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Item 2. Management’s Discussion and Analysis

2021-05-05 compared with 2020-11-06 · 86 added, 182 removed, 123 unchanged (69% of the section changed)

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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.

This report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

All statements other than statements of historical facts included or incorporated by reference in this report, including, without limitation, statements regarding the Company’s future financial position, business strategy, budgets, projected revenues, projected costs, and plans and objectives of management for future operations, are forward-looking statements.

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Important factors that could cause actual results to differ materially from the Company’s expectations include, but are not limited to, Magnolia’s assumptions about:

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

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

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

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

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• the availability of goods and services;

• legislative, regulatory, or policy changes;

• cyber attacks;

• occurrence of property acquisitions or divestitures;

• the occurrence of property acquisitions or divestitures;

• the integration of acquisitions;

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

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 that operates in one reportable segment located in the United States.

Magnolia Oil & Gas Corporation (the “Company” or “Magnolia”) is an independent oil and natural gas company engaged in the acquisition, development, exploration, and production of oil, natural gas, and NGL reserves that operates in one reportable segment located in the United States.

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

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Governments have tried to slow the spread of the virus by imposing social distancing guidelines, travel restrictions, and stay-at-home orders, which have caused a significant decrease in activity in the global economy and the demand for oil and natural gas.

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.

The implications of the decrease in global demand for, coupled with the general oversupply of, oil may have further negative effects on the Company’s business.

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.

The extent of the additional impact on the industry and Magnolia’s business cannot be reasonably predicted at this time.

Magnolia’s business, like many oil and natural gas producers, has been, and is expected to continue to be, negatively affected by the crisis described above, which is ongoing and evolving.

Magnolia’s revenues have significantly declined as a result of the sharp decline in commodity prices.

The prices ultimately realized for oil, natural gas, and NGLs are based on a number of variables, including prevailing index prices attributable to the Company’s production and certain differentials to those index prices.

Magnolia is unable to reasonably predict when, or to what extent, commodity prices and the overall markets and global economy will stabilize, and the pace of any subsequent recovery for the oil and gas industry.

Further, the ultimate impact that these events will have on Magnolia’s business, liquidity, financial condition, and results of operations is highly uncertain and dependent on numerous evolving factors that cannot be predicted, including the duration of the pandemic.

Magnolia has taken steps and continues to actively work to mitigate the evolving challenges and growing impact of both the COVID-19 pandemic and the industry downturn on its operations, financial condition, and people.

and other locations across the world or as a result of the related social distancing guidelines, travel restrictions, and stay-at-home orders.

The extent of any further impact of the pandemic on Magnolia’s industry and business cannot be reasonably predicted at this time.

Magnolia’s business model prioritizes free cash flow, financial stability, and prudent capital allocation, and is designed to withstand challenging environments.

The Company’s ongoing plan is to spend within cash flow on drilling and completing wells while maintaining low leverage.

Magnolia did not bring any operated wells online during the third quarter and continued to operate one rig in the Giddings area.

In the first quarter of 2021, Magnolia operated one rig in the Giddings area.

The Company is well positioned to reduce or increase operations given the significant flexibility within its capital program, as its operated drilling rig is on a short-term contract and the Company has no long-term service obligations.

Moreover, Magnolia does not have any contractual drilling obligations and nearly all of the Company’s acreage is held by production.

In response to the COVID-19 pandemic and industry downturn, Magnolia has initiated a corporate-wide cost reduction program to help decrease costs throughout every aspect of the Company.

The Company has made reductions in general and administrative expense by reducing corporate salaries, renegotiating the fee under the Services Agreement, and working with many of its other vendors and suppliers to reduce the cost of their services.

Magnolia believes these measures, taken together with its significant liquidity and lack of near term debt maturities, will provide additional flexibility in navigating the current volatile environment;

however, given the tremendous uncertainty and turmoil, there is no certainty that the measures Magnolia takes will be sufficient.

As a producer of oil and natural gas, Magnolia is recognized as an essential business and has continued to operate while taking steps to protect the health and safety of its workers.

Magnolia and its contractors have implemented protocols to reduce the risk of an outbreak within its operations, and these protocols have not reduced production or efficiency in a significant manner.

The Company implemented remote working procedures for a significant portion of its workforce for health and safety reasons and/or to comply with applicable national, state, and/or local government requirements.

As a result, the Company relied on such persons having sufficient access to its information technology systems, including through telecommunication hardware, software, and networks.

Magnolia's board of directors is continuing to monitor the unfolding COVID-19 pandemic very closely as well as the effect of working remotely on internal controls over financial reporting and information technology security.

Magnolia has been able to maintain a consistent level of effectiveness through these arrangements, including maintaining day-to-day operations, financial reporting systems, and internal control over financial reporting.

As of October 1, 2020, the substantial majority of Magnolia employees have returned to the office.

In order to protect the health and safety of its workers, Magnolia and its contractors have implemented protocols to reduce the risk of an outbreak within the Company’s operations, and these protocols have not reduced production or efficiency in a significant manner.

Magnolia's board of directors is continuing to monitor the unfolding COVID-19 pandemic very closely.

Magnolia has been able to maintain a consistent level of effectiveness, including maintaining day-to-day operations, financial reporting systems, and internal control over financial reporting.

Business Overview

As of September 30, 2020, Magnolia’s assets in South Texas included 43,031 gross (23,559 net) acres in Karnes, Gonzales, DeWitt, and Atascosa Counties, Texas, and 635,336 gross (437,128 net) acres in the Giddings area.

As of September 30, 2020, Magnolia held an interest in approximately 1,823 gross (1,189 net) wells, with total production of 62.2 thousand barrels of oil equivalent per day (“Mboe/d”) for the nine months ended September 30, 2020.

In the third quarter of 2020, Magnolia operated a one-rig program for the Giddings Assets.

Magnolia recognized a net loss attributable to Class A Common Stock of $1.2 billion, or $7.41 per diluted common share, for the nine months ended September 30, 2020.

Magnolia recognized a net loss of $1.9 billion, which includes noncontrolling interest of $0.7 billion related to the Magnolia LLC Units (and corresponding Class B Common Stock) held by certain affiliates of EnerVest for the nine months ended September 30, 2020.

As a result of the sharp decline in commodity prices during the nine months ended September 30, 2020, Magnolia recorded impairments of $1.9 billion related to proved and unproved properties.

Proved property impairment of $1.4 billion is included in “Impairment of oil and natural gas properties” and unproved property impairment of $0.6 billion is included in “Exploration expense” on the Company’s consolidated statement of operations for the nine months ended September 30, 2020.

On August 5, 2019, the Company’s board of directors authorized a share repurchase program of up to 10 million shares of Class A Common Stock.

As of March 31, 2021, Magnolia’s assets in South Texas included 42,970 gross (23,512 net) acres in the Karnes area, and 634,210 gross (436,585 net) acres in the Giddings area.

As of March 31, 2021, Magnolia held an interest in approximately 1,841 gross (1,174 net) wells, with total production of 62.3 thousand barrels of oil equivalent per day (“Mboe/d”) for the three months ended March 31, 2021.

In the first quarter of 2021, Magnolia operated one rig in the Giddings area.

Magnolia recognized net income attributable to Class A Common Stock of $63.2 million, or $0.37 per diluted common share, for the three months ended March 31, 2021.

Magnolia recognized net income of $91.5 million, which includes a noncontrolling interest of $28.2 million related to the Magnolia LLC Units (and corresponding Class B Common Stock) held by certain affiliates of EnerVest for the three months ended March 31, 2021.

The Company’s board of directors has authorized a share repurchase program of up to 20.0 million shares.

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

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

On August 1, 2020, the Company provided written notice to EVOC of its intent to terminate the Services Agreement.

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

In the third quarter of 2020, the Company entered into costless collars for 4.6 million MMBtu and 12.2 million MMBtu of its natural gas production in the years ending December 31, 2020 and 2021, respectively, which reduce the Company’s exposure to natural gas price volatility for a portion of its expected natural gas production volumes.

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 derivative instruments, net” on the Company’s consolidated statement of operations.

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

As of March 31, 2021, the Company had repurchased 7.4 million shares under the plan at an aggregate cost of $59.2 million.

On March 5, 2021, Magnolia LLC repurchased and subsequently canceled 5.0 million Magnolia LLC Units with an equal number of shares of corresponding Class B Common Stock for $50.8 million of cash consideration (the “Class B Common Stock Repurchase”).

In addition, EnerVest redeemed 14.2 million shares of Class B Common Stock for Class A Common Stock and subsequently sold the stock as part of the secondary offering completed on March 5, 2021.

Magnolia did not receive any proceeds from the sale of shares of Class A Common Stock by EnerVest.

Magnolia funded the Class B Common Stock Repurchase with cash on hand.

As of March 31, 2021, Magnolia owned approximately 72.6% of the interest in Magnolia LLC and the noncontrolling interest was 27.4%.

Results of Operations

Factors Affecting the Comparability of the Historical Financial Results

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

• During the first quarter of 2020, the Company incurred impairments of $1.9 billion related to proved and unproved oil and natural gas properties as a result of the sharp decline in commodity prices;

• 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;

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

• 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 natural gas well located in St.

Martin Parish, Louisiana (the “Highlander Well”), in which MGY Louisiana LLC, a wholly owned subsidiary of Magnolia Operating, holds approximately 85% of the units, with the remaining 15% attributable to noncontrolling interest.

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

Three Months Ended September 30, 2020 Compared to the Three Months Ended September 30, 2019

Three Months Ended March 31, 2021 Compared to the Three Months Ended March 31, 2020

Oil, Natural Gas and NGL Sales Revenues.

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Three Months Ended

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

(In thousands, except per unit data) March 31, 2021 March 31, 2020

Oil (MBbls) 2,593 3,391

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NGLs (per barrel) 20.31 9.09

Oil revenues were 79% and 85% of the Company’s total revenues for the three months ended September 30, 2020 and 2019, respectively.

Oil production was 50% and 54% of total production volume for the three months ended September 30, 2020 and 2019, respectively.

Oil revenues for the three months ended September 30, 2020 were $112.2 million lower than the three months ended September 30, 2019.

A 35% decrease in average prices reduced third quarter 2020 revenues by $72.4 million compared to the same period in the prior year, while a 29% decrease in oil production reduced revenues by $39.8 million.

Natural gas revenues were 12% and 9% of the Company's total revenues for the three months ended September 30, 2020 and 2019, respectively.

Natural gas production was 31% and 27% of total production volume for the three months ended September 30, 2020 and 2019, respectively.

Natural gas revenues for the three months ended September 30, 2020 were $6.3 million lower than the three months ended September 30, 2019.

A 20% decrease in average prices reduced third quarter 2020 revenues by $4.2 million compared to the same period in the prior year, while a 12% decrease in natural gas production reduced revenues by $2.1 million.

NGL revenues were 9% and 6% of the Company’s total revenues for the three months ended September 30, 2020 and 2019, respectively.

NGL production was 19% of total production volume for each of the three months ended September 30, 2020 and 2019.

NGL revenues for the three months ended September 30, 2020 were $5.2 million lower than the three months ended September 30, 2019.

An 11% decrease in average prices reduced third quarter 2020 revenues by $1.7 million compared to the same period in the prior year, while a 25% decrease in NGL production reduced revenues by $3.5 million.

Oil revenues were 71% and 85% of the Company’s total revenues for the three months ended March 31, 2021 and 2020, respectively.

Oil production was 46% and 55% of total production volume for the three months ended March 31, 2021 and 2020, respectively.

Oil revenues for the three months ended March 31, 2021 were $8.3 million lower than the three months ended March 31, 2020.

A 24% decrease in oil production reduced revenues by $45.1 million compared to the same period in the prior year, while a 24% increase in average prices increased first quarter 2021 revenues by $36.8 million.

The decrease in oil production was the result of the Company bringing fewer wells online in the three months ended March 31, 2021.

Natural gas revenues were 17% and 9% of the Company's total revenues for the three months ended March 31, 2021 and 2020, respectively.

Natural gas production was 30% and 27% of total production volume for the three months ended March 31, 2021 and 2020, respectively.

Natural gas revenues for the three months ended March 31, 2021 were $18.6 million higher than the three months ended March 31, 2020.

A 111% increase in average prices increased first quarter 2021 revenues by $18.0 million compared to the same period in the prior year, while a 2% increase in natural gas production increased revenues by $0.6 million.

NGL revenues were 13% and 6% of the Company’s total revenues for the three months ended March 31, 2021 and 2020, respectively.

NGL production was 23% and 19% of total production volume for the three months ended March 31, 2021 and 2020, respectively.

NGL revenues for the three months ended March 31, 2021 were $16.0 million higher than the three months ended March 31, 2020.

A 123% increase in average prices increased first quarter 2021 revenues by $13.0 million compared to the same period in the prior year, while a 13% increase in NGL production increased revenues by $3.0 million.

Operating Expenses and Other Income (Expense) .

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Three Months Ended

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

(In thousands, except per unit data) March 31, 2021 March 31, 2020

Operating Expenses:

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Exploration expenses 2,062 556,427

Asset retirement obligation accretion 1,501 1,394

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

Asset retirement obligations accretion 1,331 1,438

Depreciation, depletion and amortization 42,944 142,671

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General and administrative expenses 20,364 18,080

Total operating costs and expenses $ 99,126 $ 217,130

Total operating expenses $ 107,767 $ 2,145,701

Other Income (Expense):

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Other expense, net (229) (472)

Total other expense $ (8,585) $ (6,783)

Total other expense, net $ (8,005) $ (6,789)

Average Operating Costs per boe:

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Exploration expense 0.37 89.43

Asset retirement obligation accretion 0.30 0.21

Impairment of oil and natural gas properties — 222.00

Asset retirement obligations accretion 0.24 0.23

Depreciation, depletion and amortization 7.66 22.93

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Lease operating expenses are costs incurred in the operation of producing properties, including expenses for utilities, direct labor, water disposal, workover rigs, workover expenses, materials, and supplies.

Lease operating expenses for the three months ended September 30, 2020 compared to the corresponding 2019 period were $5.5 million lower primarily due to a reduction of operating expenses associated with bringing fewer new wells online resulting in lower production.

Lease operating expenses for the three months ended March 31, 2021 were $4.8 million, or $0.42 per boe, lower compared to the corresponding 2020 period primarily due to a reduction of workover expenses associated with bringing fewer new wells online, resulting in lower production.

Gathering, transportation and processing costs are costs incurred to deliver oil, natural gas, and NGLs to the market.

These expenses can vary based on the volume of oil, natural gas, and NGLs produced as well as the cost of commodity processing.

The gathering, transportation, and processing costs for the three months ended September 30, 2020 were $3.5 million, or $0.25 per boe, lower than the three months ended September 30, 2019 primarily due to lower natural gas production and prices.

gathering, transportation and processing costs for the three months ended March 31, 2021 were $0.8 million, or $0.28 per boe, higher than the three months ended March 31, 2020 primarily due to higher natural gas production and prices.

Taxes other than income include production and ad valorem taxes.

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Ad valorem taxes are based on the fair market value of the mineral interests or business assets.

Taxes other than income were $6.0 million, or $0.56 per boe, lower for the three months ended September 30, 2020 compared to the three months ended September 30, 2019 primarily due to a decrease in revenues following a decline in commodity prices.

Taxes other than income for the three months ended March 31, 2021 were $0.7 million, or $0.31 per boe, higher compared to the three months ended March 31, 2020 primarily due to an increase in natural gas and NGL revenues.

Exploration expenses are geological and geophysical costs that include unproved property impairments, seismic surveying costs, costs of expired or abandoned leases, and delay rentals.

The exploration costs for the three months ended September 30, 2020 were $3.2 million, or $0.46 per boe, lower than the three months ended September 30, 2019 primarily due to lower seismic surveying costs.

Depreciation, depletion and amortization (“DD&A”) during the three months ended September 30, 2020 was $99.2 million, or $12.99 per boe, lower than the three months ended September 30, 2019 primarily as a result of lower asset property balances associated with proved property impairments recorded in the first quarter of 2020.

General and administrative (“G&A”) expenses during the three months ended September 30, 2020 were $0.7 million lower than the three months ended September 30, 2019 primarily driven by renegotiating the fee under the Services Agreement as well as other corporate-wide cost cutting initiatives.

Loss on derivatives, net was a $2.2 million unrealized loss related to the Company’s natural gas costless collar entered into during the third quarter of 2020.

There was no derivative activity in the corresponding 2019 period.

Nine Months Ended September 30, 2020 Compared to the Nine Months Ended September 30, 2019

Oil, Natural Gas and NGL Sales Revenues.

The following table provides the components of Magnolia’s revenues for the periods indicated, as well as each period’s respective average prices and production volumes.

This table shows production on a boe basis in which natural gas is converted to an equivalent barrel of oil based on a ratio of six Mcf to one barrel.

This ratio may not be reflective of the current price ratio between the two products.

Nine Months Ended

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

Oil (MBbls) 8,965 9,615

Natural gas (MMcf) 29,261 30,583

NGLs (MBbls) 3,213 3,389

Total (Mboe) 17,055 18,101

Average daily production:

Oil (Bbls/d) 32,718 35,220

Natural gas (Mcf/d) 106,790 112,026

NGLs (Bbls/d) 11,725 12,414

Total (boe/d) 62,241 66,305

Oil revenues $ 311,153 $ 584,009

Natural gas revenues 44,238 71,208

Natural gas liquids revenues 29,880 51,215

Total revenues $ 385,271 $ 706,432

Average Price:

Oil (per barrel) $ 34.71 $ 60.74

Natural gas (per Mcf) 1.51 2.33

NGLs (per barrel) 9.30 15.11

Oil revenues were 81% and 83% of the Company’s total revenues for the nine months ended September 30, 2020 and 2019, respectively.

Oil production was 53% of total production volume for each of the nine months ended September 30, 2020 and 2019.

Oil revenues for the nine months ended September 30, 2020 were $272.9 million lower than the nine months ended September 30, 2019.

A 43% decrease in average prices reduced revenues for the nine months ended September 30, 2020 by $250.3 million compared to the same period in the prior year, while a 7% decrease in oil production reduced revenue $22.6 million.

Natural gas revenues were 11% and 10% of the Company's total revenues for the nine months ended September 30, 2020 and 2019, respectively.

Natural gas production was 28% of total production volume for each of the nine months ended September 30, 2020 and 2019.

Natural gas revenues for the nine months ended September 30, 2020 were $27.0 million lower than the nine months ended September 30, 2019.

A 35% decrease in average prices reduced revenues for the nine months ended September 30, 2020 by $25.0 million as compared to the same period in the prior year, while a 4% decrease in natural gas production reduced revenue $2.0 million.

NGL revenues were 8% and 7% of the Company’s total revenues for the nine months ended September 30, 2020 and 2019, respectively.

NGL production was 19% of total production volume for each of the nine months ended September 30, 2020 and 2019.

NGL revenues for the nine months ended were September 30, 2020 $21.3 million lower than the nine months ended September 30, 2019.

A 38% decrease in average prices reduced revenues for the nine months ended September 30, 2020 by $19.7 million as compared to the same period in the prior year, while a 5% decrease in NGL production reduced revenue $1.6 million.

Operating Expenses and Other Income (Expense) .

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

Nine Months Ended

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

Operating Expenses:

Lease operating expenses $ 61,275 $ 70,752

Gathering, transportation, and processing 20,579 26,016

Taxes other than income 22,874 40,825

Exploration expenses 563,589 10,017

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

Asset retirement obligation accretion 4,403 4,095

Depreciation, depletion and amortization 238,273 385,942

Amortization of intangible assets 10,879 10,879

General and administrative expenses 50,472 52,651

Transaction related costs — 438

Total operating costs and expenses $ 2,353,602 $ 601,615

Other Income (Expense):

Income from equity method investee $ 2,059 $ 608

Interest expense, net (21,345) (21,611)

Loss on derivatives, net (2,208) —

Other expense, net (510) 8

Total other expense $ (22,004) $ (20,995)

Average Operating Costs per boe:

Lease operating expenses $ 3.59 $ 3.91

Gathering, transportation, and processing 1.21 1.44

Taxes other than income 1.34 2.26

Exploration expense 33.05 0.55

Impairment of oil and natural gas properties 80.99 —

Asset retirement obligation accretion 0.26 0.23

Depreciation, depletion and amortization 13.97 21.32

Amortization of intangible assets 0.64 0.60

General and administrative expenses 2.96 2.91

Transaction related costs — 0.02

Lease operating expenses for the nine months ended September 30, 2020 were $9.5 million, or $0.32 per boe, lower than the nine months ended September 30, 2019 primarily due to the suspension of completion activity and reduction of operating expenses associated with bringing fewer new wells online.

Gathering, transportation, and processing costs for the nine months ended September 30, 2020 were $5.4 million, or $0.23 per boe, lower than the nine months ended September 30, 2019 primarily due to lower natural gas production and prices.

Taxes other than income and related cost per boe were $18.0 million, or $0.92 per boe, lower for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 primarily due to a decrease in revenues following a decline in commodity prices.

Exploration costs for the nine months ended September 30, 2020 were $553.6 million, or $32.50 per boe, higher than the nine months ended September 30, 2019 as a result of an impairment related to Magnolia’s unproved oil and natural gas properties due to the sharp decline in commodity prices primarily driven by the COVID-19 pandemic and oversupply by producers relating to oil price and production controls.

For more information, please see Note 6 — Fair Value Measurements in the Company’s consolidated financial statements included in this Quarterly Report on Form 10-Q.

For the nine months ended September 30, 2020, Magnolia recognized $1.4 billion of impairment included in “Impairment of oil and natural gas properties” in the consolidated statement of operations related to its proved oil and natural gas properties.

Exploration expenses for the three months ended March 31, 2021 were lower than the three months ended March 31, 2020 by $554.4 million, or $89.06 per boe, as a result of an impairment recorded for the quarter ended March 31, 2020 related to Magnolia’s unproved oil and natural gas properties due to the sharp decline in commodity prices primarily driven by the COVID-19 pandemic and oversupply by producers relating to oil price and production controls.

For more information, please see Note 6—Fair Value Measurements in the Company’s Notes to Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.

For the three months ended March 31, 2021, the Company did not recognize any impairments.

For the three months ended March 31, 2020, the Company recognized $1.4 billion of impairment included in “Impairment of oil and natural gas properties” in the consolidated statement of operations related to its proved oil and natural gas properties.

The impairment was driven by the sharp decline in commodity prices.

For more information, please see Note 6 — Fair Value Measurements in the Company’s consolidated financial statements included in this Quarterly Report on Form 10-Q.

DD&A during the nine months ended September 30, 2020 was $147.7 million, or $7.35 per boe, lower than the nine months ended September 30, 2019 as a result of lower asset property balances associated with proved property impairments recorded in the first quarter of 2020.

G&A expenses during the nine months ended September 30, 2020 were $2.2 million lower than the nine months ended September 30, 2019 primarily driven by a decrease in professional service fees and a reduction in the fee under the Services Agreement as a result of corporate-wide cost cutting initiatives.

For more information, please see Note 6—Fair Value Measurements in the Company’s Notes to Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.

Depreciation, depletion and amortization (“DD&A”) during the three months ended March 31, 2021 was $99.7 million, or $15.27 per boe, lower than the three months ended March 31, 2020, primarily as a result of lower oil and natural gas property balances associated with proved property impairments recorded in the first quarter of 2020.

General and administrative (“G&A”) expenses during the three months ended March 31, 2021 were $2.3 million, or $0.72 per boe, higher than the three months ended March 31, 2020 primarily driven by costs associated with the termination of the Services Agreement and increased corporate payroll expenses related to increased employee headcount.

Loss on derivatives, net was a $0.5 million unrealized loss related to the Company’s natural gas costless collar entered into during the third quarter of 2020.

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Magnolia’s primary source of liquidity and capital has been its cash flows from operations.

The Company’s primary uses of cash have been for acquisitions of oil and natural gas properties and related assets, development of the Company’s oil and natural gas properties, and general working capital needs.

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.

The Company’s primary uses of cash have been for acquisitions of oil and natural gas properties and related assets, development of the Company’s oil and natural gas properties, share repurchases, and general working capital needs.

The Company may also utilize borrowings under other various financing sources available to it, including its RBL Facility and the issuance of equity or debt securities through public offerings or private placements, to fund Magnolia’s acquisitions and long-term liquidity needs.

Magnolia’s ability to complete future offerings of equity or debt securities and the timing of these offerings will depend upon various factors, including prevailing market conditions and the Company’s financial condition.

The Company anticipates its current cash balance, cash flows from operations, and its available sources of liquidity to be sufficient to meet the Company’s cash requirements.

However, as the impact of recent declines in worldwide crude oil and natural gas prices and the impact of COVID-19 on the economy evolves, the Company will continue to assess its liquidity needs.

In the event of a sustained market deterioration, Magnolia may need additional liquidity, which would require the Company to evaluate available alternatives and take appropriate actions.

As of September 30, 2020, the Company had $400.0 million of principal debt related to the 2026 Senior Notes outstanding and no outstanding borrowings related to the RBL Facility.

As of September 30, 2020, the Company had $598.5 million of liquidity comprised of the $450.0 million of borrowing base capacity of the RBL Facility, which was reaffirmed on October 15, 2020, and $148.5 million of cash and cash equivalents.

As of March 31, 2021, the Company had $400.0 million of principal debt related to the 2026 Senior Notes outstanding and no outstanding borrowings related to the RBL Facility.

As of March 31, 2021, the Company had $628.2 million of liquidity comprised of the $450.0 million of borrowing base capacity of the RBL Facility, which was reaffirmed on April 12, 2021, and $178.2 million of cash and cash equivalents.

Cash and Cash Equivalents

At September 30, 2020, Magnolia had $148.5 million of cash and cash equivalents.

At March 31, 2021, Magnolia had $178.2 million of cash and cash equivalents.

The Company’s cash and cash equivalents are maintained with various financial institutions in the United States.

2 unchanged sentences

Sources and Uses of Cash and Cash Equivalents

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

Nine Months Ended

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

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

Three Months Ended

(In thousands) March 31, 2021 March 31, 2020

Sources of cash and cash equivalents

Net cash provided by operating activities $ 118,153 $ 134,878

Other — 11,551

$ 118,153 $ 134,878

4 unchanged sentences

Class A Common Stock repurchases (20,281) (6,483)

Class B Common Stock purchase and cancellation (50,781) —

Non-compete settlement (17,152) —

Other (1,838) (936)

3 unchanged sentences

Net Cash Provided by Operating Activities

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, the non-cash portion of exploration expense, impairment of oil and natural gas properties, asset retirement obligation accretion, and deferred income tax expense.

Net cash provided by operating activities totaled $231.0 million and $488.6 million for the nine months ended September 30, 2020 and 2019, respectively.

During the nine months ended September 30, 2020, cash provided by operating activities was negatively impacted by the sharp decline of oil and natural gas prices and payment of liabilities, partially offset by positive impacts from the timing of collections, and lower production tax payments.

Operating cash flows are the Company’s primary source of liquidity and are impacted, in the short- and long-term, by oil and natural gas prices.

Net cash provided by operating activities totaled $118.2 million and $134.9 million for the three months ended March 31, 2021 and 2020, respectively.

During the three months ended March 31, 2021, cash provided by operating activities was negatively impacted by lower oil production, partially offset by positive impacts from increased oil and natural gas prices, and by a decrease in expenses associated with bringing fewer new wells online.

Uses of Cash and Cash Equivalents

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

During the nine months ended September 30, 2019, the Company incurred $93.2 million of acquisition costs, comprised of the Highlander acquisition, and other acquisitions of additional oil and natural gas assets in Karnes County.

During the three months ended March 31, 2020, the Company completed various leasehold and property acquisitions, primarily comprised of a $69.7 million acquisition of certain non-operated oil and natural gas assets located in Karnes and DeWitt Counties, Texas.

There were no such acquisitions during the three months ended March 31, 2021.

Additions to Oil and Natural Gas Properties

The following table sets forth the Company’s capital expenditures for the three and nine months ended September 30, 2020 and 2019:

Three Months Ended Nine Months Ended

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

The following table sets forth the Company’s capital expenditures for the three months ended March 31, 2021 and 2020:

Three Months Ended

(In thousands) March 31, 2021 March 31, 2020

Drilling and completion $ 38,850 $ 100,611

1 unchanged sentence

Total capital expenditures $ 40,166 $ 101,391

As of September 30, 2020, Magnolia was running a one-rig program for the Giddings Assets.

The activity during the three and nine months ended September 30, 2020 was largely driven by the number of operated and non-operated drilling rigs.

The number of operated drilling rigs is largely dependent on commodity prices and the Company’s strategy of maintaining spending to accommodate the Company’s business model.

As of March 31, 2021, Magnolia was running a one-rig program for the Giddings Assets.

The activity during the three months ended March 31, 2021 was largely driven by the number of operated and non-operated drilling rigs.

The number of operated

drilling rigs is largely dependent on commodity prices and the Company’s strategy of maintaining spending to accommodate the Company’s business model.

Capital Requirements

Repurchases of Class A Common Stock

On August 5, 2019, the Company’s board of directors authorized a share repurchase program of up to 10 million shares of Class A Common Stock.

The Company’s board of directors has authorized a share repurchase program of up to 20 million shares of Class A Common Stock.

The program does not require purchases to be made within a particular timeframe and whether the Company undertakes these additional repurchases is ultimately subject to numerous considerations, market conditions, and other factors.

During the nine months ended September 30, 2020 and 2019, the Company repurchased 2.1 million and 1.0 million shares for a total cost of approximately $13.0 million and $9.7 million, respectively.

Off-Balance Sheet Arrangements

As of September 30, 2020, there were no off-balance sheet arrangements.

During the three months ended March 31, 2021 and 2020, the Company repurchased 2.0 million and 1.0 million shares for a total cost of approximately $20.3 million and $6.5 million, respectively.

Magnolia funded the Class B Common Stock Repurchase with cash on hand.

As of March 31, 2021, Magnolia owned approximately 72.6% of the interest in Magnolia LLC and the noncontrolling interest was 27.4%.

In January 2021, the Company amended the Non-Compete agreement such that, rather than delivering an aggregate of 4.0 million shares of Class A Common Stock upon the two and one-half year and the four year anniversaries of July 31, 2018 (the “Closing Date”), the Company would deliver (i) the cash value of approximately 2.0 million shares of Class A Common Stock and approximately 0.4 million shares of Class A Common Stock on the two and one-half year anniversary of the Closing Date and (ii) an aggregate of 1.6 million shares of Class A Common Stock on the four year anniversary of the Closing Date, in each case subject to the terms and conditions of the Non-Compete.

On February 1, 2021, as consideration for compliance with the Non-Compete, the Company paid $17.2 million in cash and issued 0.4 million shares of Class A Common Stock.

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 2. Management’s Discussion and Analysis