Magnolia Oil & Gas Corp - Quarter Report: 2021 September (Form 10-Q)

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, 2021

☐ 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)


Delaware		81-5365682
(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 class	Trading Symbol(s)	Name of each exchange on which registered
Class A Common Stock, par value $0.0001	MGY	New 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 filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller 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 October 28, 2021, there were 181,801,600 shares of Class A Common Stock, $0.0001 par value per share, and 49,292,476 shares of Class B Common Stock, $0.0001 par value per share, outstanding.

GLOSSARY OF CERTAIN TERMS AND CONVENTIONS USED HEREIN

The following are definitions of certain other terms and conventions 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 the Karnes County Assets; the Giddings Assets; 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, as it relates to the 2026 Senior Notes.

“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 formation in South Texas.

“Magnolia LLC Unit Holders.” 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-AIV, 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, as amended, dated as of July 31, 2018, by and between the Company, Magnolia Operating, and EnerVest Operating, L.L.C. (“EVOC”), pursuant to which EVOC provided 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 other parties thereto.

“Non-Compete.” That certain Non-Competition Agreement, dated July 31, 2018, between the Company and EnerVest, pursuant to which EnerVest and certain of its affiliates were restricted from competing with the Company in certain counties comprising the Eagle Ford Shale.

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, 2021		December 31, 2020
ASSETS	(Unaudited)		(Audited)
CURRENT ASSETS
Cash and cash equivalents	$	245,023	$	192,561
Accounts receivable	130,100		81,559
Drilling advances	63		3,805
Other current assets	1,567		3,601
Total current assets	376,753		281,526
PROPERTY, PLANT AND EQUIPMENT
Oil and natural gas properties	2,308,425		2,130,125
Other	6,799		4,412
Accumulated depreciation, depletion and amortization	(1,119,349)		(985,010)
Total property, plant and equipment, net	1,195,875		1,149,527
OTHER ASSETS
Deferred financing costs, net	4,291		6,042
Intangible assets, net	—		9,346
Other long-term assets	8,860		6,979
Total other assets	13,151		22,367
TOTAL ASSETS	$	1,585,779	$	1,453,420
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable	$	107,460	$	62,626
Other current liabilities (Note 8)	83,225		66,323
Total current liabilities	190,685		128,949
LONG-TERM LIABILITIES
Long-term debt, net	387,537		391,115
Asset retirement obligations, net of current	96,062		88,232
Other long-term liabilities	5,978		5,702
Total long-term liabilities	489,577		485,049
COMMITMENTS AND CONTINGENCIES (Note 10)
STOCKHOLDERS’ EQUITY
Class A Common Stock, $0.0001 par value, 1,300,000 shares authorized, 189,627 shares issued and 178,160 shares outstanding in 2021 and 168,755 shares issued and 163,280 shares outstanding in 2020	19		17
Class B Common Stock, $0.0001 par value, 225,000 shares authorized, 52,916 shares issued and outstanding in 2021 and 85,790 shares issued and outstanding in 2020	5		9
Additional paid-in capital	1,665,805		1,712,544
Treasury Stock, at cost, 11,468 shares and 5,475 shares in 2021 and 2020, respectively	(112,796)		(38,958)
Accumulated deficit	(858,397)		(1,125,450)
Noncontrolling interest	210,881		291,260
Total equity	905,517		839,422
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	1,585,779	$	1,453,420

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

Magnolia Oil & Gas Corporation

Consolidated Statements of Operations (Unaudited)

(In thousands, except per share data)


	Three Months Ended				Nine Months Ended
	September 30, 2021		September 30, 2020		September 30, 2021		September 30, 2020
REVENUES
Oil revenues	$	195,132	$	95,677	$	529,641	$	311,153
Natural gas revenues	42,828		14,895		110,187		44,238
Natural gas liquids revenues	45,619		10,495		102,140		29,880
Total revenues	283,579		121,067		741,968		385,271
OPERATING EXPENSES
Lease operating expenses	23,593		18,802		64,957		61,275
Gathering, transportation and processing	10,077		5,771		27,839		20,579
Taxes other than income	14,082		7,331		38,657		22,874
Exploration expense	317		701		2,440		563,589
Impairment of oil and natural gas properties	—		—		—		1,381,258
Asset retirement obligations accretion	1,329		1,501		4,065		4,403
Depreciation, depletion and amortization	47,993		44,731		134,268		238,273
Amortization of intangible assets	—		3,626		9,346		10,879
General and administrative expenses	14,695		16,663		59,816		50,472
Total operating expenses	112,086		99,126		341,388		2,353,602

OPERATING INCOME (LOSS)	171,493		21,941		400,580		(1,968,331)

OTHER INCOME (EXPENSE)
Income from equity method investee	—		1,007		—		2,059
Interest expense, net	(7,474)		(7,333)		(23,519)		(21,345)
Loss on derivatives, net	(623)		(2,208)		(3,110)		(2,208)
Other income (expense), net	142		(51)		48		(510)
Total other expense, net	(7,955)		(8,585)		(26,581)		(22,004)

INCOME (LOSS) BEFORE INCOME TAXES	163,538		13,356		373,999		(1,990,335)
Income tax expense (benefit)	3,631		(339)		6,428		(79,340)
NET INCOME (LOSS)	159,907		13,695		367,571		(1,910,995)
LESS: Net income (loss) attributable to noncontrolling interest	40,543		4,548		100,518		(674,860)
NET INCOME (LOSS) ATTRIBUTABLE TO CLASS A COMMON STOCK	$	119,364	$	9,147	$	267,053	$	(1,236,135)

NET INCOME (LOSS) PER SHARE OF CLASS A COMMON STOCK
Basic	$	0.68	$	0.05	$	1.54	$	(7.41)
Diluted	$	0.67	$	0.05	$	1.53	$	(7.41)
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
Basic	174,764		166,467		172,281		166,728
Diluted	175,683		170,676		173,280		166,728

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

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 Capital		Treasury Stock			Retained Earnings/ Accumulated Deficit		Total Stockholders’ Equity		Noncontrolling Interest		Total Equity
	Shares	Value		Shares	Value				Shares	Value
Balance, December 31, 2019	168,319	$	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	—	—		—	—		1,902		—	—		—		1,902		977		2,879
Changes in ownership interest adjustment	—	—		—	—		(970)		—	—		—		(970)		970		—
Common stock issued related to stock based compensation, net	154	—		—	—		(298)		—	—		—		(298)		(154)		(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, 2020	168,473	$	17	85,790	$	9	$	1,703,996	2,000	$	(16,760)	$	(1,144,070)	$	543,192	$	285,698	$	828,890
Stock based compensation expense	—	—		—	—		2,023		—	—		—		2,023		1,042		3,065
Changes in ownership interest adjustment	—	—		—	—		124		—	—		—		124		(124)		—
Common stock issued related to stock based compensation and other, net	114	—		—	—		(22)		—	—		—		(22)		(11)		(33)
Distributions to noncontrolling interest owners	—	—		—	—		—		—	—		—		—		(207)		(207)
Net loss	—	—		—	—		—		—	—		(18,272)		(18,272)		(11,119)		(29,391)
Balance, June 30, 2020	168,587	$	17	85,790	$	9	$	1,706,121	2,000	$	(16,760)	$	(1,162,342)	$	527,045	$	275,279	$	802,324
Stock based compensation expense	—	—		—	—		1,931		—	—		—		1,931		996		2,927
Changes in ownership interest adjustment	—	—		—	—		1,110		—	—		—		1,110		(1,110)		—
Common stock issued related to stock based compensation and other, net	89	—		—	—		(119)		—	—		—		(119)		(61)		(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, 2020	168,676	$	17	85,790	$	9	$	1,709,043	3,100	$	(23,240)	$	(1,153,195)	$	532,634	$	279,547	$	812,181

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 Capital		Treasury Stock			Accumulated Deficit		Total Stockholders’ Equity		Noncontrolling Interest		Total Equity
	Shares	Value		Shares	Value				Shares	Value
Balance, December 31, 2020	168,755	$	17	85,790	$	9	$	1,712,544	5,475	$	(38,958)	$	(1,125,450)	$	548,162	$	291,260	$	839,422
Stock based compensation expense	—	—		—	—		1,835		—	—		—		1,835		870		2,705
Changes in ownership interest adjustment	—	—		—	—		28,924		—	—		—		28,924		(28,924)		—
Common stock issued related to stock based compensation and other, net	244	—		—	—		(839)		—	—		—		(839)		(399)		(1,238)
Class A Common Stock repurchases	—	—		—	—		—		1,973	(20,281)		—		(20,281)		—		(20,281)
Class B Common Stock purchase and cancellation	—	—		(5,000)	(1)		1		—	—		—		—		(50,781)		(50,781)
Non-compete settlement	375	—		—	—		(11,231)		—	—		—		(11,231)		(5,921)		(17,152)
Conversion of Class B Common Stock to Class A Common Stock	14,166	1		(14,166)	(1)		—		—	—		—		—		—		—
Distributions to noncontrolling interest owners	—	—		—	—		—		—	—		—		—		(155)		(155)
Net income	—	—		—	—		—		—	—		63,244		63,244		28,248		91,492
Balance, March 31, 2021	183,540	$	18	66,624	$	7	$	1,731,234	7,448	$	(59,239)	$	(1,062,206)	$	609,814	$	234,198	$	844,012
Stock based compensation expense	—	—		—	—		2,577		—	—		—		2,577		951		3,528
Changes in ownership interest adjustment	—	—		—	—		(30,662)		—	—		—		(30,662)		30,662		—
Common stock issued related to stock based compensation and other, net	160	—		—	—		(44)		—	—		—		(44)		(17)		(61)
Class A Common Stock repurchases	—	—		—	—		—		2,025	(24,047)		—		(24,047)		—		(24,047)
Class B Common Stock purchase and cancellation	—	—		(5,000)	(1)		1		—	—		—		—		(71,750)		(71,750)
Non-compete settlement	—	—		—	—		(18,527)		—	—		—		(18,527)		(6,395)		(24,922)
Conversion of Class B Common Stock to Class A Common Stock	1,100	—		(1,100)	—		—		—	—		—		—		—		—
Distributions to noncontrolling interest owners	—	—		—	—		—		—	—		—		—		(276)		(276)
Net income	—	—		—	—		—		—	—		84,445		84,445		31,727		116,172
Balance, June 30, 2021	184,800	$	18	60,524	$	6	$	1,684,579	9,473	$	(83,286)	$	(977,761)	$	623,556	$	219,100	$	842,656

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 Capital		Treasury Stock			Accumulated Deficit		Total Stockholders’ Equity		Noncontrolling Interest		Total Equity
	Shares	Value		Shares	Value				Shares	Value
Balance, June 30, 2021	184,800	$	18	60,524	$	6	$	1,684,579	9,473	$	(83,286)	$	(977,761)	$	623,556	$	219,100	$	842,656
Stock based compensation expense	—	—		—	—		2,180		—	—		—		2,180		730		2,910
Changes in ownership interest adjustment	—	—		—	—		(5,373)		—	—		—		(5,373)		5,373		—
Common stock issued related to stock based compensation and other, net	219	—		—	—		(1,348)		—	—		—		(1,348)		(449)		(1,797)
Class A Common Stock repurchases	—	—		—	—		—		1,995	(29,510)		—		(29,510)		—		(29,510)
Class B Common Stock purchase and cancellation	—	—		(3,000)	—		—		—	—		—		—		(49,140)		(49,140)
Conversion of Class B Common Stock to Class A Common Stock	4,608	1		(4,608)	(1)		—		—	—		—		—		—		—
Dividends declared ($0.08 per share)	—	—		—	—		(14,233)		—	—		—		(14,233)		—		(14,233)
Distributions to noncontrolling interest owners	—	—		—	—		—		—	—		—		—		(5,276)		(5,276)
Net income	—	—		—	—		—		—	—		119,364		119,364		40,543		159,907
Balance, September 30, 2021	189,627	$	19	52,916	$	5	$	1,665,805	11,468	$	(112,796)	$	(858,397)	$	694,636	$	210,881	$	905,517

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

Magnolia Oil & Gas Corporation

Consolidated Statements of Cash Flows (Unaudited)

(In thousands)


	Nine Months Ended
	September 30, 2021		September 30, 2020
CASH FLOWS FROM OPERATING ACTIVITIES
NET INCOME (LOSS)	$	367,571	$	(1,910,995)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation, depletion and amortization	134,268		238,273
Amortization of intangible assets	9,346		10,879
Exploration expense, non-cash	—		561,629
Impairment of oil and natural gas properties	—		1,381,258
Asset retirement obligations accretion	4,065		4,403
Amortization of deferred financing costs	3,149		2,710
Unrealized loss on derivatives, net	277		2,208
Deferred taxes	—		(77,834)
Stock based compensation	9,143		8,871
Other	(85)		(2,059)
Changes in operating assets and liabilities:
Accounts receivable	(48,541)		44,532
Accounts payable	44,834		(15,953)
Accrued liabilities	(1,501)		(15,468)
Drilling advances	3,743		(174)
Other assets and liabilities, net	1,666		(1,281)
Net cash provided by operating activities	527,935		230,999
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions	(10,817)		(73,702)
Additions to oil and natural gas properties	(162,744)		(157,325)
Changes in working capital associated with additions to oil and natural gas properties	12,435		(18,972)
Other investing	(2,316)		(842)
Net cash used in investing activities	(163,442)		(250,841)
CASH FLOW FROM FINANCING ACTIVITIES
Class A Common Stock repurchases	(70,316)		(12,962)
Class B Common Stock purchases and cancellations	(171,671)		—
Non-compete settlement	(42,074)		—
Dividends paid	(14,103)		—
Cash paid for debt modification	(4,976)		—
Distributions to noncontrolling interest owners	(5,706)		(594)
Other financing activities	(3,185)		(702)
Net cash used in financing activities	(312,031)		(14,258)

NET CHANGE IN CASH AND CASH EQUIVALENTS	52,462		(34,100)
Cash and cash equivalents – Beginning of period	192,561		182,633
Cash and cash equivalents – End of period	$	245,023	$	148,533

SUPPLEMENTAL CASH FLOW INFORMATION:
Supplemental cash items:
Cash paid (received) for income taxes	$	(1,128)	$	(724)
Cash paid for interest	26,483		25,445
Supplemental non-cash investing and financing activity:
Accruals or liabilities for capital expenditures	$	28,802	$	21,750
Supplemental non-cash lease operating activity:
Right-of-use assets obtained in exchange for operating lease obligations	$	4,429	$	5,500

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

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, 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 September 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 $114.8 million as of September 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

As of September 30, 2021, the Company had settled all of its natural gas costless collar derivative contracts. Prior to September 30, 2021, Magnolia utilized 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. Under the Company’s costless collar contracts, each collar had an established floor price and ceiling price. When the settlement price was below the floor price, the counterparty was required to make a payment to the Company and when the settlement price was above the ceiling price, the Company was required to make a payment to the counterparty.

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 were 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 nine months ended September 30, 2021 and 2020:


	Three Months Ended				Nine Months Ended
(In thousands)	September 30, 2021		September 30, 2020		September 30, 2021		September 30, 2020
Derivative settlements, realized (loss)	$	(2,666)	$	—	$	(2,833)	$	—
Unrealized gain (loss) on derivatives	2,043		(2,208)		(277)		(2,208)
(Loss) on derivatives, net	$	(623)	$	(2,208)	$	(3,110)	$	(2,208)

The Company had no outstanding derivative contracts in place as of September 30, 2021.

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

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

Level 2 - Pricing inputs are other than quoted prices included within Level 1 that are observable for the investment, either directly or indirectly. Level 2 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 3 - 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 September 30, 2021 and December 31, 2020 is as follows:


	September 30, 2021				December 31, 2020
(In thousands)	Carrying Value		Fair Value		Carrying Value		Fair Value
Long-term debt	$	387,537	$	410,880	$	391,115	$	407,500

The fair value of the 2026 Senior Notes at September 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 Company had no outstanding derivative instruments as of September 30, 2021. The fair values of the Company’s outstanding natural gas costless collar derivative instruments prior to September 30, 2021 were measured using an industry-standard pricing model and were provided by a third party. The inputs used in the third-party pricing model included 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 outstanding as of December 31, 2020 were recorded at fair value within “Other current assets” on the Company’s consolidated balance sheet. These fair values were recorded by netting asset and liability positions with the same counterparty and were subject to contractual terms that provided 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 as of December 31, 2020 that were required to be measured at fair value on a recurring basis:


	Fair Value Measurements Using
(In thousands)	Level 1		Level 2		Level 3		Total Fair Value		Netting		Carrying Amount
December 31, 2020
Current assets:
Natural gas derivative instruments	$	—	$	1,375	$	—	$	1,375	$	(1,098)	$	277
Current liabilities:
Natural gas derivative instruments	$	—	$	1,098	$	—	$	1,098	$	(1,098)	$	—

See Note 5—Derivative Instruments for additional information on 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 for the nine months ended September 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 nine months ended September 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 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.


(In thousands)	September 30, 2021		December 31, 2020
Non-compete intangible assets	$	44,400	$	44,400
Accumulated amortization	(44,400)		(35,054)
Intangible assets, net	$	—	$	9,346
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:


(In thousands)	September 30, 2021		December 31, 2020
Accrued capital expenditures	$	28,802	$	16,368
Other	54,423		49,955
Total Other current liabilities	$	83,225	$	66,323

9. Long-term Debt

The Company’s debt is comprised of the following:


(In thousands)	September 30, 2021		December 31, 2020
Revolving credit facility	$	—	$	—
Senior Notes due 2026	400,000		400,000
Total long-term debt	400,000		400,000

Less: Unamortized deferred financing cost	(12,463)		(8,885)
Long-term debt, net	$	387,537	$	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 September 30, 2021 was $450.0 million, which was reaffirmed in the semi-annual redetermination on October 15, 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.

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, 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 September 30, 2021 and 2020, and $3.1 million and $3.2 million for the nine months ended September 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 September 30, 2021.

The Company did not have any outstanding borrowings under its RBL Facility as of September 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 nine months ended September 30, 2021. The Company also paid $5.0 million in fees to holders of the 2026 Senior Notes, which fees are recorded as deferred financing costs and amortized using the new effective interest rate applied prospectively over the remaining term of the 2026 Senior Notes.

As of September 30, 2021, the Company had incurred and capitalized a total of $16.8 million of deferred financing costs related to the issuance of, and the amendment to the Indenture governing, the 2026 Senior Notes. 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 September 30, 2021. The Company recognized interest expense related to the 2026 Senior Notes of $6.5 million and $6.3 million for the three months ended September 30, 2021 and 2020, respectively, and $20.5 million and $19.0 million for the nine months ended September 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 EnerVest Energy Institutional Fund XIV-C, L.P. (collectively the “Co-Defendants”) 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 Co-Defendants 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 September 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 September 30, 2021 or September 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. While oil and natural gas prices have increased in 2021, demand and pricing may again decline if there is a resurgence of the outbreak across the U.S. or 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, including the emergence and spread of variant strains of COVID-19, 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:


	Three Months Ended				Nine Months Ended
(In thousands)	September 30, 2021		September 30, 2020		September 30, 2021		September 30, 2020
Current:
Federal	$	2,604	$	—	$	4,248	$	(1,167)
State	1,027		(339)		2,180		(339)
	3,631		(339)		6,428		(1,506)
Deferred:
Federal	—		—		—		(71,792)
State	—		—		—		(6,042)
	—		—		—		(77,834)
Income tax expense (benefit)	$	3,631	$	(339)	$	6,428	$	(79,340)

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 September 30, 2021 and 2020 was 2.2% and negative 2.5%, respectively. The Company’s effective tax rate for the nine months ended September 30, 2021 and 2020 was 1.7% and 4.0%, 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 September 30, 2021 and September 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 September 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 September 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 nine months ended September 30, 2021, the Magnolia LLC Unit Holders redeemed 19.9 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 the Magnolia LLC Unit Holders. 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 September 30, 2021, the Company’s net deferred tax asset was $203.1 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, 2021, the Company assessed the realizability of the deferred tax assets and recorded a full valuation allowance of $203.1 million.

12. Stockholders’ Equity

Class A Common Stock

At September 30, 2021, there were 189.6 million shares of Class A Common Stock issued and 178.2 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 September 30, 2021, there were 52.9 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 September 30, 2021, the Company had repurchased 11.5 million shares under the program at a cost of $112.8 million.

Dividends and Distributions

Distribution

On August 2, 2021, Magnolia LLC declared a cash distribution of $0.08 per Magnolia LLC Unit totaling $19.0 million, of which $14.2 million was distributed to the Company and $4.8 million was distributed to the Magnolia LLC Unit Holders. The distribution to the Magnolia LLC Unit Holders was recorded as a reduction of noncontrolling interest on the Company’s consolidated balance sheet as of September 30, 2021.

Cash Dividend

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 totaling approximately $14.2 million. The dividend was paid on September 1, 2021 to shareholders of record as of the close of business on August 12, 2021. Dividends in excess of retained earnings are recorded as a reduction of additional paid-in capital. The $14.2 million dividend declared during the third quarter of 2021 was recorded as a reduction of additional paid-in capital on the Company’s consolidated balance sheet as of September 30, 2021.

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 nine months ended September 30, 2021 Magnolia LLC repurchased and subsequently canceled 13.0 million Magnolia LLC Units with an equal number of shares of corresponding Class B Common Stock for $171.7 million of cash consideration (the “Class B Common Stock Repurchases”). During the same period, the Magnolia LLC Unit Holders redeemed 19.9 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 the Magnolia LLC Unit Holders. Magnolia funded the Class B Common Stock Repurchases with cash on hand. As of September 30, 2021, Magnolia owned approximately 77.1% of the interest in Magnolia LLC and the noncontrolling interest was 22.9%.

Subsequent to September 30, 2021, the Magnolia LLC Unit Holders redeemed an additional 3.6 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.

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 September 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 $2.9 million for each of the three months ended September 30, 2021 and 2020, and $9.1 million and $8.9 million for the nine months ended September 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 September 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 June 30, 2021	1,552,716	$	9.00	749,611	$	11.06	1,010,491	$	9.36
Granted	24,913	14.82		—	—		—	—
Vested	(81,954)	13.65		(260,834)	14.58		—	—
Forfeited	(26,461)	8.23		(28,363)	8.80		(37,854)	9.33
Unvested at September 30, 2021	1,469,214	$	8.85	460,414	$	9.20	972,637	$	9.36

The following table presents a summary of Magnolia’s unvested RSU, PSU, and PRSU activity for the nine months ended September 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	480,041	10.62		—	—		1,012,330	9.36
Vested	(605,994)	9.20		(277,500)	14.58		—	—
Forfeited	(91,470)	9.46		(103,511)	9.04		(39,693)	9.33
Unvested at September 30, 2021	1,469,214	$	8.85	460,414	$	9.20	972,637	$	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 September 30, 2021 was $7.9 million, which the Company expects to recognize over a weighted average period of 1.9 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 September 30, 2021 was $7.3 million, which the Company expects to recognize over a weighted average period of 2.5 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 September 30, 2021 was $1.0 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 nine months ended September 30, 2021 and the PSUs granted during the nine months ended September 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.


	Nine Months Ended
PRSU and PSU Grant Date Fair Value Assumptions	September 30, 2021	September 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				Nine Months Ended
(In thousands, except per share data)	September 30, 2021		September 30, 2020		September 30, 2021		September 30, 2020
Basic:
Net income (loss) attributable to Class A Common Stock	$	119,364	$	9,147	$	267,053	$	(1,236,135)
Less: Dividends and net income allocated to participating securities	939		—		1,714		—
Net income (loss), net of participating securities	$	118,425	$	9,147	$	265,339	$	(1,236,135)
Weighted average number of common shares outstanding during the period - basic	174,764		166,467		172,281		166,728
Net income (loss) per share of Class A Common Stock - basic	$	0.68	$	0.05	$	1.54	$	(7.41)

Diluted:
Net income (loss) attributable to Class A Common Stock	$	119,364	$	9,147	$	267,053	$	(1,236,135)
Less: Dividends and net income allocated to participating securities	934		—		1,705		—
Net income (loss), net of participating securities	$	118,430	$	9,147	$	265,348	$	(1,236,135)
Weighted average number of common shares outstanding during the period - basic	174,764		166,467		172,281		166,728
Add: Dilutive effect of stock based compensation and other	919		4,209		999		—
Weighted average number of common shares outstanding during the period - diluted	175,683		170,676		173,280		166,728
Net income (loss) per share of Class A Common Stock - diluted	$	0.67	$	0.05	$	1.53	$	(7.41)

For the three and nine months ended September 30, 2021, the Company excluded 60.4 million and 68.8 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 nine months ended September 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). In addition, for the nine months ended September 30, 2020, the Company excluded 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 0.2 million RSUs and PSUs, because the effect was anti-dilutive.

15. Related Party Transactions

As of September 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.”

Distributions

On August 2, 2021, Magnolia LLC declared a cash distribution of $0.08 per Magnolia LLC Unit totaling $19.0 million, of which $3.2 million was distributed to EnerVest Energy Institutional Fund XIV-A, L.P.

Class B Common Stock Repurchases and Redemptions

During the nine months ended September 30, 2021, EnerVest Energy Institutional Fund XIV-A, L.P. received $113.6 million in cash and surrendered 8.6 million Magnolia LLC Units with an equal number of shares of corresponding Class B Common Stock. EnerVest Energy Institutional Fund XIV-A, L.P. also redeemed 13.2 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. Subsequently, Magnolia LLC canceled the surrendered Magnolia LLC Units and a corresponding number of shares of Class B Common Stock. 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.

Subsequent to September 30, 2021, EnerVest Energy Institutional Fund XIV-A, L.P. redeemed an additional 2.4 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.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

FORWARD-LOOKING STATEMENTS

This report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical facts included or incorporated by reference in this report, including, without limitation, statements regarding the Company’s future financial position, business strategy, budgets, projected revenues, projected costs, and plans and objectives of management for future operations, are forward-looking statements. Such forward-looking statements are based on the beliefs of management, as well as assumptions made by, and information currently available to, the Company’s management. In addition, forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “could,” “expect,” “intend,” “project,” “estimate,” “anticipate,” “plan,” “believe,” or “continue” or similar terminology. Although Magnolia believes that the expectations reflected in such forward-looking statements are reasonable, the Company can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from the Company’s expectations include, but are not limited to, Magnolia’s assumptions about:

•the length, scope, and severity of the ongoing coronavirus disease 2019 (“COVID-19”) pandemic (including the emergence and spread of variant strains of COVID-19), including the effects of related public health concerns and the impact of continued or new actions taken by governmental authorities and other third parties in response to the pandemic and its impact on commodity prices and supply and demand considerations;

•legislative, regulatory, or policy changes, including those following the change in presidential administrations;

•the market prices of oil, natural gas, natural gas liquids (“NGLs”), and other products or services;

•the supply and demand for oil, natural gas, NGLs, and other products or services;

•production and reserve levels;

•drilling risks;

•economic and competitive conditions;

•the availability of capital resources;

•capital expenditures and other contractual obligations;

•weather conditions;

•inflation rates;

•the availability of goods and services;

•cyber attacks;

•the occurrence of property acquisitions or divestitures;

•the integration of acquisitions; and

•the securities or capital markets and related risks such as general credit, liquidity, market, and interest-rate risks.

All of Magnolia’s forward-looking information is subject to risks and uncertainties that could cause actual results to differ materially from the results expected. Although it is not possible to identify all factors, these risks and uncertainties include the risk factors and the timing of any of those risk factors identified in this Quarterly Report on Form 10-Q and in the Company’s Annual Report on Form 10-K for the period ended December 31, 2020 (the “2020 Form 10-K”).

Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Company’s unaudited consolidated financial statements and the related notes thereto.

Overview

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 NGL reserves that operates in one reportable segment located in the United States. The Company’s oil and natural gas properties are located primarily in Karnes County and the Giddings area in South Texas, where the Company primarily targets the Eagle Ford Shale and the 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. Magnolia’s business model prioritizes free cash flow, financial stability, and prudent capital allocation, and is designed to withstand challenging environments.

COVID-19 Pandemic and Market Conditions Update

The COVID-19 pandemic and related economic repercussions have created significant volatility, uncertainty, and turmoil in the oil and natural gas industry. While oil and natural gas prices have increased in 2021, demand and pricing may again decline if there is a resurgence of the outbreak across the U.S. or other locations across the world or as a result of any related social distancing guidelines, travel restrictions, vaccination protocols, and stay-at-home orders. The extent of any further impact of the pandemic, including the emergence and spread of variant strains of COVID-19, on Magnolia’s industry and business cannot be reasonably predicted at this time.

In order to protect the health and safety of its workers, Magnolia and its contractors have implemented protocols to reduce the risk of an outbreak of COVID-19, or variants of COVID-19, within the Company’s operations, and these protocols have not reduced production or efficiency in a significant manner. Magnolia's board of directors is continuing to closely monitor the unfolding COVID-19 pandemic. Magnolia has been able to maintain a consistent level of effectiveness, including maintaining day-to-day operations, financial reporting systems, and internal control over financial reporting.

Magnolia’s business model prioritizes free cash flow, financial stability, and prudent capital allocation, and is designed to withstand challenging environments. The Company’s ongoing plan is to spend within cash flow on drilling and completing wells while maintaining low leverage. During the third quarter of 2021, Magnolia operated one rig exclusively in the Giddings area, and one rig in both the Karnes and Giddings areas. The Company is well positioned to reduce or increase operations given the significant flexibility within its capital program, as its operated drilling rigs are on short-term contracts and the Company has no long-term service obligations. Moreover, Magnolia does not have any contractual drilling obligations and nearly all of the Company’s acreage is held by production.

Business Overview

As of September 30, 2021, Magnolia’s assets in South Texas included 42,970 gross (23,513 net) acres in the Karnes area, and 655,942 gross (454,687 net) acres in the Giddings area. As of September 30, 2021, Magnolia held an interest in approximately 1,966 gross (1,255 net) wells, with total production of 67.4 thousand and 64.9 thousand barrels of oil equivalent per day (“Mboe/d”) for the three and nine months ended September 30, 2021, respectively. During the third quarter of 2021, Magnolia was running a two-rig program. One rig drilled multi-well development pads exclusively in the Giddings area. The second rig drilled a mix of wells in both the Karnes and Giddings areas.

Magnolia recognized net income attributable to Class A Common Stock of $119.4 million and $267.1 million, or $0.67 and $1.53 per diluted common share, for the three and nine months ended September 30, 2021, respectively. Magnolia recognized net income of $159.9 million and $367.6 million, which includes a noncontrolling interest of $40.5 million and $100.5 million related to the Magnolia LLC Units (and corresponding shares of Class B Common Stock) held by certain affiliates of EnerVest, for the three and nine months ended September 30, 2021, respectively.

The Company’s board of directors has authorized a share repurchase program of up to 20.0 million shares. The program does not require purchases to be made within a particular time frame. As of September 30, 2021, the Company had repurchased 11.5 million shares under the program at a cost of $112.8 million.

During the nine months ended September 30, 2021, Magnolia LLC repurchased and subsequently canceled 13.0 million Magnolia LLC Units with an equal number of shares of corresponding Class B Common Stock for $171.7 million of cash consideration (the “Class B Common Stock Repurchases”). Magnolia funded the Class B Common Stock Repurchases with cash on hand. During the same period, the Magnolia LLC Unit Holders redeemed 19.9 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 the Magnolia LLC Unit Holders. As of September 30, 2021, Magnolia owned approximately 77.1% of the interest in Magnolia LLC and the noncontrolling interest was 22.9%.

Results of Operations

Factors Affecting the Comparability of the Historical Financial Results

Magnolia’s historical financial condition and results of operations for the periods presented may not be comparable, either from period to period or going forward, as a result of the following factors:

•During the second quarter of 2021, the Company amended the term of the Services Agreement to end on June 30, 2021. As part of the termination and transition of the Services Agreement, the Company incurred $11.2 million for the nine months ended September 30, 2021, included in “General and administrative expenses” on the Company’s consolidated statements of operations.

•During the second quarter of 2021, the Company amended the Non-Compete (the “Second Non-Compete Amendment”), which modified the term of the Non-Compete to end on June 30, 2021, resulting in the Company accelerating the amortization of the intangible assets by $5.9 million.

•The 2026 Senior Notes issued under the Indenture, dated as of July 31, 2018 (the “Indenture”), were amended on April 5, 2021. This debt modification included approximately $1.1 million of one-time transaction fees which were expensed and $5.0 million in fees paid to holders of the 2026 Senior Notes, which were reflected as deferred financing costs reducing Long-term debt and will be amortized over the remaining term of the 2026 Senior Notes.

As a result of the factors listed above, the historical results of operations and period-to-period comparisons of these results and certain financial data may not be comparable or indicative of future results.

Three Months Ended September 30, 2021 Compared to the Three Months Ended September 30, 2020

Oil, Natural Gas and NGL Sales Revenues. The following table provides the components of Magnolia’s revenues for the periods indicated, as well as each period’s respective average prices and production volumes. This table shows production on a boe basis in which natural gas is converted to an equivalent barrel of oil based on a ratio of six Mcf to one barrel. This ratio may not be reflective of the current price ratio between the two products.


	Three Months Ended
(In thousands, except per unit data)	September 30, 2021		September 30, 2020
Production:
Oil (MBbls)	2,851		2,485
Natural gas (MMcf)	11,429		9,444
NGLs (MBbls)	1,444		937
Total (Mboe)	6,200		4,996

Average daily production:
Oil (Bbls/d)	30,989		27,016
Natural gas (Mcf/d)	124,224		102,653
NGLs (Bbls/d)	15,692		10,181
Total (boe/d)	67,385		54,306

Revenues:
Oil revenues	$	195,132	$	95,677
Natural gas revenues	42,828		14,895
Natural gas liquids revenues	45,619		10,495
Total revenues	$	283,579	$	121,067

Average Price:
Oil (per barrel)	$	68.44	$	38.50
Natural gas (per Mcf)	3.75		1.58
NGLs (per barrel)	31.60		11.20

Oil revenues were 69% and 79% of the Company’s total revenues for the three months ended September 30, 2021 and 2020, respectively. Oil production was 46% and 50% of total production volume for the three months ended September 30, 2021 and 2020, respectively. Oil revenues for the three months ended September 30, 2021 were $99.5 million higher than the three months ended September 30, 2020. A 78% increase in average prices increased third quarter 2021 revenues by $74.5 million, while a 15% increase in oil production increased revenues by $25.0 million compared to the same period in the prior year.

Natural gas revenues were 15% and 12% of the Company’s total revenues for the three months ended September 30, 2021 and 2020, respectively. Natural gas production was 31% of total production volume for each of the three months ended September 30, 2021 and 2020. Natural gas revenues for the three months ended September 30, 2021 were $27.9 million higher than the three months ended September 30, 2020. A 137% increase in average prices increased third quarter 2021 revenues by $20.5 million compared to the same period in the prior year, while a 21% increase in natural gas production increased revenues by $7.4 million.

NGL revenues were 16% and 9% of the Company’s total revenues for the three months ended September 30, 2021 and 2020, respectively. NGL production was 23% and 19% of total production volume for the three months ended September 30, 2021 and 2020, respectively. NGL revenues for the three months ended September 30, 2021 were $35.1 million higher than the three months ended September 30, 2020. A 182% increase in average prices increased third quarter 2021 revenues by $19.1 million compared to the same period in the prior year, while a 54% increase in NGL production increased revenues by $16.0 million.

Operating Expenses and Other Income (Expense). The following table summarizes the Company’s operating expenses and other income (expense) for the periods indicated.


	Three Months Ended
(In thousands, except per unit data)	September 30, 2021		September 30, 2020
Operating Expenses:
Lease operating expenses	$	23,593	$	18,802
Gathering, transportation and processing	10,077		5,771
Taxes other than income	14,082		7,331
Exploration expenses	317		701
Asset retirement obligations accretion	1,329		1,501
Depreciation, depletion and amortization	47,993		44,731
Amortization of intangible assets	—		3,626
General and administrative expenses	14,695		16,663
Total operating expenses	$	112,086	$	99,126

Other Income (Expense):
Income from equity method investee	$	—	$	1,007
Interest expense, net	(7,474)		(7,333)
Loss on derivatives, net	(623)		(2,208)
Other income, net	142		(51)
Total other expense, net	$	(7,955)	$	(8,585)

Average Operating Costs per boe:
Lease operating expenses	$	3.81	$	3.76
Gathering, transportation and processing	1.63		1.16
Taxes other than income	2.27		1.47
Exploration expense	0.05		0.14
Asset retirement obligations accretion	0.21		0.30
Depreciation, depletion and amortization	7.74		8.95
Amortization of intangible assets	—		0.73
General and administrative expenses	2.37		3.34

Lease operating expenses are costs incurred in the operation of producing properties, including expenses for utilities, direct labor, water disposal, workover rigs, workover expenses, materials, and supplies. Lease operating expenses for the three months ended September 30, 2021 were $4.8 million, or $0.05 per boe, higher compared to the corresponding 2020 period, due to an increase in costs including operating and maintenance costs, workover activities and additional non-operated activities.

Gathering, transportation and processing costs are costs incurred to deliver oil, natural gas, and NGLs to the market. These expenses can vary based on the volume of oil, natural gas, and NGLs produced as well as the cost of commodity processing. The gathering, transportation and processing costs for the three months ended September 30, 2021 were $4.3 million, or $0.47 per boe, higher than the three months ended September 30, 2020, primarily due to increased natural gas production and higher prices.

Taxes other than income include production and ad valorem taxes. These taxes are based on rates primarily established by state and local taxing authorities. Production taxes are based on the market value of production. Ad valorem taxes are based on the fair market value of the mineral interests or business assets. Taxes other than income for the three months ended September 30, 2021 were $6.8 million, or $0.80 per boe, higher compared to the three months ended September 30, 2020, primarily due to an increase in oil, natural gas, and NGL revenues.

Depreciation, depletion and amortization (“DD&A”) during the three months ended September 30, 2021 was $3.3 million higher than the three months ended September 30, 2020 due to increased production. DD&A was $1.21 lower per boe over the same comparison period, primarily as a result of increased production in the Giddings area, which has a lower DD&A rate.

For the three months ended September 30, 2021, the Company did not recognize any amortization of intangible assets, because the intangible assets were fully amortized in June 2021 as a result of the termination of the Non-Compete. During the three months ended September 30, 2020, the Company recognized $3.6 million of amortization of intangible assets.

General and administrative (“G&A”) expenses during the three months ended September 30, 2021 were $2.0 million, or $0.97 per boe, lower than the three months ended September 30, 2020, primarily driven by the reduction in costs due to the termination of the Services Agreement in June 2021, partially offset by higher corporate payroll expenses related to increased employee headcount.

Loss on derivatives, net, during the three months ended September 30, 2021 was $1.6 million lower than the three months ended September 30, 2020, primarily driven by the full settlement of the Company’s derivative instruments at the end of the third quarter of 2021.

Nine Months Ended September 30, 2021 Compared to the Nine Months Ended September 30, 2020


	Nine Months Ended
(In thousands, except per unit data)	September 30, 2021		September 30, 2020
Production:
Oil (MBbls)	8,346		8,965
Natural gas (MMcf)	31,617		29,261
NGLs (MBbls)	4,097		3,213
Total (Mboe)	17,713		17,055

Average daily production:
Oil (Bbls/d)	30,573		32,718
Natural gas (Mcf/d)	115,812		106,790
NGLs (Bbls/d)	15,008		11,725
Total (boe/d)	64,883		62,241

Revenues:
Oil revenues	$	529,641	$	311,153
Natural gas revenues	110,187		44,238
Natural gas liquids revenues	102,140		29,880
Total revenues	$	741,968	$	385,271

Average Price:
Oil (per barrel)	$	63.46	$	34.71
Natural gas (per Mcf)	3.49		1.51
NGLs (per barrel)	24.93		9.30

Oil revenues were 71% and 81% of the Company’s total revenues for the nine months ended September 30, 2021 and 2020, respectively. Oil production was 47% and 53% of total production volume for the nine months ended September 30, 2021 and 2020, respectively. Oil revenues for the nine months ended September 30, 2021 were $218.5 million higher than the nine months ended September 30, 2020. An 83% increase in average prices increased third quarter 2021 revenues by $257.7 million, while a 7% decrease in oil production reduced revenues by $39.2 million compared to the same period in the prior year.

Natural gas revenues were 15% and 11% of the Company’s total revenues for the nine months ended September 30, 2021 and 2020, respectively. Natural gas production was 30% and 28% of total production volume for the nine months ended September 30, 2021 and 2020, respectively. Natural gas revenues for the nine months ended September 30, 2021 were $65.9 million higher than the nine months ended September 30, 2020. A 131% increase in average prices increased third quarter 2021 revenues by $57.7 million compared to the same period in the prior year, while an 8% increase in natural gas production increased revenues by $8.2 million.

NGL revenues were 14% and 8% of the Company’s total revenues for the nine months ended September 30, 2021 and 2020, respectively. NGL production was 23% and 19% of total production volume for the nine months ended September 30, 2021 and 2020, respectively. NGL revenues for the nine months ended September 30, 2021 were $72.3 million higher than the nine months ended September 30, 2020. A 168% increase in average prices increased third quarter 2021 revenues by $50.2 million compared to the same period in the prior year, while a 28% increase in NGL production increased revenues by $22.1 million.

Operating Expenses and Other Income (Expense). The following table summarizes the Company’s operating expenses and other income (expense) for the periods indicated.


	Nine Months Ended
(In thousands, except per unit data)	September 30, 2021		September 30, 2020
Operating Expenses:
Lease operating expenses	$	64,957	$	61,275
Gathering, transportation and processing	27,839		20,579
Taxes other than income	38,657		22,874
Exploration expenses	2,440		563,589
Impairment of oil and natural gas properties	—		1,381,258
Asset retirement obligations accretion	4,065		4,403
Depreciation, depletion and amortization	134,268		238,273
Amortization of intangible assets	9,346		10,879
General and administrative expenses	59,816		50,472
Total operating expenses	$	341,388	$	2,353,602

Other Income (Expense):
Income from equity method investee	$	—	$	2,059
Interest expense, net	(23,519)		(21,345)
Loss on derivatives, net	(3,110)		(2,208)
Other expense, net	48		(510)
Total other expense, net	$	(26,581)	$	(22,004)

Average Operating Costs per boe:
Lease operating expenses	$	3.67	$	3.59
Gathering, transportation and processing	1.57		1.21
Taxes other than income	2.18		1.34
Exploration expense	0.14		33.05
Impairment of oil and natural gas properties	—		80.99
Asset retirement obligations accretion	0.23		0.26
Depreciation, depletion and amortization	7.58		13.97
Amortization of intangible assets	0.53		0.64
General and administrative expenses	3.38		2.96

Lease operating expenses for the nine months ended September 30, 2021 were $3.7 million, or $0.08 per boe, higher than the nine months ended September 30, 2020, due to an increase in operating and maintenance costs.

Gathering, transportation and processing costs for the nine months ended September 30, 2021 were $7.3 million, or $0.36 per boe, higher than the nine months ended September 30, 2020, primarily due to increased natural gas production and higher prices.

Taxes other than income for the nine months ended September 30, 2021 were $15.8 million, or $0.84 per boe, higher compared to the nine months ended September 30, 2020, primarily due to an increase in oil, natural gas, and NGL revenues.

Exploration expenses are geological and geophysical costs that include unproved property impairments, seismic surveying costs, costs of expired or abandoned leases, and delay rentals. Exploration expenses for the nine months ended September 30, 2021 were lower than the nine months ended September 30, 2020 by $561.1 million, or $32.91 per boe, as a result of an impairment recorded for the quarter ended March 31, 2020 related to Magnolia’s unproved oil and natural gas properties due to the sharp decline in commodity prices. For more information, please see Note 6—Fair Value Measurements in the Company’s Notes to Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.

For the nine months ended September 30, 2021, the Company did not recognize any impairments. For the nine months ended September 30, 2020, the Company recognized $1.4 billion of impairment included in “Impairment of oil and natural gas properties” in the consolidated statements of operations related to its proved oil and natural gas properties. The impairment was driven by the sharp decline in commodity prices. For more information, please see Note 6—Fair Value Measurements in the Company’s Notes to Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.

DD&A during the nine months ended September 30, 2021 was $104.0 million, or $6.39 per boe, lower than the nine months ended September 30, 2020, primarily as a result of lower oil and natural gas property balances associated with proved property impairments recorded in the first quarter of 2020.

Amortization of intangible assets during the nine months ended September 30, 2021 was $1.5 million, or $0.11 per boe, lower than the nine months ended September 30, 2020, driven by fewer months of amortization during the nine months ended September 30, 2021 as compared to the same period in the prior year partially offset by the accelerated amortization of the intangible assets in the second quarter of 2021 as a result of the termination of the Non-Compete.

G&A expenses during the nine months ended September 30, 2021 were $9.3 million, or $0.42 per boe, higher than the nine months ended September 30, 2020, primarily driven by costs associated with the termination of the Services Agreement and increased corporate payroll expenses related to increased employee headcount.

Interest expense, net, during the nine months ended September 30, 2021 was $2.2 million higher than the nine months ended September 30, 2020, driven by third-party costs associated with the debt modification pursuant to the amendment of the Indenture in the second quarter of 2021.

Loss on derivatives, net, during the nine months ended September 30, 2021 was $0.9 million higher than the nine months ended September 30, 2020, primarily driven by higher natural gas prices.

Liquidity and Capital Resources

Magnolia’s primary source of liquidity and capital has been its cash flows from operations. The Company’s primary uses of cash have been for acquisitions of oil and natural gas properties and related assets, development of the Company’s oil and natural gas properties, share repurchases, and general working capital needs.

The Company may also utilize borrowings under other various financing sources available to it, including its RBL Facility and the issuance of equity or debt securities through public offerings or private placements, to fund Magnolia’s acquisitions and long-term liquidity needs. Magnolia’s ability to complete future offerings of equity or debt securities and the timing of these offerings will depend upon various factors, including prevailing market conditions and the Company’s financial condition. The Company anticipates its current cash balance, cash flows from operations, and its available sources of liquidity to be sufficient to meet the Company’s cash requirements.

As of September 30, 2021, the Company had $400.0 million of principal debt related to the 2026 Senior Notes outstanding and no outstanding borrowings related to the RBL Facility. As of September 30, 2021, the Company had $695.0 million of liquidity comprised of the $450.0 million of borrowing base capacity of the RBL Facility, which was reaffirmed on October 15, 2021, and $245.0 million of cash and cash equivalents.

Cash and Cash Equivalents

At September 30, 2021, Magnolia had $245.0 million of cash and cash equivalents. The Company’s cash and cash equivalents are maintained with various financial institutions in the United States. Deposits with these institutions may exceed the amount of insurance provided on such deposits. However, the Company regularly monitors the financial stability of such financial institutions and believes that the Company is not exposed to any significant default risk.

Sources and Uses of Cash and Cash Equivalents

The following table presents the sources and uses of the Company’s cash and cash equivalents for the periods presented:


	Nine Months Ended
(In thousands)	September 30, 2021		September 30, 2020
Sources of cash and cash equivalents
Net cash provided by operating activities	$	527,935	$	230,999

Uses of cash and cash equivalents
Acquisitions	$	(10,817)	$	(73,702)
Additions to oil and natural gas properties	(162,744)		(157,325)
Changes in working capital associated with additions to oil and natural gas properties	12,435		(18,972)
Class A Common Stock repurchases	(70,316)		(12,962)
Class B Common Stock purchases and cancellations	(171,671)		—
Non-compete settlement	(42,074)		—
Dividends paid	(14,103)		—
Distributions to noncontrolling interest owners	(5,706)		(594)
Other	(10,477)		(1,544)
	(475,473)		(265,099)
Increase (decrease) in cash and cash equivalents	$	52,462	$	(34,100)

Sources of Cash and Cash Equivalents

Net Cash Provided by Operating Activities

Operating cash flows are the Company’s primary source of liquidity and are impacted, in the short- and long-term, by oil and natural gas prices. The factors that determine operating cash flows are largely the same as those that affect net earnings or net losses, with the exception of certain non-cash expenses such as DD&A, the non-cash portion of exploration expense, impairment of oil and natural gas properties, asset retirement obligations accretion, and deferred income tax expense.

Net cash provided by operating activities totaled $527.9 million and $231.0 million for the nine months ended September 30, 2021 and 2020, respectively. During the nine months ended September 30, 2021, cash provided by operating activities was positively impacted by increased oil, natural gas, and NGL prices, partially offset by an increase in accounts receivable, additional costs associated with the termination of the Services Agreement and higher production tax payments.

Uses of Cash and Cash Equivalents

Acquisitions

During the nine months ended September 30, 2020, the Company completed various leasehold and property acquisitions, primarily comprised of a $69.7 million acquisition of certain non-operated oil and natural gas assets located in Karnes and DeWitt Counties, Texas. The Company made individually insignificant bolt-on acquisitions during the nine months ended September 30, 2021.

Additions to Oil and Natural Gas Properties

The following table sets forth the Company’s capital expenditures for the three and nine months ended September 30, 2021 and 2020:


	Three Months Ended				Nine Months Ended
(In thousands)	September 30, 2021		September 30, 2020		September 30, 2021		September 30, 2020
Drilling and completion	$	67,180	$	27,425	$	159,838	$	155,308
Leasehold acquisition costs	1,208		249		2,906		2,017
Total capital expenditures	$	68,388	$	27,674	$	162,744	$	157,325

During the third quarter of 2021, Magnolia was running a two-rig program. One rig drilled multi-well development pads in our Giddings area. The second rig drilled a mix of wells in both the Karnes and Giddings areas. The number of operated drilling rigs is largely dependent on commodity prices and the Company’s strategy of maintaining spending to accommodate the Company’s business model.

Capital Requirements

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 and whether the Company undertakes these additional repurchases is ultimately subject to numerous considerations, market conditions, and other factors. During the nine months ended September 30, 2021 and 2020, the Company repurchased 6.0 million and 2.1 million shares for a total cost of approximately $73.8 million and $13.0 million, respectively.

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 July 31, 2018 (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. As part of the Second Non-Compete Amendment, the Company paid $24.9 million in cash in lieu of delivering the remaining 1.6 million shares of Class A Common Stock.

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 totaling approximately $14.2 million, of which $14.1 million was paid as of September 30, 2021. In addition, $4.8 million was distributed to the Magnolia LLC Unit Holders. The amount and frequency of future dividends is subject to the discretion of the Company’s board of directors and primarily depends on earnings, capital expenditures, debt covenants, and various other factors.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

For variable rate debt, interest rate changes generally do not affect the fair market value of such debt, but do impact future earnings and cash flows, assuming other factors are held constant. The Company is subject to market risk exposure related to changes in interest rates on borrowings under the RBL Facility. Interest on borrowings under the RBL Facility is based on the LIBOR rate or alternative base rate plus an applicable margin as stated in the agreement governing the RBL Facility. At September 30, 2021, the Company had no borrowings outstanding under the RBL Facility.

Commodity Price Risk

Magnolia’s primary market risk exposure is to the prices it receives for its oil, natural gas, and NGL production. The prices the Company ultimately realizes for its oil, natural gas, and NGLs are based on a number of variables, including prevailing index prices attributable to the Company’s production and certain differentials to those index prices. Pricing for oil, natural gas, and NGLs has historically been volatile and unpredictable, and this volatility is expected to continue in the future. The prices the Company receives for production depend on factors outside of its control, including physical markets, supply and demand, financial markets, and national and international policies. A $1.00 per barrel increase (decrease) in the weighted average oil price for the nine months ended September 30, 2021 would have increased (decreased) the Company’s revenues by approximately $11.1 million on an annualized basis and a $0.10 per Mcf increase (decrease) in the weighted average natural gas price for the nine months ended September 30, 2021 would have increased (decreased) the Company’s revenues by approximately $4.2 million on an annualized basis.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) under the Exchange Act, Magnolia has evaluated, under the supervision and with the participation of its management, including Magnolia’s principal executive officer and principal financial officer, the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2021. Based on such evaluation, Magnolia’s principal executive officer and principal financial officer have concluded that as of such date, the Company’s disclosure controls and procedures were effective. The Company’s disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed by it in reports that it files under the Exchange Act is accumulated and communicated to management, including the Company’s principal executive officer and principal financial officer, as appropriate, to allow for timely decisions regarding required disclosure and is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC.

Changes in Internal Control over Financial Reporting

There were no changes in the system of internal control over financial reporting (as defined in Rule 13a-15(f) and Rule 15d-15(f) under the Exchange Act) during the quarter ended September 30, 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

See Part I, Item 1, Note 10—Commitments and Contingencies to the Consolidated Financial Statements, which is incorporated herein by reference.

From time to time, the Company is party to certain legal actions and claims arising in the ordinary course of business. While the outcome of these events cannot be predicted with certainty, management does not currently expect these matters to have a materially adverse effect on the financial position or results of operations of the Company.

Item 1A. Risk Factors

Please refer to Part I, Item 1A - Risk Factors of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020, and Part I, Item 3 - Quantitative and Qualitative Disclosures About Market Risk of this Quarterly Report on Form 10-Q. Any of these factors could result in a significant or material adverse effect on Magnolia’s business, results of operations, or financial condition. There have been no material changes to the Company’s risk factors since its 2020 Form 10-K. Additional risk factors not presently known to the Company or that the Company currently deems immaterial may also impair its business, results of operations, or financial condition.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table sets forth the Company’s share repurchase activities for each period presented.


Period	Number of Shares of Class A Common Stock Purchased	Average Price Paid per Share		Total Number of Shares of Class A Common Stock Purchased as Part of Publicly Announced Program (1)	Maximum Number of Shares of Class A Common Stock that May Yet Be Purchased Under the Program
January 1, 2021 - June 30, 2021	3,997,520	$	11.09	3,997,520	10,527,480
July 1, 2021 - July 31, 2021	255,508	13.54		255,508	10,271,972
August 1, 2021 - August 31, 2021	1,239,517	13.98		1,239,517	9,032,455
September 1, 2021 - September 30, 2021	500,000	17.45		500,000	8,532,455
Total	5,992,545	$	12.32	5,992,545	8,532,455

(1)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.

During the nine months ended September 30, 2021, outside of the share repurchase program, Magnolia LLC repurchased and subsequently canceled a total of 13.0 million Magnolia LLC Units with an equal number of shares of corresponding Class B Common Stock for a cash consideration of $171.7 million at an average price of $13.21 per share. There is no public market for the Class B Common Stock. For further detail, see Note 12—Stockholders’ Equity in the Notes to the Company’s Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable.

Item 6. Exhibits

The following exhibits are filed as part of, or incorporated by reference into, this Quarterly Report on Form 10-Q:


Exhibit Number						Description

3.1*						Second Amended and Restated Certificate of Incorporation of the Company, dated as of July 31, 2018 (incorporated herein by reference to Exhibit 3.1 filed with the Current Report on Form 8-K filed on August 6, 2018 (File No. 001-38083)).

3.2*						Bylaws of the Company (incorporated herein by reference to Exhibit 3.3 filed with the Registration Statement on Form S-1 filed on April 17, 2017 (File No. 333-217338)).

31.1**						Certification of Chief Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2**						Certification of Chief Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1***						Certifications Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS**						XBRL Instance Document.

101.SCH**						XBRL Taxonomy Extension Schema Document.

101.CAL**						XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF**						XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB**						XBRL Taxonomy Extension Label Linkbase Document.

101.PRE**						XBRL Taxonomy Extension Presentation Linkbase Document.

104**						Cover Page Interactive Data File (embedded within the Inline XBRL and contained in Exhibit 101).

* Incorporated herein by reference as indicated.

** Filed herewith.

*** Furnished herewith.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	MAGNOLIA OIL & GAS CORPORATION

Date: November 2, 2021	By:	/s/ Stephen Chazen
		Stephen Chazen
		Chief Executive Officer (Principal Executive Officer)

Date: November 2, 2021	By:	/s/ Christopher Stavros
		Christopher Stavros
		Chief Financial Officer (Principal Financial Officer)