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, 2020 (the “2020 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 2020 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 Magnolia LLC Unit Holders 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 June 30, 2021, the Company’s significant accounting policies are consistent with those discussed in Note 2—Summary of Significant Accounting Policies of its consolidated and combined financial statements contained in the Company’s 2020 Form 10-K.
Recent Accounting Pronouncements
In December 2019, the Financial Accounting Standards Board issued Accounting Standards Update 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 adopted this standard on a prospective basis on January 1, 2021. The adoption of this guidance did not have any material impact on the Company’s financial position, cash flows, or results of operations.
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 and reflected 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 $105.9 million as of June 30, 2021 and $72.0 million as of December 31, 2020.
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 the purchaser can direct the use of the hydrocarbons, the transfer of significant risks and rewards, the Company’s right to payment, and the 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 $69.7 million in cash. The transaction was accounted for as an asset acquisition.
5. Derivative Instruments
Magnolia currently utilizes natural gas costless collars to reduce its exposure to price volatility for a portion of its natural gas production volumes. The Company’s policies do not permit the use of derivative instruments for speculative purposes. The Company’s natural gas costless collar derivative contracts are indexed to the Houston Ship Channel. Under the Company’s costless collar contracts, each collar has an established floor price and ceiling price. When the settlement price is below the floor price, the counterparty is required to make a payment to the Company and when the settlement price is above the ceiling price, the Company is required to make a payment to the counterparty. When the settlement price is between the floor and the ceiling, there is no payment required.
The Company has elected not to designate any of its derivative instruments as hedging instruments. Accordingly, changes in the fair value of the Company’s derivative instruments are recorded immediately to earnings as “Loss on derivatives, net” on the Company’s consolidated statements of operations.
The following table summarizes the effects of derivative instruments on the Company’s consolidated statements of operations during the three and six months ended June 30, 2021:
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(In thousands)
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Three Months Ended June 30, 2021
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Six Months Ended June 30, 2021
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Derivative settlements, realized loss
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$
|
166
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|
|
$
|
166
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|
Unrealized loss on derivatives
|
1,838
|
|
|
2,320
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|
Loss on derivatives, net
|
$
|
2,004
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|
|
$
|
2,486
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|
The Company did not have any derivative instruments during the three or six months ended June 30, 2020.
The Company had the following outstanding derivative contracts in place as of June 30, 2021:
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2021
|
Natural gas costless collars:
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Notional volume (MMBtu)
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|
3,100,000
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|
Weighted average floor price ($/MMBtu)
|
|
$
|
2.31
|
|
Weighted average ceiling price ($/MMBtu)
|
|
$
|
3.00
|
|
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 sheets at June 30, 2021 and December 31, 2020 is as follows:
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June 30, 2021
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December 31, 2020
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(In thousands)
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Carrying Value
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Fair Value
|
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Carrying Value
|
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Fair Value
|
Long-term debt
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$
|
386,996
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|
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$
|
412,608
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|
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$
|
391,115
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$
|
407,500
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|
The fair value of the 2026 Senior Notes at June 30, 2021 and December 31, 2020 is based on unadjusted quoted prices in an active market, which is 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 instruments 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 values 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 June 30, 2021. The Company’s derivative instruments were recorded at fair value within “Other current assets” on the Company’s consolidated balance sheet as of December 31, 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.
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:
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Fair Value Measurements Using
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(In thousands)
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Level 1
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Level 2
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Level 3
|
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Total Fair Value
|
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Netting
|
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Carrying Amount
|
June 30, 2021
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Current assets:
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Natural gas derivative instruments
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$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
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|
|
$
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—
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|
|
$
|
—
|
|
Current liabilities:
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Natural gas derivative instruments
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$
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—
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|
|
$
|
2,043
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|
|
$
|
—
|
|
|
$
|
2,043
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|
|
$
|
—
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|
|
$
|
2,043
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Fair Value Measurements Using
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(In thousands)
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Level 1
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Level 2
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Level 3
|
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Total Fair Value
|
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Netting
|
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Carrying Amount
|
December 31, 2020
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Current assets:
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Natural gas derivative instruments
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$
|
—
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|
|
$
|
1,375
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|
|
$
|
—
|
|
|
$
|
1,375
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|
|
$
|
(1,098)
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|
|
$
|
277
|
|
Current liabilities:
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|
|
|
|
|
|
|
|
|
|
Natural gas derivative instruments
|
$
|
—
|
|
|
$
|
1,098
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|
|
$
|
—
|
|
|
$
|
1,098
|
|
|
$
|
(1,098)
|
|
|
$
|
—
|
|
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 for the three and six months ended June 30, 2020. 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. No impairments were recorded for the three and six months ended June 30, 2021.
7. Intangible Assets
Non-Compete Agreement
On July 31, 2018 (the “Closing Date”), the Company and EnerVest, separate and apart from the Business Combination, entered into the Non-Compete, which initially prohibited EnerVest and certain of its affiliates from competing with the Company in the Eagle Ford Shale (the “Market Area”) until July 31, 2022 (“Prohibited Period End Date”). In January 2021, the Company amended the Non-Compete such that, rather than delivering an aggregate of 4.0 million shares of Class A Common Stock upon the two and one-half year and the four year anniversaries of the Closing Date, the Company would deliver (i) the cash value of approximately 2.0 million shares of Class A Common Stock and approximately 0.4 million shares of Class A Common Stock on the two and one-half year anniversary of the Closing Date and (ii) an aggregate of 1.6 million shares of Class A Common Stock on the four year anniversary of the Closing Date, in each case subject to the terms and conditions of the Non-Compete. On February 1, 2021, as consideration for compliance with the Non-Compete, the Company paid $17.2 million in cash and issued 0.4 million shares of Class A Common Stock.
On June 30, 2021, the Company amended the Non-Compete Prohibited Period End Date to terminate on June 30, 2021 and paid $24.9 million in cash in lieu of delivering the remaining 1.6 million shares of Class A Common Stock (the “Second Non-Compete Amendment”).
On the Closing Date of the initial Business Combination, 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 had a definite life and were subject to amortization utilizing the straight-line method over their economic life, previously estimated to be two and one-half to four years. The Second Non-Compete Amendment resulted in the Company accelerating the amortization of the remaining intangible assets. The Company includes the amortization in “Amortization of intangible assets” on the Company’s consolidated statements of operations.
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(In thousands)
|
June 30, 2021
|
|
December 31, 2020
|
Non-compete intangible assets
|
$
|
44,400
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|
|
$
|
44,400
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|
Accumulated amortization
|
(44,400)
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|
|
(35,054)
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|
Intangible assets, net
|
$
|
—
|
|
|
$
|
9,346
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|
Weighted average amortization period (in years)
|
2.70
|
|
3.25
|
8. Other Current Liabilities
The following table provides detail of the Company’s other current liabilities for the periods presented:
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(In thousands)
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June 30, 2021
|
|
December 31, 2020
|
Accrued capital expenditures
|
$
|
28,182
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|
|
$
|
16,368
|
|
Accrued interest
|
10,000
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|
|
10,000
|
|
Other
|
37,633
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|
|
39,955
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|
Total Other current liabilities
|
$
|
75,815
|
|
|
$
|
66,323
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|
9. Long-term Debt
The Company’s debt is comprised of the following:
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|
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(In thousands)
|
June 30, 2021
|
|
December 31, 2020
|
Revolving credit facility
|
$
|
—
|
|
|
$
|
—
|
|
Senior Notes due 2026
|
400,000
|
|
|
400,000
|
|
Total long-term debt
|
400,000
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|
|
400,000
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|
|
|
|
|
Less: Unamortized deferred financing cost
|
(13,004)
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|
|
(8,885)
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|
Long-term debt, net
|
$
|
386,996
|
|
|
$
|
391,115
|
|
Credit Facility
In connection with the consummation of the Business Combination, the RBL Facility was entered into by and 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 June 30, 2021 was $450.0 million, which was reaffirmed on April 12, 2021. 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 June 30, 2021, 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 for each of the three months ended June 30, 2021 and 2020, and $2.0 million and $2.2 million for the six months ended June 30, 2021 and 2020, respectively. The unamortized portion of the deferred financing costs is included in “Deferred financing costs, net” on the accompanying consolidated balance sheet as of June 30, 2021.
The Company did not have any outstanding borrowings under its RBL Facility as of June 30, 2021.
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, as amended. 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.
On April 5, 2021, the terms of the Indenture were amended to modify, among other things, the criteria used by the Company to make Restricted Payments (as defined in the Indenture). The amendment to the Indenture was accounted for as a debt modification. Costs incurred with third parties directly related to the modification were expensed as incurred. The Company incurred approximately $1.1 million of transaction fees related to the modification which were expensed and are reflected in “Interest expense, net” on the Company’s consolidated statements of operations for the three and six months ended June 30, 2021. The Company also paid $5.0 million in fees to holders of the 2026 Senior Notes, which are reflected as deferred financing costs reducing “Long-term debt, net” on the Company’s consolidated balance sheets. These costs are amortized using the new effective interest rate applied prospectively over the remaining term of the 2026 Senior Notes and are also included in “Interest expense, net” in the Company’s consolidated statements of operations.
The Company incurred $11.8 million of deferred financing costs related to the issuance of the 2026 Senior Notes, and an additional $5.0 million related to the amendment to the Indenture governing 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 has been recorded as “Long-term debt, net” on the Company’s consolidated balance sheet as of June 30, 2021. The Company recognized interest expense related to the 2026 Senior Notes of $7.7 million and $6.3 million for the three months ended June 30, 2021 and 2020, respectively, and $14.0 million and $12.6 million for the six months ended June 30, 2021 and 2020, respectively.
At any time prior to August 1, 2022, 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, 2022, 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.
10. Commitments and Contingencies
Legal Matters
From time to time, the Company is or may become involved in litigation in the ordinary course of business.
Certain of the Magnolia LLC Unit Holders 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 Magnolia LLC Unit Holders retained all such liability in connection with the Business Combination.
A mineral owner in a Magnolia operated well in Karnes County, Texas filed a complaint with the Texas Railroad Commission (the “Commission”) challenging the validity of the permit to drill such well by questioning the long-standing process by which the Commission granted the permit. After the Commission affirmed the granting of the permit, and after judicial review of the Commission’s order by the 53rd Judicial District Court Travis County, Texas (the “District Court”), the District Court reversed and remanded the Commission’s order. The Commission and Magnolia have appealed the District Court’s judgment to the Third Court of Appeals in Austin, Texas, and the appeal is in the preliminary stage.
At June 30, 2021, 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 June 30, 2021 or June 30, 2020.
Environmental Matters
The Company, as an owner or lessee and operator of oil and natural gas properties, is subject to various federal, state, and local laws and regulations relating to discharge of materials into, and the protection of, the environment. These laws and regulations may, among other things, impose liability on a 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 an 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 significantly deteriorated and has remained volatile 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, coupled with the general oversupply of, oil may have further negative effects on the Company’s business. Demand and pricing may again decline if there is a resurgence of the outbreak across the U.S. and other locations across the world or as a result of any related social distancing guidelines, travel restrictions, and stay-at-home orders. The extent of any further impact of the pandemic on the Company’s industry and business cannot be reasonably predicted at this time.
11. Income Taxes
The Company’s income tax provision consists of the following components:
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|
|
Three Months Ended
|
|
Six Months Ended
|
(In thousands)
|
June 30, 2021
|
|
June 30, 2020
|
|
June 30, 2021
|
|
June 30, 2020
|
Current:
|
|
|
|
|
|
|
|
Federal
|
$
|
1,645
|
|
|
$
|
5
|
|
|
$
|
1,645
|
|
|
$
|
(1,167)
|
|
State
|
753
|
|
|
—
|
|
|
1,152
|
|
|
—
|
|
|
2,398
|
|
|
5
|
|
|
2,797
|
|
|
(1,167)
|
|
Deferred:
|
|
|
|
|
|
|
|
Federal
|
—
|
|
|
(2,916)
|
|
|
—
|
|
|
(71,792)
|
|
State
|
—
|
|
|
(265)
|
|
|
—
|
|
|
(6,042)
|
|
|
—
|
|
|
(3,181)
|
|
|
—
|
|
|
(77,834)
|
|
Income tax expense (benefit)
|
$
|
2,398
|
|
|
$
|
(3,176)
|
|
|
$
|
2,797
|
|
|
$
|
(79,001)
|
|
The Company is subject to U.S. federal income tax, margin tax in the state of Texas, and Louisiana corporate income tax. The Company estimates its annual effective tax rate in recording its quarterly provision for income taxes in the various jurisdictions in which it operates. The Company’s effective tax rate for the three months ended June 30, 2021 and 2020 was 2.0% and 9.8%, respectively. The Company’s effective tax rate for the six months ended June 30, 2021 and 2020 was 1.3% and 3.9%, respectively. As a result of impairments in the first quarter of 2020, the Company established full valuation allowances on the federal and state deferred tax assets, which resulted in additional differences between the effective tax rate and the statutory rate as of June 30, 2021 and June 30, 2020. The primary differences between the annual effective tax rate and the statutory rate of 21.0% are income attributable to noncontrolling interest, state taxes, and valuation allowances.
As of June 30, 2021, the Company did not have an accrued liability for uncertain tax positions and does not anticipate recognition of any significant liabilities for uncertain tax positions during the next 12 months. For the quarter ended June 30, 2021, no amounts were incurred for income tax uncertainties or interest and penalties. Currently, the Company is not aware of any issues under review that could result in significant payments, accruals, or a material deviation from its position. The Company’s tax years since its formation remain subject to possible income tax examinations by its major taxing authorities for all periods.
During the six months ended June 30, 2021, EnerVest redeemed 15.3 million Magnolia LLC Units (and a corresponding number of shares of Class B Common Stock) for an equivalent number of shares of Class A Common Stock and subsequently sold these shares to the public. Magnolia did not receive any proceeds from the sale of shares of Class A Common Stock by EnerVest. The redemption and exchange of these Magnolia LLC Units created additional tax basis in Magnolia LLC. There was no net tax impact as the Company recorded a full valuation allowance.
On March 27, 2020, the United States enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). Applying the net operating loss carryback provision resulted in an income tax benefit of $1.2 million in the first quarter of 2020.
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 June 30, 2021, the Company’s net deferred tax asset was $210.4 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 June 30, 2021, the Company assessed the realizability of the deferred tax assets and recorded a full valuation allowance of $210.4 million.
12. Stockholders’ Equity
Class A Common Stock
At June 30, 2021, there were 184.8 million shares of Class A Common Stock issued and 175.3 million shares of Class A Common Stock outstanding. The holders of Class A Common Stock and Class B Common Stock vote together as a single class on all matters and are entitled one vote for each share held. There is no cumulative voting with respect to the election of directors, which results in the holders of more than 50% of the Company’s outstanding common shares being able to elect all of the directors, subject to
voting obligations under the Stockholder Agreement. In the event of a liquidation, dissolution, or winding up of the Company, the holders of the Class A Common Stock are entitled to share ratably in all assets remaining available for distribution to them after payment of liabilities and after provision is made for each class of stock, if any, having preference over the common stock. The holders of the Class A Common Stock have no preemptive or other subscription rights, and there are no sinking fund provisions applicable to such shares.
Class B Common Stock
At June 30, 2021, there were 60.5 million shares of Class B Common Stock issued and outstanding. Holders of Class B Common Stock vote together as a single class with holders of Class A Common Stock on all matters properly submitted to a vote of the stockholders. The holders of Class B Common Stock generally have the right to exchange all or a portion of their shares of Class B Common Stock, together with an equal number of Magnolia LLC Units, for the same number of shares of Class A Common Stock or, at Magnolia LLC’s option, an equivalent amount of cash. Upon the future redemption or exchange of Magnolia LLC Units held by any holder of Class B Common Stock, a corresponding number of shares of Class B Common Stock held by such holder of Class B Common Stock will be canceled. In the event of a liquidation, dissolution, or winding up of Magnolia LLC, the holders of the Class B Common Stock, through their ownership of Magnolia LLC Units, are entitled to share ratably in all assets remaining available for distribution to them after payment of liabilities and after provision is made for each class of units of Magnolia LLC, if any, having preference over the common units. The holders of the Class B Common Stock have no preemptive or other subscription rights, and there are no sinking fund provisions applicable to such shares.
Share Repurchase Program
The Company’s board of directors has authorized a share repurchase program of up to 20.0 million shares of Class A Common Stock. The program does not require purchases to be made within a particular time frame. As of June 30, 2021, the Company had repurchased 9.5 million shares under the plan at a cost of $83.3 million.
Noncontrolling Interest
Noncontrolling interest in Magnolia’s consolidated subsidiaries includes amounts attributable to Magnolia LLC Units that were issued to the Magnolia LLC Unit Holders in connection with the Business Combination. The noncontrolling interest percentage is affected by various equity transactions such as issuances and repurchases of Class A Common Stock, the exchange of Class B Common Stock (and corresponding Magnolia LLC Units) for Class A Common Stock, or the cancellation of Class B Common Stock (and corresponding Magnolia LLC Units).
During the six months ended June 30, 2021 Magnolia LLC repurchased and subsequently canceled 10.0 million Magnolia LLC Units with an equal number of shares of corresponding Class B Common Stock for $122.5 million of cash consideration (the “Class B Common Stock Repurchases”). During the same period, EnerVest redeemed 15.3 million Magnolia LLC Units (and a corresponding number of shares of Class B Common Stock) for an equivalent number of shares of Class A Common Stock and subsequently sold these shares to the public. Magnolia did not receive any proceeds from the sale of shares of Class A Common Stock by EnerVest. Magnolia funded the Class B Common Stock Repurchases with cash on hand. As of June 30, 2021, Magnolia owned approximately 74.3% of the interest in Magnolia LLC and the noncontrolling interest was 25.7%.
In the first quarter of 2019, Magnolia Operating formed Highlander Oil & Gas Holdings LLC (“Highlander”) as a joint venture whereby MGY Louisiana LLC, a wholly owned subsidiary of Magnolia Operating, holds approximately 84.7% of the units of Highlander, with the remaining 15.3% attributable to noncontrolling interest.
13. Stock Based Compensation
On October 8, 2018, the Company’s board of directors adopted the “Magnolia Oil & Gas Corporation Long Term Incentive Plan” (the “Plan”), effective as of July 17, 2018. A total of 16.8 million shares of Class A Common Stock have been authorized for issuance under the Plan as of June 30, 2021. The Company grants stock based compensation awards in the form of restricted stock units (“RSU”), performance stock units (“PSU”), and performance restricted stock units (“PRSU”) to eligible employees and directors to enhance the Company and its affiliates’ ability to attract, retain, and motivate persons who make important contributions to the Company and its affiliates by providing these individuals with equity ownership opportunities. Shares issued as a result of awards granted under the Plan are generally new shares of Class A Common Stock.
Stock based compensation expense is recognized net of forfeitures within “General and administrative expenses” and “Lease operating expenses” on the consolidated statements of operations and was $3.5 million and $3.1 million for the three months ended June 30, 2021 and 2020, respectively, and $6.2 million and $5.9 million for the six months ended June 30, 2021 and 2020,
respectively. The Company has elected to account for forfeitures of awards granted under the Plan as they occur in determining compensation expense.
The following table presents a summary of Magnolia’s unvested RSU, PSU, and PRSU activity for the three months ended June 30, 2021.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock Units
|
|
Performance Stock Units
|
|
Performance Restricted Stock Units
|
|
Units
|
|
Weighted Average Grant Date Fair Value
|
|
Units
|
|
Weighted Average Grant Date Fair Value
|
|
Units
|
|
Weighted Average Grant Date Fair Value
|
Unvested at March 31, 2021
|
1,587,243
|
|
|
$
|
8.46
|
|
|
757,944
|
|
|
$
|
11.10
|
|
|
1,001,079
|
|
|
$
|
9.33
|
|
Granted
|
148,996
|
|
|
11.82
|
|
|
—
|
|
|
—
|
|
|
9,412
|
|
|
12.19
|
|
Vested
|
(183,523)
|
|
|
6.65
|
|
|
(8,333)
|
|
|
14.58
|
|
|
—
|
|
|
—
|
|
Forfeited
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Unvested at June 30, 2021
|
1,552,716
|
|
|
$
|
9.00
|
|
|
749,611
|
|
|
$
|
11.06
|
|
|
1,010,491
|
|
|
$
|
9.36
|
|
The following table presents a summary of Magnolia’s unvested RSU, PSU, and PRSU activity for the six months ended June 30, 2021.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock Units
|
|
Performance Stock Units
|
|
Performance Restricted Stock Units
|
|
Units
|
|
Weighted Average Grant Date Fair Value
|
|
Units
|
|
Weighted Average Grant Date Fair Value
|
|
Units
|
|
Weighted Average Grant Date Fair Value
|
Unvested at December 31, 2020
|
1,686,637
|
|
|
$
|
8.51
|
|
|
841,425
|
|
|
$
|
10.95
|
|
|
—
|
|
|
$
|
—
|
|
Granted
|
455,128
|
|
|
10.39
|
|
|
—
|
|
|
—
|
|
|
1,012,330
|
|
|
9.36
|
|
Vested
|
(524,040)
|
|
|
8.50
|
|
|
(16,666)
|
|
|
14.58
|
|
|
—
|
|
|
—
|
|
Forfeited
|
(65,009)
|
|
|
9.96
|
|
|
(75,148)
|
|
|
9.13
|
|
|
(1,839)
|
|
|
9.33
|
|
Unvested at June 30, 2021
|
1,552,716
|
|
|
$
|
9.00
|
|
|
749,611
|
|
|
$
|
11.06
|
|
|
1,010,491
|
|
|
$
|
9.36
|
|
Restricted Stock Units
The Company grants service-based RSU awards to employees and non-employee directors, which generally vest ratably over a three-year service period, in the case of awards to employees, and vest in full after one year, in the case of awards to directors. RSUs represent the right to receive shares of Class A Common Stock at the end of the vesting period equal to the number of RSUs that vest. RSUs are subject to restrictions on transfer and are generally subject to a risk of forfeiture if the award recipient ceases to be an employee or director of the Company prior to vesting of the award. Compensation expense for the service-based RSU awards is based upon the grant date market value of the award and such costs are recorded on a straight-line basis over the requisite service period for each separately vesting portion of the award, as if the award was, in-substance, multiple awards. Unrecognized compensation expense related to unvested RSUs as of June 30, 2021 was $9.6 million, which the Company expects to recognize over a weighted average period of 2.0 years.
Performance Stock Units and Performance Restricted Stock Units
The Company grants PRSUs to certain employees. Each PRSU represents the contingent right to receive one share of Class A Common Stock once the PRSU is both vested and earned. PRSUs generally vest either ratably over a three-year service period or at the end of a three-year service period, in each case, subject to the recipient’s continued employment or service through each applicable vesting date. Each PRSU is earned based on whether Magnolia’s stock price achieves a target average stock price for any 20 consecutive trading days during the five-year performance period. If PRSUs are not earned by the end of the five-year performance period (“Performance Condition”), the PRSUs will be forfeited and no shares of Class A Common Stock will be issued, even if the vesting conditions have been met. Compensation expense for the PRSU awards is based upon grant date fair market value of the award, calculated using a Monte Carlo simulation, as presented below, and such costs are recorded on a straight-line basis over the requisite service period for each separately vesting portion of the award, as if the award was, in-substance, multiple awards, as applicable. Unrecognized compensation expense related to unvested PRSUs as of June 30, 2021 was $8.3 million, which the Company expects to recognize over a weighted average period of 2.8 years.
The Company grants PSUs to certain employees. Each PSU, to the extent earned, represents the contingent right to receive one share of Class A Common Stock and the awardee may earn between zero and 150% of the target number of PSUs granted based on the total shareholder return (“TSR”) of the Class A Common Stock relative to the TSR achieved by a specific industry peer group over a three-year performance period, the last day of which is also the vesting date. In addition to the TSR conditions, vesting of the PSUs is subject to the awardee’s continued employment through the date of settlement of the PSUs, which will occur within 60 days following the end of the performance period. Unrecognized compensation expense related to unvested PSUs as of June 30, 2021 was $1.6 million, which the Company expects to recognize over a weighted average period of 1.1 years.
The grant date fair values of the PRSUs granted during the six months ended June 30, 2021 and the PSUs granted during the six months ended June 30, 2020, were $9.5 million and $2.5 million, respectively. Since the Performance Condition was met on March 17, 2021, the fair value of the PRSUs granted after this date was based upon the grant date market value of the award. The fair values of the awards granted prior to March 17, 2021 were determined using a Monte Carlo simulation. The following table summarizes the Monte Carlo simulation assumptions used to calculate the grant date fair value of the PRSUs in 2021 and the PSUs in 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
PRSU and PSU Grant Date Fair Value Assumptions
|
June 30, 2021
|
|
June 30, 2020
|
Expected term (in years)
|
3.64
|
|
2.85
|
Expected volatility
|
55.18%
|
|
33.50%
|
Risk-free interest rate
|
0.56%
|
|
1.16%
|
14. Earnings (Loss) Per Share
The Company’s unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are deemed participating securities and, therefore, have been deducted from earnings in computing basic and diluted net income (loss) per share under the two-class method. Diluted net income (loss) per share attributable to common stockholders is calculated under both the two-class method and the treasury stock method and the more dilutive of the two calculations is presented.
The components of basic and diluted net income (loss) per share attributable to common stockholders are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
(In thousands, except per share data)
|
June 30, 2021
|
|
June 30, 2020
|
|
June 30, 2021
|
|
June 30, 2020
|
Basic:
|
|
|
|
|
|
|
|
Net income (loss) attributable to Class A Common Stock
|
$
|
84,445
|
|
|
$
|
(18,272)
|
|
|
$
|
147,689
|
|
|
$
|
(1,245,282)
|
|
Less: Undistributed earnings allocated to participating securities
|
642
|
|
|
—
|
|
|
819
|
|
|
—
|
|
Net income (loss), net of participating securities
|
$
|
83,803
|
|
|
$
|
(18,272)
|
|
|
$
|
146,870
|
|
|
$
|
(1,245,282)
|
|
Weighted average number of common shares outstanding during the period - basic
|
175,169
|
|
|
166,572
|
|
|
171,083
|
|
|
166,860
|
|
Net income (loss) per share of Class A Common Stock - basic
|
$
|
0.48
|
|
|
$
|
(0.11)
|
|
|
$
|
0.86
|
|
|
$
|
(7.46)
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
Net income (loss) attributable to Class A Common Stock
|
$
|
84,445
|
|
|
$
|
(18,272)
|
|
|
$
|
147,689
|
|
|
$
|
(1,245,282)
|
|
Less: Undistributed earnings reallocated to participating securities
|
638
|
|
|
—
|
|
|
814
|
|
|
—
|
|
Net income (loss), net of participating securities
|
$
|
83,807
|
|
|
$
|
(18,272)
|
|
|
$
|
146,875
|
|
|
$
|
(1,245,282)
|
|
Weighted average number of common shares outstanding during the period - basic
|
175,169
|
|
|
166,572
|
|
|
171,083
|
|
|
166,860
|
|
Add: Dilutive effect of stock based compensation and other
|
960
|
|
|
—
|
|
|
1,002
|
|
|
—
|
|
Weighted average number of common shares outstanding during the period - diluted
|
176,129
|
|
|
166,572
|
|
|
172,085
|
|
|
166,860
|
|
Net income (loss) per share of Class A Common Stock - diluted
|
$
|
0.48
|
|
|
$
|
(0.11)
|
|
|
$
|
0.85
|
|
|
$
|
(7.46)
|
|
For the three and six months ended June 30, 2021, the Company excluded 66.1 million and 73.1 million, respectively, of weighted average shares of Class A Common Stock issuable upon the exchange of Class B Common Stock (and corresponding Magnolia LLC Units) as the effect was anti-dilutive. For the three and six months ended June 30, 2020, the Company excluded 85.8 million weighted average shares of Class A Common Stock issuable upon the exchange of Class B Common Stock (and
corresponding Magnolia LLC Units), 4.0 million contingent shares of Class A Common Stock issuable to an affiliate of EnerVest, provided EnerVest did not compete in the Market Area, and 0.1 million RSUs and PSUs, because the effect was anti-dilutive.
15. Related Party Transactions
As of June 30, 2021, EnerVest Energy Institutional Fund XIV-A, L.P., a Delaware limited partnership, which is part of the Magnolia LLC Unit Holders, held more than 10% of the Company’s common stock and qualified as a principal owner of the Company, as defined in ASC 850, “Related Party Disclosures.”
Class B Common Stock Repurchases and Redemptions
During the six months ended June 30, 2021, EnerVest Energy Institutional Fund XIV-A, L.P. received $81.1 million in cash and surrendered 6.6 million Magnolia LLC Units with an equal number of shares of corresponding Class B Common Stock. Subsequently, Magnolia LLC canceled the surrendered Magnolia LLC Units and a corresponding number of shares of Class B Common Stock. EnerVest Energy Institutional Fund XIV-A, L.P. also redeemed 10.1 million Magnolia LLC Units (and a corresponding number of shares of Class B Common Stock) for an equivalent number of shares of Class A Common Stock which were subsequently sold to the public. Magnolia did not receive any proceeds from the sale of shares of Class A Common Stock by EnerVest Energy Institutional Fund XIV-A, L.P.
16. Subsequent Event
On August 2, 2021, the Company’s board of directors declared a semi-annual interim cash dividend of $0.08 per share of Class A Common Stock, and Magnolia LLC declared a cash distribution of $0.08 per Magnolia LLC Unit to each holder of Magnolia LLC Units, each payable on September 1, 2021 to shareholders or members of record, as applicable, as of August 12, 2021.