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Magnolia Oil & Gas First Quarter 2020 Results

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   |    Tuesday,May 12,2020

Magnolia Oil & Gas Corp. announced its financial and operational results for the first quarter of 2020.

First Quarter 2020 Highlights:

• Magnolia reported a first quarter 2020 net loss of $1.9 billion and net loss attributable to Class A Common Stock of $1.2 billion, or $7.34 per share. Included in the Company's first quarter results are $1.9 billion of pretax asset impairment charges related to the significant weakness in product prices. Excluding the impact of these charges, the first quarter 2020 total adjusted earnings were a loss of $18.5 million, or $0.11 per share.

• First quarter 2020 production averaged 68.4 thousand barrels of oil equivalent per day ("Mboe/d"), exceeding our earlier guidance. Oil production averaged 37.3 thousand barrels per day ("Mbbl/d") or 55 percent of total volumes. Total production increased by 10 percent compared to the first quarter of 2019 with oil production increasing by 15 percent. The higher than expected production was a result of stronger than expected well performance and new wells coming on line in the Giddings field.

• Giddings and other production averaged 23.9 Mboe/d with oil production averaging 6.5 Mbbl/d, a 17 percent sequential oil increase. Four new wells were brought online during the quarter with an average per well 60-day oil rate of approximately 800 barrels per day. Recent drilling cost reductions and further efficiencies have allowed Magnolia to reduce drilling and completion ("D&C") costs in Giddings by more than 20 percent compared to 2019, lowering average well costs to approximately $7 million.

• Adjusted EBITDAX during the first quarter of 2020 was $123.9 million. D&C costs for the quarter were 81 percent of EBITDAX or $100.6 million, which was lower than our guidance. Magnolia continues to target 2020 D&C capital to be around 60 percent of EBITDAX and expect capital expenditures to significantly decline during the remainder of 2020.

• Total cash operating costs, including general and administrative ("G&A") expenses, were $9.42 per boe in the first quarter 2020 representing a 14 percent decline compared to $11.00 per boe in the prior year period.

• Magnolia has identified cash cost savings during 2020 of approximately $55 million compared to the original 2020 plan. The reduction is generated from operating costs and G&A expenses.

• Magnolia ended the quarter with approximately $146.5 million of cash on its balance sheet and has not drawn on its $450 million revolving credit facility. The Company has no debt maturities until 2026 and has no plans to increase its debt levels.

Magnolia Chairman, President, and CEO, Steve Chazen said: "Our underlying business and assets performed better than expected during the first quarter. Our philosophy toward disciplined capital spending and low financial leverage should continue to support us during the current challenging environment. Our drilling results in the Giddings field were particularly strong, with two of our best wells drilled to date brought online during the quarter. We have taken steps to help mitigate the impact of much weaker product prices caused by weaker global demand due to COVID-19, and our business model provides us with ample liquidity, as well as the flexibility to adjust our activity levels relatively quickly. Our capital spending for drilling and completions will decline significantly during the remainder of the year as we are currently running only one operated rig and have ceased all well completion activity. We will continue to focus on what we can control and have implemented cost reduction initiatives throughout the organization in order to better align our cost structure with the current market environment.

"Magnolia continues to benefit from its strong financial position. We ended the quarter with $146.5 million of cash on our balance sheet and do not expect to add any new debt. Our current cash on hand would be able to cover all our remaining capital, overhead, and interest payments at least through 2020, even before considering the revenue from our production."

Cost Reduction Initiatives

Magnolia has initiated a corporate-wide cost reduction program to help lower expenses throughout the organization, including both our capital program and cash operating costs. As part of this plan, we have engaged with our vendors and suppliers for a reduction in the costs of their services in order to better align our costs to the current environment. We have also implemented corporate-wide salary reductions of approximately 10 percent.

• Magnolia has identified cash cost savings of approximately $55 million to be achieved during 2020 and compared to our original plan. These reductions are generated from a combination of operating costs and G&A expenses and, excludes any additional savings from the capital program.

• D&C capital outlays for the remainder of the year should be less than the D&C levels of the first quarter.

Evidence of these savings should be partially reflected in the second quarter, and more fully reflected in the second half of the year. Further cost reduction initiatives remain ongoing and the Company will continue to pursue efforts to improve margins.

Operational Update

First quarter total company production averaged 68.4 Mboe/d, a 10 percent increase compared to the first quarter 2019 levels. Production in the Karnes area averaged 44.5 Mboe/d during the first quarter 2020, a 10 percent increase from prior year levels of 40.5 Mboe/d. Production from Giddings and other increased 9 percent to 23.9 Mboe/d in the most recent quarter compared to prior year levels of 21.9 Mboe/d. Oil production in the Giddings area increased 17 percent sequentially as a result of new wells brought online in the quarter.

Magnolia brought four new Giddings wells online, including a two-well pad in the development area, during the quarter. The per well average oil production from these four wells was approximately 800 barrels of oil per day over the first 60 days and oil accounted for 75% of the total production. Recent drilling cost reductions and further efficiencies have allowed Magnolia to reduce D&C costs in Giddings by more than 20 percent compared to 2019, lowering average well costs to approximately $7 million.

The operated Karnes rig was released in early April and Magnolia currently has just one rig drilling a multi-well pad in Giddings. The Company ceased completing wells in February and does not plan to complete additional wells in the current commodity environment. Magnolia's business model provides for flexibility to our activity levels allowing the Company to better navigate the downturn.

Guidance and Other Financial Information

During the first quarter of 2020, Magnolia recorded impairments of $1.9 billion related to proved and unproved properties as a result of the sharp decline in commodity prices. 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 three months ended March 31, 2020. As a result of the non-cash impairment in the first quarter, Magnolia expects the depreciation, depletion and amortization rate to average about $9 per boe for the remainder of the year.

Magnolia is expecting a significant reduction of capital for the remainder of 2020. The total D&C capital spending for the remaining three quarters of the year is expected to be less than the first quarter levels. Magnolia operates approximately 75 percent of the total Company production volumes and less than 5 percent of the operated volumes are expected to be shut-in for the month of May and a smaller amount for June. As a result, we expect our second quarter production to be in the range of 62 to 65 Mboe/d. Oil production is expected to make up 52 to 54 percent of our total volumes for the second quarter.