 (79,340)12,449 
NET INCOME (LOSS)13,695 17,357 (1,910,995)71,373 
LESS: Net income (loss) attributable to noncontrolling interest4,548 6,810 (674,860)29,294 
NET INCOME ATTRIBUTABLE TO MAGNOLIA9,147 10,547 (1,236,135)42,079 
LESS: Non-cash deemed dividend related to warrant exchange 2,763  2,763 
NET INCOME (LOSS) ATTRIBUTABLE TO CLASS A COMMON STOCK$9,147 $7,784 $(1,236,135)$39,316 
NET INCOME (LOSS) PER SHARE OF CLASS A COMMON STOCK
Basic$0.05 $0.05 $(7.41)$0.25 
Diluted$0.05 $0.05 $(7.41)$0.24 
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
Basic166,467 166,872 166,728 160,051 
Diluted170,676 167,108 166,728 161,488 
The accompanying notes are an integral part of these consolidated financial statements.
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Magnolia Oil & Gas Corporation
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)
(In thousands)

Class A
Common Stock
Class B
Common Stock
Additional Paid In CapitalTreasury StockRetained EarningsTotal Stockholders’ EquityNoncontrolling InterestTotal
Equity
SharesValueSharesValueSharesValue
Balance, December 31, 2018156,333 $16 93,346 $9 $1,641,237  $ $35,507 $1,676,769 $1,031,186 $2,707,955 
Stock based compensation expense— — — — 2,432 — — — 2,432 — 2,432 
Changes in ownership interest adjustment— — — — (919)— — — (919)832 (87)
Final settlement adjustment related to Business Combination(496)— (1,556)— (6,095)— — — (6,095)(19,150)(25,245)
Contributions from noncontrolling interest owner— — — — — — — — — 8,809 8,809 
Net income— — — — — — — 13,026 13,026 9,687 22,713 
Balance, March 31, 2019155,837 $16 91,790 $9 $1,636,655  $ $48,533 $1,685,213 $1,031,364 $2,716,577 
Stock based compensation expense— — — — 3,115 — — — 3,115 — 3,115 
Changes in ownership interest adjustment— — — — 108 — — — 108 634 742 
Common stock issued in connection with acquisition3,055 — — — 33,693 — — — 33,693 — 33,693 
Offering expenses incurred in connection with warrants exchange— — — — (1,055)— — — (1,055)— (1,055)
Distributions to noncontrolling interest owners— — — — — — — — — (227)(227)
Net income— — — — — — — 18,506 18,506 12,797 31,303 
Balance, June 30, 2019158,892 $16 91,790 $9 $1,672,516  $ $67,039 $1,739,580 $1,044,568 $2,784,148 
Stock based compensation expense— — — — 2,829 — — — 2,829 — 2,829 
Changes in ownership interest adjustment— — — — 28,215 — — — 28,215 (36,715)(8,500)
Common stock issued in connection with warrants exchange9,179 1 — — 1,624 — — (2,763)(1,138)— (1,138)
Common stock issued related to stock based compensation, net 189 — — — (532)— — — (532)— (532)
Common stock repurchased— — — — — 950 (9,722)— (9,722)— (9,722)
Distributions to noncontrolling interest owners— — — — — — — — — (489)(489)
Net income— — — — — — — 10,547 10,547 6,810 17,357 
Balance, September 30, 2019168,260 $17 91,790 $9 $1,704,652 950 $(9,722)$74,823 $1,769,779 $1,014,174 $2,783,953 

The accompanying notes are an integral part to these consolidated financial statements.
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Magnolia Oil & Gas Corporation
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)
(In thousands)

Class A
Common Stock
Class B
Common Stock
Additional Paid In CapitalTreasury
Stock
Retained Earnings/ Accumulated DeficitTotal Stockholders’ EquityNoncontrolling InterestTotal
Equity
SharesValueSharesValueSharesValue
Balance, December 31, 2019168,319 $17 85,790 $9 $1,703,362 1,000 $(10,277)$82,940 $1,776,051 $952,478 $2,728,529 
Stock based compensation expense— — — — 2,879 — — — 2,879 — 2,879 
Changes in ownership interest adjustment— — — — (1,793)— — — (1,793)1,793  
Common stock issued related to stock based compensation, net 154 — — — (452)— — — (452)— (452)
Class A Common Stock repurchases— — — — — 1,000 (6,483)— (6,483)— (6,483)
Distributions to noncontrolling interest owners— — — — — — — — — (284)(284)
Net loss— — — — — — — (1,227,010)(1,227,010)(668,289)(1,895,299)
Balance, March 31, 2020168,473 $17 85,790 $9 $1,703,996 2,000 $(16,760)$(1,144,070)$543,192 $285,698 $828,890 
Stock based compensation expense— — — — 3,065 — — — 3,065 — 3,065 
Changes in ownership interest adjustment— — — — (907)— — — (907)907  
Common stock issued related to stock based compensation and other, net114 — — — (33)— — — (33)— (33)
Distributions to noncontrolling interest owners— — — — — — — — — (207)(207)
Net loss— — — — — — — (18,272)(18,272)(11,119)(29,391)
Balance, June 30, 2020168,587 $17 85,790 $9 $1,706,121 2,000 $(16,760)$(1,162,342)$527,045 $275,279 $802,324 
Stock based compensation expense— — — — 2,927 — — — 2,927 — 2,927 
Changes in ownership interest adjustment— — — — 175 — — — 175 (175) 
Common stock issued related to stock based compensation and other, net89 — — — (180)— — — (180)— (180)
Class A Common Stock repurchases— — — — — 1,100 (6,480)— (6,480)— (6,480)
Distributions to noncontrolling interest owners— — — — — — — — — (105)(105)
Net income— — — — — — — 9,147 9,147 4,548 13,695 
Balance, September 30, 2020168,676 $17 85,790 $9 $1,709,043 3,100 $(23,240)$(1,153,195)$532,634 $279,547 $812,181 

The accompanying notes are an integral part to these consolidated financial statements.

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Magnolia Oil & Gas Corporation
Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
Nine Months Ended
September 30, 2020September 30, 2019
CASH FLOWS FROM OPERATING ACTIVITIES
NET INCOME (LOSS)$(1,910,995)$71,373 
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation, depletion and amortization238,273 385,942 
Amortization of intangible assets10,879 10,879 
Exploration expense, non-cash561,629 536 
Impairment of oil and natural gas properties1,381,258  
Asset retirement obligation accretion4,403 4,095 
Amortization of deferred financing costs2,710 2,644 
Loss on derivatives, net2,208  
Deferred tax expense (benefit)(77,834)11,765 
Stock based compensation8,871 8,376 
Other(2,059)(512)
Changes in operating assets and liabilities:
Accounts receivable44,532 (6,937)
Accounts payable(15,953)16,034 
Accrued liabilities(15,468)(22,379)
Drilling advances(174)10,205 
Other assets and liabilities, net(1,281)(3,410)
Net cash provided by operating activities230,999 488,611 
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of EnerVest properties 4,250 
Acquisitions, other(73,702)(93,221)
Additions to oil and natural gas properties(157,325)(351,467)
Changes in working capital associated with additions to oil and natural gas properties(18,972)(13,392)
Other investing(842)(247)
Net cash used in investing activities(250,841)(454,077)
CASH FLOW FROM FINANCING ACTIVITIES
Contributions from noncontrolling interest owners 7,301 
Distributions to noncontrolling interest owners(594)(716)
Class A Common Stock repurchases(12,962)(9,722)
Other financing activities(702)(2,666)
Net cash used in financing activities(14,258)(5,803)
NET CHANGE IN CASH AND CASH EQUIVALENTS(34,100)28,731 
Cash and cash equivalents – Beginning of period182,633 135,758 
Cash and cash equivalents – End of period$148,533 $164,489 
SUPPLEMENTAL CASH FLOW INFORMATION:
Supplemental non-cash operating activity:
Cash paid (received) for income taxes$(724)$390 
Cash paid for interest25,445 25,687 
Supplemental non-cash investing and financing activity:
Accruals or liabilities for capital expenditures$21,750 $37,241 
Equity issuances in connection with acquisitions 33,693 
Non-cash deemed dividend related to warrant exchange 2,763 
Supplemental non-cash lease operating activity:
Right-of-use assets obtained in exchange for operating lease obligations$5,500 $6,720 
The accompanying notes are an integral part of these consolidated financial statements.
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Magnolia Oil & Gas Corporation
Notes to Consolidated Financial Statements

1. Description of Business and Basis of Presentation

Organization and Nature of Operations

Magnolia Oil & Gas Corporation (the “Company” or “Magnolia”) is an independent oil and natural gas company engaged in the acquisition, development, exploration, and production of oil, natural gas, and natural gas liquid (“NGL”) reserves. The Company’s oil and natural gas properties are located primarily in Karnes County and the Giddings area in South Texas where the Company targets the Eagle Ford Shale and Austin Chalk formations. Magnolia’s objective is to generate stock market value over the long term through consistent organic production growth, high full cycle operating margins, an efficient capital program with short economic paybacks, significant free cash flow after capital expenditures, and effective reinvestment of free cash flow.

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial reporting. Accordingly, certain disclosures normally included in an Annual Report on Form 10-K have been omitted. The consolidated financial statements and related notes included in this Quarterly Report should be read in conjunction with the Company’s consolidated and combined financial statements and related notes included in the Company’s Annual Report on Form 10-K for the period ended December 31, 2019 (the “2019 Form 10-K”). Except as disclosed herein, there have been no material changes to the information disclosed in the notes to the consolidated and combined financial statements included in the Company’s 2019 Form 10-K.

In the opinion of management, all normal, recurring adjustments and accruals considered necessary to present fairly, in all material respects, the Company’s interim financial results, have been included. Operating results for the periods presented are not necessarily indicative of expected results for the full year.

Certain reclassifications of prior period financial statements have been made to conform to current reporting practices. The consolidated financial statements include the accounts of the Company and its subsidiaries after elimination of intercompany transactions and balances. The Company’s interests in oil and natural gas exploration and production ventures and partnerships are proportionately consolidated. The Company reflects a noncontrolling interest representing primarily the interest owned by the Karnes County Contributors through their ownership of Magnolia LLC Units in the consolidated financial statements. The noncontrolling interest is presented as a component of equity. See Note 12—Stockholders’ Equity for further discussion of the noncontrolling interest.

2. Summary of Significant Accounting Policies
    
As of September 30, 2020, the Company’s significant accounting policies are consistent with those discussed in Note 2Summary of Significant Accounting Policies of its consolidated and combined financial statements contained in the Company’s 2019 Form 10-K, with the exception of Accounts Receivable and Allowance for Expected Credit Losses and as noted below.

Accounts Receivable and Allowance for Expected Credit Losses

In June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments-Credit Losses (Topic 326): “Measurement of Credit Losses on Financial Instruments.” For public business entities, the new standard became effective for annual reporting periods beginning after December 15, 2019, including interim periods within that reporting period. Magnolia adopted this standard on January 1, 2020. The standard changes the impairment model for most financial assets and certain other instruments, including trade and other receivables, and requires entities to use a new forward-looking expected loss model that will result in earlier recognition of allowance for losses. The Company’s receivables consist mainly of trade receivables from commodity sales and joint interest billings due from owners on properties the Company operates. The majority of these receivables have payment terms of 30 days or less. For receivables due from joint interest owners, the Company generally has the ability to withhold future revenue disbursements to recover non-payment of joint interest billings. From an evaluation of the Company’s existing credit portfolio, historical credit losses have been de minimis and are expected to remain so in the future assuming no substantial changes to the business or creditworthiness of Magnolia’s business partners. As expected, there was no material impact on the Company’s unaudited consolidated financial statements or disclosures upon adoption of this ASU.

6


Recent Accounting Pronouncements

On August 26, 2020, the SEC adopted amendments to its rules in Regulation S-K to streamline the disclosures, which registrants are required to make about business, legal proceedings and risk factors and to add new requirements for disclosures about human capital resources. The amendments take a principles-based approach that gives registrants flexibility to tailor disclosures to their circumstances. The final rules become effective November 9, 2020 and will be incorporated in the Company’s Annual Report on Form 10-K for the period ending December 31, 2020.

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): “Simplifying the Accounting for Income Taxes,” which reduces the complexity of accounting for income taxes by removing certain exceptions to the general principles and also simplifying areas such as separate entity financial statements and interim recognition of enactment of tax laws or rate changes. This standard is effective for interim and annual periods beginning after December 15, 2020 and shall be applied on either a prospective basis, a retrospective basis for all periods presented, or a modified retrospective basis through a cumulative-effect adjustment to retained earnings depending on which aspects of the new standard are applicable to an entity. The Company is currently evaluating the effect of this standard, but does not expect the adoption of this guidance to have a material impact on its financial position, cash flows, or result of operations.

In May 2020, the SEC adopted final rules that amend the financial statement disclosure requirements for significant business acquisitions and dispositions. Among other changes, the final rules modify the significance tests and improve the disclosure requirements for acquired or to be acquired businesses and related pro forma financial information, the periods those financial statements must cover, and the form and content of the pro forma financial information. The final rules do not modify requirements for the acquisition and disposition of significant amounts of assets that do not constitute a business. The final rules are effective January 1, 2021, but earlier compliance is permitted. The Company plans to comply with the final rules during 2020, if applicable.

3. Revenue Recognition

Magnolia’s revenues include the sale of crude oil, natural gas, and NGLs. Oil, natural gas, and NGL sales are recognized as revenue when production is sold to a customer in fulfillment of performance obligations under the terms of agreed contracts. Performance obligations are primarily comprised of delivery of oil, natural gas, or NGLs at a delivery point, as negotiated within each contract. Each barrel of oil, million Btu of natural gas, gallon of NGLs, or other unit of measure is separately identifiable and represents a distinct performance obligation to which the transaction price is allocated.

The Company’s oil production is primarily sold under market-sensitive contracts that are typically priced at a differential to the New York Mercantile Exchange (“NYMEX”) price or at purchaser posted prices for the producing area. For oil contracts, the Company generally records sales based on the net amount received.

For natural gas contracts, the Company generally records wet gas sales (which consists of natural gas and NGLs based on end products after processing) at the wellhead or inlet of the gas processing plant (i.e., the point of control transfer) as revenues net of gathering, transportation, and processing expenses if the processor is the customer and there is no redelivery of commodities to the Company at the tailgate of the plant. Conversely, the Company generally records residual natural gas and NGL sales at the tailgate of the plant (i.e., the point of control transfer) on a gross basis along with the associated gathering, transportation, and processing expenses if the processor is a service provider and there is redelivery of one or several commodities to the Company at the tailgate of the plant. The facts and circumstances of an arrangement are considered and judgment is often required in making this determination. For processing contracts that require noncash consideration in exchange for processing services, the Company recognizes revenue and an equal gathering, transportation, and processing expense for commodities transferred to the service provider.

Customers are invoiced once the Company’s performance obligations have been satisfied. Payment terms and conditions vary by contract type, although terms generally include a requirement of payment within 30 days. There are no judgments that significantly affect the amount or timing of revenue from contracts with customers. Additionally, the Company’s product sales contracts do not give rise to material contract assets or contract liabilities.

The Company’s receivables consist mainly of trade receivables from commodity sales and joint interest billings due from owners on properties the Company operates. Receivables from contracts with customers totaled $52.3 million as of September 30, 2020 and $100.4 million as of December 31, 2019.

The Company has concluded that disaggregating revenue by product type appropriately depicts how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors and has reflected this disaggregation of revenue on the Company’s consolidated statements of operations for all periods presented.

Performance obligations are satisfied at a point in time once control of the product has been transferred to the customer. The Company considers a variety of facts and circumstances in assessing the point of control transfer, including but not limited to: whether
7


the purchaser can direct the use of the hydrocarbons, the transfer of significant risks and rewards, the Company’s right to payment, and transfer of legal title.

The Company does not disclose the value of unsatisfied performance obligations for contracts as all contracts have either an original expected length of one year or less, or the entire future consideration is variable and allocated entirely to a wholly unsatisfied performance obligation.

4. Acquisitions

2020 Acquisitions

On February 21, 2020, the Company completed the acquisition of certain non-operated oil and natural gas assets located in Karnes and DeWitt Counties, Texas, for approximately $69.7 million in cash. The transaction was accounted for as an asset acquisition.

2019 Acquisitions

On May 31, 2019, the Company completed the acquisition of certain oil and natural gas assets primarily located in Gonzales and Karnes Counties for approximately $36.3 million in cash and approximately 3.1 million shares of the Company’s Class A Common Stock. The transaction was accounted for as an asset acquisition.

On February 5, 2019, Magnolia Operating formed a joint venture, Highlander Oil & Gas Holdings LLC (“Highlander”), to complete the acquisition of a 72% working interest in the Eocene-Tuscaloosa Zone, Ultra Deep Structure natural gas well located in St. Martin Parish, Louisiana and 31.1 million royalty trust units in the Gulf Coast Ultra Deep Royalty Trust from McMoRan Oil & Gas, LLC. Highlander paid cash consideration of $50.9 million for such interests. MGY Louisiana LLC, a wholly owned subsidiary of Magnolia Operating, holds approximately 85% of the units in Highlander. The transaction was accounted for as an asset acquisition.

5. Derivative Instruments

Magnolia currently utilizes natural gas costless collars to reduce its exposure to price volatility for a portion of its natural gas production volumes. The Company’s policies do not permit the use of derivative instruments for speculative purposes. The Company’s natural gas costless collar derivative contracts are indexed to the Houston Ship Channel. Under the Company’s costless collar contracts, each collar has an established floor price and ceiling price. When the settlement price is below the floor price, the counterparty is required to make a payment to the Company and when the settlement price is above the ceiling price, the Company is required to make a payment to the counterparty. When the settlement price is between the floor and the ceiling, there is no payment required.

The Company has elected not to designate any of its derivative instruments as hedging instruments. Accordingly, changes in the fair value of the Company’s derivative instruments are recorded immediately to earnings as “Loss on derivatives, net” on the Company’s consolidated statement of operations. For the three and nine months ended September 30, 2020, the Company recognized a $2.2 million unrealized loss related to its derivative instrument. There were no cash settlements or realized gains or losses on the Company’s derivative instruments during the three and nine months ended September 30, 2020 and 2019.

The Company had the following outstanding derivative contracts in place as of September 30, 2020:

20202021
Natural gas costless collars:
Notional volume (MMBtu)4,600,000 12,150,000 
Weighted average floor price ($/MMBtu)$2.31 $2.31 
Weighted average ceiling price ($/MMBtu)$3.00 $3.00 

See Note 6Fair Value Measurement for the fair value hierarchy of the Company’s derivative contracts.

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6. Fair Value Measurements

Certain of the Company’s assets and liabilities are carried at fair value and measured either on a recurring or nonrecurring basis. The Company’s fair value measurements are based either on actual market data or assumptions that other market participants would use in pricing an asset or liability in an orderly transaction, using the valuation hierarchy prescribed by GAAP under Accounting Standards Codification (“ASC”) 820.

The three levels of the fair value hierarchy under ASC 820 are as follows:

Level I - Quoted prices (unadjusted) in active markets for identical investments at the measurement date are used.

Level II - Pricing inputs are other than quoted prices included within Level I that are observable for the investment, either directly or indirectly. Level II pricing inputs include quoted prices for similar investments in active markets, quoted prices for identical or similar investments in markets that are not active, inputs other than quoted prices that are observable for the investment, and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level III - Pricing inputs are unobservable and include situations where there is little, if any, market activity for the investment. The inputs used in determination of fair value require significant judgment and estimation.

Recurring Fair Value Measurements

Debt Obligations

The carrying value and fair value of the financial instrument that is not carried at fair value in the accompanying consolidated balance sheet at September 30, 2020 and December 31, 2019 is as follows:
September 30, 2020December 31, 2019
(In thousands)Carrying Value Fair ValueCarrying Value Fair Value
 Long-term debt$390,787 $392,000 $389,835 $412,000 
The fair value of the 2026 Senior Notes at September 30, 2020 and December 31, 2019 is based on unadjusted quoted prices in an active market, which are considered a Level 1 input in the fair value hierarchy.

The Company has other financial instruments consisting primarily of receivables, payables, and other current assets and liabilities that approximate fair value due to the nature of the instrument and their relatively short maturities. Non-financial assets and liabilities initially measured at fair value include assets acquired and liabilities assumed in business combinations and asset retirement obligations.

Derivative Instruments

The fair value of the Company’s natural gas costless collar derivative instruments are measured using an industry-standard pricing model and are provided by a third party. The inputs used in the third-party pricing model include quoted forward prices for natural gas, the contracted volumes, volatility factors, and time to maturity, which are considered Level 2 inputs. The Company’s derivative instruments are recorded at fair value within “Other current liabilities” on the Company’s consolidated balance sheet as of September 30, 2020. These fair values are recorded by netting asset and liability positions with the same counterparty and are subject to contractual terms, which provide for net settlement. There are no long-term derivative assets or liabilities as of September 30, 2020 and there were no outstanding derivative instruments as of December 31, 2019.

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The following table presents the classification of the outstanding derivative instruments and the fair value hierarchy table for the Company’s derivative assets and liabilities that are required to be measured at fair value on a recurring basis:

Fair Value Measurements Using
(In thousands)Level 1Level 2Level 3Total Fair ValueNettingCarrying Amount
September 30, 2020
Current assets:
Natural gas derivative instruments$ $2,181 $ $2,181 $(2,181)$ 
Current liabilities:
Natural gas derivative instruments$ $4,389 $ $4,389 $(2,181)$2,208 

See Note 5Derivative Instruments for notional volumes and terms with the Company’s derivative contracts.

Nonrecurring Fair Value Measurements

The Company applies the provisions of the fair value measurement standard on a nonrecurring basis to its non-financial assets and liabilities, including oil and natural gas properties. These assets and liabilities are not measured at fair value on a recurring basis but are subject to fair value adjustments when facts and circumstances arise that indicate a need for remeasurement. 

During the first quarter of 2020, Magnolia recorded impairments of $1.9 billion related to proved and unproved properties as a result of a sharp decline in commodity prices. Proved property impairment of $1.4 billion is included in “Impairment of oil and natural gas properties” and unproved property impairment of $0.6 billion is included in “Exploration expense” on the Company’s consolidated statement of operations. Proved and unproved properties that were impaired had aggregate fair values of $0.8 billion and $0.3 billion, respectively. The fair values of these oil and natural gas properties were measured using the income approach based on inputs that are not observable in the market, and therefore, represent Level 3 inputs. The Company calculated the estimated fair values of its oil and natural gas properties using a discounted future cash flow model. Significant inputs associated with the calculation of discounted future net cash flows include estimates of future commodity prices based on NYMEX strip pricing adjusted for price differentials, estimates of proved oil and natural gas reserves and risk adjusted probable and possible reserves, estimates of future expected operating and capital costs, and a market participant based weighted average cost of capital of 10% for proved property impairments and 12% for unproved property impairments.

Deemed Dividend

In July 2019, the Company issued an aggregate of 9.2 million shares of Class A Common Stock in exchange for all of its warrants. The difference in fair value between the Class A Common Stock issued and the warrants exchanged was recorded as a non-cash deemed dividend for the incremental value provided to the holders of the warrants. The fair value of the non-cash deemed dividend related to the warrant exchange was determined based on unadjusted quoted prices in an active market, which are considered a Level 1 input in the fair value hierarchy. Refer to Note 12Stockholders’ Equity for additional information.

7. Intangible Assets

Non-Compete Agreement

On July 31, 2018, the Company and EnerVest, separate and apart from the Business Combination, entered into a non-compete agreement (the “Non-Compete”), which prohibits EnerVest and certain of its affiliates from competing with the Company in the Eagle Ford Shale (the “Market Area”) until July 31, 2022. Under the Non-Compete, an affiliate of EnerVest will have the right to receive 4.0 million shares of Class A Common Stock in two tranches of 2.0 million shares in two and one half and four years from July 31, 2018 provided EnerVest does not compete in the Market Area.

The Company recorded an estimated cost of $44.4 million for the Non-Compete as intangible assets on the Company’s consolidated balance sheet. These intangible assets have a definite life and are subject to amortization utilizing the straight-line method over their economic life, currently estimated to be two and one half to four years. The Company includes the amortization in “Amortization of intangible assets” on the Company’s consolidated statements of operations.
10


(In thousands)September 30, 2020December 31, 2019
Non-compete intangible assets$44,400 $44,400 
Accumulated amortization(31,427)(20,549)
Intangible assets, net$12,973 $23,851 
Weighted average amortization period (in years)3.253.25
8. Other Current Liabilities

The following table provides detail of the Company’s other current liabilities for the periods presented:
(In thousands)September 30, 2020December 31, 2019
Accrued capital expenditures$21,750 $40,722 
Accrued general and administrative expenditures9,703 9,753 
Accrued ad valorem taxes7,027 8,741 
Other22,507 36,564 
Total Other current liabilities$60,987 $95,780 
9. Long-term Debt

The Company’s debt is comprised of the following:
(In thousands)September 30, 2020December 31, 2019
Revolving credit facility$ $ 
Senior Notes due 2026
400,000 400,000 
Total long-term debt400,000 400,000 
Less: Unamortized deferred financing cost (9,213)(10,165)
Total debt, net$390,787 $389,835 

Credit Facility

In connection with the consummation of the Business Combination, Magnolia Operating entered into the RBL Facility among Magnolia Operating, as borrower, Magnolia Intermediate, as its holding company, the banks, financial institutions, and other lending institutions from time to time party thereto, as lenders, the other parties from time to time party thereto and Citibank, N.A., as administrative agent, collateral agent, issuing bank, and swingline lender, providing for maximum commitments in an aggregate principal amount of $1.0 billion with a letter of credit facility with a $100.0 million sublimit. The borrowing base as of September 30, 2020 was $450.0 million. On October 15, 2020, Magnolia Operating entered into a Borrowing Base Redetermination Agreement and Amendment No. 2 to the RBL Facility, which provided for, among other things, the reaffirmation of the borrowing base at $450.0 million as part of the semi-annual scheduled redetermination. The RBL Facility is guaranteed by certain parent companies and subsidiaries of Magnolia LLC and is collateralized by certain of Magnolia Operating’s oil and natural gas properties and has a borrowing base subject to semi-annual redetermination.

Borrowings under the RBL Facility bear interest, at Magnolia Operating’s option, at a rate per annum equal to either the LIBOR rate or the alternative base rate plus the applicable margin. Additionally, Magnolia Operating is required to pay a commitment fee quarterly in arrears in respect of unused commitments under the RBL Facility. The applicable margin and the commitment fee rate are calculated based upon the utilization levels of the RBL Facility as a percentage of the borrowing base then in effect.

The RBL Facility contains certain affirmative and negative covenants customary for financings of this type, including compliance with a leverage ratio of less than 4.00 to 1.00 and, if the leverage ratio is in excess of 3.00 to 1.00, a current ratio of greater than 1.00 to 1.00. As of September 30, 2020, the Company was in compliance with all covenants under the RBL Facility.
Deferred financing costs incurred in connection with securing the RBL Facility were $11.7 million, which are amortized on a straight-line basis over a period of five years and included in “Interest expense, net” in the Company’s consolidated statements of operations. The Company recognized interest expense related to the RBL Facility of $1.0 million and $1.1 million for the three months ended September 30, 2020 and 2019, respectively, and $3.2 million and $3.4 million for the nine months ended September 30, 2020 and 2019, respectively. The unamortized portion of the deferred financing costs are included in “Deferred financing costs, net” on the accompanying consolidated balance sheet as of September 30, 2020.
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The Company did not have any outstanding borrowings under its RBL Facility as of September 30, 2020.
2026 Senior Notes

On July 31, 2018, the Issuers issued and sold $400.0 million aggregate principal amount of 2026 Senior Notes in a private placement under Rule 144A and Regulation S under the Securities Act of 1933. The 2026 Senior Notes were issued under the Indenture, dated as of July 31, 2018 (the “Indenture”), by and among the Issuers and Deutsche Bank Trust Company Americas, as trustee. The 2026 Senior Notes are guaranteed on a senior unsecured basis by the Company, Magnolia Operating, and Magnolia Intermediate and may be guaranteed by certain future subsidiaries of the Company. The 2026 Senior Notes will mature on August 1, 2026 and bear interest at the rate of 6.0% per annum.

At any time prior to August 1, 2021, the Issuers may, on any one or more occasions, redeem all or a part of the 2026 Senior Notes at a redemption price equal to 100% of the principal amount of the 2026 Senior Notes redeemed, plus a “make whole” premium on accrued and unpaid interest, if any, to, but excluding, the date of redemption. After August 1, 2021, the Issuers may redeem all or a part of the 2026 Senior Notes based on principal plus a set premium, as set forth in the Indenture, including any accrued and unpaid interest.

The Company incurred $11.8 million of deferred financing costs related to the issuance of the 2026 Senior Notes, which were capitalized. These costs are amortized using the effective interest method over the term of the 2026 Senior Notes and are included in “Interest expense, net” in the Company’s consolidated statements of operations. The unamortized portion of the deferred financing costs is included as a reduction to the carrying value of the 2026 Senior Notes, which have been recorded as “Long-term debt, net” on the consolidated balance sheet as of September 30, 2020. The Company recognized interest expense related to the 2026 Senior Notes of $6.3 million for each of the three months ended September 30, 2020 and 2019, and $19.0 million and $18.9 million for the nine months ended September 30, 2020 and 2019, respectively.

10. Commitments and Contingencies

Legal Matters

The Company is involved in disputes or legal actions in the ordinary course of business. For example, certain of the Karnes County Contributors and the Company have been named as defendants in a lawsuit where the plaintiffs claim to be entitled to a minority working interest in certain Karnes County Assets. The litigation is in the pre-trial stage. The exposure related to this litigation is currently not reasonably estimable. The Karnes County Contributors retained all such liability in connection with the Business Combination. At September 30, 2020, the Company does not believe the outcome of any such disputes or legal actions will have a material effect on its consolidated statements of operations, balance sheet, or cash flows. No amounts were accrued with respect to outstanding litigation at September 30, 2020 or September 30, 2019.

Environmental Matters

The Company, as an owner or lessee and operator of oil and natural gas properties, is subject to various federal, state, local laws, and regulations relating to discharge of materials into, and protection of, the environment. These laws and regulations may, among other things, impose liability on the lessee under an oil and natural gas lease for the cost of pollution clean-up resulting from operations and subject the lessee to liability for pollution damages. In some instances, the Company may be directed to suspend or cease operations in the affected area. The Company maintains insurance coverage, which it believes is customary in the industry, although the Company is not fully insured against all environmental risks.

Risks and Uncertainties 

The Company’s revenue, profitability, and future growth are substantially dependent upon the prevailing and future prices for oil and natural gas, which depend on numerous factors beyond the Company’s control such as overall oil and natural gas production and inventories in relevant markets, economic conditions, the global political environment, regulatory developments, and competition from other energy sources. Oil and natural gas prices historically have been volatile and may be subject to significant fluctuations in the future. 

The coronavirus disease 2019 (“COVID-19”) pandemic and related economic repercussions have created significant volatility, uncertainty, and turmoil in the oil and natural gas industry. Oil demand has significantly deteriorated as a result of the virus outbreak and corresponding preventative measures taken around the world to mitigate the spread of the virus. The implications of the decrease in global demand for oil, coupled with the general oversupply, may have further negative effects on the Company’s business, such as production curtailment and reductions to its operating plans as a result of decreased prices and reduced storage capacity.
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Demand and pricing may again decline if there is a resurgence of the outbreak across the U.S. and other locations across the world and the related social distancing guidelines, travel restrictions, and stay-at-home orders. The extent of the additional impact on the Company’s industry and its business cannot be reasonably predicted at this time.

11. Income Taxes

The Company estimates its annual effective tax rate in recording its quarterly provision for income taxes in the various jurisdictions in which it operates. On March 27, 2020, the United States enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). The CARES Act includes several significant business tax provisions that, among other things, allow businesses to carry back net operating losses (“NOL”) arising in 2018, 2019, and 2020 to the five prior tax years. Applying the NOL carryback provision resulted in an income tax benefit of $1.2 million during the nine months ended September 30, 2020. The difference in the U.S. federal statutory tax rate of 34% in 2017 compared to 21% in 2018 and thereafter resulted in a discrete benefit to the tax provision of approximately $0.4 million for the nine months ended September 30, 2020.

The income tax expense or benefit recorded for the period is based on applying an estimated annual effective income tax rate to the net income or loss for the three and nine months ended September 30, 2020 and 2019. The computation of the annual estimated effective tax rate at each interim period requires certain estimates and significant judgment including, but not limited to, the Company’s expected operating income for the year, projections of the proportion of income earned and taxed in various jurisdictions, the effect of noncontrolling interest, permanent and temporary differences, and the likelihood of recovering deferred tax assets in the current year. The accounting estimates used to compute the income tax expense or benefit may change as new events occur, more experience is obtained, additional information becomes known, or as the tax environment changes. The Company’s effective tax rate for the nine months ended September 30, 2020 and 2019 was 4.0% and 14.9%, respectively. During the nine months ended September 30, 2020, the Company’s effective tax rate was primarily impacted by the reversal of its federal and state deferred tax liabilities and the federal and state deferred tax assets generated from losses related to non-cash impairments of the carrying value of the Company’s oil and natural gas properties, offset by the recognition of valuation allowances. The primary differences between the annual effective tax rate and the federal statutory tax rate of 21.0% are income attributable to noncontrolling interest, the recognition of a valuation allowance on federal and state deferred tax assets, and state taxes.

During the first quarter of 2020, the Company moved from a net deferred tax liability position to an estimated net deferred tax asset position resulting primarily from oil and natural gas impairments. As of September 30, 2020, the Company’s net deferred tax asset was $203.3 million. Management assessed whether it is more-likely-than-not that it will generate sufficient taxable income to realize its deferred income tax assets, including the investment in partnership and net operating loss carryforwards. In making this determination, the Company considered all available positive and negative evidence and made certain assumptions. The Company considered, among other things, the overall business environment, its historical earnings and losses, current industry trends, and its outlook for future years. As of September 30, 2020, the Company assessed the realizability of the deferred tax assets and recorded a full valuation allowance of $203.3 million.

The Company’s income tax provision consists of the following components:
                
Three Months EndedNine Months Ended
 (In thousands)September 30, 2020September 30, 2019September 30, 2020September 30, 2019
Current:
Federal$ $ $(1,167)$ 
State(339)115 (339)684 
 (339)115 (1,506)684 
Deferred:
Federal 3,135 (71,792)11,588 
State 279 (6,042)177 
  3,414