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Magnolia Oil & Gas Corporation Announces Third Quarter 2020 Results

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Magnolia Oil & Gas Corporation ("Magnolia," "we," "our," or the "Company") (NYSE:MGY) today announced its financial and operational results for the third quarter of 2020.

Third Quarter 2020 Highlights:

  • Magnolia reported third quarter 2020 net income attributable to Class A Common Stock of $9.1 million, or $0.05 per share. Third quarter 2020 total net income was $13.7 million and adjusted net income was $15.6 million, or $0.06 per share.
  • Third quarter 2020 production averaged 54.3 thousand barrels of oil equivalent per day ("Mboe/d"). As expected, Magnolia did not complete any operated wells during the third quarter. Quarterly volumes were negatively impacted by 2 Mboe/d due to the delays of non-operated wells in Karnes until the fourth quarter and some unplanned downtime at a Karnes processing facility.
  • Adjusted EBITDAX during the third quarter of 2020 was $76.4 million. Drilling and completion costs ("D&C") for the quarter were $27.4 million or just 36% of adjusted EBITDAX, and better than our earlier guidance. We continue to target D&C spending during 2020 of approximately 60 percent of adjusted EBITDAX, and inline with our strategy and business plan.
  • We began completing wells in Giddings at the end of the third quarter with several wells coming online during October. Progress continues in reducing our well costs in Giddings, with current total well costs averaging $6.5 million (including costs for drilling, completion, and facilities), representing a 45 percent improvement in total costs per lateral foot compared to 2019 levels.
  • We purchased 1.2 million shares of Class A Common Stock for $7 million during the third quarter as part of our active share repurchase program. Year-to-date, we have repurchased 2.2 million shares and currently have 6.8 million shares remaining under our current authorization.(1)
  • Magnolia ended the quarter with approximately $148.5 million of cash on its balance sheet and remains undrawn on its recently reaffirmed $450.0 million revolving credit facility. The Company has no debt maturities until 2026 and has no plans to increase its debt levels.

(1)

Includes 0.1 million shares of Class A Common Stock repurchased for $0.5 million in September with settlement dates in October.

"Magnolia is in a strong position with an attractive, high-margin asset base and a business model that generates consistent free cash flow with low levels of debt," said Magnolia Chairman, President, and CEO, Steve Chazen. "We generated $46 million of free cash flow after capital outlays during the quarter, ending the period with $149 million of cash and after allocating $10 million toward buying back our stock and for a small bolt-on acquisition. This general framework of organic investment in our business and small bolt-on acquisitions that generate moderate growth, while returning excess cash to shareholders, is expected to continue into next year.

"As we had previously indicated, the third quarter marked a trough period for the Company's production as we had not completed any wells since February. Production volumes are expected to rebound in the fourth quarter by 7 to 10 percent, particularly in Giddings, where we started bringing on new well completions last month. While still early, we remain very optimistic on Giddings as the results of the initial batch of wells brought on last month are better than the average of the 14 wells we drilled in this area and laid out last quarter. Our initial core area of development in Giddings continues to outperform our expectations providing us with longer term confidence in this opportunity."

Operational Update

Third quarter total company production averaged 54.3 Mboe/d, with oil production representing half of our total volumes. Production from Karnes and Giddings and other averaged 33.9 Mboe/d and 20.4 Mboe/d, respectively, during the third quarter 2020. As per our scheduled plan, Magnolia did not complete or turn on any operated wells during the third quarter. The delay of several non-operated wells in Karnes, previously expected to come online in the third quarter, negatively impacted our production during the period, and these wells have since come online in the fourth quarter.

Magnolia is currently operating one rig in Giddings that continues to drill multi-well pads in our initial core developmental area. We ended the third quarter with 8 drilled but uncompleted wells in Giddings which are expected to be brought online during the fourth quarter. The first 3-well pad was brought online in mid-October and early results indicate that the performance of these wells exceeds the average of the wells that we have drilled thus far within the initial 70,000-acre core area. We are not planning any operated activity in Karnes during the fourth quarter.

Our total cost per well at Giddings continues to improve with recent well costs averaging $6.5 million. Drilling times are continuing to set new company records providing further confidence that well costs should experience additional declines. Drilling costs per lateral foot have declined nearly 55 percent and completion costs per lateral foot have decreased 50 percent compared to 2019 levels. These operational efficiencies have resulted in a 45 percent improvement in the total costs per lateral foot (including costs for drilling and completion, and facilities). Magnolia anticipates well costs in Giddings to decline toward $6 million per well in our development area driven by continued efficiencies.

Guidance

Our total capital spending for drilling, completions, and facilities is expected to be approximately 55 percent of our adjusted EBITDAX in the fourth quarter. Fourth quarter production is expected to increase 7 to 10 percent sequentially. The increase in our overall volumes is expected to be driven by several multi-well pads in Giddings to be turned in line throughout the current quarter in addition to several non-operated wells in Karnes. Overall, we continue to run one operated rig in Giddings where our development drilling program is expected to continue through the fourth quarter.

Oil price differentials are anticipated to be a roughly $3 per barrel discount to Magellan East Houston ("MEH") during the fourth quarter, which is in line with historical levels. During the third quarter, Magnolia hedged 50,000 million British thermal units ("MMbtu") per day of natural gas production (just under half our total natural gas production) using costless collars with a weighted average floor price of $2.31 per MMbtu and a weighted average ceiling price of $3.00 per MMbtu, from September 2020 through August of 2021.

Looking into 2021, we plan to invest approximately 60 percent of our adjusted EBITDAX on drilling and completing wells consistent with the capital discipline that has supported our business model since our inception. At current product prices, Magnolia plans to operate one rig focused on pad drilling in the Giddings initial core area. Based on current drill times in Giddings, we estimate a one rig drilling program is on pace to drill approximately 20 wells per year.

Quarterly Report on Form 10-Q

Magnolia's financial statements and related footnotes will be available in its Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2020, which is expected to be filed with the U.S. Securities and Exchange Commission ("SEC") on November 6, 2020.

Conference Call and Webcast

Magnolia will host an investor conference call on Friday, November 6, 2020 at 10:00 a.m. Central (11:00 a.m. Eastern) to discuss these operating and financial results. Interested parties may join the webcast by visiting Magnolia's website at www.magnoliaoilgas.com/investors/events-and-presentations and clicking on the webcast link or by dialing 1-844-701-1059. A replay of the webcast will be posted on Magnolia's website following completion of the call.

About Magnolia Oil & Gas Corporation

Magnolia (MGY) is a publicly traded oil and gas exploration and production company with operations primarily in South Texas in the core of the Eagle Ford Shale and Austin Chalk formations. Magnolia focuses on generating value for shareholders through steady production growth, strong pre-tax margins, and free cash flow. For more information, visit www.magnoliaoilgas.com.

Cautionary Note Regarding Forward-Looking Statements

The information in this press release 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. All statements, other than statements of present or historical fact included in this press release, regarding Magnolia's strategy, future operations, financial position, estimated revenues, and losses, projected costs, prospects, plans and objectives of management are forward looking statements. When used in this press release, the words could, should, will, may, believe, anticipate, intend, estimate, expect, project, the negative of such terms and other similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. These forward-looking statements are based on management's current expectations and assumptions about future events and are based on currently available information as to the outcome and timing of future events. Except as otherwise required by applicable law, Magnolia disclaims any duty to update any forward-looking statements, all of which are expressly qualified by the statements in this section, to reflect events or circumstances after the date of this press release. Magnolia cautions you that these forward-looking statements are subject to all of the risks and uncertainties, most of which are difficult to predict and many of which are beyond the control of Magnolia, incident to the development, production, gathering and sale of oil, natural gas and natural gas liquids. In addition, Magnolia cautions you that the forward looking statements contained in this press release are subject to the following factors: (i) the length, scope and severity of the ongoing coronavirus disease 2019 ("COVID-19") pandemic, including the effects of related public health concerns and the impact of continued actions taken by governmental authorities and other third parties in response to the pandemic and its impact on commodity prices, supply and demand considerations, and storage capacity; (ii) the outcome of any legal proceedings that may be instituted against Magnolia; (iii) Magnolia's ability to realize the anticipated benefits of its acquisitions, which may be affected by, among other things, competition and the ability of Magnolia to grow and manage growth profitably; (iv) changes in applicable laws or regulations; and (v) the possibility that Magnolia may be adversely affected by other economic, business, and/or competitive factors. Should one or more of the risks or uncertainties described in this press release occur, or should underlying assumptions prove incorrect, actual results and plans could differ materially from those expressed in any forward-looking statements. Additional information concerning these and other factors that may impact the operations and projections discussed herein can be found in Magnolia's filings with the SEC, including its Annual Report on Form 10-K for the fiscal year ended December 31, 2019. Magnolia's SEC filings are available publicly on the SEC's website at www.sec.gov.

Magnolia Oil & Gas Corporation

Operating Highlights

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

For the Nine Months Ended

 

 

September 30, 2020

 

September 30, 2019

 

September 30, 2020

 

September 30, 2019

Production:

 

 

 

 

 

 

 

 

Oil (MBbls)

 

 

2,485

 

 

 

3,520

 

 

 

8,965

 

 

 

9,615

 

Natural gas (MMcf)

 

 

9,444

 

 

 

10,763

 

 

 

29,261

 

 

 

30,583

 

Natural gas liquids (MBbls)

 

 

937

 

 

 

1,245

 

 

 

3,213

 

 

 

3,389

 

Total (Mboe)

 

 

4,996

 

 

 

6,559

 

 

 

17,055

 

 

 

18,101

 

 

 

 

 

 

 

 

 

 

Average daily production:

 

 

 

 

 

 

 

 

Oil (Bbls/d)

 

 

27,016

 

 

 

38,261

 

 

 

32,718

 

 

 

35,220

 

Natural gas (Mcf/d)

 

 

102,653

 

 

 

116,989

 

 

 

106,790

 

 

 

112,026

 

Natural gas liquids (Bbls/d)

 

 

10,181

 

 

 

13,533

 

 

 

11,725

 

 

 

12,414

 

Total (boe/d)

 

 

54,306

 

 

 

71,292

 

 

 

62,241

 

 

 

66,305

 

 

 

 

 

 

 

 

 

 

Revenues (in thousands):

 

 

 

 

 

 

 

 

Oil revenues

 

$

95,677

 

 

$

207,840

 

 

$

311,153

 

 

$

584,009

 

Natural gas revenues

 

 

14,895

 

 

 

21,243

 

 

 

44,238

 

 

 

71,208

 

Natural gas liquids revenues

 

 

10,495

 

 

 

15,716

 

 

 

29,880

 

 

 

51,215

 

Total Revenues

 

$

121,067

 

 

$

244,799

 

 

$

385,271

 

 

$

706,432

 

 

 

 

 

 

 

 

 

 

Average sales price:

 

 

 

 

 

 

 

 

Oil (per Bbl)

 

$

38.50

 

 

$

59.05

 

 

$

34.71

 

 

$

60.74

 

Natural gas (per Mcf)

 

 

1.58

 

 

 

1.97

 

 

 

1.51

 

 

 

2.33

 

Natural gas liquids (per Bbl)

 

 

11.20

 

 

 

12.62

 

 

 

9.30

 

 

 

15.11

 

Total (per boe)

 

$

24.23

 

 

$

37.32

 

 

$

22.59

 

 

$

39.03

 

 

 

 

 

 

 

 

 

 

NYMEX WTI ($/Bbl)

 

$

40.94

 

 

$

56.45

 

 

$

38.30

 

 

$

57.06

 

NYMEX Henry Hub ($/Mcf)

 

$

1.97

 

 

$

2.23

 

 

$

1.88

 

 

$

2.67

 

Realization to benchmark:

 

 

 

 

 

 

 

 

Oil (per Bbl)

 

 

94

%

 

 

105

%

 

 

91

%

 

 

106

%

Natural Gas (per Mcf)

 

 

80

%

 

 

88

%

 

 

80

%

 

 

87

%

 

 

 

 

 

 

 

 

 

Operating expenses (in thousands):

 

 

 

 

 

 

 

 

Lease operating expenses

 

$

18,802

 

 

$

24,344

 

 

$

61,275

 

 

$

70,752

 

Gathering, transportation and processing

 

 

5,771

 

 

 

9,270

 

 

 

20,579

 

 

 

26,016

 

Taxes other than income

 

 

7,331

 

 

 

13,333

 

 

 

22,874

 

 

 

40,825

 

Depreciation, depletion and amortization

 

 

44,731

 

 

 

143,894

 

 

 

238,273

 

 

 

385,942

 

 

 

 

 

 

 

 

 

 

Operating costs per boe:

 

 

 

 

 

 

 

 

Lease operating expenses

 

$

3.76

 

 

$

3.71

 

 

$

3.59

 

 

$

3.91

 

Gathering, transportation and processing

 

 

1.16

 

 

 

1.41

 

 

 

1.21

 

 

 

1.44

 

Taxes other than income

 

 

1.47

 

 

 

2.03

 

 

 

1.34

 

 

 

2.26

 

Depreciation, depletion and amortization

 

 

8.95

 

 

 

21.94

 

 

 

13.97

 

 

 

21.32

 

Magnolia Oil & Gas Corporation

Consolidated Statements of Operations

(In thousands, except per share data)

 

 

 

For the Three Months Ended

 

For the Nine Months Ended

 

 

September 30, 2020

 

September 30, 2019

 

September 30, 2020

 

September 30, 2019

REVENUES

 

 

 

 

 

 

 

 

Oil revenues

 

$

95,677

 

 

$

207,840

 

 

$

311,153

 

 

$

584,009

 

Natural gas revenues

 

 

14,895

 

 

 

21,243

 

 

 

44,238

 

 

 

71,208

 

Natural gas liquids revenues

 

 

10,495

 

 

 

15,716

 

 

 

29,880

 

 

 

51,215

 

Total revenues

 

 

121,067

 

 

 

244,799

 

 

 

385,271

 

 

 

706,432

 

OPERATING EXPENSES

 

 

 

 

 

 

 

 

Lease operating expenses

 

 

18,802

 

 

 

24,344

 

 

 

61,275

 

 

 

70,752

 

Gathering, transportation and processing

 

 

5,771

 

 

 

9,270

 

 

 

20,579

 

 

 

26,016

 

Taxes other than income

 

 

7,331

 

 

 

13,333

 

 

 

22,874

 

 

 

40,825

 

Exploration expense

 

 

701

 

 

 

3,924

 

 

 

563,589

 

 

 

10,017

 

Impairment of oil and natural gas properties

 

 

 

 

 

 

 

 

1,381,258

 

 

 

 

Asset retirement obligation accretion

 

 

1,501

 

 

 

1,394

 

 

 

4,403

 

 

 

4,095

 

Depreciation, depletion and amortization

 

 

44,731

 

 

 

143,894

 

 

 

238,273

 

 

 

385,942

 

Amortization of intangible assets

 

 

3,626

 

 

 

3,626

 

 

 

10,879

 

 

 

10,879

 

General & administrative expenses

 

 

16,663

 

 

 

17,345

 

 

 

50,472

 

 

 

52,651

 

Transaction related costs

 

 

 

 

 

 

 

 

 

 

 

438

 

Total operating costs and expenses

 

 

99,126

 

 

 

217,130

 

 

 

2,353,602

 

 

 

601,615

 

 

 

 

 

 

 

 

 

 

OPERATING INCOME (LOSS)

 

 

21,941

 

 

 

27,669

 

 

 

(1,968,331

)

 

 

104,817

 

 

 

 

 

 

 

 

 

 

OTHER INCOME (EXPENSE)

 

 

 

 

 

 

 

 

Income from equity method investee

 

 

1,007

 

 

 

92

 

 

 

2,059

 

 

 

608

 

Interest expense, net

 

 

(7,333

)

 

 

(6,896

)

 

 

(21,345

)

 

 

(21,611

)

Loss on derivatives, net

 

 

(2,208

)

 

 

 

 

 

(2,208

)

 

 

 

Other expense, net

 

 

(51

)

 

 

21

 

 

 

(510

)

 

 

8

 

Total other income (expense)

 

 

(8,585

)

 

 

(6,783

)

 

 

(22,004

)

 

 

(20,995

)

 

 

 

 

 

 

 

 

 

INCOME (LOSS) BEFORE INCOME TAXES

 

 

13,356

 

 

 

20,886

 

 

 

(1,990,335

)

 

 

83,822

 

Income tax expense (benefit)

 

 

(339

)

 

 

3,529

 

 

 

(79,340

)

 

 

12,449

 

NET INCOME (LOSS)

 

 

13,695

 

 

 

17,357

 

 

 

(1,910,995

)

 

 

71,373

 

LESS: Net income (loss) attributable to noncontrolling interest

 

 

4,548

 

 

 

6,810

 

 

 

(674,860

)

 

 

29,294

 

NET INCOME ATTRIBUTABLE TO MAGNOLIA

 

 

9,147

 

 

 

10,547

 

 

 

(1,236,135

)

 

 

42,079

 

LESS: Non-cash deemed dividend related to warrant exchange

 

 

 

 

 

2,763

 

 

 

 

 

 

2,763

 

NET INCOME (LOSS) ATTRIBUTABLE TO CLASS A COMMON STOCK

 

$

9,147

 

 

$

7,784

 

 

$

(1,236,135

)

 

$

39,316

 

 

 

 

 

 

 

 

 

 

NET INCOME (LOSS) PER COMMON SHARE

 

 

 

 

 

Basic

 

$

0.05

 

 

$

0.05

 

 

$

(7.41

)

 

$

0.25

 

Diluted

 

$

0.05

 

 

$

0.05

 

 

$

(7.41

)

 

$

0.24

 

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING

 

 

 

 

 

Basic

 

 

166,467

 

 

 

166,872

 

 

 

166,728

 

 

 

160,051

 

Diluted

 

 

170,676

 

 

 

167,108

 

 

 

166,728

 

 

 

161,488

 

WEIGHTED AVERAGE NUMBER OF CLASS B SHARES OUTSTANDING(1)

 

 

85,790

 

 

 

91,790

 

 

 

85,790

 

 

 

92,292

 

(1)

Shares of Class B Common Stock, and corresponding Magnolia LLC Units, are anti-dilutive in the calculation of weighted average number of common shares outstanding.

Magnolia Oil & Gas Corporation

Summary Cash Flow Data

(In thousands)

 

 

 

For the Three Months Ended

 

For the Nine Months Ended

 

 

September 30, 2020

 

September 30, 2019

 

September 30, 2020

 

September 30, 2019

CASH FLOWS FROM OPERATING ACTIVITIES

NET INCOME (LOSS)

 

$

13,695

 

 

$

17,357

 

 

$

(1,910,995

)

 

$

71,373

 

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation, depletion and amortization

 

 

44,731

 

 

 

143,894

 

 

 

238,273

 

 

 

385,942

 

Amortization of intangible assets

 

 

3,626

 

 

 

3,626

 

 

 

10,879

 

 

 

10,879

 

Exploration expense, non-cash

 

 

 

 

 

53

 

 

 

561,629

 

 

 

536

 

Impairment of oil and natural gas properties

 

 

 

 

 

 

 

 

1,381,258

 

 

 

 

Asset retirement obligation accretion

 

 

1,501

 

 

 

1,394

 

 

 

4,403

 

 

 

4,095

 

Amortization of deferred financing costs

 

 

913

 

 

 

892

 

 

 

2,710

 

 

 

2,644

 

Loss on derivatives, net

 

 

2,208

 

 

 

 

 

 

2,208

 

 

 

 

Deferred tax expense (benefit)

 

 

 

 

 

3,414

 

 

 

(77,834

)

 

 

11,765

 

Stock based compensation

 

 

2,927

 

 

 

2,829

 

 

 

8,871

 

 

 

8,376

 

Other

 

 

(1,007

)

 

 

(88

)

 

 

(2,059

)

 

 

(512

)

Net change in operating assets and liabilities

 

 

(3,438

)

 

 

5,849

 

 

 

11,656

 

 

 

(6,487

)

Net cash provided by operating activities

 

 

65,156

 

 

 

179,220

 

 

 

230,999

 

 

 

488,611

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Acquisition of EnerVest properties

 

 

 

 

 

 

 

 

 

 

 

4,250

 

Acquisitions, other

 

 

(3,920

)

 

 

(1,318

)

 

 

(73,702

)

 

 

(93,221

)

Additions to oil and natural gas properties

 

 

(27,674

)

 

 

(88,403

)

 

 

(157,325

)

 

 

(351,467

)

Changes in working capital associated with additions to oil and natural gas properties

 

 

5,409

 

 

 

(9,147

)

 

 

(18,972

)

 

 

(13,392

)

Other investing

 

 

(496

)

 

 

1

 

 

 

(842

)

 

 

(247

)

Net cash used in investing activities

 

 

(26,681

)

 

 

(98,867

)

 

 

(250,841

)

 

 

(454,077

)

 

 

 

 

 

 

 

 

 

CASH FLOW FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Contributions from noncontrolling interest owners

 

 

 

 

 

 

 

 

 

 

 

7,301

 

Distributions to noncontrolling interest owners

 

 

(104

)

 

 

(490

)

 

 

(594

)

 

 

(716

)

Class A Common Stock repurchases

 

 

(6,479

)

 

 

(9,722

)

 

 

(12,962

)

 

 

(9,722

)

Other financing activities

 

 

(209

)

 

 

(2,361

)

 

 

(702

)

 

 

(2,666

)

Net cash used in financing activities

 

 

(6,792

)

 

 

(12,573

)

 

 

(14,258

)

 

 

(5,803

)

 

 

 

 

 

 

 

 

 

NET CHANGE IN CASH AND CASH EQUIVALENTS

 

 

31,683

 

 

 

67,780

 

 

 

(34,100

)

 

 

28,731

 

Cash and cash equivalents – Beginning of period

 

 

116,850

 

 

 

96,709

 

 

 

182,633

 

 

 

135,758

 

Cash and cash equivalents – End of period

 

$

148,533

 

 

$

164,489

 

 

$

148,533

 

 

$

164,489

 

Magnolia Oil & Gas Corporation

Summary Balance Sheet Data

(In thousands)

 

 

 

September 30, 2020

 

December 31, 2019

Cash and cash equivalents

 

$

148,533

 

 

$

182,633

 

Other current assets

 

 

66,329

 

 

 

110,585

 

Property, plant and equipment, net

 

 

1,169,949

 

 

 

3,116,757

 

Other assets

 

 

49,468

 

 

 

56,431

 

Total assets

 

$

1,434,279

 

 

$

3,466,406

 

 

 

 

 

 

Current liabilities

 

$

124,462

 

 

$

175,208

 

Long-term debt, net

 

 

390,787

 

 

 

389,835

 

Other long-term liabilities

 

 

106,849

 

 

 

172,834

 

Common stock

 

 

26

 

 

 

26

 

Additional paid in capital

 

 

1,709,043

 

 

 

1,703,362

 

Treasury stock

 

 

(23,240

)

 

 

(10,277

)

Retained earnings (accumulated deficit)

 

 

(1,153,195

)

 

 

82,940

 

Noncontrolling interest

 

 

279,547

 

 

 

952,478

 

Total liabilities and equity

 

$

1,434,279

 

 

$

3,466,406

 

Magnolia Oil & Gas Corporation

Non-GAAP Financial Measures

Reconciliation of net income to adjusted EBITDAX

In this press release, we refer to adjusted EBITDAX, a supplemental non-GAAP financial measure that is used by management and external users of our consolidated financial statements, such as industry analysts, investors, lenders, and rating agencies. We define adjusted EBITDAX as net income before interest expense, income taxes, depreciation, depletion and amortization, amortization of intangible assets, exploration costs, accretion of asset retirement obligation, non-cash stock based compensation expense, and loss on derivatives, net. Adjusted EBITDAX is not a measure of net income in accordance with GAAP.

Our management believes that adjusted EBITDAX is useful because it allows them to more effectively evaluate our operating performance and compare the results of our operations from period to period and against our peers without regard to our financing methods or capital structure. We also believe that securities analysts, investors, and other interested parties may use adjusted EBITDAX in the evaluation of our Company. We exclude the items listed above from net income in arriving at adjusted EBITDAX because these amounts can vary substantially from company to company within our industry depending upon accounting methods and book values of assets, capital structures and the method by which the assets were acquired. Adjusted EBITDAX should not be considered as an alternative to, or more meaningful than, net income as determined in accordance with GAAP or as an indicator of our operating performance or liquidity. Certain items excluded from adjusted EBITDAX are significant components in understanding and assessing a company's financial performance, such as a company's cost of capital and tax structure, as well as the historic costs of depreciable assets, none of which are components of adjusted EBITDAX. Our presentation of adjusted EBITDAX should not be construed as an inference that our results will be unaffected by unusual or non-recurring items. Our computations of adjusted EBITDAX may not be comparable to other similarly titled measures of other companies.

The following table presents a reconciliation of net income to adjusted EBITDAX, our most directly comparable financial measure, calculated and presented in accordance with GAAP:

 

 

For the Three Months Ended

(In thousands)

 

September 30, 2020

 

September 30, 2019

NET INCOME

 

$

13,695

 

 

$

17,357

Exploration expense

 

 

701

 

 

 

3,924

Asset retirement obligation accretion

 

 

1,501

 

 

 

1,394

Depreciation, depletion and amortization

 

 

44,731

 

 

 

143,894

Amortization of intangible assets

 

 

3,626

 

 

 

3,626

Interest expense, net

 

 

7,333

 

 

 

6,896

Income tax expense (benefit)

 

 

(339

)

 

 

3,529

EBITDAX

 

 

71,248

 

 

 

180,620

Non-cash stock based compensation expense

 

 

2,927

 

 

 

2,829

Loss on derivatives, net(1)

 

 

2,208

 

 

 

Adjusted EBITDAX

 

$

76,383

 

 

$

183,449

(1)

There were no cash settlements or realized gains or losses on the Company's derivative instruments during the three months ended September 30, 2020 and 2019.

Magnolia Oil & Gas Corporation

Non-GAAP Financial Measures

Reconciliation of net income attributable to Class A Common Stock to adjusted earnings

Our presentation of adjusted earnings and adjusted earnings per share are non-GAAP measures because they exclude the effect of certain items included in net income attributable to Class A Common Stock. Management uses adjusted earnings and adjusted earnings per share to evaluate our operating and financial performance because it eliminates the impact of certain items that management does not consider to be representative of the Company's on-going business operations. As a performance measure, adjusted earnings may be useful to investors in facilitating comparisons to others in the Company's industry because certain items can vary substantially in the oil and gas industry from company to company depending upon accounting methods, book value of assets, and capital structure, among other factors. Management believes excluding these items facilitates investors and analysts in evaluating and comparing the underlying operating and financial performance of our business from period to period by eliminating differences caused by the existence and timing of certain expense and income items that would not otherwise be apparent on a GAAP basis. However, our presentation of adjusted earnings and adjusted earnings per share may not be comparable to similar measures of other companies in our industry.

 

For the Three

Months Ended

September 30,

2020

 

Per Share

Diluted

EPS

 

For the Three

Months Ended

September 30,

2019

 

Per Share

Diluted

EPS

(In thousands, except per share data)

NET INCOME ATTRIBUTABLE TO CLASS A COMMON STOCK

$

9,147

 

 

$

0.05

 

$

7,784

 

$

0.05

Adjustments:

 

 

 

 

 

 

 

Non-cash deemed dividend

 

 

 

 

 

 

2,763

 

 

0.01

Loss on derivatives, net

 

2,208

 

 

 

0.01

 

 

 

 

Noncontrolling interest impact of adjustments

 

(752

)

 

 

 

 

 

 

ADJUSTED NET INCOME ATTRIBUTABLE TO CLASS A COMMON STOCK

$

10,603

 

 

$

0.06

 

$

10,547

 

$

0.06

Magnolia Oil & Gas Corporation

Non-GAAP Financial Measures

Reconciliation of net income to adjusted net income

Our presentation of adjusted net income is a non-GAAP measures because it excludes the effect of certain items included in net income and adjusts for income taxes assuming the exchange of all outstanding Magnolia LLC Units and corresponding Class B Common Stock for shares of Class A Common Stock. Management uses adjusted net income to evaluate our operating and financial performance because it eliminates the impact of certain items that management does not consider to be representative of the Company's on-going business operations. As a performance measure, adjusted net income may be useful to investors in facilitating comparisons to others in the Company's industry because certain items can vary substantially in the oil and gas industry from company to company depending upon accounting methods, book value of assets, and capital structure, among other factors. Management believes adjusting these items facilitates investors and analysts in evaluating and comparing the underlying operating and financial performance of our business from period to period by eliminating differences caused by the existence and timing of certain expense and income items that would not otherwise be apparent on a GAAP basis. However, our presentation of adjusted net income may not be comparable to similar measures of other companies in our industry.

 

For the Three Months Ended

(In thousands)

September 30, 2020

 

September 30, 2019

NET INCOME

$

13,695

 

 

$

17,357

Income tax expense (benefit)

 

(339

)

 

 

3,529

INCOME BEFORE INCOME TAXES

 

13,356

 

 

 

20,886

Adjustments:

 

 

 

Loss on derivatives, net

 

2,208

 

 

 

Adjusted income tax expense(1)

 

 

 

 

4,720

ADJUSTED NET INCOME

$

15,564

 

 

$

16,166

 

 

 

 

Diluted weighted average shares of Class A Common Stock outstanding during the period

 

170,676

 

 

 

167,108

Weighted average shares of Class B Common Stock outstanding during the period(2)

 

85,790

 

 

 

91,790

Total weighted average shares of Class A and B Common Stock, including dilutive impact of other securities(2)

 

256,466

 

 

 

258,898

(1)

Represents corporate income taxes at an assumed effective tax rate of 0% and 22.6% for the three months ended September 30, 2020 and 2019, respectively.

(2)

Shares of Class B Common Stock, and corresponding Magnolia LLC Units, are anti-dilutive in the calculation of weighted average number of common shares outstanding.

Magnolia Oil & Gas Corporation

Non-GAAP Financial Measures

Reconciliation of net cash provided by operating activities to free cash flow

Free cash flow is a non-GAAP financial measure. Free cash flow is defined as cash flows from operations before net change in operating assets and liabilities less additions to oil and natural gas properties and changes in working capital associated with additions to oil and natural gas properties. Management believes free cash flow is useful for investors and widely accepted by those following the oil and gas industry as financial indicators of a company's ability to generate cash to internally fund drilling and completion activities, fund acquisitions, and service debt. It is also used by research analysts to value and compare oil and gas exploration and production companies and are frequently included in published research when providing investment recommendations. Free cash flow, therefore, is an additional measure of liquidity, but is not a measure of financial performance under GAAP and should not be considered an alternative to cash flows from operating, investing, or financing activities.

 

 

For the Three Months Ended

(In thousands)

 

September 30, 2020

 

September 30, 2019

Net cash provided by operating activities

 

$

65,156

 

 

$

179,220

 

Net change in operating assets and liabilities

 

 

3,438

 

 

 

(5,849

)

Cash flows from operations before net change in operating assets and liabilities

 

 

68,594

 

 

 

173,371

 

Additions to oil and natural gas properties

 

 

(27,674

)

 

 

(88,403

)

Changes in working capital associated with additions to oil and natural gas properties

 

 

5,409

 

 

 

(9,147

)

Free cash flow

 

$

46,329

 

 

$

75,821

 

 

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