What changed in this filing

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Item 1. Financial Statements

2020-11-06 compared with 2020-08-06 · 152 added, 107 removed, 393 unchanged (40% of the section changed)

3 unchanged sentences

(In thousands)

June 30, 2020

December 31, 2019

September 30, 2020 December 31, 2019

ASSETS (Unaudited) (Audited)

43 unchanged sentences

(In thousands, except per share data)

Three Months Ended Six Months Ended

June 30, 2020

June 30, 2019

June 30, 2020

June 30, 2019

Three Months Ended Nine Months Ended

September 30, 2020 September 30, 2019 September 30, 2020 September 30, 2019

Oil revenues $ 95,677 $ 207,840 $ 311,153 $ 584,009

18 unchanged sentences

Interest expense, net ( 7,333 ) ( 6,896 ) ( 21,345 ) ( 21,611 )

Loss on derivatives, net ( 2,208 ) — ( 2,208 ) —

Other income (expense), net ( 51 ) 21 ( 510 ) 8

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Net income (loss) attributable to noncontrolling interest 4,548 6,810 ( 674,860 ) 29,294

NET INCOME ATTRIBUTABLE TO MAGNOLIA 9,147 10,547 ( 1,236,135 ) 42,079

Non-cash deemed dividend related to warrant exchange — 2,763 — 2,763

NET INCOME (LOSS) ATTRIBUTABLE TO CLASS A COMMON STOCK $ 9,147 $ 7,784 $ ( 1,236,135 ) $ 39,316

10 unchanged sentences

Common Stock Class B

Common Stock Additional Paid In Capital Retained Earnings Total Stockholders’ Equity Noncontrolling Interest Total

Shares Value Shares Value

Common Stock Additional Paid In Capital Treasury Stock Retained Earnings Total Stockholders’ Equity Noncontrolling Interest Total

Shares Value Shares Value Shares Value

Balance, December 31, 2018 156,333 $ 16 93,346 $ 9 $ 1,641,237 — $ — $ 35,507 $ 1,676,769 $ 1,031,186 $ 2,707,955

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Balance, June 30, 2019 158,892 $ 16 91,790 $ 9 $ 1,672,516 — $ — $ 67,039 $ 1,739,580 $ 1,044,568 $ 2,784,148

Stock based compensation expense — — — — 2,829 — — — 2,829 — 2,829

Changes in ownership interest adjustment — — — — 28,215 — — — 28,215 ( 36,715 ) ( 8,500 )

Common stock issued in connection with warrants exchange 9,179 1 — — 1,624 — — ( 2,763 ) ( 1,138 ) — ( 1,138 )

Common stock issued related to stock based compensation, net 189 — — — ( 532 ) — — — ( 532 ) — ( 532 )

Common stock repurchased — — — — — 950 ( 9,722 ) — ( 9,722 ) — ( 9,722 )

Distributions to noncontrolling interest owners — — — — — — — — — ( 489 ) ( 489 )

Net income — — — — — — — 10,547 10,547 6,810 17,357

Balance, September 30, 2019 168,260 $ 17 91,790 $ 9 $ 1,704,652 950 $ ( 9,722 ) $ 74,823 $ 1,769,779 $ 1,014,174 $ 2,783,953

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

10 unchanged sentences

Common stock issued related to stock based compensation, net 154 — — — ( 452 ) — — — ( 452 ) — ( 452 )

Class A Common Stock repurchase — — — — — 1,000 ( 6,483 ) — ( 6,483 ) — ( 6,483 )

Class A Common Stock repurchases — — — — — 1,000 ( 6,483 ) — ( 6,483 ) — ( 6,483 )

Distributions to noncontrolling interest owners — — — — — — — — — ( 284 ) ( 284 )

7 unchanged sentences

Balance, June 30, 2020 168,587 $ 17 85,790 $ 9 $ 1,706,121 2,000 $ ( 16,760 ) $ ( 1,162,342 ) $ 527,045 $ 275,279 $ 802,324

Stock based compensation expense — — — — 2,927 — — — 2,927 — 2,927

Changes in ownership interest adjustment — — — — 175 — — — 175 ( 175 ) —

Common stock issued related to stock based compensation and other, net 89 — — — ( 180 ) — — — ( 180 ) — ( 180 )

Class A Common Stock repurchases — — — — — 1,100 ( 6,480 ) — ( 6,480 ) — ( 6,480 )

Distributions to noncontrolling interest owners — — — — — — — — — ( 105 ) ( 105 )

Net income — — — — — — — 9,147 9,147 4,548 13,695

Balance, September 30, 2020 168,676 $ 17 85,790 $ 9 $ 1,709,043 3,100 $ ( 23,240 ) $ ( 1,153,195 ) $ 532,634 $ 279,547 $ 812,181

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

2 unchanged sentences

( In thousands)

Six Months Ended

June 30, 2020 June 30, 2019

Nine Months Ended

September 30, 2020 September 30, 2019

CASH FLOWS FROM OPERATING ACTIVITIES

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Impairment of oil and natural gas properties 1,381,258 —

Asset retirement obligations accretion expense 2,902 2,701

Asset retirement obligation accretion 4,403 4,095

Amortization of deferred financing costs 2,710 2,644

Loss on derivatives, net 2,208 —

Deferred tax expense (benefit) ( 77,834 ) 11,765

18 unchanged sentences

Distributions to noncontrolling interest owners ( 594 ) ( 716 )

Class A Common Stock repurchase ( 6,483 ) —

Class A Common Stock repurchases ( 12,962 ) ( 9,722 )

Other financing activities ( 702 ) ( 2,666 )

Net cash provided by (used in) financing activities ( 7,466 ) 6,770

Net cash used in financing activities ( 14,258 ) ( 5,803 )

NET CHANGE IN CASH AND CASH EQUIVALENTS ( 34,100 ) 28,731

3 unchanged sentences

Supplemental non-cash operating activity:

Cash paid for income taxes $ — $ 390

Cash paid (received) for income taxes $ ( 724 ) $ 390

Cash paid for interest 25,445 25,687

2 unchanged sentences

Equity issuances in connection with acquisitions — 33,693

Non-cash deemed dividend related to warrant exchange — 2,763

Supplemental non-cash lease operating activity:

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Magnolia Oil & Gas Corporation (the “Company” or “Magnolia”) is an independent oil and natural gas company engaged in the acquisition, development, exploration, and production of oil, natural gas, and natural gas liquid (“NGL”) reserves.

The Company’s oil and natural gas properties are located primarily in Karnes County and the Giddings Field in South Texas where the Company targets the Eagle Ford Shale and Austin Chalk formations.

The Company’s oil and natural gas properties are located primarily in Karnes County and the Giddings area in South Texas where the Company targets the Eagle Ford Shale and Austin Chalk formations.

Magnolia’s objective is to generate stock market value over the long term through consistent organic production growth, high full cycle operating margins, an efficient capital program with short economic paybacks, significant free cash flow after capital expenditures, and effective reinvestment of free cash flow.

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Accordingly, certain disclosures normally included in an Annual Report on Form 10-K have been omitted.

The consolidated financial statements and related notes included in this Quarterly Report should be read in conjunction with the Company’s consolidated and combined financial statements and related notes included in the Company’s Annual Report on Form 10-K for the period ended December 31, 2019.

Except as disclosed herein, there have been no material changes to the information disclosed in the notes to the consolidated and combined financial statements included in the Company’s Annual Report on Form 10-K for the period ended December 31, 2019.

In the opinion of management, all normal, recurring adjustments and accruals considered necessary to present fairly, in all material respects, the Company’s interim financial results, have been included.

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Summary of Significant Accounting Policies

As of June 30, 2020, the Company’s significant accounting policies are consistent with those discussed in Note 2 - Summary of Significant Accounting Policies of its consolidated and combined financial statements contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019, with the exception of Accounts Receivable and Allowance for Expected Credit Losses and as noted below.

As of September 30, 2020, the Company’s significant accounting policies are consistent with those discussed in Note 2 — Summary of Significant Accounting Policies of its consolidated and combined financial statements contained in the Company’s 2019 Form 10-K, with the exception of Accounts Receivable and Allowance for Expected Credit Losses and as noted below.

Accounts Receivable and Allowance for Expected Credit Losses

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Recent Accounting Pronouncements

On August 26, 2020, the SEC adopted amendments to its rules in Regulation S-K to streamline the disclosures, which registrants are required to make about business, legal proceedings and risk factors and to add new requirements for disclosures about human capital resources.

The amendments take a principles-based approach that gives registrants flexibility to tailor disclosures to their circumstances.

The final rules become effective November 9, 2020 and will be incorporated in the Company’s Annual Report on Form 10-K for the period ending December 31, 2020.

In December 2019, the FASB issued ASU No.

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The Company is currently evaluating the effect of this standard, but does not expect the adoption of this guidance to have a material impact on its financial position, cash flows, or result of operations.

In May 2020, the SEC adopted final rules that amend the financial statement disclosure requirements for significant business acquisitions and dispositions.

Among other changes, the final rules modify the significance tests and improve the disclosure requirements for acquired or to be acquired businesses and related pro forma financial information, the periods those financial statements must cover, and the form and content of the pro forma financial information.

The final rules do not modify requirements for the acquisition and disposition of significant amounts of assets that do not constitute a business.

The final rules are effective January 1, 2021, but earlier compliance is permitted.

The Company plans to comply with the final rules during 2020, if applicable.

Revenue Recognition

12 unchanged sentences

There are no judgments that significantly affect the amount or timing of revenue from contracts with customers.

Accordingly, the Company’s product sales contracts do not give rise to material contract assets or contract liabilities.

Additionally, the Company’s product sales contracts do not give rise to material contract assets or contract liabilities.

The Company’s receivables consist mainly of trade receivables from commodity sales and joint interest billings due from owners on properties the Company operates.

Receivables from contracts with customers totaled $ 51.3 million as of June 30, 2020 and $ 100.4 million as of December 31, 2019.

Receivables from contracts with customers totaled $ 52.3 million as of September 30, 2020 and $ 100.4 million as of December 31, 2019.

The Company has concluded that disaggregating revenue by product type appropriately depicts how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors and has reflected this disaggregation of revenue on the Company’s consolidated statements of operations for all periods presented.

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The Company considers a variety of facts and circumstances in assessing the point of control transfer, including but not limited to:

whether the purchaser can direct the use of the hydrocarbons, the transfer of significant risks and rewards, the Company’s right to payment, and transfer of legal title.

the purchaser can direct the use of the hydrocarbons, the transfer of significant risks and rewards, the Company’s right to payment, and transfer of legal title.

The Company does not disclose the value of unsatisfied performance obligations for contracts as all contracts have either an original expected length of one year or less, or the entire future consideration is variable and allocated entirely to a wholly unsatisfied performance obligation.

2020 Acquisitions

On February 21, 2020, the Company completed the acquisition of certain non-operated oil and natural gas assets located in Karnes and DeWitt Counties, Texas, for approximately $ 72.0 million in cash, subject to customary closing adjustments.

On February 21, 2020, the Company completed the acquisition of certain non-operated oil and natural gas assets located in Karnes and DeWitt Counties, Texas, for approximately $ 69.7 million in cash.

The transaction was accounted for as an asset acquisition.

2019 Acquisitions

On May 31, 2019, the Company completed the acquisition of certain oil and natural gas assets located in the Company’s Karnes County Assets for approximately $ 36.3 million in cash and approximately 3.1 million shares of the Company’s Class A Common Stock.

On May 31, 2019, the Company completed the acquisition of certain oil and natural gas assets primarily located in Gonzales and Karnes Counties for approximately $ 36.3 million in cash and approximately 3.1 million shares of the Company’s Class A Common Stock.

The transaction was accounted for as an asset acquisition.

On February 5, 2019, Magnolia Operating formed a joint venture, Highlander Oil & Gas Holdings LLC (“Highlander”), 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 and 31.1 million royalty trust units in the Gulf Coast Ultra Deep Royalty Trust from McMoRan Oil & Gas, LLC.

2 unchanged sentences

The transaction was accounted for as an asset acquisition.

Derivative Instruments

Magnolia currently utilizes natural gas costless collars to reduce its exposure to price volatility for a portion of its natural gas production volumes.

The Company’s policies do not permit the use of derivative instruments for speculative purposes.

The Company’s natural gas costless collar derivative contracts are indexed to the Houston Ship Channel.

Under the Company’s costless collar contracts, each collar has an established floor price and ceiling price.

When the settlement price is below the floor price, the counterparty is required to make a payment to the Company and when the settlement price is above the ceiling price, the Company is required to make a payment to the counterparty.

When the settlement price is between the floor and the ceiling, there is no payment required.

The Company has elected not to designate any of its derivative instruments as hedging instruments.

Accordingly, changes in the fair value of the Company’s derivative instruments are recorded immediately to earnings as “Loss on derivatives, net” on the Company’s consolidated statement of operations.

For the three and nine months ended September 30, 2020, the Company recognized a $ 2.2 million unrealized loss related to its derivative instrument.

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

The Company had the following outstanding derivative contracts in place as of September 30, 2020:

Natural gas costless collars:

Notional volume (MMBtu) 4,600,000 12,150,000

Weighted average floor price ($/MMBtu) $ 2.31 $ 2.31

Weighted average ceiling price ($/MMBtu) $ 3.00 $ 3.00

See Note 6 — F air Value Measurem ent for the fair value hierarchy of the Company’s derivative contracts.

Fair Value Measurements

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The inputs used in determination of fair value require significant judgment and estimation.

Fair Value of Financial Instruments

Recurring Fair Value Measurements

Debt Obligations

The carrying value and fair value of the financial instrument that is not carried at fair value in the accompanying consolidated balance sheet at June 30, 2020 and December 31, 2019 is as follows:

June 30, 2020 December 31, 2019

The carrying value and fair value of the financial instrument that is not carried at fair value in the accompanying consolidated balance sheet at September 30, 2020 and December 31, 2019 is as follows:

September 30, 2020 December 31, 2019

(In thousands) Carrying Value Fair Value Carrying Value Fair Value

Long-term debt $ 390,787 $ 392,000 $ 389,835 $ 412,000

The fair value of the 2026 Senior Notes at June 30, 2020 and December 31, 2019 was based on unadjusted quoted prices in an active market, which are considered a Level 1 input in the fair value hierarchy.

The fair value of the 2026 Senior Notes at September 30, 2020 and December 31, 2019 is based on unadjusted quoted prices in an active market, which are considered a Level 1 input in the fair value hierarchy.

The Company has other financial instruments consisting primarily of receivables, payables, and other current assets and liabilities that approximate fair value due to the nature of the instrument and their relatively short maturities.

Non-financial assets and liabilities initially measured at fair value include assets acquired and liabilities assumed in business combinations and asset retirement obligations.

Derivative Instruments

The fair value of the Company’s natural gas costless collar derivative instruments are measured using an industry-standard pricing model and are provided by a third party.

The inputs used in the third-party pricing model include quoted forward prices for natural gas, the contracted volumes, volatility factors, and time to maturity, which are considered Level 2 inputs.

The Company’s derivative instruments are recorded at fair value within “Other current liabilities” on the Company’s consolidated balance sheet as of September 30, 2020.

These fair values are recorded by netting asset and liability positions with the same counterparty and are subject to contractual terms, which provide for net settlement.

There are no long-term derivative assets or liabilities as of September 30, 2020 and there were no outstanding derivative instruments as of December 31, 2019.

The following table presents the classification of the outstanding derivative instruments and the fair value hierarchy table for the Company’s derivative assets and liabilities that are required to be measured at fair value on a recurring basis:

Fair Value Measurements Using

(In thousands) Level 1 Level 2 Level 3 Total Fair Value Netting Carrying Amount

September 30, 2020

Current assets:

Natural gas derivative instruments $ — $ 2,181 $ — $ 2,181 $ ( 2,181 ) $ —

Current liabilities:

Natural gas derivative instruments $ — $ 4,389 $ — $ 4,389 $ ( 2,181 ) $ 2,208

See Note 5 — Derivative Instruments for notional volumes and terms with the Company’s derivative contracts.

Nonrecurring Fair Value Measurements

7 unchanged sentences

Significant inputs associated with the calculation of discounted future net cash flows include estimates of future commodity prices based on NYMEX strip pricing adjusted for price differentials, estimates of proved oil and natural gas reserves and risk adjusted probable and possible reserves, estimates of future expected operating and capital costs, and a market participant based weighted average cost of capital of 10 % for proved property impairments and 12 % for unproved property impairments.

Deemed Dividend

In July 2019, the Company issued an aggregate of 9.2 million shares of Class A Common Stock in exchange for all of its warrants.

The difference in fair value between the Class A Common Stock issued and the warrants exchanged was recorded as a non-cash deemed dividend for the incremental value provided to the holders of the warrants.

The fair value of the non-cash deemed dividend related to the warrant exchange was determined based on unadjusted quoted prices in an active market, which are considered a Level 1 input in the fair value hierarchy.

Refer to Note 1 2 — Stockholders’ Equity for additional information.

Intangible Assets

Non-Compete Agreement

On July 31, 2018, the Company and EnerVest, separate and apart from the Business Combination, entered into a non-compete agreement (the “Non-Compete”), which prohibits EnerVest and certain of its affiliates from competing with the Company in the Eagle Ford Shale (the “Market Area”) until the later of July 31, 2022 or the date the Services Agreement is terminated.

Under the Non-Compete, an affiliate of EnerVest will have the right to receive 4.0 million shares of Class A Common Stock in two tranches of 2.0 million shares in two and one half and four years from July 31, 2018 provided EnerVest does not compete in the Market Area.

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The Company includes the amortization in “Amortization of intangible assets” on the Company’s consolidated statements of operations.

(In thousands) June 30, 2020 December 31, 2019

(In thousands) September 30, 2020 December 31, 2019

Non-compete intangible assets $ 44,400 $ 44,400

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The following table provides detail of the Company’s other current liabilities for the periods presented:

(In thousands) June 30, 2020 December 31, 2019

(In thousands) September 30, 2020 December 31, 2019

Accrued capital expenditures $ 21,750 $ 40,722

Accrued general and administrative expenditures 9,703 9,753

Accrued interest 10,000 10,000

Accrued ad valorem taxes 7,027 8,741

Other 22,507 36,564

2 unchanged sentences

The Company’s debt is comprised of the following:

(In thousands) June 30, 2020 December 31, 2019

(In thousands) September 30, 2020 December 31, 2019

Revolving credit facility $ — $ —

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In connection with the consummation of the Business Combination, Magnolia Operating entered into the RBL Facility among Magnolia Operating, as borrower, Magnolia Intermediate, as its holding company, the banks, financial institutions, and other lending institutions from time to time party thereto, as lenders, the other parties from time to time party thereto and Citibank, N.A., as administrative agent, collateral agent, issuing bank, and swingline lender, providing for maximum commitments in an aggregate principal amount of $ 1.0 billion with a letter of credit facility with a $ 100.0 million sublimit.

The borrowing base as of June 30, 2020 was $ 450.0 million.

The borrowing base as of September 30, 2020 was $ 450.0 million.

On October 15, 2020, Magnolia Operating entered into a Borrowing Base Redetermination Agreement and Amendment No.

2 to the RBL Facility, which provided for, among other things, the reaffirmation of the borrowing base at $ 450.0 million as part of the semi-annual scheduled redetermination.

The RBL Facility is guaranteed by certain parent companies and subsidiaries of Magnolia LLC and is collateralized by certain of Magnolia Operating’s oil and natural gas properties and has a borrowing base subject to semi-annual redetermination.

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The RBL Facility contains certain affirmative and negative covenants customary for financings of this type, including compliance with a leverage ratio of less than 4.00 to 1.00 and, if the leverage ratio is in excess of 3.00 to 1.00, a current ratio of greater than 1.00 to 1.00.

As of June 30, 2020, the Company was in compliance with all covenants under the RBL Facility.

As of September 30, 2020, the Company was in compliance with all covenants under the RBL Facility.

Deferred financing costs incurred in connection with securing the RBL Facility were $ 11.7 million, which are amortized on a straight-line basis over a period of five years and included in “Interest expense, net” in the Company’s consolidated statements of operations.

The Company recognized interest expense related to the RBL Facility of $ 1.0 million and $ 1.1 million for the three months ended June 30, 2020 and 2019, respectively, and $ 2.2 million for each of the six months ended June 30, 2020 and 2019.

The unamortized portion of the deferred financing costs are included in “Deferred financing costs, net” on the accompanying consolidated balance sheet as of June 30, 2020.

The Company did no t have any outstanding borrowings under its RBL Facility as of June 30, 2020.

The Company recognized interest expense related to the RBL Facility of $ 1.0 million and $ 1.1 million for the three months ended September 30, 2020 and 2019, respectively, and $ 3.2 million and $ 3.4 million for the nine months ended September 30, 2020 and 2019, respectively.

The unamortized portion of the deferred financing costs are included in “Deferred financing costs, net” on the accompanying consolidated balance sheet as of September 30, 2020.

The Company did no t have any outstanding borrowings under its RBL Facility as of September 30, 2020.

2026 Senior Notes

On July 31, 2018, the Issuers issued and sold $ 400.0 million aggregate principal amount of 2026 Senior Notes.

On July 31, 2018, the Issuers issued and sold $ 400.0 million aggregate principal amount of 2026 Senior Notes in a private placement under Rule 144A and Regulation S under the Securities Act of 1933.

The 2026 Senior Notes were issued under the Indenture, dated as of July 31, 2018 (the “Indenture”), by and among the Issuers and Deutsche Bank Trust Company Americas, as trustee.

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These costs are amortized using the effective interest method over the term of the 2026 Senior Notes and are included in “Interest expense, net” in the Company’s consolidated statements of operations.

The unamortized portion of the deferred financing costs is included as a reduction to the carrying value of the 2026 Senior Notes, which have been recorded as “Long-term debt, net” on

the consolidated balance sheet as of June 30, 2020.

The Company recognized interest expense related to the 2026 Senior Notes of $ 6.3 million for each of the three months ended June 30, 2020 and 2019, and $ 12.6 million for each of the six months ended June 30, 2020 and 2019.

Affiliate Guarantors

The Company, Magnolia LLC and Magnolia Intermediate (together with the Company, the “Parent Guarantors”), and certain subsidiaries of Magnolia Operating are guarantors under the terms of its 2026 Senior Notes and RBL Facility.

The Parent Guarantors may be released upon the request of Magnolia Operating.

Magnolia’s consolidated financial statements reflect the financial position of these subsidiary guarantors.

As the parent company, Magnolia has no independent operations.

The guarantees are full and unconditional (except for customary release provisions) and joint and several.

There are restrictions on dividends, distributions, loans, or other transfers of funds from the subsidiary guarantors to the Company.

The unamortized portion of the deferred financing costs is included as a reduction to the carrying value of the 2026 Senior Notes, which have been recorded as “Long-term debt, net” on the consolidated balance sheet as of September 30, 2020.

The Company recognized interest expense related to the 2026 Senior Notes of $ 6.3 million for each of the three months ended September 30, 2020 and 2019, and $ 19.0 million and $ 18.9 million for the nine months ended September 30, 2020 and 2019, respectively.

Commitments and Contingencies

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The Karnes County Contributors retained all such liability in connection with the Business Combination.

At June 30, 2020, the Company does not believe the outcome of any such disputes or legal actions will have a material effect on its consolidated statements of operations, balance sheet, or cash flows.

No amounts were accrued with respect to outstanding litigation at June 30, 2020 or June 30, 2019.

At September 30, 2020, the Company does not believe the outcome of any such disputes or legal actions will have a material effect on its consolidated statements of operations, balance sheet, or cash flows.

No amounts were accrued with respect to outstanding litigation at September 30, 2020 or September 30, 2019.

Environmental Matters

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Oil demand has significantly deteriorated as a result of the virus outbreak and corresponding preventative measures taken around the world to mitigate the spread of the virus.

The implications of the decrease in global demand for oil, coupled with the general oversupply, may have further negative effects on the Company’s business, such as production curtailment, reduced storage capacity, and reductions to its operating plans.

During the second quarter of 2020, and thus far during the third quarter of 2020, there have been continued and, in certain cases, increasing outbreaks of COVID-19 in the United States, particularly in Texas, where Magnolia conducts substantially all of its operations.

Demand and pricing may again decline due to the resurgence of the outbreak across the U.S.

The implications of the decrease in global demand for oil, coupled with the general oversupply, may have further negative effects on the Company’s business, such as production curtailment and reductions to its operating plans as a result of decreased prices and reduced storage capacity.

Demand and pricing may again decline if there is a resurgence of the outbreak across the U.S.

and other locations across the world and the related social distancing guidelines, travel restrictions, and stay-at-home orders.

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The CARES Act includes several significant business tax provisions that, among other things, allow businesses to carry back net operating losses (“NOL”) arising in 2018, 2019, and 2020 to the five prior tax years.

Applying the NOL carryback provision resulted in an income tax benefit of $ 1.2 million during the six months ended June 30, 2020.

Applying the NOL carryback provision resulted in an income tax benefit of $ 1.2 million during the nine months ended September 30, 2020.

The difference in the U.S.

federal statutory tax rate of 34% in 2017 compared to 21% in 2018 and thereafter results in a discrete benefit to the tax provision of approximately $ 0.4 million for the six months ended June 30, 2020.

The income tax expense or benefit recorded for the period is based on applying an estimated annual effective income tax rate to the net income or loss for the three and six months ended June 30, 2020 and 2019.

federal statutory tax rate of 34% in 2017 compared to 21% in 2018 and thereafter resulted in a discrete benefit to the tax provision of approximately $ 0.4 million for the nine months ended September 30, 2020.

The income tax expense or benefit recorded for the period is based on applying an estimated annual effective income tax rate to the net income or loss for the three and nine months ended September 30, 2020 and 2019.

The computation of the annual estimated effective tax rate at each interim period requires certain estimates and significant judgment including, but not limited to, the Company’s expected operating income for the year, projections of the proportion of income earned and taxed in various jurisdictions, the effect of noncontrolling interest, permanent and temporary differences, and the likelihood of recovering deferred tax assets in the current year.

The accounting estimates used to compute the income tax expense or benefit may change as new events occur, more experience is obtained, additional information becomes known, or as the tax environment changes.

The Company’s effective tax rate for the three months ended June 30, 2020 and 2019 was 9.8 % and 14.1 %, respectively.

The Company’s effective tax rate for the six months ended June 30, 2020 and 2019 was 3.9 % and 14.2 %, respectively.

The primary differences between the effective tax rate and the federal statutory tax rate of 21.0% are income attributable to noncontrolling interest, the recognition of a valuation allowance on federal and state deferred tax assets, and state taxes.

During the six months ended June 30, 2020, Magnolia’s effective tax rate was primarily impacted by the reversal of its deferred tax liability, the recognition of valuation allowances for its deferred tax assets from non-cash impairments of the carrying value of the Company’s oil and natural gas properties, and the net deferred tax assets generated in this period.

The Company’s effective tax rate for the nine months ended September 30, 2020 and 2019 was 4.0 % and 14.9 %, respectively.

During the nine months ended September 30, 2020, the Company’s effective tax rate was primarily impacted by the reversal of its federal and state deferred tax liabilities and the federal and state deferred tax assets generated from losses related to non-cash impairments of the carrying value of the Company’s oil and natural gas properties, offset by the recognition of valuation allowances.

The primary differences between the annual effective tax rate and the federal statutory tax rate of 21.0% are income attributable to noncontrolling interest, the recognition of a valuation allowance on federal and state deferred tax assets, and state taxes.

During the first quarter of 2020, the Company moved from a net deferred tax liability position to an estimated net deferred tax asset position resulting primarily from oil and natural gas impairments.

As of June 30, 2020, the Company’s net deferred tax asset was $ 206.3 million.

As of September 30, 2020, the Company’s net deferred tax asset was $ 203.3 million.

Management assessed whether it is more-likely-than-not that it will generate sufficient taxable income to realize its deferred income tax assets, including the investment in partnership and net operating loss carryforwards.

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The Company considered, among other things, the overall business environment, its historical earnings and losses, current industry trends, and its outlook for future years.

As of June 30, 2020, the Company assessed the realizability of the deferred tax assets and recorded a full valuation allowance of $ 206.3 million.

As of September 30, 2020, the Company assessed the realizability of the deferred tax assets and recorded a full valuation allowance of $ 203.3 million.

The Company’s income tax provision consists of the following components:

Three Months Ended Six Months Ended

(In thousands) June 30, 2020

June 30, 2019

June 30, 2020

June 30, 2019

Three Months Ended Nine Months Ended

(In thousands) September 30, 2020 September 30, 2019 September 30, 2020 September 30, 2019

Federal $ — $ — $ ( 1,167 ) $ —

4 unchanged sentences

— 3,414 ( 77,834 ) 11,765

Total provision $ ( 3,176 ) $ 5,145 $ ( 79,001 ) $ 8,920

Income tax expense (benefit) $ ( 339 ) $ 3,529 $ ( 79,340 ) $ 12,449

The Company is subject to U.S.

federal income tax, the margin tax in the state of Texas, and Louisiana corporate income tax.

No amounts have been accrued for income tax uncertainties or interest and penalties as of June 30, 2020.

No amounts have been accrued for income tax uncertainties or interest and penalties as of September 30, 2020.

The Company is currently not aware of any issues under review that could result in significant payments, accruals, or material deviation from its position.

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Class A Common Stock

At June 30, 2020, there were 168.6 million shares of Class A Common Stock issued and 166.6 million shares of Class A Common Stock outstanding.

At September 30, 2020, there were 168.7 million shares of Class A Common Stock issued and 165.6 million shares of Class A Common Stock outstanding.

The holders of Class A Common Stock and Class B Common Stock vote together as a single class on all matters and are entitled one vote for each share held.

There is no cumulative voting with respect to the election of directors, which results in the holders of more than 50% of the shares being able to elect all of the directors, subject to voting obligations under the Stockholder Agreement.

liabilities and after provision is made for each class of stock, if any, having preference over the common stock.

In the event of a liquidation, dissolution, or winding up of Magnolia Oil & Gas Corporation, the holders of the Class A Common Stock are entitled to share ratably in all assets remaining available for distribution to them after payment of liabilities and after provision is made for each class of stock, if any, having preference over the common stock.

The holders of the Class A Common Stock have no preemptive or other subscription rights, and there are no sinking fund provisions applicable to such shares.

Class B Common Stock

At June 30, 2020, there were 85.8 million shares of Class B Common Stock issued and outstanding.

At September 30, 2020, there were 85.8 million shares of Class B Common Stock issued and outstanding.

Holders of Class B Common Stock vote together as a single class with holders of Class A Common Stock on all matters properly submitted to a vote of the stockholders.

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The holders of the Class B Common Stock have no preemptive or other subscription rights, and there are no sinking fund provisions applicable to such shares.

On June 7, 2019, the Company commenced an exchange offer (the “Offer”) and consent solicitation (the “Consent Solicitation”), pursuant to which the Company (1) offered to holders of its warrants the opportunity to receive 0.29 shares of Class A Common Stock in exchange for each warrant validly tendered and (2) solicited the consent from the holders of its warrants to approve an amendment to the Company’s existing warrant agreement, by and between the Company and Continental Stock Transfer & Trust Company, to amend the agreement to provide the Company with the right to require any holder of the Company’s warrants to exchange their warrants for Class A Common Stock at an exchange ratio of 0.261 shares of Class A Common Stock for each whole warrant (the “Warrant Amendment”).

Pursuant to the Offer, certain of the Company’s warrantholders, including directors and executive officers, agreed to tender their warrants and provide the corresponding consent to the Warrants Amendment in the Consent Solicitation by entering into a tender and support agreement with the Company on June 7, 2019.

The Offer and Consent Solicitation expired on July 5, 2019.

In connection with the closing of the Offer on July 10, 2019 and the subsequent exercise of the Company’s right to exchange all remaining warrants on July 25, 2019, the Company issued an aggregate of 9.2 million shares of Class A Common Stock in exchange for all of its 31.7 million warrants outstanding, which consisted of 21.7 million public warrants and 10.0 million private placement warrants.

As the fair value of the warrants exchanged in the Offer was less than the fair value of the Class A Common Stock issued, the Company recorded a non-cash deemed dividend of $ 2.8 million for the incremental value provided to the warrant holders.

The fair value of warrants and the Class A Common Stock was determined using unadjusted quoted prices in an active market, a Level 1 fair value input.

The Company capitalized $ 2.2 million of expenses related to the Offer within “Additional paid-in capital” on the Company’s consolidated balance sheet.

Share Repurchase Program

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The program does not require purchases to be made within a particular timeframe.

As of June 30, 2020, the Company had repurchased 2.0 million shares under the plan at a cost of $ 16.8 million.

No shares were repurchased in the second quarter of 2020.

As of September 30, 2020, the Company had repurchased 3.1 million shares under the plan at a cost of $ 23.2 million.

Noncontrolling Interest

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The noncontrolling interest percentage is affected by various equity transactions such as issuances of Class A Common Stock, the exchange of Class B Common Stock (and corresponding Magnolia LLC Units) for Class A Common Stock, or the cancellation of Class B Common Stock (and corresponding Magnolia LLC Units).

As of June 30, 2020, Magnolia owned approximately 66 % of the interest in Magnolia LLC and the noncontrolling interest was 34 %.

As of September 30, 2020, Magnolia owned approximately 66 % of the interest in Magnolia LLC and the noncontrolling interest was 34 %.

In the first quarter of 2019, Magnolia Operating formed Highlander as a joint venture where MGY Louisiana LLC, a wholly owned subsidiary of Magnolia Operating, holds approximately 85 % of the units in Highlander, with the remaining 15 % attributable to noncontrolling interest.

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Shares issued as a result of awards granted under the Plan are generally new shares of Class A Common Stock.

Stock based compensation expense is recognized net of forfeitures within “General and administrative expenses” on the consolidated statements of operations and was $ 3.1 million for each of the three months ended June 30, 2020 and 2019, and $ 5.9 million and $ 5.5 million for the six months ended June 30, 2020 and 2019, respectively.

Stock based compensation expense is recognized net of forfeitures within “General and administrative expenses” on the consolidated statements of operations and was $ 2.9 million and $ 2.8 million for the three months ended September 30, 2020 and 2019, respectively, and $ 8.9 million and $ 8.4 million for the nine months ended September 30, 2020 and 2019, respectively.

The Company has elected to account for forfeitures of awards granted under the Plan as they occur in determining compensation expense.

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Compensation expense for the service-based RSU awards is based upon the grant date market value of the award and such costs are recorded on a straight-line basis over the requisite service period for each separately vesting portion of the award, as if the award was, in-substance, multiple awards.

Unrecognized compensation expense related to unvested RSUs as of June 30, 2020 was $ 12.6 million, which the Company expects to recognize over a weighted average period of 1.9 years.

The table below summarizes RSU activity for the three and six months ended June 30, 2020:

Three Months Ended Six Months Ended

June 30, 2020 June 30, 2020

Unrecognized compensation expense related to unvested RSUs as of September 30, 2020 was $ 10.5 million, which the Company expects to recognize over a weighted average period of 1.7 years.

The table below summarizes RSU activity for the three and nine months ended September 30, 2020:

Three Months Ended Nine Months Ended

September 30, 2020 September 30, 2020

Restricted Stock Units Weighted Average Grant Date Fair Value Restricted Stock Units Weighted Average Grant Date Fair Value

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Performance Stock Units

During the six months ended June 30, 2020, the Company granted PSUs to certain employees.

During the nine months ended September 30, 2020, the Company granted PSUs to certain employees.

Each PSU, to the extent earned, represents the contingent right to receive one share of Class A Common Stock and the awardee may earn between zero and 150 % of the target number of PSUs granted based on the total shareholder return (“TSR”) of the Class A Common Stock relative to the TSR achieved by a specific industry peer group over a three-year performance period, the last day of which is also the vesting date.

In addition to the TSR conditions, vesting of the PSUs is subject to the awardee’s continued employment through the date of settlement of the PSUs, which will occur within 60 days following the end of the performance period.

Unrecognized compensation expense related to unvested PSUs as of June 30, 2020 was $ 6.4 million, which the Company expects to recognize over a weighted average period of 1.8 years.

The table below summarizes PSU activity for the three and six months ended June 30, 2020:

Three Months Ended Six Months Ended

June 30, 2020 June 30, 2020

Unrecognized compensation expense related to unvested PSUs as of September 30, 2020 was $ 5.1 million, which the Company expects to recognize over a weighted average period of 1.6 years.

The table below summarizes PSU activity for the three and nine months ended September 30, 2020:

Three Months Ended Nine Months Ended

September 30, 2020 September 30, 2020

Performance Stock Units Weighted Average Grant Date Fair Value Performance Stock Units Weighted Average Grant Date Fair Value

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Unvested PSUs, end of period 1,030,630 $ 11.22 1,030,630 $ 11.22

The grant date fair values of the PSUs granted were $ 2.5 million and $ 3.7 million during the six months ended June 30, 2020 and 2019, respectively, calculated using a Monte Carlo simulation.

The grant date fair values of the PSUs granted were $ 2.5 million and $ 3.7 million during the nine months ended September 30, 2020 and 2019, respectively, calculated using a Monte Carlo simulation.

The following table summarizes the assumptions used to calculate the grant date fair value of these PSUs.

Six Months Ended

Grant Date Fair Value Assumptions June 30, 2020

June 30, 2019

Nine Months Ended

Grant Date Fair Value Assumptions September 30, 2020 September 30, 2019

Expected term (in years)

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A reconciliation of the numerators and denominators of the basic and diluted per share computations follows:

Three Months Ended Six Months Ended

(In thousands, except per share data) June 30, 2020

June 30, 2019

June 30, 2020

June 30, 2019

Three Months Ended Nine Months Ended

(In thousands, except per share data) September 30, 2020 September 30, 2019 September 30, 2020 September 30, 2019

Net income (loss) attributable to Class A Common Stock $ 9,147 $ 7,784 $ ( 1,236,135 ) $ 39,316

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$ 0.05 $ 0.05 $ ( 7.41 ) $ 0.24

The Company excluded the following from the computation of diluted earnings or loss per share because the effect was anti-dilutive for the three and six months ended June 30, 2020:

(i) 85.8 million weighted average shares of Class A Common Stock issuable upon exchange of the Class B Common Stock (and the corresponding Magnolia LLC Units), (ii) 4.0 million contingent shares of Class A Common Stock issuable to an affiliate of EnerVest, provided EnerVest does not compete in the Market Area, and (iii) 0.1 million RSUs and PSUs.

For the three months ended June 30, 2019, the Company excluded 91.8 million weighted average shares of Class A Common Stock issuable upon the exchange of the Class B Common Stock (and the corresponding Magnolia LLC Units) as the effect was anti-dilutive.

For the six months ended June 30, 2019, the Company excluded 92.5 million weighted average shares of Class A Common Stock issuable upon the exchange of the Class B Common Stock (and the corresponding Magnolia LLC Units) as the effect was anti-dilutive.

The Company excluded 85.8 million for the three and nine months ended September 30, 2020, 91.8 million for the three months ended September 30, 2019, and 92.3 million for the nine months ended September 30, 2019 of weighted average shares of Class A Common Stock issuable upon the exchange of the Class B Common Stock (and the corresponding Magnolia LLC Units) as the effect was anti-dilutive.

In addition, the Company excluded 4.0 million contingent shares of Class A Common Stock issuable to an affiliate of EnerVest, provided EnerVest does not compete in the Market Area, and 0.2 million RSUs and PSU because the effect was anti-dilutive for the nine months ended September 30, 2020.

Related Party Transactions

As of June 30, 2020, EnerVest Energy Institutional Fund XIV-A, L.P., a Delaware limited partnership, and EnerVest Energy Institutional Fund XIV-C, L.P., a Delaware limited partnership, both of which are part of the Karnes County Contributors, each held more than 10% of the Company’s common stock and qualified as principal owners of the Company, as defined in ASC 850, “Related Party Disclosures.”

Subsequent Event

On August 1, 2020, the Company provided written notice of its intent to terminate the Services Agreement, dated as of July 31, 2018, by and between the Company, Magnolia LLC, and EVOC.

The termination will be effective on November 1, 2020, unless earlier withdrawn by the Company at its discretion.

Pursuant to the Services Agreement, EVOC will continue to provide services during the transition through August 1, 2021.

As of September 30, 2020, EnerVest Energy Institutional Fund XIV-A, L.P., a Delaware limited partnership, and EnerVest Energy Institutional Fund XIV-C, L.P., a Delaware limited partnership, both of which are part of the Karnes County Contributors, each held more than 10% of the Company’s common stock and qualified as principal owners of the Company, as defined in ASC 850, “Related Party Disclosures.”

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements