Magnolia Oil & Gas(MGY) - 2021 Q4 - Annual Report

Part I Business and Properties Magnolia Oil & Gas is an independent E&P company focused on Eagle Ford Shale and Austin Chalk in South Texas, prioritizing free cash flow and moderate growth - The company is an independent oil and gas producer with primary assets in the Karnes County and Giddings areas of South Texas, targeting the Eagle Ford Shale and Austin Chalk formations[58] - Magnolia's business strategy is centered on generating free cash flow, maintaining a conservative financial profile, and achieving moderate annual production growth with an efficient capital program[63][64] Asset and Production Overview (as of Dec 31, 2021) | Metric | Value | | :--- | :--- | | Total Acreage | 683,145 gross (471,263 net) acres | | - Karnes Area | 43,511 gross (23,785 net) acres | | - Giddings Area | 639,634 gross (447,478 net) acres | | Wells | 2,011 gross (1,292 net) | | 2021 Production | 66.0 Mboe/d | | 2021 Production Mix | 46% Oil, 30% Natural Gas, 24% NGLs | Estimated Proved Reserves (as of Dec 31, 2021) | Category | Oil (MMBbls) | Natural Gas (Bcf) | NGLs (MMBbls) | Total (MMboe) | | :--- | :--- | :--- | :--- | :--- | | Proved Developed | 46.7 | 216.3 | 27.1 | 109.8 | | Proved Undeveloped | 12.0 | 39.1 | 7.0 | 25.6 | | Total Proved | 58.7 | 255.4 | 34.1 | 135.4 | - In 2021, the company terminated its Services Agreement with EVOC, leading to the direct hiring of 192 employees to manage administrative, back-office, and field-level services internally[121][122] - As of December 31, 2021, 26% of Magnolia's total employee population were female and 31% identified as a minority group[126] Risk Factors The company faces significant risks from volatile commodity prices, operational uncertainties, geographic concentration, and increasing environmental regulations - The business is highly sensitive to volatile oil, natural gas, and NGL prices, which could adversely affect financial condition, results of operations, and the ability to fund capital expenditures[136] - The COVID-19 pandemic and potential resurgences pose risks of disrupting operations, reducing demand for oil and gas, and limiting access to transportation and storage facilities[133][134] - A significant portion of the company's producing properties are geographically concentrated in South Texas, making it vulnerable to regional supply/demand factors, regulatory changes, and severe weather events[153] - The company is subject to increasing risks from climate change, including stricter regulations on GHG and methane emissions, potential litigation, and reduced access to capital as financial institutions and investors shift away from fossil fuels[178][181] - In 2021, four customers accounted for an aggregate of 63% of total revenue, indicating a dependency on a small number of significant purchasers[159] - During the first quarter of 2020, the company recorded significant impairments of $1.9 billion on its properties due to a sharp decline in commodity prices, highlighting the risk of future write-downs[156] Unresolved Staff Comments The company reports no unresolved staff comments - None[202] Legal Proceedings The company is involved in ordinary course legal actions, including a lawsuit and a well permit appeal, with no expected material adverse effect - The company is a defendant in a lawsuit where plaintiffs claim a minority working interest in certain Karnes County Assets; however, co-defendants retained this liability[403] - Magnolia is appealing a District Court judgment that reversed a Texas Railroad Commission order granting a well permit in Karnes County[404] Mine Safety Disclosures This item is not applicable to the company - Not applicable[204] Information About Magnolia's Executive Officers and Directors This section provides biographical information for Magnolia's executive officers and directors, including Stephen I. Chazen (CEO) and Christopher G. Stavros (CFO) - Stephen I. Chazen serves as Chairman, President, and Chief Executive Officer[205] - Christopher G. Stavros serves as Executive Vice President and Chief Financial Officer[207] Part II Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities Magnolia's Class A Common Stock trades on NYSE (MGY); the company actively repurchased 8.7 million Class A shares and 13.0 million Class B units in 2021 - The company's Class A Common Stock is traded on the New York Stock Exchange under the ticker symbol 'MGY'[218] 2021 Share Repurchase Activity (Class A Common Stock) | Period | Number of Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | Jan 1 - Sep 30, 2021 | 5,992,545 | $12.32 | | Nov 1 - Nov 30, 2021 | 1,739,206 | $19.37 | | Dec 1 - Dec 31, 2021 | 960,794 | $18.85 | | Total 2021 | 8,692,545 | $14.45 | - In February 2022, the board of directors increased the share repurchase authorization by an additional 10.0 million shares, bringing the total authorization to 30.0 million shares[220] - In 2021, Magnolia LLC repurchased and canceled 13.0 million of its units along with an equal number of Class B Common Stock for $171.7 million[221] Management's Discussion and Analysis of Financial Condition and Results of Operations Magnolia's 2021 financial performance significantly improved with revenues nearly doubling to $1.08 billion and net income reaching $417.3 million, driven by strong commodity prices 2021 vs. 2020 Revenue and Production Comparison | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Total Revenues | $1,078.4 million | $541.3 million | | Total Production | 24,099 Mboe | 22,631 Mboe | | Avg. Daily Production | 66,025 boe/d | 61,833 boe/d | | Avg. Oil Price | $66.83 /bbl | $36.31 /bbl | | Avg. Natural Gas Price | $3.97 /Mcf | $1.79 /Mcf | | Avg. NGL Price | $27.84 /bbl | $11.10 /bbl | 2021 vs. 2020 Operating Results | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Net Income (Loss) Attributable to Class A Common Stock | $417.3 million | ($1,208.4 million) | | Diluted EPS | $2.36 | ($7.27) | | Impairment of Oil & Gas Properties | $0 | $1,381.3 million | | Exploration Expenses | $4.1 million | $567.3 million | 2021 vs. 2020 Cash Flow Summary (in thousands) | Cash Flow Category | 2021 | 2020 | | :--- | :--- | :--- | | Net Cash from Operating Activities | $788,477 | $310,121 | | Net Cash Used in Investing Activities | ($243,442) | ($269,988) | | Net Cash Used in Financing Activities | ($370,614) | ($30,205) | | Increase in Cash | $174,421 | $9,928 | - As of December 31, 2021, the company had total liquidity of $817.0 million, consisting of $367.0 million in cash and $450.0 million of borrowing capacity under its RBL Facility, with no outstanding borrowings[257] - Critical accounting estimates include proved oil and natural gas reserves, which impact DD&A and impairment calculations, and the assessment of long-lived assets for impairment, which led to a $1.9 billion charge in 2020[269][277] Quantitative and Qualitative Disclosures about Market Risk The company's primary market risk is commodity price volatility; a $1.00/bbl oil price change impacts revenue by $11.2 million, and a $0.10/Mcf gas price change by $4.3 million - The primary market risk exposure is from the volatile and unpredictable prices of oil, natural gas, and NGLs[280] - A $1.00 per barrel change in the weighted average oil price would have changed 2021 revenues by approximately $11.2 million[280] - A $0.10 per Mcf change in the weighted average natural gas price would have changed 2021 revenues by approximately $4.3 million[280] - The company is exposed to interest rate risk on its RBL Facility, but had no outstanding borrowings as of December 31, 2021[279] Financial Statements and Supplementary Data This section presents audited consolidated financial statements, including KPMG's unqualified opinion, and supplementary unaudited oil and gas producing activity data Report of Independent Registered Public Accounting Firm KPMG LLP issued unqualified opinions on Magnolia's 2021 financial statements and internal controls, highlighting oil and gas reserve estimates as a critical audit matter - KPMG LLP provided an unqualified audit opinion on the consolidated financial statements for the three-year period ended December 31, 2021[283] - KPMG LLP issued an unqualified opinion on the effectiveness of the Company's internal control over financial reporting as of December 31, 2021[293] - The critical audit matter identified was the assessment of the impact of estimated oil and natural gas reserves on depreciation, depletion, and amortization (DD&A) expense, due to the complex judgment involved in evaluating assumptions about future production and costs[289] Consolidated Financial Statements Consolidated financial statements show significant 2021 improvement, with total assets at $1.75 billion, net income of $559.7 million, and operating cash flow of $788.5 million Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Cash and cash equivalents | $366,982 | $192,561 | | Total Assets | $1,746,742 | $1,453,420 | | Long-term debt, net | $388,087 | $391,115 | | Total Equity | $1,045,249 | $839,422 | Consolidated Statement of Operations Highlights (in thousands) | Account | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Total Revenues | $1,078,351 | $541,303 | $942,156 | | Operating Income (Loss) | $602,594 | ($1,925,666) | $127,502 | | Net Income (Loss) | $559,716 | ($1,868,983) | $85,005 | | Diluted EPS | $2.36 | ($7.27) | $0.28 | Notes to Consolidated Financial Statements Notes detail accounting policies, debt structure (including $400 million Senior Notes), tax rate drivers, significant shareholder returns, and 63% revenue concentration from four customers - The company uses the successful efforts method of accounting for its oil and natural gas properties[322] - As of Dec 31, 2021, long-term debt consisted of $400.0 million in 6.0% Senior Notes due 2026. The company had no outstanding borrowings under its RBL Facility, which had a borrowing base of $450.0 million[386][387] - The company's effective tax rate of 1.6% for 2021 differed from the 21% statutory rate primarily due to income attributable to noncontrolling interests and a full valuation allowance of $184.3 million against its net deferred tax assets[412][417] - In 2021, the company returned significant capital to shareholders, including repurchasing 8.7 million Class A shares for $125.6 million, repurchasing 13.0 million Class B units/shares for $171.7 million, and paying its first semi-annual dividend of $0.08 per share[425][427][429] - For the year ended December 31, 2021, four customers accounted for 22%, 15%, 15%, and 11% of combined revenue, respectively, indicating significant customer concentration[451] Supplemental Information About Oil & Natural Gas Producing Activities (Unaudited) Unaudited supplemental data shows 2021 proved reserves increased to 135.4 MMboe, and the standardized measure of discounted future net cash flows more than doubled to $2.07 billion Changes in Proved Reserves (MMboe) | Description | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Balance, Beginning of Year | 112.3 | 109.3 | 100.5 | | Extensions | 37.2 | 26.1 | 26.3 | | Revisions of previous estimates | 9.6 | (2.7) | (1.7) | | Purchases of reserves in place | 0.4 | 2.2 | 8.6 | | Production | (24.1) | (22.6) | (24.4) | | Balance, End of Year | 135.4 | 112.3 | 109.3 | - The increase in proved reserves in 2021 was primarily due to 37.2 MMboe in extensions from drilling activities and 9.6 MMboe in positive revisions, largely driven by a 17.1 MMboe increase from higher SEC-based prices[462][463] Standardized Measure of Discounted Future Net Cash Flows (in thousands) | Year-End | Standardized Measure | | :--- | :--- | | 2021 | $2,072,262 | | 2020 | $1,004,952 | | 2019 | $1,625,468 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[470] Controls and Procedures Management, including the CEO and CFO, concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2021 - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of December 31, 2021[471] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2021, based on the COSO framework[473] - There were no changes in the system of internal control over financial reporting during the fourth quarter of 2021 that materially affected, or are reasonably likely to materially affect, the company's internal controls[475] Other Information On February 16, 2022, the RBL Facility was amended, extending maturity to February 2026, maintaining a $450.0 million borrowing base, and revising covenants - On February 16, 2022, the company amended and restated its RBL Facility, extending the maturity to February 2026 and maintaining the $450.0 million borrowing base[476] - The amended facility's borrowings will bear interest based on the SOFR rate, and it includes revised financial covenants, such as a leverage ratio of less than 3.50 to 1.00[477][478] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - Not applicable[480] Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the Definitive Proxy Statement Executive Compensation Executive compensation information is incorporated by reference from the company's Definitive Proxy Statement Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership information for beneficial owners and management is incorporated by reference from the Definitive Proxy Statement Certain Relationships and Related Transactions, and Director Independence Information on related party transactions and director independence is incorporated by reference from the Definitive Proxy Statement Principal Accountant Fees and Services Information on principal accountant fees and services by KPMG LLP is incorporated by reference from the Definitive Proxy Statement Part IV Exhibits and Financial Statement Schedules This section lists financial statements, schedules, and exhibits included in or filed with the Form 10-K, referencing consolidated financial statements in Part II, Item 8 Form 10-K Summary The company reports no Form 10-K summary - None[497]