GLOSSARY OF OIL AND NATURAL GAS TERMS
DEFINITIONS OF CERTAIN TERMS AND CONVENTIONS USED HEREIN
The following are abbreviations and definitions of certain terms used in this document, some of which are commonly used in the oil and gas industry:
“Bbl.” One stock tank barrel, of 42 U.S. gallons liquid volume, used herein in reference to crude oil, condensate, natural gas liquids, or water.
“Bbls/d.” Stock tank barrels per day.
“Bcf.” billion cubic feet of natural gas.
“boe.” Barrels of oil equivalent. One boe is equal to one Bbl, six thousand cubic feet of natural gas, or 42 gallons of natural gas liquids. Based on approximate energy equivalency.
“boe/d.” Barrels of oil equivalent per day.
“British Thermal Unit or Btu.” The quantity of heat required to raise the temperature of a one-pound mass of water by one degree Fahrenheit.
“DD&A.” Depletion, depreciation, and amortization.
“Developed acreage.” The number of acres that are allocated or assignable to productive wells or wells capable of production.
“Development well.” A well drilled within the proved area of an oil or natural gas reservoir to the depth of a stratigraphic horizon known to be productive.
“Dry well.” A well that is determined to be incapable of producing either oil or natural gas in sufficient quantities to justify completion as an oil and natural gas well.
“Exploratory well.” A well drilled to find a new field or to find a new reservoir in a field previously found to be productive of oil or natural gas in another reservoir.
“Field.” An area consisting of a single reservoir or multiple reservoirs all grouped on or related to the same individual geological structural feature and/or stratigraphic condition. There may be two or more reservoirs in a field that are separated vertically by intervening impervious, strata, or laterally by local geologic barriers, or by both. Reservoirs that are associated by being in overlapping or adjacent fields may be treated as a single or common operational field. The field name refersgeological terms structural feature and stratigraphic condition are intended to identify localized geological features as opposed to the surface area, although it may refer to both the surface and the underground productive formations.broader terms of basins, trends, provinces, plays, areas-of-interest, etc.
“Formation.” A layer of rock which has distinct characteristics that differs from nearby rock.
“Gross acres or gross wells.” Gross acres or gross wells are the total acres or wells in which all or part of the working interest is owned.
“Henry Hub.” A distribution hub in Louisiana that serves as the delivery location for natural gas futures contracts on the NYMEX.
“Horizontal drilling.” A drilling technique used in certain formations where a well is drilled vertically to a certain depth and then drilled at a rightan angle within a specified interval.
“MBbls.” One thousand barrels of crude oil, condensate or NGLs.
“Mboe/d.” Thousand barrels of oil equivalent per day.
“Mcf.” One thousand cubic feet of natural gas.
“Mcf/d.” Thousand cubic feet of natural gas per day.
“MMboe.” Million barrels of oil equivalent.
“MMBtu.” One million British thermal units.
“MMBtu/d.” Million British thermal units per day.
“MMcf.” One million cubic feet of natural gas.
“NGL” or “NGLs.” Natural gas liquids. Hydrocarbons found in natural gas which may be extracted as purity products such as ethane, propane, isobutane and normal butane, and natural gasoline.
“Net acres or net wells.” The sum of fractional working interests owned in gross acres or gross wells.
“NYMEX.” The New York Mercantile Exchange.
“Productive well.” AAn exploratory, development, or extension well that is found to benot a dry well. Productive wells include producing wells and wells mechanically capable of producing hydrocarbons in sufficient quantities such that proceeds from the sale of the production exceed production expenses and taxes.production.
“Proved developed reserves.” ReservesProved oil and natural gas reserves that can be expected to be recovered through existing wells with existing equipment and operating methods.methods or in which the cost of the required equipment is relatively minor compared to the cost of a new well.
“Proved reserves.” The estimatedThose quantities of oil natural gas, and natural gas, liquids which, geologicalby analysis of geoscience and engineering data, demonstratecan be estimated with reasonable certainty to be commercially recoverable in future yearseconomically producible—from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and operating conditions.government regulations—prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation. The project to extract the hydrocarbons must have commenced or the operator must be reasonably certain that it will commence the project within a reasonable time.
“Proved undeveloped reserves.” Proved oil and natural gas reserves that are expected to be recovered from new wells on undrilled acreage or from existing wells where a relatively major expenditure is required for recompletion. Reserves on undrilled acreage are limited to those directly offsetting development spacing areas that are reasonably certain of production when drilled, unless evidence using reliable technology exists that establishes reasonable certainty of economic producibility at greater distances. Undrilled locations can be classified as undeveloped reserves only if a plan has been adopted indicating that they are scheduled to be drilled within five years, unless the specific circumstances justify a longer time.
“Reservoir.” A porous and permeable underground formation containing a natural accumulation of producible oil and/or natural gas that is confined by impermeable rock or water barriers and is individual and separate from other reservoirs.
“Standardized measure.” Discounted future net cash flows estimated by applying the twelve month12-month unweighted arithmetic average of the first-day-of-the-month price for the preceding twelve12 months to the estimated future production of year‑end proved reserves. Future cash inflows are reduced by estimated future production and development costs based on period‑end costs to determine pre‑tax cash inflows. Future income taxes, if applicable, are computed by applying the statutory tax rate to the excess of pre‑tax cash inflows over Magnolia’s tax basis in the oil and natural gas and oil properties. Future net cash inflows after income taxes are discounted using a 10% annual discount rate.
“Undeveloped acreage.” Lease acreage on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of oil, natural gas, and NGLs regardless of whether such acreage contains proved reserves.
“Unit.” The joining of all or substantially all interests in a reservoir or field, rather than a single tract, to provide for development and operation without regard to separate property interests. Also, the area covered by a unitization agreement.
“Working interest.” The right granted to the lessee of a property to explore for, to produce, and to own natural gas or other minerals. The working interest owners bear the exploration, development, and operating costs on either a cash, penalty, or carried basis.
“WTI.” West Texas Intermediate light sweet crude oil.
GLOSSARY OF CERTAIN TERMS AND CONVENTIONS USED HEREIN
The following are definitions of certain other terms and conventions that are used in this Annual Report on Form 10-K:
“The Company” or “Magnolia.” Magnolia Oil & Gas Corporation (either individually or together with its consolidated subsidiaries, as the context requires, including Magnolia Holdings, Magnolia LLC, Magnolia Intermediate, Magnolia Operating, and Magnolia Oil & Gas Finance Corp.).
“Magnolia Holdings.” Magnolia Oil & Gas Holdings LLC.
“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.
“EVOC.” EnerVest Operating, L.L.C.
“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.
“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.
“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.
“Closing Date.” July 31, 2018.
“Issuers.” Magnolia Operating and Magnolia Oil & Gas Finance Corp., a wholly owned subsidiary of Magnolia Operating, as it relates to the 2026 Senior Notes.
“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.
“Non-Compete.” That certain Non-Competition Agreement, dated as of 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.
“RBL Facility.” Senior secured reserve-based revolving credit facility, as amended February 16, 2022.
“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 EVOC, pursuant to which EVOC provided certain services to the Company.
“Stockholder Agreement.” The Stockholder Agreement, dated as of July 31, 2018, by and between the Company and the other parties thereto.
“OPEC.” The Organization of the Petroleum Exporting Countries.
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.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:to:
•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;services, including impacts of actions taken by OPEC and other state-controlled oil companies;
•production and reserve levels;
•the timing and extent of the Company’s success in discovering, developing, producing and estimating reserves;
•geopolitical and business conditions in key regions of the world;
•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;
legislative, regulatory, or policy changes;
•cyber attacks;
•the occurrence of property acquisitions or divestitures;
•the integration of acquisitions;
•the securities or capital markets and related risks such as general credit, liquidity, market, and interest-rate risks;
•the economic effects of the COVID-19 pandemic and actions taken by federal, state and local governments and other third parties in response to the pandemic; and
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• | •other factors disclosed in this Annual Report on Form 10-K, including underItems 1 and 2 - Business and Properties, Item 1A - Risk Factors, Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations, Item 7A - Quantitative and Qualitative Disclosures About Market Risk.
Items 1 and 2 - Business and Properties, Item 1A - Risk Factors, Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations, Item 7A - Quantitative and Qualitative Disclosures About Market Risk, and elsewhere in this Annual Report on Form 10-K.
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All subsequent written and oral forward-looking statements attributable to the Company, or persons acting on its behalf, are
expressly qualified in their entirety by the cautionary statements.statements above. Except as required by law, Magnolia assumes no duty to update or revise its forward-looking statements based on changes in internal estimates or expectations or otherwise.
PART I
Items 1 and 2. Business and Properties
Overview
Magnolia Oil & Gas Corporation (the “Company”(either individually or together with its consolidated subsidiaries, as the context requires, “the Company” or “Magnolia”) is a Delaware corporation formedan independent oil and natural gas company engaged in February 2017 as a special purposethe acquisition, company underdevelopment, 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 name TPG Pace Energy Holdings Corp. forGiddings area in South Texas, where the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization, or similar business combination with one or more businesses.Company targets the Eagle Ford Shale and Austin Chalk formations.
On July 31, 2018, (the “Closing Date”), Magnolia consummated its initial business combination (the “Business Combination”) through its acquisition of certain oil and natural gas assets in the Karnes County portion of the Eagle Ford Shale in South Texas (the “Karnes County Assets” and, such business, the “Karnes County Business”), certain oil and natural gas assets inAssets, the Giddings Field of the Austin Chalk (the “Giddings Assets”),Assets, and a 35.0% membership interest in Ironwood Eagle Ford Midstream, LLC, which owns an Eagle Ford gathering system, each with certain affiliates of EnerVest Ltd. (“EnerVest”). As of December 31, 2019, Magnolia owned a 66.1%EnerVest. On October 23, 2020, the Company sold its 35% membership interest in Ironwood Eagle Ford Midstream, LLC. Magnolia is the managing member of Magnolia Oil & Gas Parent LLC (“Magnolia LLC”),. Magnolia’s principal asset is a controlling equity interest in Magnolia LLC. As the managing member of Magnolia LLC, the Company operates and controls all of the business and affairs of Magnolia LLC and, through Magnolia LLC and its subsidiaries, conducts business. Magnolia consolidates the financial results of Magnolia LLC and its subsidiaries and records non-controlling interests for the economic interest in Magnolia LLC held by the Magnolia LLC Unit Holders. As of December 31, 2022, Magnolia owned an 89.8% interest in Magnolia LLC, which owns the assets acquired in the Business Combination.
In connection with the Business Combination, Magnolia entered into athe Services Agreement (the “Services Agreement”) with EnerVest Operating L.L.C. (“EVOC”),EVOC, an affiliate of EnerVest, pursuant to which EVOC operatesoperated Magnolia’s assets under the direction of Magnolia’s management by providing services substantially identical to the services historically provided by EVOC in operating the assets Magnolia acquired in the Business Combination, including administrative, back office, and day-to-day field-level services reasonably necessary to operate the Company’s business, subject to certain exceptions.
In connection with the Business Combination, On August 1, 2020, the Company has been identified asprovided written notice to EVOC of its intent to terminate the acquirer for accounting purposes andServices Agreement. Pursuant to the Karnes County BusinessServices Agreement, EVOC continued to provide services during the transition, which was deemed to be the accounting predecessor (“Predecessor”). For the periodscompleted on or after the Business Combination, the Company, including the combination of the Karnes County Business, the Giddings Assets, and the Ironwood Interests, is the accounting successor (“Successor”). The Business Combination was accounted for using the acquisition method of accounting and the Successor financial statements reflect a new basis of accounting based on the fair value of the net assets acquired. As a result of the application of the acquisition method of accounting, the Company’s consolidated and combined financial statements and certain presentations are separated into two distinct periods to indicate the different ownership and accounting basis between the periods presented, the period before the consummation of the Business Combination, which includes the year ended December 31, 2017 (the “2017 Predecessor Period”) and the period from January 1, 2018 to JulyJune 30, 2018 (the “2018 Predecessor Period” and, together with the 2017 Predecessor Period, the “Predecessor Period”); and the period on and after the consummation of the Business Combination, from the Closing Date to December 31, 2018 (the “2018 Successor Period”), and the year ended December 31, 2019 (the “2019 Successor Period” and, together with the 2018 Successor Period, the “Successor Period”).2021.
Available Information
Magnolia’sMagnolia, which is incorporated in Delaware, has its principal executive offices are located at Nine Greenway Plaza Suite 1300, Houston, Texas 77046. Magnolia’s website is located at www.magnoliaoilgas.com.
Magnolia furnishes or files with the Securities and Exchange Commission (the “SEC”) its Annual Reports on Form 10‑K,10-K, its Quarterly Reports on Form 10‑Q,10-Q, and its Current Reports on Form 8‑K.8-K. Magnolia makes these documents available free of charge at www.magnoliaoilgas.com under the “Investors” tab as soon as reasonably practicable after they are filed or furnished with the SEC. Information on Magnolia’s website is not incorporated by reference into this Annual Report on Form 10‑K10-K or any of the Company’s other filings with the SEC.
Magnolia’s Class A Common Stock, par value $0.0001 per share, (“Class A Common Stock”), is listed and traded on the New York Stock Exchange (“NYSE”) under the symbol “MGY.”
Strategy
Magnolia’s business model prioritizes prudent and disciplined capital allocation, free cash flow, and financial stability. The Company’s ongoing plan is to spend well within cash flow on drilling and completing wells while maintaining low financial leverage. The Company is well positioned to reduce or increase operations given the significant flexibility within its capital program as the Company has no long-term service obligations.
The Company’s long-term strategy is centered around the following value creation principles:
•generate moderate annual organic production growth,
•maintain an efficient capital program with short economic paybacks,
•maintain a conservative financial leverage profile,
•generate high full-cycle operating margins,
•generate significant free cash flow after capital expenditures, and
•effectively reinvest free cash flow to maximize shareholder returns.
Segment Information and Geographic Area
Operating segments are defined under accounting principles generally accepted in the United States of America (“GAAP”) as components of an enterprise that engage in activities from which it may earn revenues and incur expenses and for which separate financial information is available and regularly evaluated for the purpose of allocating resources and assessing performance.
Based on Magnolia’s organization and management, theThe Company operates in one reportable segment engaged in the acquisition, development, exploration, and production of oil and natural gas properties located in the United States. All of Magnolia’s operations are conducted predominantly in one geographic area of the United States. Magnolia’s oil and natural gas properties are located primarily in the Karnes County and the Giddings Fieldareas in South Texas where the Company primarily targets the Eagle Ford Shale and the Austin Chalk formation.formations. Additional data and discussion are provided in Item 7 - Management’s Discussion and Analysisof Financial Condition and Results of OperationsOperations of this Annual Report on Form 10-K.
Properties
As of December 31, 2019,2022, Magnolia’s assets consisted of a total leasehold position of 670,787688,033 gross (450,854(482,015 net) acres, including 39,99843,022 gross (22,088(23,259 net) acres in the Karnes Gonzales, DeWitt,area and Atascosa Counties, Texas and 630,789645,011 gross (428,766(458,756 net) acres in the Giddings Field.area. As of December 31, 2019,2022, Magnolia had 1,6302,131 gross (1,141(1,366 net) wells with total production of 66.875.4 Mboe/d for the year ended December 31, 2019. As of December 31, 2019,2022. During 2022, Magnolia was running a one-rig program for the Karnes County Assets and a one-rig program for the Giddings Assets.operated two rigs. Approximately 52.8%44%, 28.2%31%, and 19.0%25% of production from Magnolia’s assets was attributable to oil, natural gas, and NGLs, respectively, for the year ended December 31, 2019.2022.
The Karnes County Assets are primarily located in Karnes, County,Gonzales, DeWitt, and Atascosa Counties, Texas, in the core of the Eagle Ford Shale. The acreage comprising the Karnes County Assets also includes the Austin Chalk formation overlying the Eagle Ford Shale. The Austin Chalk formation has shown itself to be an independent reservoir from the Eagle Ford Shale and represents a very attractive development target. The Karnes County Assets include a well-known, low-risk acreage position that has been developed with a focus on maximizing returns and improving operational efficiencies.
The Giddings Assets are primarily located in Austin, Brazos, Burleson, Fayette, Lee, Grimes, Montgomery, and Washington Counties, Texas. The Austin Chalk formation produces along a northeast-to-southwest trend that is approximately parallel to the Texas Gulf Coast. There are several notable producing fieldsareas along the Austin Chalk trend, the largest of which is the Giddings Field.area. The Giddings Fieldarea has seen two major drilling cycles. The first cycle began in the late 1970s and into the early 1980s and consisted primarily of vertical well drilling. The second cycle ran through much of the 1990s and involved primarily horizontal well drilling. The wells included in the Giddings Assets have historically targeted the lower third of the Austin Chalk formation. Recent improvements in drilling and completion technologies have unlocked new development opportunities in the Giddings Field.area. Wells drilled over the past twoin recent years have helped to substantiate the strong economic viability of new drilling activity across the field.Giddings area. Future development results may allow for further expansion of existing location inventory throughout the leasehold.
Reserve Data
Estimated Proved Reserves
The estimates of Magnolia’s proved oil and natural gas reserves included in this Annual Report on Form 10-K are as of December 31, 2019.2022. The majority of the Company’s proved reserves volumes, approximately 96%98%, are based on evaluations prepared by the independent petroleum engineering firm of Miller and Lents, in accordance with Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information promulgated by the Society of Petroleum Evaluation Engineers and definitions and guidelines established by the SEC. Miller and Lents was selected for its historical experience and expertise in evaluating hydrocarbon resources.
Proved oil and natural gas reserves are those quantities of oil and natural gas, which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible producible—from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulations regulations—prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation. The project to extract the hydrocarbons must have commenced or the operator must be reasonably certain that it will commence the project within a reasonable time. Oil and natural gas prices applied in estimating proved reserves are determined using an unweighted arithmetic average of the first-day-of-the-month price for the reporting period.trailing historical 12 months.
Proved reserves are sub-divided into two categories, proved developed and proved undeveloped. Proved developed reserves includeare volumes that can be expected to be recovered through existing wells with existing equipment and operating methods.methods or where the cost of the required equipment is relatively minor compared to the cost of a new well. Proved undeveloped reserves are volumes that are expected to be recovered from new wells on undrilled acreage or from existing wells where a relatively major expenditure is required and there is management commitmentfor recompletion. Proved undeveloped reserves on undrilled acreage are limited to commencethose directly offsetting development spacing areas that are reasonably certain of production when drilled, unless evidence using reliable technology exists that establishes reasonable certainty of economic producibility at greater distances. Undrilled locations can be classified as undeveloped reserves only
if a plan has been adopted indicating that they are scheduled to be drilled within five years, unless the development withinspecific circumstances justify a reasonable
timeframe.longer time. All of Magnolia’s proved undeveloped reserves as of December 31, 2019,2022, that are included in this Annual Report, are planned to be developed within one year of first reporting.year.
The technical and economic data used to estimate proved reserves include, but are not limited to, well logs, geologic maps, well-test data, production data, well data, historical price and cost information, and property ownership interests. This technical data, performance analysis, decline curve analysis, volumetric analysis, assessment of analogues, together with standard engineering and geoscience methods, or a combination of methods, including performance analysis, decline curve methods, volumetric analysis, and assessment of analogues, are applied to estimate proved reserves.
The proved developed reserves per well are estimated by applying performance analysis and decline curve methods. For proved developed wells that lack adequate production history, reserves were estimated using performance-based type curves and offset location analogues. Proved undeveloped reserves are estimated by using a combination of geologic and engineering data for planned drilling locations. Performance data along with log and core data was used to delineate consistent, continuous reservoir and performance characteristics in core areas of development to identify areas of technical certainty that meets the criteria for proved reserves. Performance based type curves are applied to forecast proved undeveloped well performance.
Preparation of Oil and Natural Gas Reserve Information
Magnolia’s Director of Reserves, Peter Corbeil, is the technical person primarily responsible for overseeing the internal reserves estimation process. Mr. Corbeil has more than 20 years of oil and gas industry experience in reservoir engineering, reserves assessment, field development, and technical management. His experience prior to joining Magnolia includes tenures in the corporate reserve groups at three large and diversified oil and gas companies. He holds a Bachelor of Engineering degree and a Master of Business Administration degree and is a member of the Society of Petroleum Engineers.
The Director of Reserves works closely with EVOC’sMagnolia’s petroleum engineers and geoscience professionals to ensure the integrity, accuracy, and timeliness of the data furnished to Miller and Lents for the preparation of their reserve reports. Periodically, Magnolia’s internal staff and EVOC’s technical teams meetmeets with the independent reserves engineers to review properties, methods, and assumptions used to prepare reserve estimates for Magnolia’s assets.
The reserve reports were prepared by Miller and Lents’ team of geologists and reservoir engineers who integrate geological, geophysical, engineering, and economic data to produce reserve estimates and economic forecasts. The process to prepare Magnolia’s proved reserves as of December 31, 20192022 was supervised by Katie M. Reinaker,Jennifer A. Godbold, Senior Vice President and an officer of Miller and Lents. Ms. ReinakerGodbold is a professionally qualified and licensed Professional Engineer in the State of Texas with more than 10 years of relevant experience in the estimation, assessment, and evaluation of oil and natural gas reserves.
Reserves estimation involves a degree of uncertainty and estimating volumes of economically recoverable oil and natural gas that cannot be measured in an exact manner. The accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation. As a result, the estimates of different engineers often vary. In addition, the results of drilling, testing, and production may justify revisions of such estimates. Accordingly, reserve estimates often differ from the quantities of oil, natural gas, and NGLs that are ultimately recovered. Estimates of economically recoverable oil, natural gas, NGLs, and of future net revenues are based on a number of variables and assumptions, all of which may vary from actual results, including geologic interpretation, prices, future production rates, and costs. Please readrefer to the Company’s “Risk Factors” in Item 1A in this Annual Report on Form 10-K.
Proved Reserves
The following table presents theMagnolia’s estimated net proved oil and natural gas reserves of Magnolia as of December 31, 2019.2022. This table shows reserves 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 Bbl. This ratio is not reflective of the current price ratio between the two products. The proved undeveloped reserves volumes in the table below are expected to be converted to proved developed reserves within one year.
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| | December 31, 2019 |
| | Oil (MMBbls) | | Natural Gas (Bcf) | | NGLs (MMBbls) | | Total (MMboe) |
Proved reserves | | | | | | | | |
Total proved developed | | 40.3 |
| | 165.8 |
| | 18.9 |
| | 86.8 |
|
Total proved undeveloped | | 12.3 |
| | 31.4 |
| | 5.0 |
| | 22.5 |
|
Total proved reserves | | 52.6 |
| | 197.2 |
| | 23.9 |
| | 109.3 |
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| | December 31, 2022 |
| | Oil (MMBbls) | | Natural Gas (Bcf) | | NGLs (MMBbls) | | Total (MMboe) |
Proved reserves | | | | | | | | |
Total proved developed | | 53.5 | | | 244.6 | | | 31.3 | | | 125.6 | |
Total proved undeveloped | | 9.4 | | | 68.5 | | | 10.6 | | | 31.4 | |
Total proved reserves | | 62.9 | | | 313.1 | | | 41.9 | | | 157.0 | |
Development of Proved Undeveloped Reserves
As of December 31, 2019,2022, the proved undeveloped reserves volumes are expected to be converted to proved developed reserves within one year. The following table summarizes the changes in Magnolia’s proved undeveloped reserves during the year ended December 31, 2019:2022:
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| | Total (MMboe) |
Proved undeveloped reserves at January 1, 20192022 | | 24.025.6 |
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Conversions into proved developed reserves | | (20.4(21.9) | ) |
Extensions | | 15.725.5 |
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Acquisitions | | 2.6— |
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Revisions of previous estimates | | 0.62.2 |
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Proved undeveloped reserves at December 31, 20192022 | | 22.531.4 |
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As of December 31, 2019,2022, Magnolia’s assets contained approximately 22.531.4 MMboe of proved undeveloped reserves, consisting of 12.39.4 MMBbls of oil, 31.468.5 Bcf of natural gas, and 5.010.6 MMBbls of NGLs. The Company’s total estimated proved undeveloped reserves decreased 1.5increased by 5.8 MMboe during the year ended December 31, 2019.2022. Magnolia converted 20.421.9 MMboe of proved undeveloped reserves to proved developed reserves as a result of the drilling activities completed during 2019. Extension adds2022. Extensions of 15.725.5 MMboe were a result ofresulted from the planned drilling program for the Karnes County Assets and the Giddings Assets. Acquisitions related to purchasesprogram. Upward revisions of acreage in the Company’s Karnes County Assets resulted in an increase in proved undeveloped reserves of approximately 2.6 MMboe. Revisions of 0.62.2 MMboe to proved undeveloped reserves were comprised of a 2.22.3 MMboe positive revision relateddue to infill drilling in the Karnes County Assets that wasand 0.1 MMboe related to higher commodity prices, partially offset by a 0.2 MMboe downward revisions of approximately 1.6 MMboeadjustment related to technical updates, lower commodity prices, and an updated well schedule to optimizeoptimizing development activity.
During the year ended December 31, 2019,2022, Magnolia incurred costs of approximately $158.8$210.4 million to convert the reserves associated with 4035 of its net proved undeveloped locations to 20.421.9 MMboe of proved developed reserves.
Drilling Statistics
The following table describes new development and exploratory wells drilled within Magnolia’s assets during the years ended December 31, 2019, 2018,2022, 2021, and 2017.2020. The information should not be considered indicative of future performance, nor should it be assumed that there is necessarily any correlation among the number of productive wells drilled, quantities of reserves found, or economic value. A dry well is a well that proves to be incapable of producing either oil or natural gas in sufficient quantities to justify completion as an oil and natural gas well. A productive well is aan exploratory, development, or extension well that is found to benot a dry well. Productive wells include producing wells and wells mechanically capable of producing hydrocarbons in sufficient quantities.production. Completion refers to installation of permanent equipment for production of oil or natural gas, or, in the case of a dry well, to reporting to the appropriate authority that the well has been abandoned. As of December 31, 2019, 842022, 28 gross (34(15 net) wells were in various stages of completion. As of December 31, 2019,2022, Magnolia was running a one-rig program for the Karnes County Assets and a one-rig program for the Giddings Assets.two-rig program.
| | | | Successor | | | Predecessor and Giddings Assets | | Years Ended |
| | Year Ended December 31, 2019 | | July 31, 2018 Through December 31, 2018 | | | January 1, 2018 Through July 30, 2018 | | Year Ended December 31, 2017 | | December 31, 2022 | | December 31, 2021 | | December 31, 2020 |
Net exploratory wells | | | | | | | | | | Net exploratory wells | | | | | | |
Productive | | — |
| | — |
| | | — |
| | — |
| Productive | | — | | | — | | | — | |
Dry | | — |
| | — |
| | | — |
| | — |
| Dry | | — | | | — | | | — | |
| | — |
| | — |
| | | — |
| | — |
| | — | | | — | | | — | |
Net development wells | | | | | | | | | | Net development wells | | | | | | |
Productive | | 76 |
| | 25 |
| | | 42 |
| | 58 |
| Productive | | 50 | | | 42 | | | 44 | |
Dry | | — |
| | — |
| | | — |
| | — |
| Dry | | — | | | — | | | — | |
| | 76 |
| | 25 |
| | | 42 |
| | 58 |
| | 50 | | | 42 | | | 44 | |
Net total wells | | | | | | | | | | Net total wells | | | | | | |
Productive | | 76 |
| | 25 |
| | | 42 |
| | 58 |
| Productive | | 50 | | | 42 | | | 44 | |
Dry | | — |
| | — |
| | | — |
| | — |
| Dry | | — | | | — | | | — | |
Total | | 76 |
| | 25 |
| | | 42 |
| | 58 |
| Total | | 50 | | | 42 | | | 44 | |
The following table describes, for each of the last three fiscal years, oil, natural gas, and NGL production volumes, average lease operating costs per boe (including transportation costs, but excluding severance and other taxes), and average sales prices related to Magnolia’s operations:
|
| | | | | | | | | | | | | | | | | |
| | Successor | | | Predecessor and Giddings Assets |
| | Year Ended December 31, 2019 | | July 31, 2018 Through December 31, 2018 | | | January 1, 2018 Through July 30, 2018 | | Year Ended December 31, 2017 |
Production | | | | | | | | | |
Crude oil (MMBbls) | | 12.9 |
| | 5.1 |
| | | 6.4 |
| | 7.8 |
|
Natural gas (Bcf) | | 41.3 |
| | 14.1 |
| | | 13.5 |
| | 16.8 |
|
Natural gas liquids (MMBbls) | | 4.6 |
| | 1.9 |
| | | 1.7 |
| | 2.0 |
|
| | | | | | | | | |
Average lease operating cost per boe | | $ | 5.28 |
| | $ | 4.83 |
| | | $ | 5.42 |
| | $ | 5.28 |
|
| | | | | | | | | |
Average sale price | | | | | | | | | |
Crude oil (MMBbls) | | $ | 60.00 |
| | $ | 67.37 |
| | | $ | 69.14 |
| | $ | 49.03 |
|
Natural gas (Bcf) | | 2.27 |
| | 3.04 |
| | | 2.82 |
| | 2.94 |
|
Natural gas liquids (MMBbls) | | 15.17 |
| | 25.93 |
| | | 25.99 |
| | 21.80 |
|
Gross and Net Undeveloped and Developed Acreage
The following table sets forth certain information regarding the total developed and undeveloped acreage in which Magnolia held an interest as of December 31, 2019:2022:
|
| | | |
| | December 31, 2019 |
Undeveloped acreage | | |
Gross | | 65,984 |
|
Net | | 47,298 |
|
| | |
Developed acreage | | |
Gross | | 604,803 |
|
Net | | 403,556 |
|
| | |
Total acreage | | |
Gross | | 670,787 |
|
Net | | 450,854 |
|
| | | | | | | | | | | | | | | | | |
| Acreage |
| Undeveloped | | Developed | | Total |
Gross | 56,655 | | | 631,378 | | | 688,033 | |
Net | 43,569 | | | 438,446 | | | 482,015 | |
Undeveloped Acreage Expirations
As of December 31, 2019,2022, Magnolia’s total net undeveloped acres across its assets that will expire in 2020, 2021,2023, 2024, and 20222025 are 1,129 acres, 6,610 acres,2,514 gross (2,246 net), 2,665 gross (2,005 net), and 3,1092,312 gross (1,971 net) acres, respectively, unless production is established within the spacing units covering the acreage prior to the expiration dates or unless such leasehold rights are extended or renewed. There are no expirations after 2022.2025.
Delivery Commitments
Magnolia has a long term contract with the commitment to deliver a fixed minimum sales volume of oil production from the Karnes County Assets. This contract requires Magnolia to deliver approximately 7,988 MBbls for the period from 2020 through 2021. In addition, theThe Giddings Assets are subject to a contractcontracts with a third-party midstream companycompanies that providesprovide for firm pipeline transportation and gathering and processing services for a portion of the natural gas produced from the Giddings Assets. Under this contract, Magnolia currently has reserved firm capacity of upThe delivery commitments require the Company to 30,000 MMBtu/d, which amount Magnolia has the rightdeliver 6.4 million MMBtu in 2023 and 20.9 million MMBtu thereafter. The Company’s delivery commitments are subject to reduce during the term of the agreement based on current capacity requirements. This contract requires Magnolia to pay a standard pipeline demand fee for theits reserved capacity amount.amount and a potential shortfall fee if unable to deliver the agreed upon quantity of gas. Magnolia expects to fulfill both of theseits commitments with existing proved developed and proved undeveloped reserves, which are regularly monitored to ensure sufficient availability. In addition, Magnolia monitors current production, anticipated future production, and future development plans in order to meet its commitments.
Operations
General
Pursuant to the Services Agreement entered into in connection with the Business Combination, EVOC, under the direction of Magnolia’s management, has provided services to Magnolia since the Business Combination substantially identical to the services historically provided by EVOC, including all administrative, back office and day-to-day field-level services reasonably necessary to operate Magnolia’s business and its assets, subject to certain exceptions.
Facilities
Production facilities related to Magnolia’s assets are located near producing wells and consist of storage tanks, two-phase and/or three-phase separation equipment, flowlines, metering equipment, emissions control equipment, leased compressors, and safety systems. Predominant artificial lift methods include gas lift, rod pump lift, and plunger lift.
Magnolia’s assetsThe Karnes County Assets include access to a 35.0% ownership interest in ancrude oil gathering system and access to natural gas gathering system operated bysystems. Magnolia is subject to the terms of a crude oil gathering agreement with Ironwood Eagle Ford Midstream, LLC that expires in July 2027, which allows gas and oil production to be delivered and sold to various intrastate and interstate markets, or to various crude oil refining markets on a competitive pricing basis. The majority of natural gas production related to the Karnes County Assets is currently processed to collect NGLs. The Karnes County Assets also include a saltwater disposal well, which currently handles a portion of water production from the Karnes County Assets.Produced natural gas and NGLs are sold to third-party natural gas processors.
The Giddings Assets include access to natural gas gathering systems, which allows production to be delivered to third-party natural gas processors. The majority of natural gas production related to the Giddings Assets is currently processed to collect NGLs. Produced natural gas can beand NGLs are sold to third-party natural gas processors as well as various intrastate and interstate markets on a competitive pricing basis. The Giddings Assets also include aoperated two saltwater disposal well that handleswells, including one directly connected via pipe to a small portion of water production from the Giddings Assets.central tank battery built in 2022.
Marketing and Customers
For the year ended December 31, 2019, two2022, four customers, including their subsidiaries, accounted for 43.3%19%, 17%, 14%, and 18.5%, respectively,11% of the Company’s combined oil, natural gas, and NGL revenue. For the 2018 Successor Period, twoyear ended December 31, 2021, four customers, including their subsidiaries, accounted for 42.2%22%, 15%, 15%, and 19.1%, respectively,11% of the Company’s combined oil, natural gas, and NGL revenue. For the 2018 Predecessor Period,year ended December 31, 2020, three customers, including their subsidiaries, accounted for 47.6%40%, 14.5%17%, and 12.2%, respectively,12% of the Company’s combined oil, natural gas, and NGL revenues. For the 2017 Predecessor Period, four customers accounted for 28.8%, 22.3%, 18.9%, and 10.2%, respectively, of the combined oil, natural gas, and NGL revenues.revenue.
No other purchaser accounted for 10% or more of Magnolia’s revenue on a combined basis in each respective period. The loss of any of the purchasers above could adversely affect Magnolia’s revenues in the short term. Please see “Risk Factors—Magnolia depends upon a small number of significant purchasers for the sale of most of its oil, natural gas, and NGL production. The loss of one or more of such purchasers could, among other factors, limit Magnolia’s access to suitable markets
for the oil, natural gas, and NGLs it produces.” in Item 1A in this Annual Report on Form 10-K for more information.
Magnolia gathers and processes a portion of theThe natural gas production from the Giddings Assets is gathered and processed under acreage dedications with twothree third-party midstream companies. The natural gas plant residue volumes are sold either to thenatural gas processorprocessors or various third parties utilizing the firm transportation agreement described under “Delivery CommitmentsCommitments.” in this item (“Items 1 and 2. Business and Properties”).Residue sales utilizing the firm transportation are at market prices with terms of 12 months or less. The NGL production extracted from the Giddings Assets is sold to third parties pursuant to purchase agreements with varying terms.terms at market prices. Magnolia sells the majority of the oil production from the Giddings Assets to twothree third parties at market prices, with such purchasers generally transporting such productionthe oil from the lease via trucks.trucks under contracts of 12 months or less. The remainder of the oil natural gas, and NGL production from the Giddings Assets is sold to various third-party purchasers at market prices typically under contracts with terms of twelve12 months or less.
In addition, Magnolia sells the natural gas production from the Karnes County Assets to various third parties pursuant to the terms of multiple natural gas processing and purchase contracts of varying terms. Such natural gas production is gathered and processed under agreements with terms ranging from month-to-month to the life of the applicable lease agreements. Magnolia is subject totransports the termsmajority of aits crude oil production from the Karnes County Assets on a gathering agreement with Ironwood Eagle Ford Midstream, LLC that expires in July 2027, which provides an outlet for Magnolia to sell oil production via pipeline from the Karnes County Assets to third-party purchasers at market prices. The majority of the remaining oil production is generally transported from the lease via trucks. The remainder of the oil, natural gas, and NGL production from the Karnes County Assets is sold to various third-party purchaserstrucks at market prices typically under contracts with terms of twelve12 months or less. The NGL production from the Karnes County Assets is primarily sold to midstream natural gas processors in the Eagle Ford area.
Competition
The oil and natural gas industry is a highly competitive environment and Magnolia competes with both major integrated and other independent oil and natural gas companies in all aspects of the Company’s business to explore, develop, and operate its properties and market its production. Competitive conditions may be affected by future legislation and regulations as the United States develops new energy and climate-related policies. In addition, some of Magnolia’s competitors may have a competitive advantage when responding to factors that affect demand for oil and natural gas production, such as changing prices, domestic and foreign political conditions, weather conditions, the proximity and capacity of natural gas pipelines and other transportation facilities, and overall economic conditions. Magnolia also faces indirect competition from alternative energy sources, including wind, solar, and electric power. Magnolia’s ability to acquire additional prospects and to find and develop reserves in the future will depend on the Company’s ability to evaluate and select suitable properties and to consummate transactions in a highly competitive environment.
Regulation
Environmental, Health and Safety Matters
Oil and natural gas operations are substantially affected by federal, state, and local laws and regulations. In particular, oil and natural gas production and related operations are, or have been, subject to price controls, taxes, and numerous other laws and regulations. All of the jurisdictions in which Magnolia’s assets are located have statutory provisions regulating the development and production of oil and natural gas. These laws and regulations can impose recordkeeping, monitoring, and reporting requirements or other operational constraints on the Company’s business, including operational controls for minimizing pollution, costs to remediate releases of regulated substances, including crude oil, into the environment, or costs to remediate sites to which the Company sent regulated substances for disposal. In some cases, these laws can impose strict liability for the entire cost of clean-up on any responsible party without regard to negligence or fault and impose liability on the Company for the conduct of others (such as prior owners or operators of Magnolia’s assets) or conditions others have caused, or for the Company’s acts that complied with all applicable requirements when they were performed. The Company could incur capital, operating, maintenance, and remediation expenditures as a result of environmental laws and regulations. New laws have been enacted, and regulations are being adopted by various regulatory agencies on a continuing basis, and the costs of compliance with these new laws and regulations can only be broadly appraised until their implementation becomes more defined.
COVID-19 Pandemic
The COVID-19 pandemic and related economic repercussions have created significant volatility, uncertainty, and turmoil in the oil and natural gas industry. As the global economy continues to recover from the effects of the COVID-19 pandemic, economic indicators have continued to strengthen. However, the economy is experiencing elevated inflation levels as a result of global supply and demand imbalances. Elevated inflation levels have resulted in increased capital and oilfield service costs and continued inflationary pressures and labor shortages could result in further increases to the Company’s operating and capital costs.
Air and Climate Change
Environmental advocacy groups and regulatory agencies inThe threat of climate change continues to attract considerable attention globally. In the United States, and other countries have focused considerable attentionno comprehensive climate change legislation regulating the emission of greenhouse gases or directly imposing a price on carbon has been implemented at the federal level. However, following the U.S. Environmental Protection Agency (the “EPA”) determination that emissions of carbon dioxide, methane, and other greenhouse gases (“GHG”) present an endangerment to public health and their potential rolewelfare in climate change. The federal Clean Air Act (the “CAA”) and comparable state laws restrictDecember 2009, the emission of air pollutantsEPA adopted regulations in 2011 to regulate GHG emissions from manycertain large stationary sources, through the imposition of air emissions standards, construction and operating permitting programs, and other compliance requirements. These requirements may result in increased operating costs as a result of the need to install emission control devices or increased emission monitoring and reporting requirements. For example, the U.S. Environmental Protection Agency (the “EPA”) has adopted rules requiringrequire the monitoring and annual reporting of GHG emissions from certain sources, and (together with the National Highway Traffic Safety Administration), implement GHG emissions limits on vehicles manufactured for operation in the United States, among other things. President Biden has highlighted addressing climate change as a priority of his administration, and federal regulators, state and local governments, and private parties have taken (or announced that they plan to take) actions that have or may have a significant influence on the Company’s operations. The Biden Administration has also issued several executive orders that have, among others, recommitted the United States to the Paris Agreement, called for a government-wide approach to addressing climate change, and called for the reinstatement or issuance of methane emissions standards for new, modified, and existing oil and gas facilities. On November 15, 2021, the EPA proposed a new rule intended to reduce methane emissions from oil and gas sources. The proposed rule would make the existing regulations in Subpart OOOOa more stringent and create a Subpart OOOOb to expand and strengthen emissions reduction requirements that are currently effective for new, modified and reconstructed oil and natural gas sources. In addition, the proposed rule would establish “Emissions Guidelines,” creating a Subpart OOOOc that would require states to develop plans to reduce methane emissions from existing sources that must be at least as effective as presumptive standards set by the EPA. Under the proposed rule, states would have three years to develop their compliance plan for existing sources and the regulations for new sources would take effect immediately upon issuance of a final rule. On November 11, 2022, the EPA issued a proposed supplementing rule to the November 2021 proposed rule. Among other things, the November 2022 supplemental proposed rule removes an emissions monitoring exemption for small wellhead-only sites and creates a new third-party monitoring program to flag large emissions events, referred to in the proposed rule as “super emitters”. The EPA is expected to issue a final rule by August 2023. Additionally, in August 2022, President Biden signed into law the Inflation Reduction Act of 2022. Among other things, the Inflation Reduction Act includes a methane emissions reduction program that amends the Clean Air Act to include a Methane Emissions and Waste Reduction Incentive Program for petroleum and natural gas system sources in the U.S., including, among others, onshore and offshore production facilities, which include certain of Magnolia’s assets. Separately, in June 2016,systems. This program requires the EPA published performance standards that establish new controls, known as Subpart OOOOa, forto impose a “waste emissions of methane from new, modified, or reconstructed sources in thecharge” on certain oil and natural gas sector, including production, processing, transmission,sources that are already required to report under EPA’s Greenhouse Gas Reporting Program. As a result of these regulatory changes, the scope of any final methane regulations or the costs for complying with federal methane regulations are uncertain. Additional climate-related regulations have been passed by several states, and storage activities.additional laws may be implemented at the federal, state, or local levels. Please see “Risk Factors”“Risk Factors” in Item 1A in this Annual Report on Form 10-K for further discussion of risks related to climate change and the regulation of methane emissions and GHGs.
Separately, the EPA finalized a more stringent National Ambient Air Quality Standard (“NAAQS”) for ozone in October 2015 and completed attainment/nonattainment designations in 2018. State implementation of the revised NAAQsNAAQS in the areas in which Magnolia operates could result in increased costs for emission controls and requirements for additional monitoring and testing, as well as a more cumbersome permitting process. Failure to comply with air quality regulations may also result in administrative, civil, and/or criminal penalties for non-compliance.
Hydraulic Fracturing Activities
Hydraulic fracturing is an important and common practice that is used to stimulate production of oil and/or natural gas from dense subsurface rock formations. The hydraulic fracturing process involves the injection of water, proppants, and chemicals under pressure into targeted subsurface formations to fracture the surrounding rock and stimulate production. Hydraulic fracturing is regularly used by operators of Magnolia’s assets. Hydraulic fracturing is typically regulated by state oil and natural gas commissions, but the EPA has asserted federal regulatory authority pursuant to the U.S. Safe Drinking Water Act (“SDWA”) over certain hydraulic fracturing activities involvingaspects of the use of diesel fuels and published permitting guidance in February 2014 addressing the performance of such activities using diesel fuels. The EPA has issued final regulations under the CAA establishing performance standards,process, including standards for the capture of air emissions, released during hydraulic fracturing fluid constituents, and also finalized rules under the CWA in June 2016 that prohibit the discharge of wastewater from hydraulic fracturing operations to publicly owned wastewater treatment plants.disposal, among others.
At the state level, several states have adopted, or are considering adopting, legal requirements that could impose more stringent permitting, disclosure, and well construction requirements on hydraulic fracturing activities. For example, the Texas Railroad Commission has adopted a “well integrity rule,” which updated the requirements for drilling, putting pipe down, and cementing wells. The rule also imposes new testing and reporting requirements, such as (i) the requirement to submit cementing reports after well completion or after cessation of drilling, whichever is later, and (ii) the imposition of additional testing on wells less than 1,000 feet below usable groundwater. Local governments also may seek to adopt ordinances within their jurisdictions regulating the time, place, and manner of drilling activities in general or hydraulic fracturing activities in particular.
Compliance with existing laws has not had a material adverse effect on operations related to Magnolia’s assets, but if new or far more stringent federal, state, or local legal restrictions relating to the hydraulic fracturing process are adopted in areas where Magnolia’s assets are located, operators could incur potentially significant added costs to comply with such requirements, experience delays or curtailment in the pursuit of development activities, and perhaps even be precluded from drilling wells.
Water
The federal Clean Water Act (“CWA”), and analogous state laws, impose restrictions and strict controls with respect to the discharge of pollutants, including spills and leaks of oil and hazardous substances, into state waters and waters of the United States. The discharge of pollutants into regulated waters is prohibited, except in accordance with the terms of a permit issued by the EPA or an analogous state agency. Federal and state regulatory agencies can impose administrative, civil, and criminal penalties for non-compliance with discharge permits or other requirements of the CWA and analogous state laws and regulations. The CWA also prohibits the discharge of dredge and fill material in regulated waters, including wetlands, unless authorized by permit. In September 2015,On January 18, 2023, the EPA andpublished the U.S. Army Corps of Engineers (“Corps”) issued new rules defining the scope of the EPA’s and the Corps’ jurisdiction under the CWA with respect to certain types of waterbodies and classifying these waterbodies as regulated wetlands (the “WOTUS rule”). However, following the change in presidential administrations, there have been several attempts to modify this rule. For example, on January 23, 2020, the EPA and the Corps finalized the Navigable Waters Protection Rule,final rule which narrowsrevised the definition of “waters“Waters of the United States” relative to. Magnolia is evaluating the prior 2015 rulemaking. Legal challenges to the new rule are expected, and multiple challenges to the EPA’s
prior rulemaking remain pending.impact of these changes on its operations. To the extent any finalthe rule expands the scope of the CWA’s jurisdiction, Magnolia could face increased permitting costs and project delays.
In addition, Magnolia may be required under the CWA to obtain and maintain approvals or permits for the discharge of wastewater or storm water and are required to develop and implement spill prevention, control, and countermeasure plans, also referred to as “SPCC plans,” in connection with on-site storage of significant quantities of oil.
Hazardous Substances and Waste Handling
The Comprehensive Environmental Response, Compensation and Liability Act (the “CERCLA”(“CERCLA”), also known as the “Superfund” law, and comparable state laws impose liability, without regard to fault or the legality of the original conduct, on certain classes of persons that are considered responsible for the release of a “hazardous substance” into the environment. These persons include the current and past owner or operator of the disposal site or the site where the release occurred and persons that disposed or arranged for the disposal or the transportation for disposal of the hazardous substances at the site where the release occurred.
The Resources Conservation and Recovery Act (the “RCRA”(“RCRA”) and analogous state laws, impose detailed requirements for the generation, handling, storage, treatment, and disposal of nonhazardous and hazardous solid wastes. RCRA specifically excludes drilling fluids, produced waters, and other wastes associated with the development or production of crude oil, natural gas, or geothermal energy from regulation as hazardous wastes. However, these wastes may be regulated by the EPA or state agencies under RCRA’s less stringent nonhazardous solid waste provisions, state laws or other federal laws. It is, however, possible that certain oil and natural gas drilling and production wastes now classified as non-hazardous could be classified as hazardous wastes in the future. For example, in December 2016, the EPA and environmental groups entered into a consent decree to address the EPA’s alleged failure to timely assess its RCRA Subtitle D criteria regulations exempting certain exploration and production related oil and natural gas wastes from regulation as hazardous wastes under RCRA. The consent decree requires the EPA to propose a rulemaking no later than March 15, 2019 for revision of certain Subtitle D criteria regulations pertaining to oil and natural gas wastes or to sign a determination that revision of the regulations is not necessary. Due to the government shutdown, the deadline was extended, and in April 2019, the EPA signed a determination that revision of the regulations is not necessary at this time. However, it is possible that these particular oil and natural gas development and production wastes now classified as nonhazardous solid wastes could be classified as hazardous wastes in the future. A loss of the RCRA exclusion for drilling fluids, produced waters, and related wastes could result in an increase in the costs to manage and dispose of generated wasteswastes.
Endangered Species Act
The Endangered Species Act (the “ESA”) and (in some cases) comparable state laws were established to protect endangered and threatened species. Pursuant to the ESA, if a species is listed as threatened or endangered, restrictions may be imposed on activities adversely affecting that species’ habitat. The U.S. Fish and Wildlife Service may designate critical habitat and suitable habitat areas that it believes are necessary for survival of a threatened or endangered species. A critical habitat or suitable habitat designation could result in further material restrictions to land use and may materially delay or prohibit land access for oil and natural gas development. The identification or designation of previously unprotected species as threatened or endangered in areas where underlying property operations are conducted could cause increased costs arising from species protection measures or could result in limitations on development activities that could have an adverse impact on the ability to develop and produce reserves within Magnolia’s assets. If a portion of Magnolia’s assets were to be designated as a critical or suitable habitat, it could adversely impact the value of its assets.
OSHA
Magnolia is subject to the requirements of the Occupational Health and Safety Act (“OSHA”) and comparable state statutes whose purpose is to protect the health and safety of workers. Violations can result in civil or criminal penalties as well as required abatement. In addition, the OSHA hazard communication standard, the Emergency Planning and Community Right-to-Know Act, and comparable state statutes, and any implementing regulations require that Magnolia organizesmaintain and/or disclosesdisclose information about hazardous materials used or produced in its operations and that this information be provided to employees, state and local governmental authorities, and citizens.
Related Permits and Authorizations
Many environmental laws require permits or other authorizations from state and/or federal agencies before initiating certain drilling, construction, production, operation, or other oil and natural gas activities, and require maintaining these permits and
compliance with their requirements for on-going operations. These permits are generally subject to protest, appeal, or litigation, which could in certain cases delay or halt projects and cease production or operation of wells, pipelines, and other operations related to Magnolia’s assets.
Human Capital Disclosures
EmployeesMagnolia’s Human Capital Philosophy
The experience and expertise of Magnolia’s employees is critical to the Company’s ability to create value for investors by growing the Company’s asset platform, generating free cash flow, maintaining financial flexibility, and ensuring thoughtful capital allocation. Magnolia seeks to attract, develop, and retain highly qualified individuals who are committed to helping Magnolia enhance its position as an investment of choice with a broad shareholder base, an employer of choice with a winning culture, and an operator of choice with best-in-class assets. The Company’s Nominating and Corporate Governance Committee is responsible for oversight over Magnolia’s ESG policies and practices, which may include but is not limited to those related to certain safety, social responsibility, philanthropy and other human capital issues.
Growing and Supporting the Magnolia Team
To achieve the Company’s goals, Magnolia seeks to attract, develop, and retain highly qualified individuals who will embrace Company values and think like Magnolia owners. On December 31, 2022, Magnolia had 213 employees with 87 of those employees located in the Company’s field offices in Giddings and Gillett, Texas and 126 located at Magnolia’s corporate headquarters in Houston, Texas.
Magnolia offers a workplace flexibility program designed to support its business operations while giving eligible employees flexibility to work where they can be most productive. Under the program, eligible employees in the Houston office can telecommute for up to two days a week, as approved by their leader. The Company provides employees with technology and tools to ensure they can work effectively from home, including monitors, headsets, and cameras.
In 2022, the Company launched an Education Assistance Program designed to provide eligible employees with financial assistance to support their pursuit of a business-related education or professional certification.
Valuing Diversity
Magnolia is committed to creating and maintaining a workplace in which all employees have an opportunity to participate and contribute to the success of the business and are valued for their expertise, experiences, and ideas. A key human capital priority is to hire the most qualified individuals while promoting the Company’s workforce diversity. This commitment to diversity is critical to Magnolia’s culture, reputation, and success.
As an Equal Employment Opportunity employer, Magnolia makes employment decisions based on business need, job requirements, and individual qualifications, without regard to race, religion, color, national origin, gender, pregnancy, sexual orientation, gender identity, age, status as an individual with a disability, or any other status protected by the laws or regulations in the locations where it operates. Magnolia is committed to a work environment in which all individuals are treated with respect and dignity and are free from all forms of harassment and discrimination.
As of December 31, 2019,2022, 25% of Magnolia’s total employee population were female and 30% identified as a minority group, as defined by the U.S. Equal Employment Opportunity Commission. At the Company’s headquarters location in Houston, Texas, 39% of Magnolia’s employees were female and 37% identified as a minority group. At Magnolia’s Giddings and Gillett, Texas locations, combined, 6% of Magnolia’s employees were female and 20% identified as a minority group.
Ensuring the Health and Safety of the Magnolia had approximately 45Team
At Magnolia, safety is a core value, and the Company is committed to taking proactive measures to minimize health and safety risks to employees on all Company worksites. Magnolia tracks key safety metrics, including employee recordables, lost time incidents, total recordable incident rate, and contractor recordables. In addition to these common lagging indicators, the Company also tracks leading indicators such as safety observations and near-miss reports. The Company uses internal and third-party applications to collect and monitor safety data and track its performance against its metrics through the HSER Safety Scorecard and other measures.
The Magnolia Good Catch Program recognizes employees who identify and submit potential safety or environmental issues before they arise. The Company reviews employee submissions each month and provide recognition and monetary awards for the
most impactful submission. The Company then recognizes the most significant of these monthly submissions through its yearly Great Catch Awards, where award winners receive recognition and a monetary award.
The Company recognizes that employee training is important to achieving its goals and maintaining safe operations. In 2022, its full-time employees. Additionally, pursuantfield employees each received an average of 37 hours of safety training designed to enhance their skills. Team members at the Company’s field locations are assigned computer-based training courses monthly covering a variety of safety and environmental subjects that are pertinent to their daily activities, including electrical safety, respiratory protection, heat stress prevention, and personal protective equipment. Training and skills development continue at Magnolia’s monthly leader-led safety meetings, which are conducted in person at its two field locations or virtually. At these meetings, teams review pertinent safety incidents and corrective actions, discuss specific safety topics in depth, and receive updates on safety performance metrics.
Finally, the Company maintains comprehensive emergency response and crisis communication plans at both the field and corporate level. These plans are based on the standardized Incident Command System. Magnolia conducts periodic simulated emergency situations and corporate-level drills to test these plans and continue to improve its team’s capabilities to respond effectively in the event of an incident at a work location.
Strengthening Local Communities
In support of Magnolia’s commitment to strengthen the local communities where it operates, Magnolia makes a $1,000 donation annually on each employee’s behalf to the Services Agreement, EVOCcharitable organization of their choice. In 2022, employees across the Company directed nearly $193,000 in donations to local and its employees providenational non-profits. Contributions went to a variety of health and human services organizations, faith-based groups, educational institutions, and charities providing services to children and young adults, among other causes.
In addition to employee-directed contributions, Magnolia’s Field Giving Program provides direct donations to non-profit organizations in local communities where Magnolia operates. In 2022, Magnolia’s field teams donated more than $23,000 to 18 organizations. Organizations supported included local volunteer fire departments and school districts, food banks, and county constable’s offices as well as scholarship funds associated with day-to-day services reasonably necessary to operate its assets. Magnolia is not a party to any collective bargaining agreementslocal rodeos, fairs, and has not experienced any strikes or work stoppages. Magnolia considers its relations with its employees to be satisfactory. other community events.
Item 1A. Risk Factors
The nature of Magnolia’s business activities subjects the Company to certain hazards and risks. The following risks and uncertainties, together with other information set forth in this Annual Report on Form 10-K, should be carefully considered by current and future investors in the Company’s securities. These risks and uncertainties are not the only ones Magnolia faces. Additional risks and uncertainties presently unknown to Magnolia, or currently deemed immaterial, also may impair the Company’s business operations. The occurrence of one or more of these risks or uncertainties could materially and adversely affect the Company’s business, its financial condition, and the results of Magnolia’s operations, which in turn could negatively impact the value of the Company’s securities.
Risks Related to the Ongoing COVID-19 Pandemic
COVID-19 and other pandemic outbreaks could negatively impact Magnolia’s business and results of operations.
The Company may face additional risks related to the resurgence of COVID-19 or the emergence of any other pandemic. Any preventative or protective actions that the Company, its customers, or governmental authorities may take in response to COVID-19 or other pandemics may result in a period of disruption, including with respect to the Company’s financial reporting capabilities and its operations generally, and could potentially impact the Company’s customers, distribution partners, and third parties. For example, China’s strict lockdown measures as a result of COVID-19 have put downward pressure on the demand for oil and gas, which may materially and adversely affect Magnolia’s financial condition and results of operations. Any resulting impacts from the resurgence of the COVID-19 pandemic cannot be reasonably estimated, and may materially affect the business and the Company’s financial condition and results of operations. The extent and duration of such impacts will depend on future developments, which are highly uncertain and cannot be predicted, including, among others, new information which may emerge concerning the severity of, and the actions to contain or curb the impact of the resurgence of COVID-19 variants thereof, or any other pandemic.
The marketability of Company production is dependent upon market demand, vehicles, transportation and storage facilities, and other facilities, most of which the Company does not control. If these vehicles or facilities are unavailable, or if the Company is unable to access such vehicles or facilities on commercially reasonable terms, operations could be interrupted, production could be curtailed or shut in, and revenues could be reduced.
The marketing of oil, natural gas, and NGL production depends in large part on the availability, proximity, and capacity of trucks, pipelines, and storage facilities, natural gas gathering systems, and other transportation, processing, and refining facilities, as well as the existence of adequate markets. If there is a resurgence of the COVID-19 outbreak, or if variants of COVID-19 continue to emerge, across the United States and other locations across the world and the related responsive measures due to the pandemic are renewed or newly imposed, and if such events reduce demand for oil and natural gas, available storage and transportation capacity for the Company’s production may be limited or unavailable in the future. If there is insufficient capacity, if the capacity is unavailable to the Company, or if the capacity is unavailable on commercially reasonable terms, the prices Magnolia receives for its production could be significantly depressed.
As a result of future storage and/or market shortages, the Company could be forced to temporarily shut in some or all of its production or delay or discontinue drilling plans and commercial production following a discovery of hydrocarbons while the Company constructs or purchases its own facilities or system or is able to locate necessary storage and transportation. If the Company is forced to shut in production, it may incur greater costs to bring the associated production back online. Potential cost increases associated with bringing wells back online may be significant enough that such wells may become non-economic at low commodity price levels, which may lead to decreases in proved reserve estimates and potential impairments and associated charges to earnings. If the Company is able to bring wells back online, there is no assurance that such wells will be as productive following recommencement as they were prior to being shut in. Should sustained periods of lower oil and natural gas prices return, the Company may shut in wells or curtail production.
Risks Related to Magnolia’s Overall Business Operations
Oil, natural gas, and NGL prices are volatile. A sustained period of low oil, natural gas, and NGL prices could adversely affect Magnolia’s business, financial condition, results of operations, and ability to meet its expenditure obligations and financial commitments.
The prices Magnolia receives for its oil, natural gas, and NGL production will heavily influence its revenue, profitability, access to capital, future rate of growth, and the carrying value of its properties. Oil, natural gas, and NGLs are commodities, and their
prices may fluctuate widely in response to market uncertainty and to relatively minor changes in the supply of and demand for oil, natural gas, and NGLs. Historically, oil, natural gas, and NGL prices have been volatile. Likewise, NGLs, which are made up of ethane, propane, isobutane, normal butane, and natural gasoline, each of which has different uses and pricing characteristics, have suffered significant recent declines in realized prices. The prices Magnolia receives for its production and the levels of Magnolia’s production depend on numerous factors beyond Magnolia’s control, which include, without limitation, the following:
•the economic effects of the COVID-19 pandemic and actions taken by federal, state and local governments and other third parties in response to the pandemic;
•U.S. federal, state, local, and non-U.S. governmental regulation and taxes;
•worldwide and regional economic conditions impacting the global supply and demand for oil, natural gas, and NGLs;
•the price and quantity of foreign imports of oil, natural gas, and NGLs;
•political and economic conditions in or affecting other producing regions or countries, including the Middle East, Africa, South America, and Russia;
•actions of the Organization of the Petroleum Exporting Countries,OPEC, its members, and other state- controlledstate-controlled oil companies relating to oil price and production controls;
•the level of global exploration, development, and production;
•the level of global inventories;
•prevailing prices on local price indexes in the areas in which Magnolia operates;
•the proximity, capacity, cost, and availability of gathering, transportation, and transportationprocessing facilities;
•localized and global supply, demand fundamentals, and transportation availability;
•the cost of exploring for, developing, producing, and transporting reserves;
•weather conditions and natural disasters;
•inflation rates;
•technological advances affecting energy consumption;
•the price and availability of alternative fuels;
•expectations about future commodity prices; and
•other events that impact global market demand; anddemand.
U.S. federal, state, local, and non-U.S. governmental regulation and taxes.
Lower commodity prices may reduce Magnolia’s cash flow and borrowing ability. If Magnolia is unable to obtain needed capital or financing on satisfactory terms, its ability to acquire and develop future reserves could be adversely affected. Also, using lower prices in estimating proved reserves may result in a reduction in proved reserves volumes due to economic limits. In addition, sustained periods with lower oil and natural gas prices may adversely affect drilling economics and Magnolia’s ability to raise capital, which may require it to re-evaluate and postpone or eliminate its development program, and result in the reduction of some proved undeveloped reserves and related standardized measure. If Magnolia is required to curtail its drilling program, Magnolia may be unable to hold leases that are scheduled to expire, which may further reduce reserves. As a result, a substantial or extended decline in commodity prices may materially and adversely affect Magnolia’s future business, financial condition, results of operations, liquidity, and ability to finance planned capital expenditures.
Magnolia has not entered into hedging arrangements with respect to the oil, natural gas, and NGL production from its properties, and Magnolia will be exposed to the impact of decreases in the price of oil, natural gas, and NGLs.
Magnolia has not entered into hedging arrangements to establish, in advance, a price for the sale of the oil, natural gas, and NGLs it produces. As a result, Magnolia will not be protected against decreases in such prices, and if such prices decrease significantly,Inflation may adversely affect Magnolia’s business, results of operations, and cash flow may befinancial condition.
Magnolia is in an industry that has experienced inflationary pressures on operating costs - namely fuel, steel (i.e., wellbore tubulars and facilities manufactured using steel), labor, and drilling and completion services. Such inflationary pressures have resulted from supply chain disruptions caused by the COVID-19 pandemic, increased demand, labor shortages and other factors, including the conflict between Russia and Ukraine which began in late February 2022. Supply chain disruptions have been further exacerbated by the recent resurgence of the COVID-19 pandemic in certain parts of China, which resulted in the temporary closure of manufacturing facilities in certain parts of China. While supply chain disruptions and inflation have not materially adversely affected.
affected Magnolia’s development projects and acquisitions require substantial capital expenditures.operating results to date, if Magnolia may beis unable to obtain required capital or financing on satisfactory terms, which could lead to a declinepass any increases in its abilitycosts of operations along to access or grow production and reserves.
The oil and natural gas industry is capital-intensive. Magnolia makes, and expects to continue to make, substantial capital expenditures related to development and acquisition projects. Magnolia has funded, and expects to continue to fund, its capital budget with cash generated by operations and potentially through borrowings under Magnolia’s secured reserve-based revolving credit facility (the “RBL Facility”). However, Magnolia’s financing needs may requirecustomers, it to alter or increasecould adversely affect its capitalization substantially through the issuance of debt or equity securities or the sale of assets. The issuance of additional indebtedness would require that an additional portion of cash flow from operations be used for the payment of interest and principal on its indebtedness, thereby further reducing its ability to use cash flow from operations to fund working capital, capital expenditures, and acquisitions. The issuance of additional equity securities would be dilutive to existing stockholders. The actual amount and timing ofoperating results. In addition, any projected future capital expenditures may differ materially from estimates as a result of, among other things: commodity prices; actual drilling results; the availability of drilling rigs and other services and equipment; and regulatory, technological, and competitive developments. A reductiondecreases in commodity prices from current levels may result in a decrease in actual capital expenditures, which would negatively impact Magnolia’s ability to grow production.
Magnolia’s cash flow from operations and access to capital is subject to a number of variables, including:
the prices at which Magnolia’s production is sold;
proved reserves;
the amount of hydrocarbons Magnolia is able to produce from its wells;
Magnolia’s ability to acquire, locate, and produce new reserves;
the amount of Magnolia’s operating expenses;
Magnolia’s abilityresults due to borrow under the RBL Facility;
restrictions in the instruments governing Magnolia’s debt, and Magnolia’s ability to incur additional indebtedness; and
Magnolia’s ability to access the capital markets.
If Magnolia’s revenues or the borrowing base under the RBL Facility decrease as a result of lower oil, natural gas, and NGL prices, operational difficulties, declines in reserves or for any other reason, Magnolia may have limited ability to obtain the capital necessary to sustain operations at current levels. If additional capital is needed, Magnolia may not be able to obtain debt or equity financing on terms acceptable to it, if at all. If cash flow generated by Magnolia’s operations or available borrowings under the RBL Facility are insufficient to meet its capital requirements, the failure to obtain additional financinginflation could result in a curtailment of the development of Magnolia’s properties, which in turn could lead to a decline in reserves and production and could materially and adversely affect Magnolia’s future business, financial condition, and results of operations. If Magnolia incurs additional indebtedness, the operational risks that Magnolia faces could intensify,operations, liquidity, and Magnolia may be unableability to service its existing debt service obligations.finance planned capital expenditures.
Part of Magnolia’s business strategy involves using some of the latest available horizontal drilling and completion techniques, which involve risks and uncertainties in their application.
Magnolia’s operations involve utilizing some of the latest drilling and completion (“D&C”) techniques. The difficulties Magnolia faces drilling horizontal wells include:
include landing its wellbore in the desired drilling zone;
zone, staying in the desired drilling zone while drilling horizontally through the formation;
formation, running its casing the entire length of the wellbore;wellbore, and
being able to run tools and other equipment consistently through the horizontal wellbore.
DifficultiesThe difficulties that Magnolia faces while completing its wells include the following:
the ability to fracture stimulate the planned number of stages;
stages, the ability to run tools the entire length of the wellbore during completion operations;operations, and
the ability to successfully clean out the wellbore after completion of the final fracture stimulation stage.
Use of new technologies may not prove successful and could result in significant cost overruns or delays or reductions in production, and, in extreme cases, the abandonment of a well. In addition, certain of the new techniques may cause irregularities or interruptions in production due to offset wells being shut in and the time required to drill and complete multiple wells before any such wells begin producing. Furthermore, the results of drilling in new or emerging formations are more uncertain initially than drilling results in areas that are more developed and have a longer history of established production. Newer and emerging formations and areas have limited or no production history and, consequently, Magnolia may be more limited in assessing future drilling results in these areas. If its drilling results are less favorable than anticipated, the return on investment for a particular project may not be as attractive as anticipated, and Magnolia could incur material write-downs of unevaluated properties, and the value of undeveloped acreage could decline in the future.
For example, potential complications associated with the new D&C techniques that Magnolia utilizes may cause Magnolia to be unable to develop its assets in line with current expectations and projections. Further, Magnolia’s recent well results may not be indicative of its future well results.
Drilling for and producing oil and natural gas are high risk activities with many uncertainties that could adversely affect Magnolia’s business, financial condition, or results of operations.
Magnolia’s future financial condition and results of operations will depend on the success of its development, production, and acquisition activities, which are subject to numerous risks beyond its control, including the risk that drilling will not result in commercially viable oil and natural gas production.
Magnolia’s decisions to develop or purchase prospects or properties will depend, in part, on the evaluation of data obtained through geophysical and geological analysis, production data, and engineering studies, which are often inconclusive or subject to varying interpretations. For a discussion of the uncertainty involved in these processes, see “Crude oil, natural gas, and NGL reserves are estimates, and actual recoveries may vary significantly.” In addition, the cost of drilling, completing, and operating wells is often uncertain.
Further, many factors may curtail, delay, or cancel scheduled drilling projects, including:
•delays imposed by, or resulting from, permitting activities, compliance with regulatory requirements, including limitations on wastewater disposal, emission of greenhouse gases (“GHGs”), and hydraulic fracturing;
•pressure or irregularities in geological formations;
•sustained periods of low oil and natural gas prices;
•shortages of or delays in obtaining equipment and qualified personnel or in obtainingpersonnel;
•access to water for hydraulic fracturing activities;activities and waste disposal or recycling services at a reasonable cost and in accordance with applicable environmental regulations;
•equipment failures, accidents, or other unexpected operational events;
•lack of available gathering facilities or delays in construction of gathering facilities;
•lack of available capacity on interconnecting transmission pipelines;
•adverse weather conditions;
•issues related to compliance with environmental regulations;
•environmental or safety hazards, such as oil and natural gas leaks, oil spills, pipeline and tank ruptures, and unauthorized discharges of brine, well stimulation and completion fluids, toxic gases, or other pollutants into the surface and subsurface environment;
•limited availability of financing on acceptable terms;
•title issues; and
•other market limitations in Magnolia’s industry.industry;
•the economic effects of the COVID-19 pandemic and actions taken by federal, state and local governments and other third parties in response to the pandemic; and
•changes in the supply chain of the Company’s vendors that may adversely impact the supply of key components.
Crude oil, natural gas, and NGL reserves are estimates, and actual recoveries may vary significantly.
The process of estimating oil and natural gas reserves is complex. It requires interpretations of available technical data and many assumptions, including assumptions relating to current and future economic conditions and commodity prices. Any significant inaccuracies in these interpretations or assumptions could materially affect the estimated quantities and present value of reserves. In order to prepare the reserve estimates, Magnolia must project production rates and timing of development expenditures. The Company must also analyze available geological, geophysical, production, and engineering data. The extent, quality, and reliability of this data can vary. The process also requires economic assumptions about matters such as oil and natural gas prices, drilling and operating expenses, capital expenditures, taxes, and availability of funds. Magnolia cannot assure you that its management team’s assumptions
with respect to projected production and/or the timing of development expenditures will not materially change in subsequent periods. Magnolia’s management team and board may determine to secure and deploy development capital at a faster or slower pace than currently assumed.
Actual future production, oil prices, natural gas prices, NGL prices, revenues, taxes, development expenditures, operating expenses, and quantities of recoverable oil and natural gas reserves may vary from Magnolia’s estimates. For instance, initial production rates reported by Magnolia or other operators may not be indicative of future or long-term production rates, recovery efficiencies may be worselower than expected, and production declines may be greater than anticipated and may be more rapid and irregular when compared
to initial production rates. In addition, estimates of proved reserves may be adjusted to reflect additional production history, results of development activities, current commodity prices, and other existing factors. Any significant variance could materially affect the estimated quantities and present value of reserves. Moreover, there can be no assurance that reserves will ultimately be produced or that proved undeveloped reserves will be developed within the periods anticipated.
Actual future prices and costs may differ materially from those used in the present value estimate. If spot prices are below such calculated amounts, using more recent prices in estimating proved reserves may result in a reduction in proved reserve volumes due to economic limits.
The standardized measure of estimated reserves may not be an accurate estimate of the current fair value of estimated oil and natural gas reserves.
The standardized measure is a reporting convention that provides a common basis for comparing oil and natural gas companies subject to the rules and regulations of the SEC. The standardized measure requires historical twelve-month12-month pricing as required by the SEC as well as operating and development costs prevailing as of the date of computation. Consequently, it may not reflect the prices ordinarily received or that will be received for oil and natural gas production because of varying market conditions, and it also may not reflect the actual costs that will be required to produce or develop the oil and natural gas properties. In addition, the sellers in the Business Combination wereMagnolia LLC Unit Holders are generally not subject to U.S. federal, state, or local income taxes other than certain state franchise taxes. Magnolia is subject to U.S. federal, state, and local income taxes. As a result, estimates included in this Annual Report on Form 10-K of future net cash flow may be materially different from the future net cash flows that are ultimately received. Therefore, the standardized measure of estimated reserves included in this Annual Report on Form 10-K should not be construed as accurate estimates of the current fair value of such proved reserves.
Properties Magnolia has acquired or will acquire may not produce as projected, and Magnolia may be unable to determine reserve potential, identify liabilities associated with such properties, or obtain protection from sellers against such liabilities.
Acquiring oil and natural gas properties requires Magnolia to assess reservoir and infrastructure characteristics, including recoverable reserves, future oil and natural gas prices and their applicable differentials, development and operating costs, and potential liabilities, including environmental liabilities. In connection with these assessments, Magnolia performs a review of the subject properties that it believes to be generally consistent with industry practices. Such assessments are inexact and inherently uncertain. For these reasons, the properties Magnolia has acquired or will acquire may not produce as expected. In connection with the assessments, Magnolia performs a review of the subject properties, but such a review may not reveal all existing or potential problems. In the course of due diligence, Magnolia may not review every well, pipeline, or associated facility. Magnolia cannot necessarily observe structural and environmental problems, such as groundwater contamination, when a review is performed. Magnolia may be unable to obtain or successfully enforce contractual indemnities from the seller for liabilities created prior to Magnolia’s purchase of the property. Magnolia may be required to assume the risk of the physical condition of the properties in addition to the risk that the properties may not perform in accordance with its expectations. Additionally, the success of future acquisitions will depend on Magnolia’s ability to integrate effectively the then-acquired business into its then-existing operations. The process of integrating acquired assets may involve unforeseen difficulties and may require a disproportionate amount of managerial and financial resources. Magnolia’s failure to achieve consolidation savings, to incorporate the additionally acquired assets into its then-existing operations successfully, or to minimize any unforeseen operational difficulties, or the failure to acquire future assets at all, could have a material adverse effect on its financial condition and results of operations.
Because Magnolia has a limited operating history, it may be difficult to evaluate its ability to successfully implement its business strategy.
Because of Magnolia’s limited operating history, the operating performance of its future assets and business strategy are not yet proven. As a result, it may be difficult to evaluate Magnolia’s business and results of operations to date and to assess its future prospects. In addition, Magnolia may encounter risks and difficulties experienced by companies whose performance is dependent upon recently acquired assets, such as failing to operate its assets as expected, higher than expected operating costs, equipment breakdown or failures, and operational errors. Further, Magnolia’s assets are operated on a day-to-day basis by EVOC’s employees pursuant to the Services Agreement, and Magnolia may be less involved in the day-to-day operations of the assets. As a result of the foregoing, Magnolia may be less successful in achieving a consistent operating level capable of generating cash flows from operations as compared to a company that has had a longer operating history. In addition, Magnolia may be less equipped to identify and address operating risks and hazards in the conduct of its business than those companies that have had longer operating histories.
Magnolia is not the operator on all of its acreage or drilling locations, and, therefore, is not able to control the timing of exploration or development efforts, associated costs, or the rate of production of any non-operated assets and could be liable for certain financial obligations of the operators or any of its contractors to the extent such operator or contractor is unable to satisfy such obligations.
Magnolia conducts many of its exploration and production operations through joint operating agreements with other parties under which the Company may not control decisions, either because the Company does not have a controlling interest or is not an operator under the subject agreement. There is risk that these parties may at any time have economic, business, or legal interests or
goals that are inconsistent with Magnolia’s, and therefore decisions may be made that are not what the Company believes are in its best interest. Moreover, parties to these agreements may be unable or unwilling to meet their economic or other obligations, and Magnolia may be required to fulfill those obligations alone. In either case, the value of Magnolia’s investment may be adversely affected.
Magnolia’s use of a contract operator to operate its assets may adversely affect Magnolia’s business.
EVOC provides certain oil and gas operating services, including providing operating services for the substantial majority of Magnolia’s assets under the Services Agreement, the term of which extends through at least October 29, 2020, subject to possible earlier termination. There can be no assurance that Magnolia’s use of an experienced contract operator will make its operations successful.For example, EV Energy Partners, L.P., an entity that EVOC previously provided operating services for, entered bankruptcy in April of 2018. Magnolia cannot be certain that its use of EVOC to provide contract operating services will continue to be economical or that EVOC will be able or willing to provide similar or additional services to Magnolia during or after the term of the Services Agreement. In addition, other factors may exist that materially and adversely affect Magnolia’s future business, financial condition, results of operations, liquidity, and ability to finance planned capital expenditures, negating the benefits of low operating costs.
Adverse weather conditions may negatively affect Magnolia’s operating results and ability to conduct drilling activities.
Adverse weather conditions may cause, among other things, increases in the costs of, and delays in, drilling or completing new wells, power failures, temporary shut-in of production, and difficulties in the transportation of oil, natural gas, and NGLs. Any decreases in production due to poor weather conditions will have an adverse effect on revenues, which will in turn negatively affect cash flow from operations.
Magnolia’s operations are substantially dependent on the availability of water. Restrictions on its ability to obtain water may have an adverse effect on its financial condition, results of operations, and cash flows.
Water is an essential component of oil and natural gas production during both the drilling and hydraulic fracturing processes. Drought conditions have persisted in the areas where Magnolia’s assets are located in past years. These drought conditions have led governmental authorities to restrict the use of water, subject to their jurisdiction, for hydraulic fracturing to protect local water supplies. If Magnolia is unable to obtain water to use in operations, it may be unable to economically produce oil and natural gas, which could have a material and adverse effect on its financial condition, results of operations, and cash flows.
Magnolia’s producing properties are predominantly located in South Texas, making Magnolia vulnerable to risks associated with operating in a limited geographic area.
Substantially all of Magnolia’s producing properties are geographically concentrated in the Karnes County portion of the Eagle Ford Shale in South Texas and the Giddings Fieldarea of the Austin Chalk. As a result, Magnolia may be disproportionately exposed to various factors, including, among others: (i) the impact of regional supply and demand factors, (ii) delays or interruptions of production from wells in such areas caused by governmental regulation, (iii) processing or transportation capacity constraints, (iv) market limitations, (v) availability of equipment and personnel, (vi) water shortages or other drought related conditions, or (vii) interruption of the processing or transportation of oil, natural gas, or NGLs. The concentration of Magnolia’s assets in a limited geographic area also increases its exposure to changes in local laws and regulations, certain lease stipulations designed to protect wildlife and unexpected events that may occur in the regions such as natural disasters, severe weather events, seismic events, industrial accidents, or labor difficulties.
The concentration of Magnolia’s producing properties exposes Magnolia to disproportionate and adverse impacts from extreme regional weather events, which could affect the Company’s suppliers or customers. For example, a significant hurricane or similar weather event could damage refining and other oil and natural gas-related facilities on the Gulf Coast of Texas and Louisiana, which (if significant enough) could limit the availability of gathering and transportation facilities across Texas and could then cause production in the Eagle Ford Shale and Giddings area (including potentially Magnolia’s production) to be curtailed or shut in or (in the case of natural gas) flared. Any of the above-referenced events could have a material adverse effect on Magnolia. Likewise, a weather event like the severe winter storms in Texas in February 2021 could reduce the availability of electrical power, road accessibility, and transportation facilities, which could have an adverse impact on Magnolia’s production volumes. Any one of these factors has the potential to cause producing wells to be shut-in, delay operations, decrease cash flows, increase operating and capital costs, and prevent development of lease inventory before expirations. Any of the risks described above could have a material adverse effect on Magnolia’s business, financial condition, results of operations, and cash flow.
The marketabilityIn addition, the effect of Magnolia’s production is dependent upon transportationfluctuations on supply and other facilities, certain of which it does not control. If these facilities are unavailable, Magnolia’s operations could be interrupted and its revenues reduced.
The marketability of Magnolia’sdemand may become more pronounced within specific geographic oil and natural gas production depend in part uponproducing areas such as Karnes County and Austin Chalk, which may cause these conditions to occur with greater frequency or magnify the availability, proximity, and capacityeffects of transportation facilities owned by third parties. Oil production is generally transported by gathering systems, including, with respectthese conditions. Due to the Karnes County Assets, the gathering system owned by Ironwood Eagle Ford Midstream, LLC. The remaining oil is generally then transported by the purchaser by truck. Natural gas production is generally transported by third-party gathering lines and, with respect to natural gas production from the Karnes County Assets, by the gathering system owned by Ironwood Eagle Ford Midstream, LLC. Magnolia does not control allconcentrated nature of Magnolia’s portfolio of properties, a number of its properties could experience any of the trucks and transportation facilities used to transport production fromsame conditions at the properties, and access to them may be limitedsame time, resulting in a relatively greater impact on its results of operations than they might have on other companies that have a more diversified portfolio of properties. Such delays or denied. Insufficient production from wells to support the construction of pipeline facilities by purchasers orinterruptions could have a significant disruption in the availability ofmaterial adverse effect on Magnolia’s or third-party transportation facilities or other production facilities could adversely impact
Magnolia’s ability to deliver to market or produce oil and natural gas and thereby cause a significant interruption in Magnolia’s operations. If, in the future, Magnolia is unable, for any sustained period, to implement acceptable delivery or transportation arrangements or encounter production related difficulties, it may be required to shut in or curtail production. Any such shut-in or curtailment, or an inability to obtain favorable terms for delivery of the oil and natural gas produced from Magnolia’s fields, would materially and adversely affect its financial condition and results of operations.
Magnolia may incur losses as a result of title defects in the properties in which it invests.
The existence of a material title deficiency can render a lease worthless and adversely affect Magnolia’s results of operations and financial condition. While Magnolia typically obtains title opinions prior to commencing drilling operations on a lease or in a unit, the failure of title may not be discovered until after a well is drilled, in which case Magnolia may lose the lease and the right to produce all or a portion of the minerals under the property. Additionally, if an examination of the title history of a property reveals that an oil or natural gas lease or other developed right has been purchased in error from a person who is not the owner of the mineral interest desired, Magnolia’s interest would substantially decline in value. In such cases, the amount paid for such oil or natural gas lease or leases would be lost.
The development of proved undeveloped reserves may take longer and may require higher levels of capital expenditures than anticipated. Therefore, proved undeveloped reserves may not be ultimately developed or produced.
As of December 31, 2019,2022, Magnolia’s assets contained 22.531.4 MMboe of proved undeveloped reserves consisting of 12.39.4 MMBbls of oil, 31.468.5 Bcf of natural gas, and 5.010.6 MMBbls of NGLs. Development of these proved undeveloped reserves may take longer and require higher levels of capital expenditures than anticipated. Magnolia’s ability to fund these expenditures is subject to a number ofseveral risks. Magnolia may be unable to obtain required capital or financing on satisfactory terms, which could lead to a decline in its ability to access or grow production and reserves. Delays in the development of reserves, increases in costs to drill and develop such reserves, or decreases in commodity prices will reduce the value of the proved undeveloped reserves and future net revenues estimated for such reserves, and may result in some projects becoming uneconomic. In addition, delays in the development of reserves could cause Magnolia to have to reclassify proved undeveloped reserves as unproved reserves. Furthermore, there is no certainty that Magnolia will be able to convert proved undeveloped reserves to developed reserves, or that undeveloped reserves will be economically viable or technically feasible to produce.
Certain factors could require Magnolia to write-down the carrying values of its properties, including commodity prices decreasing to a level such that future undiscounted cash flows from its properties are less than their carrying value.
Accounting rules require that Magnolia periodically review the carrying value of its properties for possible impairment. Based on prevailing commodity prices, specific market factors, circumstances at the time of prospective impairment reviews, the continuing evaluation of development plans, production data, economics, and other factors, Magnolia may be required to write-down the carrying value of its properties. A write-down constitutes a non-cash impairment charge to earnings. Commodity prices have been cyclical, settling as low as $46.92 per barrel for oil on the WTI spot price and $1.75 per MMBtu on the Henry Hub spot price for natural gas in 2019. Likewise, NGLs have seen significant volatility in realized prices. Further declinesDeclines in commodity prices may adversely affect proved reserve values, which would likely result in a proved property impairment of Magnolia’s properties, which could have a material adverse effect on results of operations for the periods in which such charges are taken. Magnolia could experience material write-downs as a result of lower commodity prices or other factors, including low production results or high lease operating expenses, capital expenditures, or transportation fees.
Unless Magnolia replaces its reserves with new reserves and develops those new reserves, its reserves and production will decline, which would adversely affect future cash flows and results of operations.
Producing oil and natural gas reservoirs generally are characterized by declining production rates that vary depending upon reservoir characteristics and other factors. Unless Magnolia conducts successful ongoing exploration and development activities or continually acquires properties containing proved reserves, proved reserves will decline as those reserves are produced. Magnolia’s future reserves and production, and therefore future cash flow and results of operations, are highly dependent on Magnolia’s success in efficiently developing current reserves and economically finding or acquiring additional recoverable reserves. Magnolia may not be able to develop, find, or acquire sufficient additional reserves to replace future production. If Magnolia is unable to replace such production, the value of its reserves will decrease, and its business, financial condition, and results of operations would be materially and adversely affected.
Properties that Magnolia decides to drill may not yield oil or natural gas in commercially viable quantities.
Properties that Magnolia decides to drill that do not yield oil or natural gas in commercially viable quantities will adversely affect its results of operations and financial condition. There is no way to predict in advance of drilling and testing whether any particular prospect will yield oil or natural gas in sufficient quantities to recover drilling or completion costs or to be economically viable. The use of seismic data and other technologies and the study of producing fields in the same area will not enable Magnolia to know conclusively prior to drilling whether oil or natural gas will be present or, if present, whether oil or natural gas will be present in commercial quantities. Magnolia cannot ensure that the analogies drawn from available data from other wells, more fully explored prospects, or producing fields will be applicable to its drilling prospects. Further, Magnolia’s drilling operations may be curtailed, delayed, or canceled as a result of numerous factors, including unexpected drilling conditions, title issues, pressure or lost circulation in formations, equipment failures or accidents, adverse weather conditions, compliance with environmental and other governmental or contractual requirements, and increases in the cost of, and shortages or delays in the availability of, electricity, supplies, materials, drilling or workover rigs, equipment, and services.
Magnolia depends upon a small number of significant purchasers for the sale of most of its oil, natural gas, and NGL production. The loss of one or more of such purchasers could, among other factors, limit Magnolia’s access to suitable markets for the oil, natural gas, and NGLs it produces.
Magnolia normally sells its production to a relatively small number of customers, as is customary in the oil and natural gas
business. In 2019,2022, there were twofour purchasers who accounted for an aggregate 62%61% of the total revenue attributable to Magnolia’s assets. The loss of any significant purchaser could adversely affect Magnolia’s revenues in the short term.short-term. Magnolia expects to depend upon these or other significant purchasers for the sale of most of its oil and natural gas production. Magnolia cannot ensure that it will continue to have ready access to suitable markets for its future oil and natural gas production.
The unavailability or high cost of drilling rigs, equipment, supplies, personnel, and oilfield services could adversely affect Magnolia’s ability to execute its development plans within its budget and on a timely basis.
The demand for drilling rigs, pipe, and other equipment and supplies, as well as for qualified and experienced field personnel to drill wells and conduct field operations, geologists, geophysicists, engineers, and other professionals in the oil and gas industry, can fluctuate significantly, often in correlation with oil, natural gas, and NGL prices, causing periodic shortages of supplies and needed personnel. Magnolia’s operations are concentrated in areas in which oilfield activity levels have increased rapidly, and as a result, demand for such drilling rigs, equipment, and personnel, as well as access to transportation, processing, and refining facilities in these areas, have increased, as have the costs for those items. To the extent that commodity prices continue to increase in the future, the demand for and prices of these goods and services are likely to increase, and Magnolia could encounter delays in securing, or an inability to secure, the personnel, equipment, power, services, resources, and facilities access necessary for it to resume or increase
Magnolia’s development activities, which could result in production volumes being below its forecasted volumes. In addition, any such negative effect on production volumes, or significant increases in costs, could have a material adverse effect on cash flow and profitability. Furthermore, if it is unable to secure a sufficient number of drilling rigs at reasonable costs, Magnolia may not be able to drill all of its acreage before its leases expire.
Competition in the oil and gas industry is intense, making it more difficult for Magnolia to acquire properties, market oil or natural gas, and secure trained personnel.
Magnolia’s ability to acquire additional prospects to complement or expand the Company’s current business and to find and develop reserves in the future will depend on its ability to evaluate and select suitable properties for acquisitions and to consummate transactions in a highly competitive environment for acquiring properties, marketing oil and natural gas, and securing trained personnel. However, there is no guarantee that Magnolia will be able to identify attractive acquisition opportunities. In the event it is able to identify attractive acquisition opportunities, Magnolia may not be able to complete the acquisition or do so on commercially acceptable terms. Competition for capital available for investment in the oil and gas industry, specifically for acquisitions, may also increase the cost of, or cause Magnolia to refrain from, completing acquisitions. Many other oil and gas companies possess and employ greater financial, technical, and personnel resources than Magnolia. Those companies may be able to pay more for productive properties and exploratory prospects and to evaluate, bid for, and purchase a greater number of properties and prospects than Magnolia’s financial or personnel resources permit. Magnolia may not be able to compete successfully in the future in acquiring prospective reserves, developing reserves, marketing hydrocarbons, attracting and retaining quality personnel, and raising additional capital, which could have a material adverse effect on its business.
The loss of senior management or technical personnel could adversely affect operations.
Magnolia depends on the services of its senior management and technical personnel. Magnolia does not maintain, nor does Magnolia plan to obtain, any insurance against the loss of any of these individuals. The loss of the services of its senior management could have a material adverse effect on Magnolia’s business, financial condition, and results of operations.
Magnolia may not be able to keep pace with technological developments in its industry.
The oil and gas industry is characterized by rapid and significant technological advancement and the introduction of new products and services using new technologies. As others use or develop new technologies, Magnolia may be placed at a competitive disadvantage or may be forced by competitive pressures to implement those new technologies at substantial cost. In addition, other oil and gas companies may have greater financial, technical, and personnel resources that allow them to enjoy technological advantages and that may in the future allow them to implement new technologies before Magnolia can. Magnolia may not be able to respond to these competitive pressures or implement new technologies on a timely basis or at an acceptable cost. If one or more of the technologies it expects to use were to become obsolete, Magnolia’s business, financial condition, or results of operations could be materially and adversely affected.
Magnolia’s business could be adversely affected by security threats, including cyber security threats, and related disruptions.
Magnolia relies heavily on its information systems, and the availability and integrity of these systems is essential to conducting Magnolia’s business and operations. Cyber security risks, including phishing-attacks, unauthorized access, malicious software, data privacy breaches by employees or others with authorized access, ransomware, and other cyber security issues could compromise computer and telecommunications systems and result in disruptions to the Company’s business operations or the access, disclosure, or loss of Company data and proprietary information. Additionally, as a producer of oil and natural gas, Magnolia faces various security threats that could render its information or systems unusable, and threats to the security of its facilities and infrastructure or the facilities and infrastructure of third parties, such as gathering and processing and other facilities, refineries and pipelines, or third party technology cloud providers. If any of these security breaches were to occur, they could lead to losses of, or damage to, sensitive information, facilities, infrastructure, and systems essential to its business and operations, as well as data corruption, communication interruptions, or other disruptions to its operations, which, in turn, could have a material adverse effect on its business, financial position, results of operations, and cash flows.
Magnolia’s implementation of various procedures and controls to monitor and mitigate such security threats and to increase security for its information, systems, facilities, and infrastructure may result in increased costs. Moreover, there can be no assurance that such procedures and controls will be sufficient to prevent security breaches from occurring.
Potential future legislation may generally affect the taxation of oil and natural gas exploration and development companies and may adversely affect Magnolia’s future cash flows and results of operations.
From time to time, federal legislation has been proposed that would, if enacted into law, make significant changes to tax laws, including to certain key U.S. federal and state income tax provisions currently available to oil and natural gas exploration and development companies. Such legislative changes have included, but have not been limited to, (i) the repeal of the percentage depletion allowance for oil and natural gas properties, (ii) the elimination of current deductions for intangible drilling and development costs, and (iii) an extension of the amortization period for certain geological and geophysical expenditures. Although these provisions were largely unchanged in recent federal tax legislation such as the Inflation Reduction Act of 2022 (the “IRA”), Congress could consider, and could include, some or all of these proposals as part of future tax reform legislation. Moreover, other more general features of any additional tax reform legislation, including changes to cost recovery rules, may be developed that also would change the taxation of oil and gas companies. It is unclear whether these or similar changes will be enacted in future legislation and, if enacted, how soon any such changes could take effect. The passage of any legislation as a result of these proposals and other similar changes in U.S. federal income tax laws could adversely affect Magnolia’s future cash flows and results of operations.
Unanticipated changes in effective tax rates or adverse outcomes resulting from examination of Magnolia’s income or other tax returns could adversely affect its financial condition and results of operations.
Magnolia is subject to taxes by U.S. federal, state, and local tax authorities. Magnolia’s future effective tax rates could be subject to volatility or adversely affected by a number of factors, including changes in the valuation of Magnolia’s deferred tax assets and liabilities, expected timing and amount of the release of any tax valuation allowances, tax effects of stock based compensation, or changes in tax laws, regulations, or interpretations thereof.
In addition, Magnolia may be subject to audits of its income, sales, and other transaction taxes by U.S. federal, state, and local taxing authorities. Outcomes from these audits could have an adverse effect on the Company’s financial condition and results of operations.
Risks Related to Environmental and Political Conditions
Magnolia’s operations are subject to environmental and occupational health and safety laws and regulations that may expose the Company to significant costs and liabilities.
Magnolia’s operations are subject to stringent and complex federal, state, and local laws and regulations governing the discharge of materials into the environment, health and safety aspects of the Company’s operations or otherwise relating to environmental protection. These laws and regulations may impose numerous obligations applicable to Magnolia’s operations, including the acquisition of a permit or other approval before conducting regulated activities; the restriction of types, quantities, and concentration of materials that can be released into the environment; the limitation or prohibition of drilling activities on certain lands lying within wilderness, wetlands, and other protected areas; the application of specific health and safety criteria addressing worker protection; and the imposition of substantial liabilities for pollution resulting from the Company’s operations. Failure to comply with these laws and regulations may result in the assessment of sanctions, including administrative, civil or criminal penalties.
Certain environmental laws impose strict joint and several liability for costs required to remediate and restore sites where hazardous substances, hydrocarbons or solid wastes have been stored or released. Magnolia may be required to remediate contaminated properties currently or formerly operated by the Company or facilities of third parties that received waste generated by the Company.
Magnolia may incur substantial losses and be subject to substantial liability claims as a result of operations. Additionally, Magnolia may not be insured for, or insurance may be inadequate to protect Magnolia against, these risks.
Magnolia is not insured against all risks. Losses and liabilities arising from uninsured and underinsured events could materially and adversely affect its business, financial condition, or results of operations.
Magnolia’s development activities are subject to all of the operating risks associated with drilling for and producing oil and natural gas, including the possibility of environmental hazards, such as uncontrollable releases of oil, natural gas, brine, well fluids, toxic gas, or other pollution into the environment, including groundwater, air, and shoreline contamination, or the presence of endangered or threatened species; abnormally pressured formations; mechanical difficulties, such as stuck oilfield drilling and service tools and casing collapse; fires, explosions, and ruptures of pipelines; personal injuries and death; natural disasters; and terrorist attacks targeting oil and natural gas related facilities and infrastructure.
Events that could adversely affect Magnolia’s ability to conduct operations or result in substantial loss as a result of claims
include injury or loss of life, damage to and destruction of property, natural resources, and equipment, pollution and other environmental damage, regulatory investigations and penalties, and repair and remediation costs.
Magnolia may elect not to obtain insurance for any or all of these risks if it believes that the cost of available insurance is excessive relative to the risks presented. In addition, pollution and environmental risks generally are not fully insurable. The occurrence of an event that is not fully covered by insurance could have a material adverse effect on business, financial condition, and results of operations.
Certain of Magnolia’s properties are subject to land use restrictions, which could limit the manner in which Magnolia conducts business.
Certain of Magnolia’s properties are subject to land use restrictions, including city ordinances, which could limit the manner in which Magnolia conducts business. Such restrictions could affect, among other things, access to and the permissible uses of facilities as well as the manner in which Magnolia produces oil and natural gas and may restrict or prohibit drilling in general. The costs incurred to comply with such restrictions may be significant in nature, and Magnolia may experience delays or curtailment in the pursuit of development activities and perhaps even be precluded from the drilling of wells.
Magnolia’s operations are subject to a series of risks arising from the threat of climate change.
The threat of climate change continues to attract considerable attention globally. In the United States, no comprehensive climate change legislation regulating the emission of greenhouse gases or directly imposing a price on carbon has been implemented at the federal level. However, President Biden has highlighted addressing climate change as a priority of his administration, and federal regulators, state and local governments, and private parties have taken (or announced that they plan to take) actions that have or may have a significant influence on the Company’s operations. For example, on November 15, 2021, the EPA published a proposed rule that would strengthen the existing emissions reduction requirements in Subpart OOOOa and create a Subpart OOOOb to expand reduction requirements for new, modified and reconstructed oil and natural gas sources, and would impose methane emissions limitations on existing oil and natural gas sources nationwide for the first time. In addition, the proposed rule would establish “Emissions Guidelines,” creating a Subpart OOOOc that would require states to develop plans to reduce methane emissions from existing sources that must be at least as effective as presumptive standards set by the EPA. Under the proposed rule, states would have three years to develop their compliance plan for existing sources and the regulations for new sources would take effect immediately upon issuance of a final rule. On November 11, 2022, the EPA issued a proposed rule supplementing the November 2021 proposed rule. Among other things, the November 2022 supplemental proposed rule removes an emissions monitoring exemption for small wellhead-only sites and creates a new third-party monitoring program to flag large emissions events, referred to in the proposed rule as “super emitters”. The EPA is expected to issue a final rule by August 2023. Additionally, in August 2022, President Biden signed into law the Inflation Reduction Act of 2022. Among other things, the Inflation Reduction Act includes a methane emissions reduction program that amends the Clean Air Act to include a Methane Emissions and Waste Reduction Incentive Program for petroleum and natural gas systems. This program requires the EPA to impose a “waste emissions charge” on certain oil and gas sources that are already required to report under EPA’s Greenhouse Gas Reporting Program. As a result of these regulatory changes, the scope of any final methane regulations or the costs for complying with federal methane regulations are uncertain.
Separately, a number of states have developed programs that are aimed at reducing GHG emissions by means of cap and trade programs, carbon taxes, or encouraging the use of renewable energy or alternative low-carbon fuels. Cap and trade programs typically require major sources of GHG emissions to acquire and surrender emission allowances in return for emitting those GHGs. In addition, efforts have been made and continue to be made in the international community toward the adoption of international treaties or protocols that would address global climate change issues. For example, President Biden has recommitted the United States to the Paris Agreement and, in April 2021, announced a goal of reducing the United States’ emissions by at least 50% below 2005 levels by 2030. In addition, at the 26th conference of parties (“COP26”) in September 2021, the United States and the European Union jointly announced the Global Methane Pledge, a pact that aims to reduce global methane emissions at least 30% below 2020 levels by 2030, including “all feasible reductions” in the energy sector. COP26 concluded with the finalization of the Glasgow Climate Pact, which stated long-term global goals (including those in the Paris Agreement) to limit the increase in the global average temperature and emphasized reductions in GHG emissions. Most recently, at the 27th conference of parties, President Biden announced the EPA’s supplemental proposed rule to reduce methane emissions from existing oil and gas sources (discussed above), and agreed, in conjunction with the European Union and a number of other partner countries, to develop standards for monitoring and reporting methane emissions to help create a market for low methane-intensity natural gas. To the extent that governmental entities in the United States or other countries implement or impose climate change regulations on the oil and gas industry, it could have a material adverse effect on the Company’s business, including by restricting Magnolia’s ability to execute on its business strategy, requiring additional capital, compliance, operating and maintenance costs, increasing the cost of Magnolia’s products and services, reducing demand for its products and services, reducing its access to financial markets, or creating greater potential for governmental investigations or litigation.
Furthermore, climate change-related developments may result in negative perceptions of the traditional oil and gas industry and, in turn, reputational risks associated with exploration and production activities. Negative public perception regarding the
Company and/or its industry resulting from, among other things, concerns raised by advocacy groups about climate change, emissions, hydraulic fracturing, seismicity, or oil spills may lead to increased litigation risk and regulatory, legislative and judicial scrutiny, which may, in turn, lead to new state and federal safety and environmental laws, regulations, guidelines and enforcement interpretations. These actions may cause operational delays or restrictions, increased operating costs, additional regulatory burdens and increased risk of litigation. Moreover, governmental authorities exercise considerable discretion in the timing and scope of permit issuance and the public may engage in the permitting process, including through intervention in the courts. Negative public perception could cause the permits Magnolia needs to conduct the Company’s operations to be withheld, delayed, or burdened by requirements that restrict the Company’s ability to profitably conduct the Company’s business. In addition, various officials and candidates at the federal, state, and local levels, have made climate-related pledges or proposed banning hydraulic fracturing altogether. More broadly, the enactment of climate change-related policies and initiatives across the market at the corporate level and/or investor community level may in the future result in increases in the Company’s compliance costs and other operating costs and have other adverse effects (e.g., greater potential for governmental investigations or litigation).
Increasing attention from governmental and regulatory bodies, investors, consumers, industry, and other stakeholders on combating climate change, together with changes in consumer and industrial/commercial behavior, societal expectations on companies to address climate change, investor and societal expectations regarding voluntary climate-related disclosures, preferences and attitudes with respect to the generation and consumption of energy, the use of hydrocarbons, and the use of products manufactured with, or powered by, hydrocarbons, may result in the enactment of climate change-related regulations, policies and initiatives (at the government, regulator, corporate and/or investor community levels), including alternative energy requirements, new fuel consumption standards, energy conservation and emissions reductions measures and responsible energy development; technological advances with respect to the generation, transmission, storage and consumption of energy (including advances in wind, solar and hydrogen power, as well as battery technology); increased availability of, and increased demand from consumers and industry for, energy sources other than oil and natural gas (including wind, solar, nuclear, and geothermal sources as well as electric vehicles); and development of, and increased demand from consumers and industry for, lower-emission products and services (including electric vehicles and renewable residential and commercial power supplies), as well as more efficient products and services. These developments may in the future adversely affect the demand for products manufactured with, or powered by, petroleum products, as well as the demand for, and in turn the prices of, the products that Magnolia sells. Such developments may also adversely impact, among other things, the Company’s stock price and access to capital markets, and the availability of necessary third-party services and facilities, which may increase the Company’s operational costs and adversely affect the Company’s ability to successfully carry out the Company’s business strategy. Climate change-related developments may also impact the market prices of or the Company’s access to raw materials such as energy and water and therefore result in increased costs to the Company’s business. Concern over climate change has also resulted in political risks in the United States, including climate-related pledges by certain candidates now in public office. Litigation risks are also increasing, as a number of cities and other local governments have sought to bring suit against the largest oil and gas companies in state or federal court, alleging, among other things, that such companies created public nuisances by producing fuels that contributed to climate change or alleging that the companies have been aware of the adverse effects of climate change for some time but failed to adequately disclose such impacts to their investors or customers. Private individuals or public entities may seek to enforce environmental laws and regulations against us and could allege personal injury, property damages or other liabilities. While the Company’s business is not a party to any such litigation, Magnolia could be named in actions making similar allegations. An unfavorable ruling in any such case could significantly impact the Company’s operations and could have an adverse impact on the Company’s financial condition.
Negative perceptions regarding the Company’s industry and reputational risks, including perceptions regarding the sufficiency of the Company’s ESG program (which may include policies, practices, and extralegal objectives related to climate change, environmental stewardship, social responsibility, and corporate governance), may also in the future adversely affect the Company’s ability to successfully carry out the Company’s business strategy by adversely affecting Magnolia’s access to capital. There have been efforts in recent years, for example, to influence the investment community, including investment advisors, insurance companies, and certain sovereign wealth, pension and endowment funds and other groups, by promoting divestment of fossil fuel equities and pressuring lenders to limit funding and insurance underwriters to limit coverages to companies engaged in the extraction of fossil fuel reserves. Certain financial institutions and members of the investment community have shifted and others may elect in the future to shift some or all of their investment into non-fossil fuel related sectors. There is also a risk that financial institutions may be required to adopt policies that have the effect of reducing the funding provided to the fossil fuel sector. Certain investment banks and asset managers based both domestically and internationally have announced that they are adopting climate change guidelines for their banking and investing activities. Institutional lenders who provide financing to energy companies such as the Company’s have also become more attentive to sustainable lending practices, and some may elect not to provide traditional energy producers or companies that support such producers with funding. Ultimately, this could make it more difficult to secure funding for exploration and production activities or adversely impact the cost of capital for both the Company and its customers, and could thereby adversely affect the demand and price of the Company’s securities. Recent equity returns in the sector versus other industry sectors have led to lower oil and natural gas representation in certain key equity market indices. Limitation of investments in and financings for energy companies could also result in the restriction, delay, or cancellation of infrastructure projects and energy production activities. Additionally, shareholder activism has been recently increasing in the oil and gas industry, and shareholders may attempt to effect changes to Magnolia’s business or governance, whether by shareholder proposals, public campaigns, proxy solicitations, or otherwise. Such actions could adversely impact the Company’s business by distracting management and other personnel from their primary
responsibilities, require the Company to incur increased costs, and/or result in reputational harm. Activist shareholders have introduced proposals that may seek to force companies to adopt aggressive emission reduction targets or to shift away from more carbon-intensive industries. As noted above, activists may also pursue other means of curtailing oil and natural gas operations, such as through litigation. Such developments, including environmental activism and initiatives aimed at limiting climate change and reducing air pollution, could result in downward pressure on the stock prices of oil and gas companies, including Magnolia’s. This may also potentially result in a reduction of available capital funding for potential development projects, impacting the Company’s future financial results.
Many scientists have concluded that increasing concentrations of GHG in the earth’s atmosphere may produce significant physical effects of adverse weather conditions that pose risks to Magnolia’s business, such as increased frequency and severity of storms, droughts, and floods, among other climatic phenomena. These physical effects could adversely affect or delay demand for the Company’s products or cause us to incur significant costs in preparing for, or responding to, the effects of climatic events themselves. Energy needs could increase or decrease as a result of extreme weather conditions depending on the duration and magnitude of any such climate changes and adversely impact Magnolia’s operating costs or revenues. To the extent the frequency of extreme weather events increases, this could impact operations in various ways, including damage to the Company’s facilities, increased insurance premiums or increases to the cost of providing service. Any of these effects could have an adverse effect on the Company’s assets and operations. See “Magnolia’s producing properties are predominantly located in South Texas, making Magnolia vulnerable to risks associated with operating in a limited geographic area.”
New climate disclosure rules proposed by the SEC may increase Magnolia’s costs of compliance and adversely impact its business.
On March 21, 2022, the U.S. Securities and Exchange Commission proposed new rules relating to the disclosure of a range of climate-related risks. Magnolia is currently assessing the proposed rule, but at this time cannot predict the costs of implementation or any potential adverse impacts resulting from the rule. According to the SEC’s Fall 2022 regulatory agenda, the proposed climate disclosure rule is scheduled to be finalized in April 2023. To the extent this rule is finalized as proposed, Magnolia could incur increased costs relating to the assessment and disclosure of climate-related risks, including increased legal, accounting and financial compliance costs, as well as making some activities more difficult, time-consuming and costly, and placing strain on Magnolia’s personnel, systems and resources. Magnolia may also face increased litigation risks related to disclosures made pursuant to the rule if finalized as proposed. In addition, enhanced climate disclosure requirements could accelerate the trend of certain stakeholders and lenders restricting or seeking more stringent conditions with respect to their investments in certain carbon-intensive sectors. The SEC proposes certain phase-in compliance dates for disclosures under the proposed rules, including for GHG emissions metrics.
Federal, state, and local legislative and regulatory initiatives relating to hydraulic fracturing as well as governmental reviews of such activities could result in increased costs, additional operating restrictions or delays in the completion of oil and natural gas wells, and adversely affect Magnolia’s production.
The hydraulic fracturing process involves the injection of water, proppants, and chemicals under pressure into targeted subsurface formations to fracture the surrounding rock and stimulate production. It is typically done at substantial depths in formations with low permeability. Magnolia routinely uses fracturing techniques in the U.S. to expand the available space for oil and natural gas to migrate toward the wellbore. Hydraulic fracturing is typically regulated by state oil and natural gas commissions, but certain federal agencies have asserted regulatory authority over certain aspects of the process, including air emissions, fracturing fluid constituents, and wastewater disposal, among others.
From time to time the U.S. Congress has considered proposals to regulate hydraulic fracturing under the U.S. Safe Drinking Water Act. While, to date, those proposals have not been enacted, such proposals may be considered again in the future. Several states have already enacted or are otherwise considering legislation to regulate hydraulic fracturing practices through more stringent permitting, fluid disclosure, and well construction requirements on hydraulic-fracturing operations or otherwise seek to ban fracturing activities altogether. Hydraulic fracturing of wells and subsurface water disposal via injection wells are also under public and governmental scrutiny due to potential environmental and physical impacts, including possible contamination of groundwater and drinking water and possible links to seismic events. In addition, some municipalities have significantly limited or prohibited drilling activities and/or hydraulic fracturing or are considering doing so. The adoption of any new federal, state, or local laws or the implementation of regulations regarding hydraulic fracturing in areas in which the Company operates could result in operational delays, increased compliance costs, or a decrease in Magnolia’s production, which could have an adverse effect on the Company’s business, financial condition, and results of operations.
Risks Related to Financing and Liquidity
Magnolia may not be able to generate sufficient cash to service all of its indebtedness and may be forced to take other actions to satisfy debt obligations, which may not be successful.
Magnolia’s ability to make scheduled payments on or to refinance its indebtedness obligations including the RBL Facility and the 6.0% Senior Notes due 2026 (the “2026 Senior Notes”), depends on Magnolia’s financial condition and operating performance, which are subject to prevailing economic and competitive conditions, industry cycles and certain financial, business, and other factors, affecting Magnolia’s operations, many of which are beyond Magnolia’s control. Magnolia may not be able to maintain a level of cash flow from operating activities sufficient to permit Magnolia to pay the principal, premium, if any, and interest onservice or repay its indebtedness. Failure to make required payments on its indebtedness will result in an event of default under the agreement governing the applicable indebtedness, entitling the requisite lenders of such indebtedness to accelerate the payment of obligations thereunder and to exercise other remedies, including in respect of collateral (if any) securing such indebtedness. As of December 31, 2019,2022, 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 and $550.0$450.0 million of borrowing capacity of the RBL Facility.
If Magnolia’s cash flow and capital resources are insufficientMagnolia is unable to fund its debt service obligations, Magnolia may be forced to reduce or delay investments and capital expenditures, sell assets, seek additional capital, or restructure or refinance existing indebtedness. Magnolia’s ability to restructure or refinance indebtedness, all of which will depend on the condition of the capital markets and itsMagnolia’s financial condition at such time. Any refinancing of indebtedness may be at higher interest rates and may require Magnolia to comply with more onerous covenants, which could further restrict business operations. The terms of Magnolia’s existing or future debt instruments may restrict it from adopting some of these alternatives. In addition, any failure to make payments of interest and principal on outstanding indebtedness on a timely basis would likely harm itsMagnolia’s ability to incur additional indebtedness. In the absence of sufficient cash flows and capital resources, Magnolia could face substantial liquidity problems and might be required to dispose of material assets or operations to meet debt service and other obligations. The RBL Facility and the indenture governing the 2026 Senior Notes limit Magnolia’s ability to dispose of assets and use the proceeds from such dispositions. Magnolia may not be able to consummate those dispositions, and the proceeds of any such disposition may not be adequate to meet any debt service obligations then due. These alternative measures may not be successful and may not permit Magnolia to meet scheduled debt service obligations.
Restrictions in Magnolia’s existing and future debt agreements could limit Magnolia’s growth and ability to engage in certain activities.
Magnolia’s ability to meet its expenses and debt obligations and comply with the covenants and restrictions contained therein will depend on its future performance, which will be affected by financial, business, economic, industry, regulatory, and other factors, many of which are beyond Magnolia’s control. If market or other economic conditions deteriorate, Magnolia’s ability to comply with these covenants may be impaired. For example, Magnolia’s RBL Facility requires Magnolia to maintain quarterly compliance with a leverage and current ratio and the satisfaction of certain conditions, including the absence of defaults and events of default thereunder, to borrow money. The RBL Facility also limits Magnolia Operating’s ability to draw additional amounts under the RBL Facility if Magnolia Operating has a consolidated cash balance in excess of $45.0 million. Magnolia’s debt agreements alsomay restrict the payment of dividends and distributions by certain of its subsidiaries to it, which could affect its access to cash. In addition, Magnolia’s ability to comply with the financial and other restrictive covenants in the agreements governing its indebtedness will be affected by the levels of cash flow from operations, future events, and other circumstances beyond Magnolia’s control. Breach of these covenants or restrictions will result in a default under Magnolia’s debt agreements, which if not cured or waived within the applicable grace period (if any), would permit the acceleration of all indebtedness outstanding thereunder by the requisite holders of such indebtedness. Upon acceleration, the indebtedness would become immediately due and payable, together with accrued and unpaid interest, and any commitments of a lender to make further loans to Magnolia may terminate. Even if new financing were then available, it may not be on terms that are acceptable to Magnolia. In addition to accelerating the indebtedness, the requisite group of affected lenders may exercise remedies upon the incurrence of an event of default, including through foreclosure, in respect of the collateral securing any such secured financing arrangements. Moreover, any subsequent replacement of Magnolia’s financing arrangements may require it to comply with more restrictive covenants, which could further restrict business operations.
Any significant reduction in Magnolia’s borrowing base under the RBL Facility as a result of the periodic borrowing base redeterminations or otherwise may negatively impact Magnolia’s ability to fund its operations.
The RBL Facility limits the amounts Magnolia can borrow up to a borrowing base amount, which the lenders determine, in good faith, in accordance with their respective usual and customary oil and natural gas lending criteria, based upon the loan value of the proved oil and natural gas reserves located within the geographic boundaries of the United States included in the most recent reserve report provided to the lenders. As of December 31, 2019,2022, the Company had $550.0$450.0 million of borrowing base capacity of the RBL Facility.and no borrowings.
The RBL Facility requires periodic borrowing base redeterminations based on reserve reports. Additionally, the borrowing base is subject to unscheduled reductions due to certain issuances of new junior lien indebtedness, unsecured indebtedness or
subordinated indebtedness, certain sales or acquisitions of borrowing base properties, or early monetizations or terminations of certain hedge or swap positions. An unscheduled redetermination may also be requested by either the requisite lenders under the RBL Facility, once within a twelve month period, or by Magnolia twice within a twelve month period.once between scheduled redeterminations. A reduced borrowing base could render Magnolia unable to access adequate funding under the RBL Facility. Additionally, if the aggregate amount outstanding under the RBL Facility exceeds the borrowing base at any time, Magnolia would be required to repay any indebtedness in excess of the borrowing base or to provide mortgages on additional borrowing base properties to eliminate such excess. As a result of a mandatory prepayment and/or reduced access to funds under the RBL Facility, Magnolia may be unable to implement its drilling and development plan, make acquisitions, or otherwise carry out business plans, which would have a material adverse effect on its financial condition and results of operations.
Magnolia’s operations are subject to environmentaldevelopment projects and occupational health and safety laws and regulations that may expose the Company to significant costs and liabilities.
Magnolia’s operations are subject to stringent and complex federal, state, and local laws and regulations governing the discharge of materials into the environment, health and safety aspects of the Company’s operations or otherwise relating to environmental protection. These laws and regulations may impose numerous obligations applicable to Magnolia’s operations, including the acquisition of a permit or other approval before conducting regulated activities; the restriction of types, quantities, and concentration of materials that can be released into the environment; the limitation or prohibition of drilling activities on certain lands lying within wilderness, wetlands, and other protected areas; the application of specific health and safety criteria addressing worker protection; and the imposition ofacquisitions require substantial liabilities for pollution resulting from the Company’s operations. Failure to comply with these laws and regulations may result in the assessment of sanctions, including administrative, civil or criminal penalties.
Certain environmental laws impose strict joint and several liability for costs required to remediate and restore sites where hazardous substances, hydrocarbons or solid wastes have been stored or released.capital expenditures. Magnolia may be unable to obtain required capital or financing on satisfactory terms, which could lead to remediate contaminated properties currentlya decline in its ability to access or formerly operated by the Company or facilities of third parties that received wastegrow production and reserves.
The oil and gas industry is capital-intensive. Magnolia makes, and expects to continue to make, substantial capital expenditures related to development and acquisition projects. Magnolia has funded, and expects to continue to fund, its capital budget with cash generated by operations and potentially through borrowings under the Companies.
MagnoliaRBL Facility. However, Magnolia’s financing needs may incur substantial lossesrequire it to alter or increase its capitalization substantially through the issuance of debt or equity securities or the sale of assets. The issuance of additional indebtedness would require that an additional portion of cash flow from operations be used for the payment of interest and principal on its indebtedness, thereby further reducing Magnolia’s ability to use cash flow from operations to fund working capital, capital expenditures, and acquisitions. The issuance of additional equity securities would be subjectdilutive to substantial liability claimsexisting stockholders. The actual amount and timing of future capital expenditures may differ materially from estimates as a result of, operations. Additionally,among other things: commodity prices; actual drilling results; the availability of drilling rigs and other services and equipment; and legislative, regulatory, technological, competitive, and other economic or industry developments. A reduction in commodity prices from current levels may result in a decrease in actual capital expenditures, which would negatively impact Magnolia’s ability to grow production.
Magnolia’s cash flow from operations and access to capital is subject to a number of variables, including:
•the prices at which Magnolia’s production is sold;
•proved reserves;
•the amount of hydrocarbons Magnolia is able to produce from its wells;
•Magnolia’s ability to acquire, locate, and produce new reserves;
•the amount of Magnolia’s operating expenses;
•Magnolia’s ability to borrow under the RBL Facility;
•restrictions in the instruments governing Magnolia’s debt, and Magnolia’s ability to incur additional indebtedness; and
•Magnolia’s ability to access the capital markets.
If Magnolia’s revenues or the borrowing base under the RBL Facility decrease as a result of lower oil, natural gas, and NGL prices, operational difficulties, declines in reserves or for any other reason, Magnolia may have limited ability to obtain the capital necessary to sustain operations at current levels. If additional capital is needed, Magnolia may not be insured for,able to obtain debt or insurance may be inadequateequity financing on terms acceptable to protect Magnolia against, these risks.
Magnolia is not insured against all risks. Lossesit, if at all. If cash flow generated by Magnolia’s operations or available borrowings under the RBL Facility are insufficient to meet Magnolia’s capital requirements, the failure to obtain additional financing could result in a curtailment of the development of Magnolia’s properties, which in turn could lead to a decline in reserves and liabilities arising from uninsuredproduction and underinsured events could materially and adversely affect its business, financial condition, or results of operations.
Magnolia’s development activities are subject to all of the operating risks associated with drilling for and producing oil and natural gas, including the possibility of:
environmental hazards, such as uncontrollable releases of oil, natural gas, brine, well fluids, toxic gas, or other pollution into the environment, including groundwater, air, and shoreline contamination, or the presence of endangered or threatened species;
abnormally pressured formations;
mechanical difficulties, such as stuck oilfield drilling and service tools and casing collapse;
fires, explosions, and ruptures of pipelines;
personal injuries and death;
natural disasters; and
terrorist attacks targeting oil and natural gas related facilities and infrastructure.
Any of these events could adversely affect Magnolia’s ability to conduct operations or result in substantial loss as a result of claims for:
injury or loss of life;
damage to and destruction of property, natural resources, and equipment;
pollution and other environmental damage;
regulatory investigations and penalties; and
repair and remediation costs.
Magnolia may elect not to obtain insurance for any or all of these risks if it believes that the cost of available insurance is excessive relative to the risks presented. In addition, pollution and environmental risks generally are not fully insurable. The occurrence of an event that is not fully covered by insurance could have a material adverse effect on business, financial condition, and results of operations.
Properties If Magnolia incurs additional indebtedness, the operational risks that Magnolia decides to drill may not yield oil or natural gas in commercially viable quantities.
Properties that Magnolia decides to drill that do not yield oil or natural gas in commercially viable quantities will adversely affect its results of operationsfaces could intensify, and financial condition. There is no way to predict in advance of drilling and testing whether any particular prospect will yield oil or natural gas in sufficient quantities to recover drilling or completion costs or to be economically viable. The use of seismic data and other technologies and the study of producing fields in the same area will not enable Magnolia to know conclusively prior to drilling whether oil or natural gas will be present or, if present, whether oil or natural gas will be present in commercial quantities. Magnolia cannot ensure that the analogies drawn from available data from other wells, more fully explored prospects or producing fields will be applicable to its drilling prospects. Further, Magnolia’s drilling operations may be curtailed, delayed, or canceled as a result of numerous factors, including:
unexpected drilling conditions;
title issues;
pressure or lost circulation in formations;
equipment failures or accidents;
adverse weather conditions;
compliance with environmental and other governmental or contractual requirements; and
increases in the cost of, and shortages or delays in the availability of, electricity, supplies, materials, drilling or workover rigs, equipment, and services.
Magnolia may be unable to make additional attractive acquisitions or successfully integrate acquired businesses, and any inability to do so may disrupt its business and hinder its ability to grow.
In the future, Magnolia may make acquisitions of assets or businesses that are expected to complement or expand the Company’s current business. However, there is no guarantee that Magnolia will be able to identify attractive acquisition opportunities. In the event it is able to identify attractive acquisition opportunities, Magnolia may not be able to complete the acquisition or do so on commercially acceptable terms. Competition for acquisitions may also increase the cost of, or cause Magnolia to refrain from, completing acquisitions.
The success of completed acquisitions will depend on Magnolia’s ability to effectively integrate the acquired business intoservice its existing operations. The process of integrating acquired businesses may involve unforeseen difficulties and may require a disproportionate amount of its managerial and financial resources. In addition, possible future acquisitions may be larger and for purchase prices significantly higher than those paid for earlier acquisitions. No assurance can be given that it will be able to identify additional suitable acquisition opportunities, negotiate acceptable terms, obtain financing for acquisitions on acceptable terms, or successfully acquire identified targets. Magnolia’s failure to achieve consolidation savings, to integrate the acquired businesses and assets into its then-existing operations successfully, or to minimize any unforeseen operational difficulties could have a material adverse effect on its financial condition and results of operations.
Certain of Magnolia’s properties are subject to land use restrictions, which could limit the manner in which Magnolia conducts business.
Certain of Magnolia’s properties are subject to land use restrictions, including city ordinances, which could limit the manner in which Magnolia conducts business. Such restrictions could affect, among other things, access to and the permissible uses of facilities as well as the manner in which Magnolia produces oil and natural gas and may restrict or prohibit drilling in general. The costs incurred to comply with such restrictions may be significant in nature, and Magnolia may experience delays or curtailment in the pursuit of development activities and perhaps even be precluded from the drilling of wells.
The unavailability or high cost of drilling rigs, equipment, supplies, personnel, and oilfield services could adversely affect Magnolia’s ability to execute its development plans within its budget and on a timely basis.
The demand for drilling rigs, pipe, and other equipment and supplies, as well as for qualified and experienced field personnel to drill wells and conduct field operations, geologists, geophysicists, engineers, and other professionals in the oil and natural gas industry, can fluctuate significantly, often in correlation with oil, natural gas, and NGL prices, causing periodic shortages of supplies and needed personnel. Magnolia’s operations are concentrated in areas in which oilfield activity levels have increased rapidly, and as a result, demand for such drilling rigs, equipment, and personnel, as well as access to transportation, processing, and refining facilities in these areas, have increased, as have the costs for those items. To the extent that commodity prices improve in the future, the demand for and prices of these goods and services are likely to increase, and Magnolia could encounter delays in securing, or an inability to secure, the personnel, equipment, power, services, resources, and facilities access necessary for it to resume or increase Magnolia’s development activities, which could result in production volumes being below its forecasted volumes. In addition, any such negative effect on production volumes, or significant increases in costs, could have a material adverse effect on cash flow and profitability. Furthermore, if it is unable to secure a sufficient number of drilling rigs at reasonable costs, Magnolia may not be able to drill all of its acreage before its leases expire.
Magnolia could experience periods of higher costs if commodity prices rise. These increases could reduce profitability, cash flow, and ability to complete development activities as planned.
Historically, capital and operating costs have risen during periods of increasing oil, natural gas, and NGL prices. These cost increases have resulted from a variety of factors that Magnolia will be unable to control, such as increases in the cost of electricity, steel, and other raw materials; increased demand for labor, services, and materials as drilling activity increases; and increased taxes. Decreased levels of drilling activity in the oil and natural gas industry in recent periods have led to declining costs of some drilling equipment, materials, and supplies. However, such costs may rise faster than increases in Magnolia’s revenue if commodity prices rise, thereby negatively impacting its profitability, cash flow, and ability to complete development activities as scheduled and on budget.
Magnolia may be involved in legal proceedings that could result in substantial liabilities.
Like many oil and gas companies, from time to time, Magnolia expects to be involved in various legal and other proceedings, such as title, royalty or contractual disputes, regulatory compliance matters, and personal injury or property damage matters, in the ordinary course of its business. Such legal proceedings are inherently uncertain, and their results cannot be predicted. Regardless of the outcome, such proceedings could have an adverse impact on Magnolia because of legal costs, diversion of management, other personnel, and other factors. In addition, it is possible that a resolution of one or more such proceedings could result in liability, penalties, or sanctions, as well as judgments, consent decrees, or orders requiring a change in its business practices, which could materially and adversely affect its business, operating results, and financial condition. Accruals for such liability, penalties, or sanctions may be insufficient, and judgments and estimates to determine accruals or range of losses related to legal and other proceedings could change from one period to the next, and such changes could be material.
Climate change laws and regulations restricting emissions of GHGs could result in increased operating costs and reduced demand for the oil and natural gas produced by Magnolia, while potential physical effects of climate change could disrupt production and cause it to incur significant costs in preparing for or responding to those effects.
The EPA has determined that emissions of carbon dioxide, methane, and other GHGs present an endangerment to public health and the environment and has adopted regulations pursuant to the CAA to reduce GHG emissions from various sources.
debt service obligations.
The EPA has adopted rules requiring the monitoring and reporting of GHG emissions from specified onshore and offshore oil and natural gas production sources in the United States on an annual basis, which will include certain of Magnolia’s operations. These reporting requirements cover all segments of the oil and natural gas industry, including gathering and boosting facilities as well as completions and workovers from hydraulically fractured oil wells. Separately, in June 2016, the EPA published the Oil and Natural Gas Sector: Emission Standards for New, Reconstructed, and Modified Sources Reconsideration that establish new controls, known as Subpart OOOOa, for emissions of methane from new, modified, or reconstructed sources in the oil and gas sector (“the 2016 OOOOa”). Following the change in presidential administration, there have been attempts to modify these regulations.Most recently, in August 2019, the EPA proposed amendments to the 2016 standards that, among other things, would rescind methane-specific requirements applicable to sources in the oil and natural gas industry but retain emissions limits for volatile organic compounds. Legal challenges to any final rulemaking that rescinds the 2016 standards are expected. As a result, Magnolia cannot predict the scope of any final methane regulatory requirements or the cost to comply with such requirements.
Although there has been no federal legislation to reduce GHG emissions, a number of states have developed programs that are aimed at reducing GHG emissions by means of cap and trade programs, carbon taxes, or encouraging the use of renewable energy or alternative low-carbon fuels. Cap and trade programs typically require major sources of GHG emissions to acquire and surrender emission allowances in return for emitting those GHGs. In addition, efforts have been made and continue to be made in the international community toward the adoption of international treaties or protocols that would address global climate change issues. For example, in April 2016, the United States signed the Paris Agreement, which includes nonbinding pledges to limit or reduce future emissions. In November 2019, the United States formally initiated the one year withdrawal from the agreement but may later choose to rejoin the Paris Agreement or enter into a future international agreement related to GHGs. However, the terms on which the United States may reenter the Paris Agreement, or a separately negotiated agreement, are unclear at this time.
Substantial limitations on GHG emissions could adversely affect demand for the oil and natural gas produced by Magnolia and lower the value of its reserves. Recently, activists concerned about the potential effects of climate change have directed their attention at sources of funding for fossil-fuel energy companies, which has resulted in certain financial institutions, funds, and other sources of capital restricting or eliminating their investment in oil, natural gas, and NGL activities. Ultimately, this could make it more difficult to secure funding for exploration and production activities. Additionally, activist shareholders have introduced proposals that may seek to force companies to adopt aggressive emission reduction targets or to shift away from more carbon-intensive industries. Separately, activists may also pursue other means of curtailing oil and gas operations, such as through litigation. The Company continually monitors the global
climate change agenda initiatives, including stakeholder concerns, and responds accordingly based on its assessment of such initiatives on its business.
A negative shift in investor or shareholder sentiment of the oil and gas industry could adversely affect Magnolia’s business and ability to raise debt and equity capital.
Certain segments of the investor community have developed negative sentiment towards investing in the oil and gas industry. Recent equity returns in the sector versus other industry sectors have led to lower oil and gas representation in certain key equity market indices. In addition, some investors, including investment advisors and certain sovereign wealth, pension funds, university endowments, and family foundations, have stated policies to disinvest in the oil and gas sector based on their social and environmental considerations. Certain other stakeholders have also pressured commercial and investment banks to reduce or stop financing oil and gas and related infrastructure projects.
In addition, shareholder activism has been recently increasing in the oil and gas industry, and shareholders may attempt to effect changes to Magnolia’s business or governance, whether by shareholder proposals, public campaigns, proxy solicitations, or otherwise. Such actions could adversely impact the Company’s business by distracting management and other personnel from their primary responsibilities, require the Company to incur increased costs, and/or result in reputational harm.
Such developments, including environmental activism and initiatives aimed at limiting climate change and reducing air pollution, could result in downward pressure on the stock prices of oil and gas companies, including Magnolia’s. This may also potentially result in a reduction of available capital funding for potential development projects, impacting the Company’s future financial results.
Federal, state, and local legislative and regulatory initiatives relating to hydraulic fracturing as well as governmental reviews of such activities could result in increased costs, additional operating restrictions or delays in the completion of oil and natural gas wells, and adversely affect Magnolia’s production.
The hydraulic fracturing process involves the injection of water, proppants, and chemicals under pressure into targeted subsurface formations to fracture the surrounding rock and stimulate production. It is typically done at substantial depths in formations with low permeability. Magnolia routinely uses fracturing techniques in the U.S. and other regions to expand the available space for natural gas and oil to migrate toward the wellbore. Hydraulic fracturing is typically regulated by state oil and natural gas commissions, but certain federal agencies have asserted regulatory authority over certain aspects of the process. For example, the EPA finalized regulations under the CWA in June 2016 prohibiting wastewater discharges from hydraulic fracturing and certain other natural gas operations to publicly owned wastewater treatment plants. Separately, in December 2016, the EPA released its final report on the potential impacts of hydraulic fracturing on drinking water resources. The EPA report concluded that “water cycle” activities associated with hydraulic fracturing may impact drinking water resources under certain limited circumstances.
From time to time the U.S. Congress has considered proposals to regulate hydraulic fracturing under the SDWA. While, to date, those proposals have not been enacted, several states have already enacted or are otherwise considering legislation to regulate hydraulic fracturing practices through more stringent permitting, fluid disclosure, and well construction requirements on hydraulic-fracturing operations or otherwise seek to ban fracturing activities altogether. Hydraulic fracturing of wells and subsurface water disposal via injection wells are also under public and governmental scrutiny due to potential environmental and physical impacts, including possible contamination of groundwater and drinking water and possible links to seismic events. In addition, some municipalities have significantly limited or prohibited drilling activities and/or hydraulic fracturing or are considering doing so. Although it is not possible at this time to predict the final outcome of the legislation regarding hydraulic fracturing, any new federal, state, or local restrictions on hydraulic fracturing that may be imposed in areas in which the Company conducts business could result in increased compliance costs or additional operating restrictions in the U.S.
Competition in the oil and natural gas industry is intense, making it more difficult for Magnolia to acquire properties, market oil or natural gas, and secure trained personnel.
Magnolia’s ability to acquire additional prospects and to find and develop reserves in the future will depend on its ability to evaluate and select suitable properties for acquisitions and to consummate transactions in a highly competitive environment for acquiring properties, marketing oil and natural gas, and securing trained personnel. Also, there is substantial competition for capital available for investment in the oil and natural gas industry. Many other oil and natural gas companies possess and employ greater financial, technical, and personnel resources than Magnolia. Those companies may be able to pay more for productive properties and exploratory prospects and to evaluate, bid for, and purchase a greater number of properties and prospects than Magnolia’s financial or personnel resources permit. In addition, other companies may be able to offer better compensation packages to attract and retain qualified personnel than Magnolia will able to offer. The cost to attract and retain qualified personnel has historically continually increased due to competition and may increase substantially in the future. Magnolia may not be able to compete successfully in the future in acquiring prospective reserves, developing reserves, marketing hydrocarbons, attracting and retaining quality personnel, and raising additional capital, which could have a material adverse effect on its business.
The loss of senior management or technical personnel could adversely affect operations.
Magnolia depends on the services of its senior management and technical personnel. Magnolia does not maintain, nor does Magnolia plan to obtain, any insurance against the loss of any of these individuals. The loss of the services of its senior management could have a material adverse effect on its business, financial condition, and results of operations. Magnolia is also dependent, in part, upon EVOC’s technical personnel in connection with operating its assets pursuant to the Services Agreement. A loss by EVOC of its technical personnel could adversely affect Magnolia’s business and results of operations.
Magnolia may not be able to keep pace with technological developments in its industry.
The oil and natural gas industry is characterized by rapid and significant technological advancement and the introduction of new products and services using new technologies. As others use or develop new technologies, Magnolia may be placed at a competitive disadvantage or may be forced by competitive pressures to implement those new technologies at substantial cost. In addition, other oil and natural gas companies may have greater financial, technical, and personnel resources that allow them to enjoy technological advantages and that may in the future allow them to implement new technologies before Magnolia can. Magnolia may not be able to respond to these competitive pressures or implement new technologies on a timely basis or at an acceptable cost. If one or more of the technologies it expects to use were to become obsolete, Magnolia’s business, financial condition, or results of operations could be materially and adversely affected.
There are inherent limitations in all control systems, and misstatements due to error or fraud that could seriously harm Magnolia’s business may occur and not be detected.
Magnolia’s management does not expect that Magnolia’s internal and disclosure controls will prevent all possible error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. In addition, the design of a control system must reflect the fact that there are resource constraints and the benefit of controls must be relative to their costs. Because of the inherent limitations in all control systems, an evaluation of controls can only provide reasonable assurance that all material control issues and instances of fraud, if any, in Magnolia have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Further, controls can be circumvented by the individual acts of some persons or by collusion of two or more persons. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. Magnolia is also dependent, in part, upon EVOC’s internal and disclosure controls in connection with operating its assets pursuant to the Services Agreement. A failure of Magnolia’s or EVOC’s controls and procedures to detect error or fraud could seriously harm Magnolia’s business and results of operations.
Magnolia’s business could be adversely affected by security threats, including cyber security threats, and related disruptions.
Magnolia relies heavily on its information systems, and the availability and integrity of these systems is essential to conducting Magnolia’s business and operations. Technical system flaws, power loss, cyber security risks, including cyber or phishing-attacks, unauthorized access, malicious software, data privacy breaches by employees or others with authorized access, ransomware, and other cyber security issues could compromise Magnolia’s computer and telecommunications systems and result in disruptions to the Company’s business operations or the access, disclosure, or loss of Company data and proprietary information. Additionally, as a producer of natural gas and oil, Magnolia faces various security threats that could render its information or systems unusable, and threats to the security of its facilities and infrastructure or third-party facilities and infrastructure, such as gathering and processing and other facilities, refineries
and pipelines. If any of these security breaches were to occur, they could lead to losses of, or damage to, sensitive information, facilities, infrastructure, and systems essential to its business and operations, as well as data corruption, communication interruptions, or other disruptions to its operations, which, in turn, could have a material adverse effect on its business, financial position, results of operations, and cash flows.
Magnolia’s implementation of various procedures and controls to monitor and mitigate such security threats and to increase security for its information, systems, facilities, and infrastructure may result in increased costs. Moreover, there can be no assurance that such procedures and controls will be sufficient to prevent security breaches from occurring. Magnolia is also dependent, in part, upon EVOC’s information systems in connection with operating its assets pursuant to the Services Agreement. A failure in the security of EVOC’s information systems could seriously harm Magnolia’s business and results of operations.
Magnolia is subject to certain requirements of Section 404 of the Sarbanes-Oxley Act. If the Company fails to comply with the requirements of Section 404 or if the Company or its auditors identify and report material weaknesses in internal control over financial reporting, Magnolia’s investors may lose confidence in the Company’s reported information and Magnolia’s stock price may be negatively affected.
Magnolia is required to comply with certain provisions of Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”). Section 404 requires that the Company documents and tests its internal control over financial reporting and issues the management’s assessment of the Company’s internal control over financial reporting. This section also requires that the Company’s independent registered public accounting firm issue an attestation report on such internal control. If Magnolia fails to comply with the requirements of Section 404 of the Sarbanes-Oxley Act, or if the Company or its auditors identify and report material weaknesses in Magnolia’s internal control over financial reporting, the accuracy and timeliness of the filing of the Company’s annual and quarterly reports may be materially adversely affected and could cause investors to lose confidence in Magnolia’s reported financial information, which could have a negative effect on the trading price of the Company’s Class A Common Stock. In addition, a material weakness in the effectiveness of the Company’s internal control over financial reporting could result in an increased chance of fraud and the loss of customers, reduce Magnolia’s ability to obtain financing, and require additional expenditures to comply with these requirements, each of which could have a material adverse effect on the Company’s business, results of operations, and financial condition.
Risks Related to Magnolia’s Class A Common Stock and Capital Structure
Magnolia is a holding company. Magnolia’s sole materialprincipal asset is its controlling equity interest in Magnolia LLC, and Magnolia is accordingly dependent upon distributions from Magnolia LLC to pay taxes and cover its corporate and other overhead expenses.
Magnolia is a holding company and has no material assets other than its principal asset is its controlling equity interest in Magnolia LLC. Magnolia has no independent means of generating revenue. To the extent Magnolia LLC has available cash, Magnolia intends to cause Magnolia LLC to make (i) generally pro rata distributions to its unitholders, including Magnolia, in an amount at least sufficient to allow Magnolia to pay its taxes and (ii) non-pro rata payments to Magnolia to reimburse it for its corporate and other overhead expenses. As of December 31, 2022, the Company had $450.0 million of borrowing base capacity and no borrowings during the year or outstanding at the end of the period, and therefore there were no restrictions under the RBL Facility on the ability of Magnolia LLC and its subsidiaries to transfer funds to Magnolia. To the extent that Magnolia needs funds and Magnolia LLC or its subsidiaries are restricted
from making such distributions or payments under applicable law or regulation or under the terms of any financing arrangements, or are otherwise unable to provide such funds, Magnolia’s liquidity and financial condition could be materially adversely affected.
Magnolia’s second amended and restated certificate of incorporation and bylaws, as well as Delaware law, contain provisions that could discourage acquisition bids or merger proposals, which may adversely affect the market price of Magnolia’s Class A Common Stock.
Magnolia’s second amended and restated certificate of incorporation authorizes its board of directors to issue preferred stock without stockholder approval. If Magnolia’s board of directors elects to issue preferred stock, it could be more difficult for a third-party to acquire Magnolia. In addition, some provisions of Magnolia’s second amended and restated certificate of incorporation and its bylaws could make it more difficult for a third-party to acquire control of Magnolia, even if the change of control would be beneficial to its stockholders, including:
including limitations on the removal of directors;
directors, limitations on the ability of Magnolia’s stockholders to call special meetings;
meetings, providing that the board of directors is expressly authorized to adopt, or to alter or repeal, Magnolia’s bylaws;bylaws, and
establishing advance notice and certain information requirements for nominations for election to its board of directors and for proposing matters that can be acted upon by stockholders at stockholder meetings.
In addition, certain change of control events may have the effect of accelerating any payments due under Magnolia’s RBL Facility, and could, in certain defined circumstances, require Magnolia to make an offer to repurchase its outstanding Senior Notesnotes and/
or result in the acceleration of payments required by the indenture governing its outstanding notes, which could be substantial and accordingly serve as a disincentive to a potential acquirer of the Company.
Future sales of Magnolia’s Class A Common Stock in the public market, or the perception that such sales may occur, could reduce Magnolia’s stock price, and any additional capital raised by Magnolia through the sale of equity or convertible securities may dilute your ownership in the Company.
Magnolia may sell additional shares of Class A Common Stock or securities convertible into shares of its Class A Common Stock in subsequent offerings. Magnolia cannot predict the size of future issuances of its Class A Common Stock or securities convertible into Class A Common Stock or the effect, if any, that such future issuances will have on the market price of its Class A Common Stock. Sales of substantial amounts of Magnolia’s Class A Common Stock (including shares issued in connection with an acquisition or in connection with Magnolia’s existing or future equity compensation plans), or the perception that such sales could occur, may adversely affect prevailing market prices of its Class A Common Stock.
Unanticipated changes in effective tax rates or adverse outcomes resulting from examination of Magnolia’s income or other tax returns could adversely affect its financial condition and results of operations.
Magnolia is subject to taxes by U.S. federal, state, and local tax authorities. Magnolia’s future effective tax rates could be subject to volatility or adversely affected by a number of factors, including:
changes in the valuation of Magnolia’s deferred tax assets and liabilities;
expected timing and amount of the release of any tax valuation allowances;
tax effects of stock based compensation;
costs related to intercompany restructurings; or
changes in tax laws, regulations, or interpretations thereof.
In addition, Magnolia may be subject to audits of its income, sales, and other transaction taxes by U.S. federal, state, and local taxing authorities. Outcomes from these audits could have an adverse effect on the Company’s financial condition and results of operations.
Item 1B. Unresolved Staff Comments
None.
Item 3. Legal Proceedings
See Part II, Item 8, 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 4. Mine Safety Disclosures
Not applicable.
Information About Magnolia’s Executive Officers and Directors
The following table sets forth, as of February 26, 2020,16, 2023, the names, ages, and positions held by Magnolia’s executive officers and directors:
|
| | | | | | | |
Name | Age | Position |
Stephen I. ChazenChristopher G. Stavros | 7359 | Chairman, President, and Chief Executive Officer and Director |
Christopher G. StavrosBrian M. Corales | 5643 | ExecutiveSenior Vice President and Chief Financial Officer |
Timothy D. Yang | 4851 | Executive Vice President, General Counsel, and Corporate Secretary and Land |
Steve F. Millican | 4447 | Senior Vice President, Operations |
Dan F. Smith | 76 | Chairman |
Arcilia C. Acosta | 5457 | Director |
Angela MM. Busch | 5356 | Director |
Edward P. Djerejian | 8083 | Director |
James R. Larson | 7073 | Director |
Michael G. MacDougall | 49 | Director |
Dan F. Smith | 73 | Director |
John B. Walker | 7477 | Director |
Stephen “Steve” I. Chazen
Christopher G. Stavros has served asis Magnolia’s President and Chief Executive Officer, since February 2017 and has servedserves as Chairman of the Board since the completiona member of the Company’s initial public offering in May 2017.board of directors. Before taking this position he served as Magnolia’s Executive Vice President and Chief Financial Officer since the closing of the Business Combination. Prior to joining Magnolia,the Company, Mr. ChazenStavros was the Chief ExecutiveFinancial Officer of Occidental Petroleum Corporation (“Occidental”), whose principal businesses consist of oil and gas, chemical and midstream, and marketing segments, a position he held from May 2011 until his retirement in April 2016, and was a member of Occidental’s board of directors of Occidental from 2010 to 2017.
Christopher G. Stavros serves as Magnolia’s Executive Vice President and Chief Financial Officer, a position he has held since the closing of the Business Combination. Prior to joining the Company,segments. Mr. Stavros was Chief Financial Officer of Occidentalserved in this position from 2014 to 2017, having previously served in various investor relations and treasury roles at Occidental since 2005.
Brian M. Corales serves as Magnolia’s Senior Vice President and Chief Financial Officer. Prior this appointment, Mr. Corales served as the Company’s Vice President, Investor Relations since November 2018. Prior to joining the Company in November 2018, Mr. Corales was a senior analyst at Johnson Rice & Co. and previously spent 15 years in positions at other investment banks, including as a director at Scotia Howard Weil from October 2009 to February 2018, where he covered E&P companies with a range of market caps located in various basins throughout the United States.
Timothy D. Yang joinedserves Magnolia as Executive Vice President, General Counsel, and Corporate Secretary and Land. Mr. Yang joined Magnolia in September 2018. Prior to joining Magnolia, Mr. Yang served as General Counsel and Corporate Secretary of Newfield Exploration Company, an independent exploration and production company, from July 2015 through September 2018, and as General Counsel, Chief Compliance Officer, and Secretary of Sabine Oil & Gas Corporation from February 2013 to July 2015.
Steve F. Millican serves as Senior Vice President, Operations for Magnolia, a position he has held since November 2018. Prior to joining the Company, Mr. Millican was Senior Vice President and General Manager of the South Texas Region for EnerVest Operating Company since July 2016, and he held various reservoir engineering positions at EnerVest from 2008 to 2016.
Dan F. Smith has served as a Director on Magnolia’s board since 2018 and as its Chairman since 2022. He is a retired Chief Executive Officer of Lyondell Chemical Company, which operated in the chemicals, polymers and fuels business segments, and its wholly owned subsidiaries Millennium Chemicals Inc. and Equistar Chemicals, LP., a position he held from December 1996 until his retirement in December 2007. Mr. Smith is currently a director and Chairman of the board of Orion Engineered Carbons, S.A.
Arcilia C. Acosta is the President and Chief Executive Officer of CARCON Industries & Construction, specializing in commercial, institutional, and transportationa full-service construction firm, and is also the founder and Chief Executive Officer of Southwestern Testing Laboratories (STL Engineers), a geotechnical engineering and controlling principalconstruction materials testing firm, both of STL Engineers.which are based in Dallas, Texas.
Angela M. Busch currently serves as the Executive Vice President of Corporate and Business Development for Ecolab Inc., a global leader in water, hygiene, and energy technologies and services, where she is responsible for acquisitions, divestitures, and alliances in support of Ecolab’s strategic objectives related to its global portfolio of businessbusinesses and activities.
Edward P. Djerejian served in the U.S. Foreign Service for eight presidents, from John F. Kennedy in 1962 to William J. Clinton in 1994. After his retirement from government service in 1994, he became and currently serves as, the founding director of the James A.Rice University’s Baker III Institute for Public Policy, at Rice University, a premier nonpartisan public policy think tank.tank, which he led for 28 years until June 2022.
James R. Larson has served as an independent director of CSI Compressco GP LLC and its predecessor CSI Compressco GP Inc. and, general partner of CSI Compressco L.P., a provider of compression services and equipment for oil and natural gas and oil production, gathering, transportation, processing, and storage, and as Chairman of its Audit Committee since July 2011, and served as a member of its Conflicts Committee from April 2012 until January 2021 and as Chairman of its Conflicts Committee since April 2012.August 2021. Mr. Larson retired in January 2006 from his position as senior vice president of Anadarko Petroleum Corporation (“Anadarko”), an independent exploration and production company, and he held various tax and financial positions within Anadarko afterupon joining the company in 1981.
Michael G. MacDougall
is a senior partner of TPG Global, LLC, a leading global alternative asset firm, the Managing Partner of TPG Pace Energy, and the co-Managing Partner of TPG Energy Solutions.
Dan F. Smith is a retired Chief Executive Officer of Lyondell Chemical Company (“Lyondell”), which operated in the chemicals, polymers and fuels business segments, and its wholly owned subsidiaries Millennium Chemicals Inc. and Equistar Chemicals, LP., a
position he held from December 1996 until his retirement in December 2007. Mr. Smith is currently a director of Orion Engineered Carbons, S.A., Kraton Corp., and the general partner of Valerus Compression Services, L.P. (doing business as Axip Energy Services, L.P.).
John B. Walker is Executive Chairman of EnerVest, Ltd., a position he has held since December 2020. He previously served as theEnerVest’s Chief Executive Officer since its formation in 1992. Mr. Walker served as Chairman of EnerVest, Ltd since 1992. EnerVest has more than $5.0 billion in assets with an interest in more than 30,000 wells across 14 states.the Independent Petroleum Association of America from 2003 to 2005 and served on the board of Petrologistics LP from 2012 until 2014. Mr. Walker serves on the Board of Regents of the Texas Tech University System.
PART II
Item 5. Market for the Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
(a) Market Information
Magnolia’s Class A Common Stock are currently traded on the NYSE under the ticker symbol “MGY.” Through July 30, 2018, Magnolia’s Class A Common Stock and warrants were listed under the symbols “TPGE” and “TPGE.W,” respectively. On July 31, 2018, the Company delisted the units offered in its initial public offering, each consisting of one share of Class A Common Stock and one-third of a warrant, which were listed under the symbol “TPGE.U,” and the units ceased to trade. In July 2019, the Company exchanged all of its public and private warrants, which, in the case of the public warrants, were listed under the symbol “MGY.WS,” for Class A Common Stock, and the warrants ceased to trade.
(b) Holders
AtAs of February 24, 2020,10, 2023, there were 4812 holders of record of Magnolia’s separately traded Class A Common Stock, and 5 holders of record of the Company’s Class B Common Stock, par value $0.0001 per share (“Class B Common Stock”).share.
(c) Issuer Purchases of Equity Securities
The following table sets forth the Company’s share repurchase activities for each period presented.the year ended December 31, 2022:
|
| | | | | | | | | | | | |
Period | Number of Shares of Class A Common Stock Purchased | | Average Price Paid per Share | | Total Number of Common Shares Purchased as Part of Publicly Announced Program (1) | | Maximum Number of Common Shares that May Yet be Purchased Under the Program |
October 1, 2019 - October 31, 2019 | 50,000 |
| | $ | 11.10 |
| | 50,000 |
| | 9,000,000 |
|
November 1, 2019 - November 30, 2019 | — |
| | — |
| | — |
| | 9,000,000 |
|
December 1, 2019 - December 31, 2019 (2) | — |
| | — |
| | — |
| | 9,000,000 |
|
Total | 50,000 |
| | $ | 11.10 |
| | 50,000 |
| | 9,000,000 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
Period | Number of Shares of Class A Common Stock Purchased | | Average Price Paid per Share | | Total Number of Common Shares Purchased as Part of Publicly Announced Program (1) | | Maximum Number of Common Shares that May Yet be Purchased Under the Program |
January 1, 2022 - September 30, 2022 (2) | 7,115,815 | | | $ | 21.87 | | | 6,565,000 | | | 9,267,455 | |
October 1, 2022 - October 31, 2022 | 600 | | | 20.99 | | | 600 | | | 9,266,855 | |
November 1, 2022 - November 30, 2022 | — | | | — | | | — | | | 9,266,855 | |
December 1, 2022 - December 31, 2022 | 399,750 | | | 23.25 | | | 399,750 | | | 8,867,105 | |
Total | 7,516,165 | | | $ | 21.94 | | | 6,965,350 | | | 8,867,105 | |
| |
(1) | In August 2019, the Company’s board of directors authorized a share repurchase program of up to 10(1)As of December 31, 2022, the Company’s board of directors had authorized a share repurchase program of up to 30.0 million shares of Class A Common Stock. The program does not require purchases to be made within a particular time frame. |
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(2) | On December 18, 2019, outside of the share repurchase program, Magnolia LLC repurchased and subsequently canceled 6.0 million units representing limited liability company interests in Magnolia LLC with an equal number of shares of corresponding Class B Common Stock for a cash consideration of $69.1 million at an average price of $11.52 per share. There is no public market for the Class B Common Stock. For further detail, see Note 13 - Stockholders’ Equity in the Notes to the Consolidated and Combined Financial Statements in this Annual Report on Form 10-K.
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(2)The company repurchased 0.6 million shares of Class A Common Stock for $11.6 million in a privately negotiated transaction with EnerVest Energy Institutional Fund XIV-C, L.P. outside of the share repurchase program.
During the year ended December 31, 2022, outside of the share repurchase program, Magnolia LLC repurchased and subsequently canceled a total of 7.9 million Magnolia LLC Units with an equal number of shares of corresponding Class B Common Stock for cash consideration of $187.3 million at an average price of $23.56 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 Annual Report on Form 10-K.
(d)
Comparative Stock Performance
The performance graph below compares the cumulative total stockholder return for the Company’s Class A Common Stock to that of the Standard and Poor’s (“S&P”), 500 Index and the S&P 500 Oil & Gas Exploration and Production Index for the Successor Period.Index. “Cumulative total return” means the change in share price of the Company’s Class A Common Stock during the measurement period divided by the share price at the beginning of the measurement period. The graph assumes an investment of $100 was made in the Company’s Class
A Common Stock and in each of the S&P 500 Index and the S&P 500 Oil & Gas Exploration and Production Index on June 26, 2017, which is when the Class A Common Stock and warrants comprising the units offered in Magnolia’s initial public offering began separate trading.December 31, 2017.
Note: The stock price performance of Magnolia’s Class A Common Stock is not necessarily indicative of future performance.
The above information under the caption “Comparative Stock Performance” shall not be deemed to be “soliciting material” or to be “filed” with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or the Exchange Act except to the extent that Magnolia specifically requests that such information be treated as “soliciting material” or specifically incorporate such information by reference into such a filing.
Item 6. Selected Financial Data
The following table sets forth selected financial data of the Company over the five-year period ended December 31, 2019. The below data is split into three distinct periods: the period after the Business Combination, which includes the year ended December 31, 2019, referred to as the 2019 Successor Period and the period from July 31, 2018 to December 31, 2018, referred to as the 2018 Successor Period; the period before the Business Combination derived from the audited historical combined financial statements of the Karnes County Business, which includes period from January 1, 2018 to July 30, 2018, referred to as the 2018 Predecessor Period, the year ended 2017, referred to as the 2017 Predecessor Period, the year ended December 2016, and the period from October 1, 2015 to December 31, 2015; and the period from January 1, 2015 to September 30, 2015 derived from the audited historical financial statements of the predecessor to the Karnes County Business (the “AM Assets”).
This information should be read in connection with, and is qualified in its entirety by, the more detailed information in the Company’s financial statements set forth in this Annual Report on Form 10-K. Certain amounts for prior years have been reclassified to
conform to the current presentation. Factors that materially affect the comparability of this information are disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations under Item 7 of this Annual Report on Form 10-K.
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Successor | | Predecessor | | AM Assets |
(In thousands, except per share data) | | Year Ended December 31, 2019 | | July 31, 2018 Through December 31, 2018 | | | January 1, 2018 Through July 30, 2018 | | Year Ended December 31, 2017 | | Year Ended December 31, 2016 | | October 1, 2015 Through December 31, 2015 | | January 1, 2015 Through September 30, 2015 |
Income Statement Data | | | | | | | | | | | | | | | |
Revenues | | $ | 936,142 |
| | $ | 433,218 |
| | | $ | 449,186 |
| | $ | 403,194 |
| | $ | 110,926 |
| | $ | 6,187 |
| | $ | 20,177 |
|
Operating expenses | | 808,640 |
| | 319,260 |
| | | 211,382 |
| | 213,183 |
| | 82,067 |
| | 5,432 |
| | 23,031 |
|
Operating income | | 127,502 |
| | 113,958 |
| | | 237,804 |
| | 190,011 |
| | 28,859 |
| | 755 |
| | (2,854 | ) |
Other income (expense) | | (27,737 | ) | | (20,055 | ) | | | (17,466 | ) | | (8,396 | ) | | (6,715 | ) | | 1,558 |
| | (41 | ) |
Income tax expense | | 14,760 |
| | 11,455 |
| | | 1,785 |
| | 2,741 |
| | 673 |
| | 58 |
| | 32 |
|
NET INCOME | | 85,005 |
| | 82,448 |
| | | $ | 218,553 |
| | $ | 178,874 |
| | $ | 21,471 |
| | $ | 2,255 |
| | $ | (2,927 | ) |
LESS: Net income attributable to noncontrolling interest | | 34,809 |
| | 43,353 |
| | | | | | | | | | | |
NET INCOME ATTRIBUTABLE TO MAGNOLIA | | 50,196 |
| | 39,095 |
| | | | | | | | | | | |
LESS: Non-cash deemed dividend related to warrant exchange | | 2,763 |
| | — |
| | | | | | | | | | | |
NET INCOME ATTRIBUTABLE TO CLASS A COMMON STOCK | | $ | 47,433 |
| | $ | 39,095 |
| | | | | | | | | | | |
Basic | | $ | 0.29 |
| | $ | 0.25 |
| | | | | | | | | | | |
Diluted | | $ | 0.28 |
| | $ | 0.25 |
| | | | | | | | | | | |
Weighted average number of common shares outstanding | | | | | | | | | | | | | | | |
Basic | | 161,886 |
| | 154,527 |
| | | | | | | | | | | |
Diluted | | 167,047 |
| | 158,232 |
| | | | | | | | | | | |
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| | | | | | | | | | | | | | | | | | | | | |
| | Successor | | | Predecessor |
(In thousands) | | December 31, 2019 | | December 31, 2018 | | | December 31, 2017 | | December 31, 2016 | | December 31, 2015 |
Balance Sheet Data | | | | | | | | | | | |
Total assets | | $ | 3,466,406 |
| | $ | 3,433,523 |
| | | $ | 1,688,974 |
| | $ | 1,427,368 |
| | $ | 125,995 |
|
Long-term debt | | 389,835 |
| | 388,635 |
| | | — |
| | — |
| | — |
|
Total equity | | $ | 2,728,529 |
| | $ | 2,707,955 |
| | | $ | 1,597,838 |
| | $ | 1,361,918 |
| | $ | 121,485 |
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For a discussion of significant acquisitions, see Note 3 - Acquisitions in the Notes to the Consolidated and Combined Financial Statements in this Annual Report on Form 10-K.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Company’s consolidated and combined financial statements and the related notes thereto.
This section of this Form 10-K generally discusses 20192022 and 20182021 items and year-to-year comparisons between 20192022 and 2018.2021. Discussions of 20172020 items and year-to-year comparisons between 20182021 and 20172020 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018.2021.
Overview
Magnolia Oil & Gas Corporation (the “Company” or “Magnolia”) is a Delaware corporation formed in February 2017 as a special purpose acquisition company under the name TPG Pace Energy Holdings Corp. for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization, or similar business combination with one or more businesses.
Magnolia’s business model was designed with a primary objective to generate stock market value over the long term. The Company’s strategy is to establish a company whose characteristics would demonstrate a certain basic set of criteria that appeal to generalist investors and to generate growing earnings per share over time, high operating and full cycle margins, and maintain a very strong balance sheet with a low amount of leverage.
On July 31, 2018 (the “Closing Date”), the Company and Magnolia Oil & Gas Parent LLC (“Magnolia LLC”), as applicable, consummated the acquisition of: (i) certain right, title, and interest in certainan independent oil and natural gas assets located primarily in the Karnes County portion of the Eagle Ford Shale in South Texas (the “Karnes County Assets”) pursuant to that certain Contribution and Merger Agreement (as subsequently amended, the “Karnes County Contribution Agreement”), by and among the Company, Magnolia LLC, and certain affiliates (the “Karnes County Contributors”) of EnerVest Ltd. (“EnerVest”); (ii) certain right, title, and interest in certain oil and natural gas assets located primarily in the Giddings Field of the Austin Chalk (the “Giddings Assets”) pursuant to that certain Purchase and Sale Agreement (the “Giddings Purchase Agreement”) by and among Magnolia LLC and certain affiliates of EnerVest (the “Giddings Sellers”); and (iii) a 35% membership interest (the “Ironwood Interests”) in Ironwood Eagle Ford Midstream, LLC, a Texas limited liability company which owns an Eagle Ford gathering system, pursuant to that certain Membership Interest Purchase Agreement, by and among Magnolia LLC and certain affiliates of EnerVest (the “Ironwood Sellers”) (collectively, the “Business Combination”).
In connection with the consummation of the Business Combination, on July 31, 2018, the Karnes County Contributors received 83.9 million shares of Class B Common Stock, par value $0.0001 per share (“Class B Common Stock”), 31.8 million shares of Class A Common Stock, par value $0.0001 per share (“Class A Common Stock”), and approximately $911.5 million in cash; the Giddings Sellers received approximately $282.7 million in cash; and the Ironwood Sellers received $25.0 million in cash. On March 29, 2019, Magnolia and EnerVest consummated the final settlement of the Business Combination, with Magnolia LLC receiving a net cash payment of $4.3 million in cash and the Karnes County Contributors forfeiting to Magnolia 0.5 million shares of Class A Common Stock and 1.6 million shares of Class B Common Stock (and a corresponding number of units representing limited liability company interest in Magnolia LLC (“Magnolia LLC Units”) to Magnolia LLC).
In accordance with accounting principles generally accepted in the United States of America (“GAAP”), the Company has been identified as the acquirer in the Business Combination and the Karnes County Business was deemed to be the accounting “Predecessor”. References to the “Successor” refer to the Company on or after the date of the Business Combination, including the combination of the Karnes County Business, the Giddings Assets, and the Ironwood Interests. The Business Combination was accounted for using the acquisition method of accounting and the Successor financial statements reflect a new basis of accounting based on the fair value of net assets acquired. As a result of the application of the acquisition method of accounting, the Company’s consolidated and combined financial statements and certain presentations of information therein are separated into two distinct periods to indicate the different ownership and accounting basis between the periods presented, the period before the consummation of the Business Combination, which includes the year ended December 31, 2017 (the “2017 Predecessor Period”) and the period from January 1, 2018 to July 30, 2018 (the “2018 Predecessor Period”); and the period after the Business Combination, which includes the period from July 31, 2018 to December 31, 2018 (the “2018 Successor Period”) and the year ended December 31, 2019 (the “2019 Successor Period”).
The Company operates in one reportable segment and is engaged in the acquisition, development, exploration, and production of oil, natural gas, and natural gas propertiesliquid reserves that operates in one reportable segment located in the United States. The Company'sCompany’s oil and natural gas properties are located primarily in Karnes County and the Giddings Fieldarea 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. The Company’s allocation of capital prioritizes reinvesting in its business to achieve moderate and predictable annual volume growth, balanced with returning capital to its shareholders through dividends and share repurchases.
Magnolia’s business model prioritizes prudent and disciplined capital allocation, free cash flow, and financial stability. The Company’s ongoing plan is to spend within cash flow on drilling and completing wells while maintaining low financial leverage. As of December 31, 2022, Magnolia operated two rigs. The Company’s gradual and measured approach toward the development of the Giddings area has created operating efficiencies leading to higher production growth in 2022.
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. As the global economy continues to recover from the effects of the COVID-19 pandemic, economic indicators have continued to strengthen. However, the economy is experiencing elevated inflation levels as a result of global supply and demand imbalances. Elevated inflation levels have resulted in increased capital and oilfield service costs and continued inflationary pressures and labor shortages could result in further increases to the Company’s operating and capital costs.
Business Overview
As of December 31, 2019,2022, Magnolia’s assets in South Texas included 39,99843,022 gross (22,088(23,259 net) acres in the Karnes Gonzales, DeWitt,area and Atascosa counties and 630,789645,011 gross (428,766(458,756 net) acres in the Giddings Field.area. As of December 31, 2019,2022, Magnolia held an interest in approximately 1,6302,131 gross (1,141(1,366 net) wells, with total production of 66.875.4 thousand barrels of oil equivalent per day (“Mboe/d”) for the year ended December 31, 2019. In the fourth quarter2022. As of 2019,December 31, 2022, Magnolia operated two drilling rigs across its acreage, one rig in Karnes County and one rig in the Giddings Field.was running a two-rig program.
Magnolia recognized net income attributable to Class A Common Stock of $47.4$893.8 million, or $0.28$4.71 per diluted common share, for the year ended December 31, 2019. Net2022. Magnolia also recognized net income attributable to Class A Common Stockof $1,050.2 million, which includes noncontrolling interest of $156.4 million for the year ended December 31, 2019 was reduced by $2.8 million related to the non-cash deemed dividend as a result2022.
As of a warrant exchange for Class A Common Stock. Magnolia also recognized net income of $85.0 million, which includes noncontrolling interest of $34.8 million related to the Class B Common Stock held by certain affiliates of EnerVest for the year ended December 31, 2019.
In July 2019, the Company exchanged all of its warrants for an aggregate of 9.2 million shares of Class A Common Stock. For more information, see Note 13 - Stockholders’ Equity in the Company’s consolidated financial statements included in this Annual Report on Form 10-K.
On August 5, 2019,2022, the Company’s board of directors had authorized a share repurchase program of up to 1030.0 million shares.shares of Class A Common Stock. The program does not require purchases to be made within a particular timeframe. During the year ended December 31, 2019,2022, the Company repurchased 1.07.0 million shares of Class A Common Stock under the program at a weighted average price of $10.28,$22.02, for a total cost of approximately $10.3$153.3 million. During the year ended December 31, 2022, the Company also repurchased 0.6 million shares of Class A Common Stock for $11.6 million from EnerVest Energy Institutional Fund XIV-C, L.P. outside of the share repurchase program.
OnDuring the year ended December 18, 2019,31, 2022, outside of the share repurchase program, Magnolia LLC repurchased and subsequently canceled 6.07.9 million Magnolia LLC Units with an equal number of shares of corresponding Class B Common Stock for $69.1$187.3 million of cash consideration (the “Class B Common Stock Repurchase”). Asconsideration. During the same period, the Magnolia LLC Unit Holders redeemed 19.5 million Magnolia LLC Units (and a resultcorresponding number of theshares of Class B Common Stock) for an equivalent number of shares of Class A Common Stock Repurchase,and subsequently sold these shares to the Company’s ownershippublic. Magnolia did not receive any proceeds from the sale of shares of Class A Common Stock by the Magnolia LLC Unit Holders. As of December 31, 2022, Magnolia owned approximately 89.8% of the interest in Magnolia LLC increased from 64.6% to 66.1% and the Karnes County Contributors’ ownership of Magnolia LLC decreased from 35.4% to 33.9%noncontrolling interest was 10.2%.
Results of Operations
Factors Affecting the Comparability of the Historical Financial Results
The 2018 Successor PeriodMagnolia’s historical financial statementscondition and the 2019 Successor Period financial statements reflect a new basisresults of accountingoperations for the assets acquired and liabilities assumed by the Company in the Business Combination that is based on their fair value. As a result, the statement of operations subsequent to the Business Combination includes depreciation and amortization expense on Magnolia’s property, plant, and equipment balances made under the new basis of accounting. Therefore, the Company’s financial information prior to the Business Combinationperiods presented may not be comparable, either from period to its financial information subsequent to the Business Combination. Certain other items of income and expense may not be comparableperiod or going forward, as a result of the following factors:
For•On February 16, 2022, Magnolia Operating, as borrower, amended and restated the periods priororiginal RBL Facility in its entirety, which will now mature in February 2026.
•During the second quarter of 2021, the Company amended the term of the Services Agreement to end on June 30, 2021.
•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.
•The 2026 Senior Notes issued under the Indenture, dated as of July 31, 2018 the results(the “Indenture”), were amended on April 5, 2021. This debt modification included approximately $1.1 million of operations reflect the results of solely the Predecessor,one-time transaction fees which as described above, consists of only the resultswere expensed and $5.0 million in fees paid to holders of the Karnes County Business, including,2026 Senior Notes, which were reflected as applicable, its ownershipdeferred financing costs reducing Long-term debt and will be amortized over the remaining term of the Ironwood Interests, when the Predecessor was not owned by the Company, and do not include the results of the Giddings Assets;2026 Senior Notes.
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• | The results of operations of the Predecessor were not previously accounted for as the results of operations of a stand-alone legal entity, and accordingly have been carved out, as appropriate, for the periods presented. The results of operations of the Predecessor therefore include a portion of indirect costs for salaries and benefits, depreciation, rent, accounting, legal services, and other expenses. In addition to the allocation of indirect costs, the results of operations reflect certain agreements executed by the Karnes County Contributors for the benefit of the Predecessor, including price risk management instruments. For more information, please see Note 1 - Description of Business and Basis of Presentation in the Notes to the Consolidated and Combined Financial Statements in this Annual Report on Form 10-K. These allocations may not be indicative of the cost of future operations or the amount of future allocations;
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The Predecessor completed the acquisition of certain assets from GulfTex Energy III, L.P. and GulfTex Energy IV, L.P. on March 1, 2018 during the Predecessor Period, and accordingly the results of operations of the Predecessor reflect the impact of the assets acquired in that acquisition only from their respective acquisition date;
As a corporation, the Company is subject to U.S. federal income taxes at a statutory rate of 21% of pretax earnings whereas the Karnes County Contributors were treated as partnerships for income tax purposes. As a result, items of income, expense, gains, and losses flowed through to the owners of the Karnes County Contributors and were taxed at the owner level. Accordingly, no U.S. tax provision for federal income taxes is included in the financial statements of the Predecessor;
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• | On August 31, 2018, the Company acquired substantially all of the South Texas assets of Harvest Oil & Gas Corporation (the “Harvest Acquisition”) for approximately $133.3 million in cash and 4.2 million shares of the Company’s Class A Common Stock. The Harvest Acquisition added an undivided working interest across a portion of the Karnes County Assets and all of the Giddings Assets;
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On February 5, 2019, Magnolia Operating formed a joint venture, Highlander Oil & Gas Holdings LLC, to complete the acquisition of a 72% working interest in the Eocene-Tuscaloosa Zone, Ultra Deep Structure gas well located in St. Martin Parish, Louisiana (the “Highlander Well”); and
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• | The financial results for the 2019 Successor Period and the 2018 Successor Period reflect the adoption of ASU No. 2014-09, Revenue from Contracts with Customers, which the Company adopted on December 31, 2018 and applied to all periods presented in the 2019 Successor Period and the 2018 Successor Period. The Predecessor Period continues to be reported under the accounting standards in effect for that period.
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As a result of the factors listed above, the combined 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.
Year Ended December 31, 20192022 Compared to the Year Ended December 31, 2018
2021
Oil, Natural Gas and Natural Gas LiquidsNGL 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.
| | | | Successor | | | Predecessor | | Years Ended |
(In thousands, except per unit data) | | Year Ended December 31, 2019 | | July 31, 2018 Through December 31, 2018 | | | January 1, 2018 Through July 30, 2018 | (In thousands, except per unit data) | | December 31, 2022 | | December 31, 2021 |
Production: | | | | | | | | Production: | | | | |
Oil (MBbls) | | 12,867 |
| | 5,078 |
| | | 5,755 |
| Oil (MBbls) | | 12,189 | | | 11,190 | |
Natural gas (MMcf) | | 41,272 |
| | 14,136 |
| | | 7,595 |
| Natural gas (MMcf) | | 50,660 | | | 43,436 | |
NGLs (MBbls) | | 4,643 |
| | 1,857 |
| | | 1,097 |
| NGLs (MBbls) | | 6,874 | | | 5,669 | |
Total (Mboe) | | 24,389 |
| | 9,291 |
| | | 8,118 |
| Total (Mboe) | | 27,506 | | | 24,099 | |
| | | | | | | | |
Average daily production: | | | | | | | | Average daily production: | |
Oil (Bbls/d) | | 35,252 |
| | 33,190 |
| | | 27,146 |
| Oil (Bbls/d) | | 33,394 | | | 30,659 | |
Natural gas (Mcf/d) | | 113,074 |
| | 92,392 |
| | | 35,825 |
| Natural gas (Mcf/d) | | 138,796 | | | 119,003 | |
NGLs (Bbls/d) | | 12,721 |
| | 12,137 |
| | | 5,175 |
| NGLs (Bbls/d) | | 18,833 | | | 15,532 | |
Total (boe/d) | | 66,819 |
| | 60,725 |
| | | 38,292 |
| Total (boe/d) | | 75,360 | | | 66,025 | |
| | | | | | | | |
Revenues: | | | | | | | | Revenues: | |
Oil revenues | | $ | 771,981 |
| | $ | 342,093 |
| | | $ | 399,124 |
| Oil revenues | | $ | 1,158,006 | | | $ | 747,896 | |
Natural gas revenues | | 93,745 |
| | 42,979 |
| | | 22,135 |
| Natural gas revenues | | 301,494 | | | 172,648 | |
Natural gas liquids revenues | | 70,416 |
| | 48,146 |
| | | 27,927 |
| Natural gas liquids revenues | | 234,993 | | | 157,807 | |
Total revenues | | $ | 936,142 |
| | $ | 433,218 |
| | | $ | 449,186 |
| Total revenues | | $ | 1,694,493 | | | $ | 1,078,351 | |
| | | | | | | | |
Average Price: | | | | | | | | Average Price: | |
Oil (per barrel) | | $ | 60.00 |
| | $ | 67.37 |
| | | $ | 69.35 |
| Oil (per barrel) | | $ | 95.01 | | | $ | 66.83 | |
Natural gas (per Mcf) | | 2.27 |
| | 3.04 |
| | | 2.91 |
| Natural gas (per Mcf) | | 5.95 | | | 3.97 | |
NGLs (per barrel) | | 15.17 |
| | 25.93 |
| | | 25.46 |
| NGLs (per barrel) | | 34.18 | | | 27.84 | |
Oil revenues were 82%, 79%,68% and 89%69% of the Company’s total revenues for the 2019 Successor Period, the 2018 Successor Period,years ended December 31, 2022 and the 2018 Predecessor Period,2021, respectively. Oil production was 53%, 55%,44% and 71%46% of total production volume for the 2019 Successor Period,years ended December 31, 2022 and 2021, respectively. Oil revenues for the 2018 Successor Period, and the 2018 Predecessor Period, respectively. The 2019 Successor Period oil revenuesyear ended December 31, 2022 were $30.8$410.1 million higher than the combined 2018 Successor Period and 2018 Predecessor Period due to 19% higher production partially offset by a 12% decreaseyear ended December 31, 2021. A 42% increase in average prices. The 2,034 MBbls higher volumes inprices increased revenues for the 2019 Successor Periodyear ended December 31, 2022 by $315.3 million compared to the combined 2018 Successor Periodsame period in the prior year, and 2018 Predecessor Period are attributable to the inclusion of the Giddings Assets, recent acquisitions, and continued development.a 9% increase in oil production increased revenue $94.8 million.
Natural gas revenues were 10%, 10%,18% and 5% of the Company's total revenues for the 2019 Successor Period, the 2018 Successor Period, and the 2018 Predecessor Period, respectively. Natural gas production was 28%, 25%, and 16% of total production volume for the 2019 Successor Period, the 2018 Successor Period, and the 2018 Predecessor Period, respectively. 2019 Successor Period natural gas revenues were $28.6 million higher than the combined 2018 Successor Period and 2018 Predecessor Period due to 19,541 MMcf, or 90%, higher natural gas production primarily attributable to the Successor’s inclusion of the Giddings Assets and the acquisition of the Highlander Well, partially offset by a 24% decrease in average prices.
Natural gas liquids (“NGLs”) revenues were 8%, 11%, and 6% of the Company’s total revenues for the 2019 Successor Period, the 2018 Successor Period,years ended December 31, 2022 and the 2018 Predecessor Period,2021, respectively. NGLNatural gas production was 19%, 20%,31% and 14%30% of total production volume for the 2019 Successor Period,years ended December 31, 2022 and 2021, respectively. Natural gas revenues for the 2018 Successor Period, and the 2018 Predecessor Period, respectively. 2019 Successor Period natural gas liquids revenuesyear ended December 31, 2022 were $5.7$128.8 million lowerhigher than the combined 2018 Successor Period and 2018 Predecessor Period due to a
41% decreaseyear ended December 31, 2021. A 50% increase in average prices partially offsetincreased revenues for the year ended December 31, 2022 by 57%, or 1,689 MBbls, higher production. The higher production volumes are primarily attributable$85.8 million compared to the Successor’s inclusionsame period in the prior year, and a 17% increase in natural gas production increased revenue $43.0 million.
NGL revenues were 14% and 15% of the Giddings Assets, recent acquisitions,Company’s total revenues for the years ended December 31, 2022 and continued development.2021, respectively. NGL production was 25% and 24% of total production volume for the years ended December 31, 2022 and 2021, respectively. NGL revenues for the year ended December 31, 2022 were $77.2 million higher than the year ended December 31, 2021. A 23% increase in average prices increased revenues for the year ended December 31, 2022 by $36.0 million compared to the same period in the prior year, and a 21% increase in NGL production increased revenue $41.2 million.
Operating Expenses and Other Income (Expense). The following table summarizes the Company’s operating expenses and other income (expense) for the periods indicated.
| | | | Successor | | | Predecessor | | Years Ended |
(In thousands, except per unit data) | | Year Ended December 31, 2019 | | July 31, 2018 Through December 31, 2018 | | | January 1, 2018 Through July 30, 2018 | (In thousands, except per unit data) | | December 31, 2022 | | December 31, 2021 |
Operating Expenses: | | | | | | | | Operating Expenses: | | | | |
Lease operating expenses | | $ | 93,788 |
| | $ | 30,753 |
| | | $ | 23,513 |
| Lease operating expenses | | $ | 131,513 | | | $ | 93,021 | |
Gathering, transportation, and processing | | 34,924 |
| | 14,445 |
| | | 12,929 |
| Gathering, transportation, and processing | | 64,754 | | | 45,535 | |
Taxes other than income | | 53,728 |
| | 23,170 |
| | | 23,763 |
| Taxes other than income | | 94,031 | | | 55,834 | |
Exploration expenses | | 12,741 |
| | 11,882 |
| | | 492 |
| Exploration expenses | | 11,586 | | | 4,125 | |
Asset retirement obligations accretion | | 5,512 |
| | 1,668 |
| | | 104 |
| Asset retirement obligations accretion | | 3,245 | | | 4,929 | |
Depreciation, depletion and amortization | | 523,572 |
| | 177,890 |
| | | 137,871 |
| Depreciation, depletion and amortization | | 243,152 | | | 187,688 | |
Amortization of intangible assets | | 14,505 |
| | 6,044 |
| | | — |
| Amortization of intangible assets | | — | | | 9,346 | |
General and administrative expenses | | 69,432 |
| | 28,801 |
| | | 12,710 |
| General and administrative expenses | | 72,426 | | | 75,279 | |
Transaction related costs | | 438 |
| | 24,607 |
| | | — |
| |
Total operating costs and expenses | | $ | 808,640 |
| | $ | 319,260 |
| | | $ | 211,382 |
| Total operating costs and expenses | | $ | 620,707 | | | $ | 475,757 | |
| | | | | | | | |
Other Income (Expense): | | | | | | | | Other Income (Expense): | |
Income from equity method investee | | $ | 857 |
| | $ | 773 |
| | | $ | 711 |
| |
Interest expense, net | | (28,356 | ) | | (12,454 | ) | | | — |
| Interest expense, net | | $ | (23,442) | | | $ | (31,002) | |
Loss on derivatives, net | | — |
| | — |
| | | (18,127 | ) | Loss on derivatives, net | | — | | | (3,110) | |
Other expense, net | | (238 | ) | | (8,374 | ) | | | (50 | ) | |
Total other expense | | $ | (27,737 | ) | | $ | (20,055 | ) | | | $ | (17,466 | ) | |
Other income, net | | Other income, net | | 6,543 | | | 85 | |
Total other expense, net | | Total other expense, net | | $ | (16,899) | | | $ | (34,027) | |
| | | | | | | | |
Average Operating Costs per boe: | | | | | | | | Average Operating Costs per boe: | |
Lease operating expenses | | $ | 3.85 |
| | $ | 3.31 |
| | | $ | 2.90 |
| Lease operating expenses | | $ | 4.78 | | | $ | 3.86 | |
Gathering, transportation, and processing | | 1.43 |
| | 1.55 |
| | | 1.59 |
| Gathering, transportation, and processing | | 2.35 | | | 1.89 | |
Taxes other than income | | 2.20 |
| | 2.49 |
| | | 2.93 |
| Taxes other than income | | 3.42 | | | 2.32 | |
Exploration costs | | 0.52 |
| | 1.28 |
| | | 0.06 |
| |
Asset retirement obligation accretion | | 0.23 |
| | 0.18 |
| | | 0.01 |
| |
Exploration expenses | | Exploration expenses | | 0.42 | | | 0.17 | |
Asset retirement obligations accretion | | Asset retirement obligations accretion | | 0.12 | | | 0.20 | |
Depreciation, depletion and amortization | | 21.47 |
| | 19.15 |
| | | 16.98 |
| Depreciation, depletion and amortization | | 8.84 | | | 7.79 | |
Amortization of intangible assets | | 0.59 |
| | 0.65 |
| | | — |
| Amortization of intangible assets | | — | | | 0.39 | |
General and administrative expenses | | 2.85 |
| | 3.10 |
| | | 1.57 |
| General and administrative expenses | | 2.63 | | | 3.12 | |
Transaction related costs | | 0.02 |
| | 2.65 |
| | | — |
| |
Lease operating expenses are the costs incurred in the operation of producing properties, including expenses for utilities, direct labor, water disposal, workover rigs, workover expenses, materials, and supplies. The 2019 Successor Period leaseLease operating expenses for the year ended December 31, 2022 were $39.5$38.5 million, or $0.92 per boe, higher than the combined 2018 Successor Period and 2018 Predecessor Periodyear ended December 31, 2021 primarily due to the inclusion of the Giddings Assets, recent acquisitions,an increase in costs including operating and continued development. The higher per boe cost in the 2019 Successor Period compared to the combined 2018 Successor Periodmaintenance costs, workover activities and 2018 Predecessor Period was primarily due to higher fixed costs per boe in the Giddings area.additional non-operated activities.
Gathering, transportation, and processing costs are costs incurred to deliver oil, natural gas, and NGLs to the market. Cost levels of theseThese expenses can vary based on the volume of oil, natural gas, and NGLs produced as well as the cost of commodity processing. The 2019 Successor Period gathering, transportation, and processing costs for the year ended December 31, 2022 were $7.6$19.2 million, or $0.46 per boe, higher than the combined 2018 Successor Period and 2018 Predecessor Periodyear ended December 31, 2021 primarily due to the inclusion of the Giddings Assets as the Giddings Assets produce moreincreased natural gas than the Karnes County Assetsproduction and require more gathering, transportation, and processing than the Karnes County Assets. The lower cost per boe in the 2019 Successor Period compared to the combined 2018 Successor Period and 2018 Predecessor Period was primarily attributable to the adoption of the new revenue recognition requirements that were not retroactively applied to the 2018 Predecessor Period.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. The 2019 Successor Period taxesTaxes other than income for the year ended December 31, 2022 were $6.8$38.2 million, or $1.10 per boe, higher than the combined 2018 Successor Period and 2018 Predecessor Periodyear ended December 31, 2021 primarily due to an increase in revenues. The lower costs per boe in the 2019 Successor Period compared to the combined 2018 Successor Periodoil, natural gas, and 2018 Predecessor Period were primarily due to the inclusion of the Giddings Assets as the Giddings Assets incur lower production taxes.NGL revenues.
The Company may also utilize borrowings under other various financing sources available to Magnolia, 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 orand debt securities and the timing of these offerings will depend upon various factors, including prevailing market conditions and the Company’s financial condition.
Operating cash flows are the Company’s primary source of liquidity and are impacted, in the short term 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, stock based compensation, amortization of deferred financing costs, the non-cash portion of exploration expenses, impairment of oil and natural gas properties, asset retirement obligationobligations accretion, and deferred income tax expense.taxes.