UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019

OR

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________ to ___________

Commission File Number: 001-38083

Magnolia Oil & Gas Corporation

(Exact Name of Registrant as Specified in its Charter)

Delaware		81-5365682
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
Nine Greenway Plaza, Suite 1300		77046
Houston,	Texas
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (713) 842-9050

Securities registered pursuant to section 12(b) of the Act:
Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Class A Common Stock, par value $0.0001	MGY	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

As of November 4, 2019, there were 167,280,858 shares of Class A Common Stock, $0.0001 par value per share, and 91,789,814 shares of Class B Common Stock, $0.0001 par value per share, outstanding.

Table of Contents

		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets (unaudited)	1
	Consolidated and Combined Statements of Operations (unaudited)	2
	Combined Statement of Changes in Parents' Net Investment (unaudited)	3
	Consolidated Statements of Changes in Stockholders’ Equity (unaudited)	4
	Consolidated and Combined Statements of Cash Flows (unaudited)	6
	Notes to Consolidated Financial Statements (unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	35
Item 4.	Controls and Procedures	36
PART II.	OTHER INFORMATION	36
Item 1.	Legal Proceedings	36
Item 1A.	Risk Factors	36
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	37
Item 3.	Defaults Upon Senior Securities	37
Item 4.	Mine Safety Disclosures	37
Item 5.	Other Information	37
Item 6.	Exhibits	38
Signatures		38

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Magnolia Oil & Gas Corporation

Consolidated Balance Sheets

(In thousands)

	Successor
	September 30, 2019			December 31, 2018
ASSETS	(Unaudited)			(Audited)
CURRENT ASSETS
Cash and cash equivalents	$	164,489		$	135,758
Accounts receivable	120,664			140,284
Drilling advances	2,055			12,259
Other current assets	5,047			4,058
Total current assets	292,255			292,359
PROPERTY, PLANT AND EQUIPMENT
Oil and natural gas properties	3,741,357			3,250,742
Other	2,710			360
Accumulated depreciation, depletion and amortization	(563,901		)	(177,898		)
Total property, plant and equipment, net	3,180,166			3,073,204
OTHER ASSETS
Deferred financing costs, net	8,980			10,731
Equity method investment	19,482			18,873
Intangible assets, net	27,477			38,356
Other long-term assets	4,773			—
TOTAL ASSETS	$	3,533,133		$	3,433,523
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities	$	186,627		$	196,357
Other current liabilities	3,684			1,004
Total current liabilities	190,311			197,361
LONG-TERM LIABILITIES
Long-term debt, net	389,528			388,635
Asset retirement obligations, net of current	93,102			84,979
Deferred taxes, net	74,200			54,593
Other long-term liabilities	2,039			—
Total long-term liabilities	558,869			528,207
COMMITMENTS AND CONTINGENCIES (Note 16)
STOCKHOLDERS’ EQUITY
Class A Common Stock, $0.0001 par value, 1,300,000 shares authorized, 168,260 shares issued and 167,310 shares outstanding in 2019 and 156,333 shares issued and outstanding in 2018	17			16
Class B Common Stock, $0.0001 par value, 225,000 shares authorized, 91,790 and 93,346 shares issued and outstanding in 2019 and 2018, respectively	9			9
Additional paid-in capital	1,704,652			1,641,237
Treasury Stock, at cost, 950 shares in 2019	(9,722		)	—
Retained earnings	74,823			35,507
Noncontrolling interest	1,014,174			1,031,186
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	3,533,133		$	3,433,523

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

1

Magnolia Oil & Gas Corporation

Consolidated and Combined Statements of Operations (Unaudited)

(In thousands, except per share data)

	Successor									Predecessor
	Three Months Ended September 30, 2019			Nine Months Ended September 30, 2019			July 31, 2018 Through September 30, 2018			July 1, 2018 Through July 30, 2018			January 1, 2018 Through July 30, 2018
REVENUES
Oil revenues	$	207,840		$	584,009		$	143,202		$	68,487		$	399,124
Natural gas revenues	21,243			71,208			13,414			3,646			22,135
Natural gas liquids revenues	15,716			51,215			21,547			4,754			27,927
Total revenues	244,799			706,432			178,163			76,887			449,186
OPERATING EXPENSES
Lease operating expenses	24,344			70,755			11,016			3,681			23,513
Gathering, transportation and processing	9,270			26,016			5,353			2,240			12,929
Taxes other than income	13,333			40,825			9,351			2,087			23,763
Exploration expense	3,924			10,017			11,221			40			492
Asset retirement obligation accretion	1,394			4,095			391			21			104
Depreciation, depletion and amortization	143,894			385,942			65,902			23,157			137,871
Amortization of intangible assets	3,626			10,879			2,418			—			—
General and administrative expenses	17,345			52,648			10,297			1,701			12,710
Transaction related costs	—			438			22,366			—			—
Total operating costs and expenses	217,130			601,615			138,315			32,927			211,382
OPERATING INCOME	27,669			104,817			39,848			43,960			237,804
OTHER INCOME (EXPENSE)
Income (loss) from equity method investee	92			608			309			(345		)	711
Interest expense, net	(6,896		)	(21,611		)	(4,959		)	—			—
Gain (loss) on derivatives, net	—			—			—			3,865			(18,127		)
Other income (expense), net	21			8			(7,019		)	24			(50		)
Total other income (expense)	(6,783		)	(20,995		)	(11,669		)	3,544			(17,466		)
INCOME BEFORE INCOME TAXES	20,886			83,822			28,179			47,504			220,338
Income tax expense	3,529			12,449			3,538			766			1,785
NET INCOME	17,357			71,373			24,641			46,738			218,553
LESS: Net income attributable to noncontrolling interest	6,810			29,294			18,465			—			—
NET INCOME ATTRIBUTABLE TO MAGNOLIA	10,547			42,079			6,176			46,738			218,553
LESS: Non-cash deemed dividend related to warrant exchange	2,763			2,763			—			—			—
NET INCOME ATTRIBUTABLE TO CLASS A COMMON STOCK	$	7,784		$	39,316		$	6,176		$	46,738		$	218,553
NET INCOME PER COMMON SHARE
Basic	$	0.05		$	0.25		$	0.04
Diluted	$	0.05		$	0.24		$	0.04
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
Basic	166,872			160,051			151,992
Diluted	167,108			161,488			157,072

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

2

Magnolia Oil & Gas Corporation

Combined Statement of Changes in Parents’ Net Investment (Unaudited)

(In thousands)

	Predecessor
BALANCE, DECEMBER 31, 2017	$	1,597,838
Parents’ contribution, net	133,117
Net income	85,366
Balance – March 31, 2018	$	1,816,321
Parents’ distributions, net	(48,937		)
Net income	86,449
Balance – June 30, 2018	$	1,853,833
Parents’ distributions, net	(21,539		)
Net income	46,738
Balance – July 30, 2018	$	1,879,032

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

3

Magnolia Oil & Gas Corporation

Consolidated Statements of Changes in Stockholders’ Equity (Successor) (Unaudited)

(In thousands)

	Class A Common Stock				Class B Common Stock			Class F Common Stock					Additional Paid In Capital			Retained Earnings			Total Stockholders’ Equity			Noncontrolling Interest			Total Equity
	Shares		Value		Shares	Value		Shares		Value
Balance, July 30, 2018	3,052		$	—	—	$	—	16,250		$	2		$	8,370		$	(3,588	)	$	4,784		$	—		$	4,784
Class A Common Stock released from possible redemption	61,948		6		—	—		—		—			619,473			—			619,479			—			619,479
Class A Common Stock redeemed	(1	)	—		—	—		—		—			(9		)	—			(9		)	—			(9		)
Conversion of Common Stock from Class F to Class A at closing of Business Combination	16,250		2		—	—		(16,250	)	(2		)	—			—			—			—			—
Common stock issued as part of the Business Combination	31,791		3		83,939	9		—		—			391,017			—			391,029			1,032,455			1,423,484
Common stock issued in private placement	35,500		4		—	—		—		—			354,996			—			355,000			—			355,000
Earnout consideration issued as part for the Business Combination	—		—		—	—		—		—			41,371			—			41,371			108,329			149,700
Non-compete consideration	—		—		—	—		—		—			44,400			—			44,400			—			44,400
Changes in ownership interest adjustment	—		—		—	—		—		—			206,966			—			206,966			(206,966		)	—
Changes in deferred tax liability	—		—		—	—		—		—			(52,787		)	—			(52,787		)	—			(52,787		)
Balance, July 31, 2018	148,540		$	15	83,939	$	9	—		$	—		$	1,613,797		$	(3,588	)	$	1,610,233		$	933,818		$	2,544,051
Issuance of earnout share consideration Tranche I	1,244		—		3,256	—		—		—			—			—			—			—			—
Issuance of earnout share consideration Tranche II	1,244		—		3,256	—		—		—			—			—			—			—			—
Common stock issued in connection with Harvest Acquisition	4,200		1		—	—		—		—			58,211			—			58,212			—			58,212
Net income	—		—		—	—		—		—			—			6,176			6,176			18,465			24,641
Changes in ownership interest adjustment	—		—		—	—		—		—			(39,366		)	—			(39,366		)	39,366			—
Changes in deferred tax liability	—		—		—	—		—		—			15,263			—			15,263			—			15,263
Balance, September 30, 2018	155,228		$	16	90,451	$	9	—		$	—		$	1,647,905		$	2,588		$	1,650,518		$	991,649		$	2,642,167

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

4

Magnolia Oil & Gas Corporation

Consolidated Statements of Changes in Stockholders’ Equity (Successor) (Unaudited)

(In thousands)

	Class A Common Stock				Class B Common Stock				Additional Paid In Capital			Treasury Stock				Retained Earnings			Total Stockholders’ Equity			Noncontrolling Interest			Total Equity
	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
Stock based compensation expense	—		—		—		—		2,432			—	—			—			2,432			—			2,432
Changes in ownership interest adjustment	—		—		—		—		(919		)	—	—			—			(919		)	832			(87		)
Final settlement adjustment related to Business Combination	(496	)	—		(1,556	)	—		(6,095		)	—	—			—			(6,095		)	(19,150		)	(25,245		)
Contributions from noncontrolling interest owners	—		—		—		—		—			—	—			—			—			8,809			8,809
Net income	—		—		—		—		—			—	—			13,026			13,026			9,687			22,713
Balance, March 31, 2019	155,837		$	16	91,790		$	9	$	1,636,655		—	$	—		$	48,533		$	1,685,213		$	1,031,364		$	2,716,577
Stock based compensation expense	—		—		—		—		3,115			—	—			—			3,115			—			3,115
Changes in ownership interest adjustment	—		—		—		—		108			—	—			—			108			634			742
Common stock issued in connection with acquisition	3,055		—		—		—		33,693			—	—			—			33,693			—			33,693
Offering expenses incurred in connection with warrants exchange	—		—		—		—		(1,055		)	—	—			—			(1,055		)	—			(1,055		)
Distributions to noncontrolling interest owners	—		—		—		—		—			—	—			—			—			(227		)	(227		)
Net income	—		—		—		—		—			—	—			18,506			18,506			12,797			31,303
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.

5

Magnolia Oil & Gas Corporation

Consolidated and Combined Statements of Cash Flows (Unaudited) (In thousands)

	Successor						Predecessor
	Nine Months Ended September 30, 2019			July 31, 2018 Through September 30, 2018			January 1, 2018 Through July 30, 2018
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	71,373		$	24,641		$	218,553
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, depletion and amortization	385,942			65,902			137,871
Amortization of intangible assets	10,879			2,418			—
Exploration expense, non-cash	536			—			—
Asset retirement obligations accretion expense	4,095			391			104
Amortization of deferred financing costs	2,644			570			—
Loss on derivatives, net	—			—			18,127
Cash settlements of matured derivative contracts	—			—			(27,617		)
Deferred taxes	11,765			3,493			324
Contingent consideration change in fair value	—			6,700			—
Stock based compensation	8,376			—			—
Other	(526		)	(218		)	(796		)
Changes in operating assets and liabilities:
Accounts receivable	(6,937		)	(77,500		)	(61,405		)
Prepaid expenses and other assets	996			(275		)	—
Accounts payable and accrued liabilities	(6,345		)	64,511			36
Drilling advances	10,205			(3,376		)	—
Other assets and liabilities, net	(4,392		)	45			(385		)
Net cash provided by operating activities	488,611			87,302			284,812
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds withdrawn from Trust Account	—			656,078			—
Acquisition of EnerVest properties	4,250			(1,219,217		)	—
Acquisitions, other	(93,221		)	(135,652		)	(150,139		)
Additions to oil and natural gas properties	(364,859		)	(33,724		)	(197,314		)
Payment of Contingent Consideration	—			(26,000		)	—
Other investing	(247		)	—			—
Net cash used in investing activities	(454,077		)	(758,515		)	(347,453		)
CASH FLOW FROM FINANCING ACTIVITIES
Parents’ contribution, net	—			—			62,641
Contributions from noncontrolling interest owners	7,301			—			—
Distributions to noncontrolling interest owners	(716		)	—			—
Issuance of common stock	—			355,000			—
Proceeds from issuance of long term debt	—			400,000			—
Repayments of deferred underwriting compensation	—			(22,750		)	—
Cash paid for debt issuance costs	—			(23,336		)	—
Common stock repurchased	(9,722		)	—			—
Other financing activities	(2,666		)	(1,009		)	—
Net cash provided by (used in) financing activities	(5,803		)	707,905			62,641
NET CHANGE IN CASH AND CASH EQUIVALENTS	28,731			36,692			—
Cash and cash equivalents – Beginning of period	135,758			23			—
Cash and cash equivalents – End of period	$	164,489		$	36,715		$	—

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

6

Magnolia Oil & Gas Corporation

Notes to Consolidated Financial Statements

(Unaudited)

1. Description of Business and Basis of Presentation

Organization and General

Magnolia Oil & Gas Corporation (formerly TPG Pace Energy Holdings Corp.) (the “Company” or “Magnolia”) was incorporated in Delaware on February 14, 2017.

On March 15, 2018, the Company formed three wholly owned subsidiaries: Magnolia Oil & Gas Parent LLC (“Magnolia LLC”), Magnolia Oil & Gas Intermediate LLC (“Magnolia Intermediate”), and Magnolia Oil & Gas Operating LLC (“Magnolia Operating”), all of which are Delaware limited liability companies formed in contemplation of the Business Combination (as defined herein).

Business Combination

On July 31, 2018 (the “Closing Date”), the Company and Magnolia LLC consummated the acquisition of the following:

• certain right, title, and interest in certain oil and natural gas assets located primarily in the Karnes County portion of the Eagle Ford Shale in South Texas (the “Karnes County Assets” and, such business the “Karnes County Business”) pursuant to that certain Contribution and Merger Agreement (as subsequently amended, the “Karnes County Contribution Agreement”), by and among the Company, Magnolia LLC and certain affiliates (the “Karnes County Contributors”) of EnerVest Ltd. (“EnerVest”);

• certain right, title, and interest in certain oil and natural gas assets located primarily in the Giddings Field of the Austin Chalk (the “Giddings Assets”) pursuant to that certain Purchase and Sale Agreement (the “Giddings Purchase Agreement”) by and among Magnolia LLC and certain affiliates of EnerVest (the “Giddings Sellers”); and

• a 35% membership interest (the “Ironwood Interests”) in Ironwood Eagle Ford Midstream LLC (“Ironwood”), a Texas limited liability company, which owns an Eagle Ford gathering system, pursuant to that certain Membership Interest Purchase Agreement (together with the transactions contemplated by the Karnes County Contribution Agreement and the Giddings Purchase Agreement, the “Business Combination Agreements,” and the transactions contemplated thereby, the “Business Combination”), by and among Magnolia LLC and certain affiliates of EnerVest (the “Ironwood Sellers”).

The Company consummated the Business Combination for an aggregate consideration of approximately $1.2 billion in cash, 31.8 million shares of the Company’s Class A Common Stock, par value $0.0001 per share (the “Class A Common Stock”), and 83.9 million shares of the Company’s Class B Common Stock, par value $0.0001 per share (the “Class B Common Stock”), and a corresponding number of units in Magnolia LLC (the “Magnolia LLC Units”), as well as certain earnout rights payable in a combination of cash and additional equity securities in the Company. In connection with the Business Combination, Magnolia issued and sold 35.5 million shares of Class A Common Stock in a private placement to certain qualified institutional buyers and accredited investors for gross proceeds of $355.0 million (the “PIPE Investment”). In addition, Magnolia Operating and Magnolia Oil & Gas Finance Corp., a wholly owned subsidiary of Magnolia Operating (“Finance Corp.” and, together with Magnolia Operating, the “Issuers”), issued and sold $400.0 million aggregate principal amount of 6.0% Senior Notes due 2026 (the “2026 Senior Notes”). The proceeds of the PIPE Investment and the offering of 2026 Senior Notes were used to fund a portion of the cash consideration required to effect the Business Combination.

Business Operations and Strategy

Magnolia is an independent oil and natural gas company engaged in the acquisition, development, exploration and production of oil, natural gas, and 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. 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.

7

Basis of Presentation

In accordance with accounting principles generally accepted in the United States of America (“GAAP”), the Company was the acquirer in the Business Combination and the Karnes County Business, the Giddings Assets, and the Ironwood Interests were the acquirees. The Karnes County Business including, as applicable, its ownership of the Ironwood Interests, was deemed the “Predecessor” for periods prior to the Business Combination, and does not include the consolidation of the Company and the Giddings Assets. Although the Karnes County Contributors are not under common control, each were managed by the same managing general partner, EnerVest, and as such, these Predecessor financial statements have been presented on a combined basis for financial reporting purposes.

For the periods on or after the Business Combination, the Company, including the combination of the Karnes County Business, the Giddings Assets, and the Ironwood Interests, is the “Successor.” The financial statements and certain footnote presentations separate the Company’s presentations into two distinct periods, the period before the consummation of the Business Combination, which includes the period from January 1, 2018 to July 30, 2018 (the “Predecessor Period”) and the period after the Business Combination, which includes the period from July 31, 2018 to September 30, 2018 (the “2018 Successor Period”), and the three and nine months ended September 30, 2019 (the “2019 Successor Period”). The Business Combination was accounted for using the acquisition method of accounting and the Successor financial statements reflect a new basis of accounting that is based on the fair value of assets acquired and liabilities assumed. As a result of the inclusion of the Giddings Assets, the new basis of accounting, and certain other items that affect comparability, the Company’s financial information prior to the Business Combination is not comparable to its financial information subsequent to the Business Combination.

The assets, liabilities, revenues, expenses, and cash flows related to the Karnes County Business were not previously separately accounted for as a standalone legal entity and have been carved out of the overall assets, liabilities, revenues, expenses and cash flows from the Karnes County Contributors as appropriate. In addition, Parents’ Net Investment represents the Karnes County Contributors’ interest in the recorded net assets of the Karnes County Business and represents the cumulative net investment of the Karnes County Contributors’ in the Karnes County Business through the dates presented, inclusive of cumulative operating results.

The Karnes County Contributors utilized EnerVest’s centralized processes and systems for its treasury services and the Karnes County Business’ cash activity was commingled with other oil and gas assets that were not part of the Business Combination. As such, the net results of the cash transactions between the Karnes County Business and the Karnes County Contributors are reflected as Parents’ contributions and distributions in the accompanying Combined Statement of Changes in Parents’ Net Investment.

The Predecessor financial statements also include a portion of indirect costs for salaries and benefits, rent, accounting, legal services, and other expenses. In addition to the allocation of indirect costs, the financial statements reflect certain agreements executed by the Karnes County Contributors for the benefit of the Karnes County Business, including price risk management instruments. The allocations methodologies for significant allocated items include:

Corporate G&A - EnerVest, as managing general partner of the Karnes County Contributors, provided management, accounting, and advisory services to the Karnes County Contributors in exchange for a quarterly management fee based on the Karnes County Contributors’ investor commitments, which were used, in part, to acquire the Karnes County Business as well as other oil and natural properties that were not part of the Business Combination. As such, the management fee was allocated to the Karnes County Business using a ratio of asset acquisitions value to total asset acquisitions completed by the Karnes County Contributors, for the Predecessor Period.

Derivatives - Certain Karnes County Contributors entered into financial instruments to manage the Karnes County Business’ exposure to changes in commodity prices for the Karnes County Business as well as other oil and natural gas properties that were not part of the Business Combination, on a combined basis. The commodity derivative activity was allocated to the Karnes County Business using a ratio of expected crude oil and condensate, natural gas liquids (“NGLs”), and natural gas volumes produced, on an equivalents basis, by the Karnes County Business to the Karnes County Contributors’ total expected crude oil and condensate, NGLs, and natural gas produced, on an equivalents basis, for the Predecessor Period.

Indebtedness - The Karnes County Business did not historically have outstanding indebtedness, but its oil and natural gas properties were collateral to various credit facilities held by the Karnes County Contributors and/or EnerVest. Amounts outstanding on these credit facilities have not been allocated to the Karnes County Business as they were not directly attributable to the Karnes County Business.

Management believes the allocation methodologies used are reasonable and result in an allocation of the indirect costs and other items to operate the Karnes County Business as if it were a stand-alone entity. These allocations, however, may not be indicative of the cost of future operations or the amount of future allocations. Direct costs were included at the historical amounts related to each reported period.

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The accompanying unaudited interim consolidated and combined financial statements have been prepared in accordance with GAAP and in accordance with the rules and regulations of the SEC. Accordingly, certain information and disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted. Certain amounts have been reclassified to conform to the current period presentation resulting from the adoption of ASU No. 2014-09, Revenue from Contracts with Customers. See Note 3 - Revenue Recognition for additional information. In the opinion of management, all adjustments, consisting of only normal recurring adjustments, considered necessary for a fair presentation have been included. Interim results are not necessarily indicative of results for the full year or any future periods. The unaudited interim consolidated financial statements, including the Predecessor financial statements, should be read in conjunction with the information included in or incorporated by reference from the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

2. Summary of Significant Accounting Policies

As of September 30, 2019, the Company’s significant accounting policies are consistent with those discussed in Note 2 - Summary of Significant Accounting Policies of its consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018, with the exception of Accounting Standards Update (“ASU”) 2016-02, “Leases (Topic 842)” and as noted below.

Leases

In February 2016, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2016-02, Leases, which requires lessees to recognize a right-of-use asset and a lease liability on their balance sheet for all leases, including operating leases, with a term of greater than 12 months. In July 2018, the FASB issued ASU 2018-11, which adds a transition option permitting entities to apply the provisions of the new standard at its adoption date instead of the earliest comparative period presented in the consolidated financial statements. Under this transition option, comparative reporting would not be required, and the provisions of the standard would be applied prospectively to leases in effect at the date of adoption. The Company elected the package of transition practical expedients provided by the new standard that allow the Company to not reassess under the new standard its prior conclusions about lease identification, classification related to contracts that commenced prior to adoption, and to apply the standard prospectively to all new or modified land easements and rights-of-way. The Company has also elected a policy to not recognize right of use assets and lease liabilities related to short-term leases. The Company has lease agreements with lease and non-lease components, which are generally accounted for as a single lease component.

Magnolia adopted this standard on January 1, 2019 and recognized right of use assets and lease liabilities for certain commitments primarily related to real estate, vehicles, and field equipment, while prior reporting periods are presented in accordance with historical accounting treatment under ASC Topic 840, Leases (“ASC 840”). The Company determines if an arrangement is a lease at inception. Operating leases are included in other long-term assets, other current liabilities, and other long-term liabilities in Magnolia’s consolidated balance sheet as of September 30, 2019. Operating lease right-of-use (“ROU”) assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Magnolia’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expenses for lease payments are recognized on a straight-line basis over the lease term. For more information, refer to Note 10 - Leases.

Recent Accounting Pronouncements

In June 2016 the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The standards update requires the use of a forward-looking “expected loss” model as opposed to the current “incurred loss” model. This standard is effective for the Company in the first quarter of 2020. The Company is currently evaluating the new standard and does not believe the adoption will have a material impact on the Company’s consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU 2018-15”). The amendments in the update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software and hosting arrangements that include an internal-use software license. The Company early adopted ASU 2018-15 effective April 1, 2019, with prospective application. The adoption did not have a material impact on the Company’s consolidated financial statements.

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3. Revenue Recognition

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. This ASU and the associated subsequent amendments (collectively, “ASC 606”), superseded virtually all of the revenue recognition guidance in GAAP by requiring companies to recognize revenue using a five-step model. The core principle of the five-step model is that an entity will recognize revenue when it transfers control of goods or services to customers at an amount that reflects the consideration to which it expects to be entitled in exchange for those goods or services. Magnolia adopted this standard on December 31, 2018 for all Successor Periods using a modified retrospective approach.

There were no significant changes to the timing of revenue recognized for sales of production as a result of ASC 606. However, the new guidance resulted in certain changes to the classification of processing and other fees between revenue and gathering, transportation, and processing expense. The change also resulted in an increase to the production volumes and depreciation, depletion and amortization. The amounts included in the accompanying unaudited interim consolidated financial statements for the 2018 Successor Period were reclassified in order to conform to the current period presentation resulting from the adoption of ASC 606 and are considered immaterial. The Predecessor Period has not been restated and continues to be reported under the accounting standards in effect for that period.

Oil, Natural Gas, and NGL Revenues

Magnolia’s revenues include the sale of crude oil, natural gas, and NGLs. Oil, natural gas, and NGL sales are recognized as revenue when production is sold to a customer in fulfillment of performance obligations under the terms of agreed contracts. Performance obligations primarily comprise delivery of oil, natural gas, or NGLs at a delivery point, as negotiated within each contract. Each barrel of oil, million Btu of natural gas, gallon of NGLs, or other unit of measure is separately identifiable and represents a distinct performance obligation to which the transaction price is allocated.

The Company’s oil production is primarily sold under market-sensitive contracts that are typically priced at a differential to the New York Mercantile Exchange (“NYMEX”) price or at purchaser posted prices for the producing area. For oil contracts, the Company generally records sales based on the net amount received.

For natural gas contracts, the Company generally records wet gas sales (which consists of natural gas and NGLs based on end products after processing) at the wellhead or inlet of the gas processing plant (i.e., the point of control transfer) as revenues net of gathering, transportation, and processing expenses if the processor is the customer and there is no redelivery of commodities to the Company at the tailgate of the plant. Conversely, the Company generally records residual natural gas and NGL sales at the tailgate of the plant (i.e., the point of control transfer) on a gross basis along with the associated gathering, transportation, and processing expenses if the processor is a service provider and there is redelivery of one or several commodities to the Company at the tailgate of the plant. The facts and circumstances of an arrangement are considered and judgment is often required in making this determination. For processing contracts that require noncash consideration in exchange for processing services, the Company recognizes revenue and an equal gathering, transportation, and processing expense for commodities transferred to the service provider.

Contract Balances

Customers are invoiced once the Company’s performance obligations have been satisfied. Payment terms and conditions vary by contract type, although terms generally include a requirement of payment within 30 days. 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.

The Company’s receivables consist mainly of receivables from oil and natural gas purchasers and from joint interest owners on properties the Company operates. Receivables from contracts with customers totaled $113.2 million as of September 30, 2019 and $100.1 million as of December 31, 2018. Accounts receivable are stated at the historical carrying amount net of write-offs and allowance for doubtful accounts. The Company routinely assesses the collectability of all material trade and other receivables. The Company’s receivables consist mainly of receivables from oil and natural gas purchasers and from joint interest owners on properties the Company operates. The Company accrues a reserve on a receivable when, based on the judgment of management, it is probable that a receivable will not be collected and the amount of any reserve may be reasonably estimated. The Company had no allowance for doubtful accounts as of September 30, 2019 or December 31, 2018.

Disaggregation of Revenue

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 and combined statements of operations for all periods presented.

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Performance Obligations

Performance obligations are satisfied at a point in time once control of the product has been transferred to the customer. 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 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.

4. Acquisitions

Acquisitions (Successor)

EnerVest Business Combination

As discussed in Note 1 - Description of Business and Basis of Presentation, on July 31, 2018, the Company consummated the Business Combination contemplated by the Business Combination Agreements. The Business Combination Agreements and the Business Combination were approved by the Company’s stockholders on July 17, 2018. At the closing of the Business Combination, the Karnes County Contributors received 83.9 million shares of the Company’s Class B Common Stock and an equivalent number of Magnolia LLC Units, which, together, are exchangeable on a one-for-one basis for shares of the Company’s Class A Common Stock, subject to certain conditions; 31.8 million shares of Class A Common Stock; and approximately $911.5 million in cash. The Giddings Sellers received approximately $282.7 million in cash. The Ironwood Sellers received $25.0 million in cash in exchange for the Ironwood Interests. On March 29, 2019, Magnolia and EnerVest consummated the final settlement pursuant to the Contribution and Merger Agreement and as otherwise agreed to by the parties, with Magnolia receiving a net cash payment of $4.3 million and the Karnes County Contributors forfeiting to Magnolia 0.5 million shares of Class A Common Stock and 1.6 million shares of Class B Common Stock (and forfeiting a corresponding number of Magnolia LLC Units to Magnolia LLC).

The Business Combination has been accounted for using the acquisition method. The acquisition method of accounting is based on ASC 805 “Business Combinations,” and uses the fair value concepts defined in ASC 820. ASC 805 requires, among other things, that the assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date by the Company.

Contingent Consideration

Pursuant to the Karnes County Contribution Agreement, for a period of five years following the Closing Date, the Karnes County Contributors were entitled to receive an aggregate of up to 13.0 million additional shares of Class A Common Stock or shares of Class B Common Stock (and a corresponding number of Magnolia LLC Units) based on certain EBITDA and free cash flow or stock price thresholds. As of December 31, 2018, the Company had met the defined stock price thresholds and, as a result, the Company had issued an aggregate of 3.6 million additional shares of Class A Common Stock and 9.4 million additional shares of Class B Common Stock (and a corresponding number of Magnolia LLC Units) to the Karnes County Contributors.

Pursuant to the Giddings Purchase Agreement, until December 31, 2021, the Giddings Sellers were entitled to receive an aggregate of up to $47.0 million in cash earnout payments based on certain net revenue thresholds. On September 28, 2018, the Company paid the Giddings Sellers a cash payment of $26.0 million to fully settle the earnout obligation.

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The purchase consideration for the Business Combination was as follows:

(In thousands)
Purchase Consideration:
Cash consideration	$	1,214,966
Stock consideration (1)	1,398,238
Fair value of contingent earnout purchase consideration (2)	169,000
Total purchase price consideration	$	2,782,204

(1) At closing of the Business Combination, the Karnes County Contributors received 83.9 million shares of Class B Common Stock (and a corresponding number of Magnolia LLC Units) and 31.8 million shares of Class A Common Stock. On March 29, 2019, Magnolia and EnerVest consummated the final settlement pursuant to the Contribution and Merger Agreement as agreed to by the parties, with the Karnes County Contributors forfeiting an aggregate of 2.1 million shares of Class A and Class B Common Stock to Magnolia (and a corresponding number of Magnolia LLC Units).

(2) Pursuant to ASC 805, ASC 480, “Distinguishing Liabilities from Equity,” and ASC 815, “Derivatives and Hedging,” the Karnes County earnout consideration was valued at fair value as of the Closing Date and was classified in stockholders’ equity. The Giddings earnout was valued at fair value as of the Closing Date and was classified as a liability. The fair value of the earnouts was determined using the Monte Carlo simulation valuation method based on Level 3 inputs in the fair value hierarchy.

The following table summarizes the allocation of the purchase consideration to the assets acquired and liabilities assumed on the acquisition date:

(In thousands)
Fair value of assets acquired
Accounts receivable	$	61,790
Other current assets	2,853
Oil and natural gas properties (1)	2,813,140
Ironwood equity investment	18,100
Total fair value of assets acquired	2,895,883
Fair value of liabilities assumed
Accounts payable and other current liabilities	(65,908		)
Asset retirement obligations	(34,132		)
Deferred tax liability	(13,639		)
Fair value of net assets acquired	$	2,782,204

(1) The fair value measurements of oil and natural gas properties and asset retirement obligations are based on inputs that are not observable in the market and therefore represent Level 3 inputs. The fair values of oil and natural gas properties and asset retirement obligations were measured using valuation techniques that convert future cash flows to a single discounted amount. Significant inputs to the valuation of oil and natural gas properties included estimates of: (i) recoverable reserves; (ii) production rates; (iii) future operating and development costs; (iv) future commodity prices; and (v) a market-based weighted average cost of capital rate.

The Company incurred $24.8 million in transaction costs associated with the Business Combination. The Company also incurred a total of $23.5 million of debt issuance costs in connection with the consummation of the Business Combination related to the establishment of the RBL Facility (as defined herein) and the issuance of the 2026 Senior Notes.

Unaudited Pro Forma Operating Results

The following unaudited pro forma combined financial information has been prepared as if the Business Combination and other related transactions had taken place on January 1, 2017.

The information reflects pro forma adjustments based on available information and certain assumptions that the Company believes are reasonable, including depletion of the Company’s fair-valued proved oil and gas properties, and the estimated tax impacts of the pro forma adjustments. Additionally, pro forma net income attributable to Class A Common Stock excludes $34.3 million of transaction related costs, $11.0 million related to a one-time purchase of a seismic license continuation, and a $6.7 million loss related to the settlement of the Giddings earnout obligation.

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The pro forma combined financial information has been included for comparative purposes and is not necessarily indicative of the results that might have actually occurred had the Business Combination taken place on January 1, 2017; furthermore, the financial information is not intended to be a projection of future results.

	(Unaudited Pro Forma) (In thousands)
	Three Months Ended September 30, 2018		Nine Months Ended September 30, 2018
Total revenues	$	267,659	$	723,768
Net income attributable to Class A Common Stock	57,891		151,316
Net income per share - basic	0.39		1.02
Net income per share - diluted	0.38		0.98

Non-Compete

On the Closing Date, the Company and EnerVest, separate and apart from the Business Combination, entered into a non-compete agreement (the “Non-Compete”) restricting EnerVest and certain of its affiliates from competing with the Company in certain counties comprising the Eagle Ford Shale following the Closing Date. An affiliate of EnerVest will have the right to receive 4.0 million shares of Class A Common Stock issuable in two tranches of 2.0 million shares in two and one half and four years from the Closing Date provided EnerVest does not compete with Magnolia in the Eagle Ford Shale until the later of July 31, 2022 or the date the Services Agreement with EnerVest Operating, LLC (“EVOC”), a wholly owned subsidiary of EnerVest, (the “Services Agreement”), is terminated. For more discussion on the Non-Compete, refer to Note 7 - Intangible Assets.

Harvest Acquisition

On August 31, 2018, the Company completed the acquisition of substantially all of Harvest Oil & Gas Corporation’s South Texas assets for approximately $133.3 million in cash and 4.2 million shares of Class A Common Stock for a total consideration of $191.5 million. The acquisition added an undivided working interest across a portion of Magnolia’s existing Karnes County Assets and all of the Company’s existing Giddings Assets. On March 14, 2019, Magnolia consummated the final settlement with Harvest receiving a cash payment of $1.4 million. The transaction was accounted for as a business combination.

The following table summarizes the allocation of the purchase consideration to the assets acquired and liabilities assumed:

(In thousands)
Fair value of assets acquired
Other current assets	$	1,290
Oil and natural gas properties (1)	201,337
Total fair value of assets acquired	202,627
Fair value of liabilities assumed
Asset retirement obligations and other current liabilities	(9,666		)
Fair value of net assets acquired	$	192,961

(1) The fair value measurements of oil and natural gas properties and asset retirement obligations are based on inputs that are not observable in the market and therefore represent Level 3 inputs. The fair values of oil and natural gas properties and asset retirement obligations were measured using valuation techniques that convert future cash flows to a single discounted amount. Significant inputs to the valuation of oil and natural gas properties included estimates of: (i) recoverable reserves; (ii) production rates; (iii) future operating and development costs; (iv) future commodity prices; and (v) a market-based weighted average cost of capital rate. These inputs required significant judgments and estimates by management at the time of the valuation.

Certain Other Acquisitions

• On May 31, 2019, the Company completed the acquisition of certain oil and gas assets located in the Company’s Karnes County Assets for approximately $36.3 million in cash, subject to customary closing adjustments, 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

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Oil & Gas, LLC. Highlander paid cash consideration of $50.9 million, for such interests. MGY Louisiana LLC, a wholly owned subsidiary of Magnolia Operating, holds approximately 85% of the units in Highlander. The transaction was accounted for as an asset acquisition.

Acquisitions (Predecessor)

Subsequent GulfTex Acquisition

On March 1, 2018, the Predecessor acquired certain oil and natural gas properties located in the Eagle Ford Shale from GulfTex Energy III, L.P. and GulfTex Energy IV, L.P. for an adjusted purchase price of approximately $150.1 million, net of customary closing adjustments (the “Subsequent GulfTex Acquisition”).

The recognized fair value of identifiable assets and acquired liabilities assumed in connection with the Subsequent GulfTex Acquisition, is as follows:

(In thousands)
Purchase price allocation:
Accounts receivable	$	10,501
Proved oil and natural gas properties	118,572
Unproved oil and natural gas properties	22,802
Accounts payable and accrued liabilities	(1,679		)
Asset retirement obligations	(57		)
	$	150,139

5. Derivative Instruments and Hedging Activities (Predecessor)

The Company’s activities expose it to risks associated with changes in the market price of oil, natural gas, and NGLs. As such, future earnings are subject to fluctuation due to changes in the market price of oil, natural gas, and NGLs. The Company has not engaged in any hedging activities and does not expect to engage in any hedging activities with respect to the market risk to which the Company is exposed. The Karnes County Contributors, on behalf of the Predecessor, used derivatives to reduce the risk of volatility in the prices of oil, natural gas, and NGLs and their policies did not permit the use of derivatives for speculative purposes.

The Predecessor elected not to designate any of its derivatives as hedging instruments. Accordingly, changes in the fair value of the Predecessor's derivatives were recorded immediately to earnings as “Gain (loss) on derivatives, net” in the combined statements of operations. During the periods from July 1 through July 30, 2018 and January 1 through July 30, 2018, the Predecessor incurred a gain on derivatives of $3.9 million and a loss on derivatives of $18.1 million, respectively.

6. Fair Value Measurements

Certain of the Company’s assets and liabilities are carried at fair value and measured either on a recurring or non-recurring basis. The Company’s fair value measurements are based either on actual market data or assumptions that other market participants would use in pricing an asset or liability in an orderly transaction, using the valuation hierarchy prescribed by GAAP under ASC 820.

The three levels of the fair value hierarchy under ASC 820 are as follows:

Level I - Quoted prices (unadjusted) in active markets for identical investments at the measurement date are used.

Level II - Pricing inputs are other than quoted prices included within Level I that are observable for the investment, either directly or indirectly. Level II pricing inputs include quoted prices for similar investments in active markets, quoted prices for identical or similar investments in markets that are not active, inputs other than quoted prices that are observable for the investment, and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level III - Pricing inputs are unobservable and include situations where there is little, if any, market activity for the investment. The inputs used in determination of fair value require significant judgment and estimation.

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Fair Values - Recurring (Predecessor)

The Predecessor’s derivatives consisted of over-the-counter contracts that were not traded on a public exchange. As the fair value of these derivatives was based on inputs using market prices obtained from independent brokers or determined using quantitative models that used as their basis readily observable market parameters that are actively quoted and can be validated through external sources, including third-party pricing services, brokers and market transactions, the Predecessor categorized these derivatives as Level 2. The Predecessor valued these derivatives using the income approach using inputs such as the forward curve for commodity prices based on quoted market prices and prospective volatility factors related to changes in the forward curves. Estimates of fair value were determined at discrete points in time based on relevant market data. Furthermore, fair values were adjusted to reflect the credit risk inherent in the transaction, which may have included amounts to reflect counterparty credit quality and/or the effect of the Predecessor’s creditworthiness.

Fair Values - Nonrecurring

The fair value measurements of assets acquired and liabilities assumed in a business combination are measured on a nonrecurring basis on the acquisition date using an income valuation technique based on inputs that are not observable in the market, and therefore, represent Level 3 inputs. Significant inputs to the valuation of acquired oil and gas properties includes estimates of: (i) reserves; (ii) production rates; (iii) future operating and development costs; (iv) future commodity prices, including price differentials; (v) future cash flows; and (vi) a market participant-based weighted average cost of capital rate. These inputs require significant judgments and estimates by the Company’s management at the time of the valuation. Refer to Note 4 - Acquisitions for additional information.

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 11 - Stockholders’ Equity for additional information.

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 as of September 30, 2019 is as follows:

	September 30, 2019
(In thousands)	Carrying Value		Fair Value
Long-term debt	$	389,528	$	404,000

The fair value of the 2026 Senior Notes at September 30, 2019 was 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 the business combinations and asset retirement obligations.

7. Intangible Assets

Non-Compete Agreement

On the Closing Date, the Company and EnerVest, separate and apart from the Business Combination, entered into 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 the Closing Date provided EnerVest does not compete in the Market Area.

The Company recorded an estimated cost of $44.4 million for the Non-Compete as intangible assets on the Company’s consolidated balance sheet. These intangible assets have a definite life and are subject to amortization utilizing the straight-line method over their economic life, currently estimated to be two and one half to four years. The Company includes the amortization in “Amortization of intangible assets” on the Company’s consolidated statement of operations.

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(In thousands)	September 30, 2019
Non-compete intangible assets	$	44,400
Accumulated amortization	(16,923		)
Intangible assets, net	$	27,477
Weighted average amortization period (in years)	3.25

8. Income Taxes

The Company estimates its annual effective tax rate in recording its quarterly provision for income taxes in the various jurisdictions in which Magnolia and its subsidiaries operate. The tax effects of statutory rate changes, significant unusual or infrequent items, and certain changes in the assessment of the realizability of deferred tax assets are excluded from the determination of the Company’s annual effective tax rate as such items are recognized as discrete items in the period in which they occur.

Income tax expense recorded for the period is based on applying an estimated annual effective income tax rate to the net income from January 1, 2019 through September 30, 2019. There were no significant unusual or infrequently occurring items that are required to be recorded as discrete items as of September 30, 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 may change as new events occur, more experience is obtained, additional information becomes known, or as the tax environment changes. For the three and nine months ended September 30, 2019, the Company incurred U.S. federal income tax expense of approximately $3.1 million and $11.6 million, respectively. The Company’s annual effective tax rate for the three and nine months ended September 30, 2019 was 16.9% and 14.9%, respectively. The primary differences between the annual effective tax rate and the statutory rate of 21.0% are income attributable to noncontrolling interest and state taxes.

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

	Successor						Predecessor
(In thousands)	Three Months Ended September 30, 2019		Nine Months Ended September 30, 2019		July 31, 2018 Through September 30, 2018		July 1, 2018 Through July 30, 2018		January 1, 2018 Through July 30, 2018
Current:
Federal	$	—	$	—	$	—	$	—	$	—
State	115		684		45		631		1,461
	115		684		45		631		1,461
Deferred:
Federal	3,135		11,588		3,493		—		—
State	279		177		—		135		324
	3,414		11,765		3,493		135		324
Total provision	$	3,529	$	12,449	$	3,538	$	766	$	1,785

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 September 30, 2019. The Company is currently not aware of any issues under review that could result in significant payments, accruals, or material deviation from its position. The Company’s tax years since its formation remain subject to possible income tax examinations by its major taxing authorities for all periods.

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9. Long Term Debt

The Company’s debt is comprised of the following:

(In thousands)	September 30, 2019
Revolving credit facility	$	—
6.0% Senior Notes due 2026	400,000
Total long-term debt	400,000
Less: Unamortized deferred financing cost	(10,472		)
Total debt, net	$	389,528

Credit Facility

In connection with the consummation of the Business Combination, Magnolia Operating entered into a senior secured reserve-based revolving credit facility (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 September 30, 2019 was $550.0 million. 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.

Borrowings under the RBL Facility bear interest, at Magnolia Operating’s option, at a rate per annum equal to either the LIBOR rate or the alternative base rate plus the applicable margin. Additionally, Magnolia Operating is required to pay a commitment fee quarterly in arrears in respect of unused commitments under the RBL Facility. The applicable margin and the commitment fee rate are calculated based upon the utilization levels of the RBL Facility as a percentage of the borrowing base then in effect.

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 September 30, 2019, 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 statement of operations. During the three and nine months ended September 30, 2019, the Company recognized interest expense of $1.1 million and $3.4 million, respectively, related to the RBL Facility. The unamortized portion of the deferred financing costs are included in “Deferred financing costs, net” on the accompanying unaudited consolidated balance sheet as of September 30, 2019.

The Company did not have any outstanding borrowings under its RBL Facility as of September 30, 2019.

2026 Senior Notes

On the Closing Date, the Issuers issued and sold $400.0 million aggregate principal amount of 2026 Senior Notes. The 2026 Senior Notes were issued under the Indenture, dated as of the Closing Date (the “Indenture”), by and among the Issuers and Deutsche Bank Trust Company Americas, as trustee. The 2026 Senior Notes are guaranteed on a senior unsecured basis by the Company, Magnolia Operating, and Magnolia Intermediate and may be guaranteed by certain future subsidiaries of the Company. The 2026 Senior Notes will mature on August 1, 2026 and bear interest at the rate of 6.0% per annum.

At any time prior to August 1, 2021, the Issuers may, on any one or more occasions, redeem all or a part of the 2026 Senior Notes at a redemption price equal to 100% of the principal amount of the 2026 Senior Notes redeemed, plus a “make whole” premium on accrued and unpaid interest, if any, to, but excluding, the date of redemption. After August 1, 2021, the Issuers may redeem all or a part of the Notes based on principal plus a set premium, as set forth in the Indenture, including any accrued and unpaid interest.

The Company incurred $11.8 million of deferred financing costs related to the issuance of the 2026 Senior Notes, which were capitalized, 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 statement 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 September 30, 2019. During the three and nine months ended September 30, 2019, the Company recognized interest expense of $6.3 million and $18.9 million, respectively, related to the 2026 Senior Notes.

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Affiliate Guarantors

Certain subsidiaries of the Company are guarantors under the terms of its Senior Notes and RBL Facility. The parent guarantees 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.

10. Leases

Magnolia’s leases primarily consist of real estate, vehicles, and field equipment. The Company’s leases have remaining lease terms of up to 8 years, some of which include options to renew or terminate the lease. The exercise of lease renewal options is at the Company’s sole discretion. Magnolia’s lease agreements do not contain any residual value guarantees or restrictive covenants.

As most of Magnolia’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The Company used the incremental borrowing rate on January 1, 2019, for operating leases that commenced prior to that date.

(In thousands)	September 30, 2019
Operating Leases
Operating lease assets	$	4,772
Operating lease liabilities - current	$	2,724
Operating lease liabilities - long-term	2,039
Total operating lease liabilities	$	4,763
Weighted average remaining lease term (in years)	2.0
Weighted average discount rate	3.8		%

For the three and nine months ended September 30, 2019, respectively, the Company incurred $0.9 million and $2.1 million of lease costs for operating leases included on the Company’s balance sheet, $5.9 million and $21.1 million for short-term lease costs and $0.6 million and $2.5 million for variable lease costs. Cash paid for amounts included in the measurement of lease liabilities in operating cash flows from operating leases for the nine months ended September 30, 2019 is $2.0 million.

Maturities of lease liabilities as of September 30, 2019 under the scope of ASC 842 are as follows:

(In thousands)
Maturity of Lease Liabilities(1)	Operating Leases
2019 (remaining)	$	771
2020	2,653
2021	1,170
2022	165
2023	98
After 2023	91
Total lease payments	$	4,948
Less: Interest	(185		)
Present value of lease liabilities	$	4,763

(1) As of December 31, 2018, minimum future contractual payments for long-term operating leases under the scope of ASC 840 were $881 thousand in 2019, $646 thousand in 2020, $198 thousand in 2021, $14 thousand in 2022, $15 thousand in 2023 and $63 thousand thereafter.

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11. Stockholders’ Equity

Class A Common Stock

In connection with the closing of the Business Combination, the Company increased the number of authorized shares of Class A Common Stock to 1.3 billion. At September 30, 2019, there were 168.3 million shares issued and 167.3 million shares outstanding of Class A Common Stock. 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 (defined below). In the event of a liquidation, dissolution, or winding up of the Company, the common stockholders 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

In connection with the closing of the Business Combination, the Company authorized 225.0 million shares of Class B Common Stock. At September 30, 2019, there were 91.8 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. The holders of Class B Common Stock generally have the right to exchange all or a portion of their Class B Common Stock, together with an equal number of Magnolia LLC Units, for the same number of shares of Class A Common Stock or, at Magnolia LLC’s option, an equivalent amount of cash. Upon the future redemption or exchange of Magnolia LLC Units held by any holder of Class B Common Stock, a corresponding number of shares of Class B Common Stock held by such holder of Class B Common Stock will be canceled. In the event of a liquidation, dissolution, or winding up of the Company, the common stockholders 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 B Common Stock have no preemptive or other subscription rights, and there are no sinking fund provisions applicable to such shares.

Warrants

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 the Tender and Support Agreement (as defined below).

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.

Share Repurchase Program

On August 5, 2019, the Company’s Board of Directors authorized a share repurchase program of up to 10 million shares. The program does not require purchases to be made within a particular timeframe. As of September 30, 2019, the Company had repurchased 950 thousand shares of Class A Common Stock at a weighted average price of $10.23, for a total cost of approximately $9.7 million.

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Noncontrolling Interest

Noncontrolling interest in Magnolia’s consolidated subsidiaries include amounts attributable to Magnolia LLC Units that were issued to the Karnes County Contributors in connection with the Business Combination. The noncontrolling interest percentage is affected by various equity transactions such as issuances of Class A Common Stock and the conversion of Class B Common Stock to Class A Common Stock. As of September 30, 2019, Magnolia owned approximately 64.6% of the interest in Magnolia LLC and the noncontrolling interest was 35.4%. In the first quarter of 2019, Magnolia Operating formed a joint venture, 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.

12. Supplemental Cash Flow Information

Supplemental cash flow disclosures are presented below:

	Successor				Predecessor
(In thousands)	Nine Months Ended September 30, 2019		July 31, 2018 Through September 30, 2018		January 1, 2018 Through July 30, 2018
Supplemental non-cash operating activity:
Cash paid for income taxes	$	390	$	—	$	336
Cash paid for interest	25,687		350		—
Supplemental non-cash investing and financing activity:
Accruals or liabilities for capital expenditures	$	37,241	$	45,242	$	38,028
Contingent Consideration issued in Business Combination	—		149,700		—
Non-Compete agreement entered into in Business Combination	—		44,400		—
Equity issuances in connection with acquisitions	33,693		1,481,695		—
Non-cash deemed dividend related to warrant exchange	2,763		—		—
Supplemental non-cash lease operating activity:
Right-of-use assets obtained in exchange for operating lease obligations	$	6,720	—		—

13. Stock Based Compensation

On October 8, 2018, the Company’s board of directors adopted the “Magnolia Oil & Gas Corporation Long Term Incentive Plan” (the “Plan”), effective as of July 17, 2018. A total of 11.8 million shares of Class A Common Stock have been authorized for issuance under the Plan. The Company granted employees stock based compensation awards in the form of restricted stock units (“RSUs”) and performance stock units (“PSUs”) to enhance the Company and its affiliates’ ability to attract, retain and motivate persons who make important contributions to the Company and its affiliates by providing these individuals with equity ownership opportunities. 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 within general and administrative expense on the consolidated statement of operations and was $2.8 million and $8.4 million for the three and nine months ended September 30, 2019. The Company has elected to account for forfeitures of awards granted under the Plan as they occur in determining compensation expense.

Restricted Stock Units

The Company grants service-based RSU awards to employees and non-employee directors, which generally vest ratably over a three-year service period. RSUs represent the right to receive shares of Class A Common Stock at the end of the vesting period equal to the number of RSUs granted. RSUs are subject to restrictions on transfer and are generally subject to a risk of forfeiture if the award recipient is no longer an employee or director of the Company for any reason prior to vesting of the award. 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 restricted shares at September 30, 2019 was $12.0 million, which the Company expects to recognize over a weighted average period of 2.1 years.

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The table below summarizes restricted stock unit activity for the nine months ended September 30, 2019.

	Restricted Stock Units	Weighted Average Grant Date Fair Value
Unvested restricted stock units, beginning of period	807,431	$	13.97
Granted	585,659	$	12.33
Vested	237,702	$	14.58
Forfeited	—	—
Unvested restricted stock units, end of period	1,155,388	$	13.06

Performance Stock Units

During the nine months ended September 30, 2019, the Company granted PSUs to certain employees, with each PSU representing the contingent right to receive one share of Class A Common Stock. The number of shares of Class A Common Stock issuable upon vesting, however, ranges from zero to 150% of the 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 an approximate three-year performance period, the last day of which is also the vesting date. Unrecognized compensation expense related to unvested PSUs at September 30, 2019 was $7.0 million, which the Company expects to recognize over a weighted average period of 2.1 years.

The table below summarizes performance stock award and unit activity for the nine months ended September 30, 2019.

	Performance Stock Units	Weighted Average Grant Date Fair Value
Unvested performance stock units, beginning of period	475,312	$	14.58
Granted	267,482	$	13.87
Vested	33,333	$	14.58
Forfeited	—	—
Unvested performance stock units, end of period	709,461	$	14.31

The grant date fair value of the PSUs granted during the nine months ended September 30, 2019 was $3.7 million, calculated using a Monte Carlo simulation. The following table summarizes the assumptions used to calculate the grant date fair value of these PSUs.

	Grant Date Fair Value Assumptions
Expected term (in years)	2.85 - 2.67
Expected volatility	33.61% - 31.58%
Risk-free interest rate	2.48% - 2.29%

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14. Earnings Per Share

A reconciliation of the numerators and denominators of the basic and diluted per share computations follows. No such computation is necessary for the Predecessor Period as the Predecessor was not previously accounted for as a standalone legal entity and did not have publicly traded securities.

(In thousands, except per share data)	Three Months Ended September 30, 2019		Nine Months Ended September 30, 2019		July 31, 2018  Through  September 30, 2018
Basic:
Net Income attributable to Class A Common Stock	$	7,784	$	39,316	$	6,176
Weighted average number of common shares outstanding during the period - basic	166,872		160,051		151,992
Net income per common share - basic	$	0.05	$	0.25	0.04
Diluted:
Net Income attributable to Class A Common Stock	$	7,784	$	39,316	$	6,176
Weighted average number of common shares outstanding during the period - basic	166,872		160,051		151,992
Add: Dilutive effect warrants and stock based compensation	236		1,437		5,080
Weighted average number of common shares outstanding during the period - diluted	167,108		161,488		157,072
Net income per common share - diluted	$	0.05	$	0.24	$	0.04

The calculation for weighted average shares reflects shares outstanding over the reporting period based on the actual number of days the shares were outstanding. The Company excluded 91.8 million, 92.3 million, and 87.6 million of weighted average shares of Class A Common Stock issuable upon conversion of the Class B Common Stock (and the corresponding Magnolia LLC Units) for the three and nine months ended September 30, 2019 and for the period from July 31, 2018 through September 30, 2018, respectively, as the effect was anti-dilutive. In addition, for the three months ended September 30, 2019 the effect of warrants were excluded because their inclusion would be anti-dilutive.

15. Related Party Transactions

As of September 30, 2019, 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.”

Amended and Restated Limited Liability Company Agreement of Magnolia LLC

On the Closing Date, the Company, Magnolia LLC, and certain of the Karnes County Contributors entered into Magnolia LLC’s amended and restated limited liability company agreement, which sets forth, among other things, the rights and obligations of the holders of units in Magnolia LLC. Under the Magnolia LLC Agreement, the Company is the sole managing member of Magnolia LLC.

Registration Rights Agreement

At the closing of the Business Combination, the Company entered into a registration rights agreement (the “Registration Rights Agreement”) with TPG Pace Energy Sponsor LLC, a Delaware limited liability company (“TPG Pace”), the Karnes County Contributors, and the Company’s four independent directors prior to the Business Combination (collectively, the “Holders”), pursuant to which the Company is obligated, subject to the terms thereof and in the manner contemplated thereby, to register for resale under the Securities Act all or any portion of the shares of Class A Common Stock that the Holders held as of July 31, 2018 and that they may have acquired or might acquire thereafter, including upon conversion, exchange, or redemption of any other security therefor. Under the Registration Rights Agreement, Holders also have “piggyback” registration rights exercisable at any time that allow them to include the shares of Class A Common Stock that they own in certain registrations initiated by the Company.

                Pursuant to the Registration Rights Agreement, the Company has filed and taken effective two registration statements on Form S-3, each of which registered, among others, the offering by the Holders of the shares of Class A Common Stock included therein.

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Stockholder Agreement

On the Closing Date, the Company, TPG Pace, and the Karnes County Contributors entered into the Stockholder Agreement (the “Stockholder Agreement”), under which the Karnes County Contributors are entitled to nominate two directors, one of whom shall be independent under the listing rules of the New York Stock Exchange, the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Sarbanes-Oxley Act of 2002, for appointment to the board of directors of the Company (the “Board”) so long as they collectively own at least 15% of the outstanding shares of Class A Common Stock and Class B Common Stock, (on a fully diluted basis, including equity securities exercisable into common stock, and on a combined basis), and one director so long as they collectively own at least 2% of the outstanding shares of Class A Common Stock and Class B Common Stock (on a fully diluted basis, including equity securities exercisable into common stock, and on a combined basis). The Karnes County Contributors are collectively entitled to appoint one director to each committee of the Board (subject to applicable laws and stock exchange rules). Furthermore, TPG Pace was entitled to certain director nomination rights under the Stockholder Agreement, but those rights ceased following a distribution by TPG Pace of its shares in August 2019.

Contingent Consideration

Pursuant to the Karnes County Contribution Agreement, for a period of five years following the Closing Date, the Company agreed to issue or cause to be issued to the Karnes County Contributors additional equity in the Company and Magnolia LLC upon satisfaction of certain EBITDA and free cash flow or stock price thresholds in three tranches. As of December 31, 2018, the Company had met the defined stock price thresholds and had issued an aggregate of 3.6 million additional shares of Class A Common Stock and 9.4 million additional shares of Class B Common Stock to the Karnes County Contributors and had caused Magnolia LLC to issue 9.4 million additional Magnolia LLC Units to the Karnes County Contributors.

Tender and Support Agreement

Pursuant to the Offer, certain of the Company’s warrantholders, including directors and executive officers, agreed to tender their warrants by entering into the tender and support agreement, dated as of June 7, 2019, by and between the Company and such holders (the “Tender and Support Agreement”). See Note 11 - Stockholders’ Equity for more information.

Predecessor Transactions

EnerVest, as managing general partner of the Karnes County Contributors, provided management, accounting and advisory services to the Karnes County Contributors in exchange for a quarterly management fee based on the Karnes County Contributors' investor commitments. The management fees incurred were allocated to the Predecessor using a ratio of asset acquisitions value to total asset acquisitions completed by the Karnes County Contributors. The management fees and other costs allocated to the Predecessor and included in "General and administrative expenses" in the combined statements of operations were $1.6 million and $11.6 million for the periods of July 1 through July 30, 2018 and January 1 through July 30, 2018, respectively.

The Karnes County Contributors also entered into operating agreements with EVOC to act as contract operator of the Predecessor’s oil and natural gas wells. The Predecessor reimbursed EVOC for direct expenses incurred. A majority of such expenses were charged on an actual basis (i.e., no mark-up or subsidy to EVOC). These costs are included in “Lease operating expenses” in the combined statements of operations in the Predecessor Period. Additionally, in its role as contract operator, EVOC collected proceeds from oil, natural gas, and NGL sales and distributed them to the Predecessor and other working interest owners.

16. Commitments and Contingencies

Legal Matters

The Company is involved in disputes or legal actions in the ordinary course of business. For example, certain of the Karnes County Contributors and the Company have been named as defendants in a lawsuit where the plaintiffs claim to be entitled to a minority working interest in certain Karnes County Business properties. The litigation is in the discovery stage. The exposure related to this litigation is currently not reasonably estimable. The Karnes County Contributors retained all such liability in connection with the Business Combination. At September 30, 2019, the Company does not believe the outcome of any such disputes or legal actions will have a material effect on its consolidated statement of operations, balance sheet, or cash flows.

Environmental Matters

The Company, as an owner or lessee and operator of oil and gas properties, is subject to various federal, state, local laws and regulations relating to discharge of materials into, and protection of, the environment. These laws and regulations may, among other

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things, impose liability on the lessee under an oil and gas lease for the cost of pollution clean-up resulting from operations and subject the lessee to liability for pollution damages. In some instances, the Company may be directed to suspend or cease operations in the affected area. The Company maintains insurance coverage, which it believes is customary in the industry, although the Company is not fully insured against all environmental risks.

Risks and Uncertainties 

The Company’s revenue, profitability, and future growth are substantially dependent upon the prevailing and future prices for oil and natural gas, which depend on numerous factors beyond the Company’s control such as overall oil and natural gas production and inventories in relevant markets, economic conditions, the global political environment, regulatory developments, and competition from other energy sources. Oil and natural gas prices historically have been volatile, and may be subject to significant fluctuations in the future. 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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. All statements other than statements of historical facts included or incorporated by reference in this report, including, without limitation, statements regarding the Company’s future financial position, business strategy, budgets, projected revenues, projected costs, and plans and objectives of management for future operations, are forward-looking statements. Such forward-looking statements are based on the beliefs of management, as well as assumptions made by, and information currently available to, the Company’s management. In addition, forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “could,” “expect,” “intend,” “project,” “estimate,” “anticipate,” “plan,” “believe,” or “continue” or similar terminology. Although Magnolia believes that the expectations reflected in such forward-looking statements are reasonable, the Company can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from the Company’s expectations include, but are not limited to, Magnolia’s assumptions about:

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

• the supply and demand for oil, natural gas, NGLs, and other products or services;

• production and reserve levels;

• drilling risks;

• economic and competitive conditions;

• the availability of capital resources;

• capital expenditures and other contractual obligations;

• weather conditions;

• inflation rates;

• the availability of goods and services;

• legislative, regulatory, or policy changes;

• cyber attacks;

• occurrence of property acquisitions or divestitures;

• the integration of acquisitions; and

• the securities or capital markets and related risks such as general credit, liquidity, market, and interest-rate risks.

All of Magnolia’s forward-looking information is subject to risks and uncertainties that could cause actual results to differ materially from the results expected. Although it is not possible to identify all factors, these risks and uncertainties include the risk factors

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and the timing of any of those risk factors identified in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018 filed with the SEC on February 27, 2019.

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.

Overview 

Magnolia Oil & Gas Corporation (the "Company" or "Magnolia") is a Delaware corporation formed in February 2017 as a special purpose acquisition company under the name TPG Pace Energy Holdings Corp. for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization, or similar business combination with one or more businesses.

Magnolia’s business model was designed with a primary objective to generate stock market value over the long term. The Company’s strategy is to establish a company whose characteristics would demonstrate a certain basic set of criteria that appeal to generalist investors and to generate growing earnings per share over time, high operating and full cycle margins, and maintain a very strong balance sheet with a low amount of leverage.

On July 31, 2018, the Company and Magnolia Oil & Gas Parent LLC (“Magnolia LLC”), as applicable, consummated the acquisition of: (i) certain right, title, and interest in certain oil and natural gas assets located primarily in the Karnes County portion of the Eagle Ford Shale in South Texas (the "Karnes County Assets") pursuant to that certain Contribution and Merger Agreement (as subsequently amended, the "Karnes County Contribution Agreement"), by and among the Company, Magnolia LLC and certain affiliates (the "Karnes County Contributors") of EnerVest Ltd. ("EnerVest"); (ii) certain right, title, and interest in certain oil and natural gas assets located primarily in the Giddings Field of the Austin Chalk (the "Giddings Assets") pursuant to that certain Purchase and Sale Agreement (the "Giddings Purchase Agreement") by and among Magnolia LLC and certain affiliates of EnerVest (the "Giddings Sellers"); and (iii) a 35% membership interest (the “Ironwood Interests”) in Ironwood Eagle Ford Midstream, LLC, a Texas limited liability company, which owns an Eagle Ford gathering system, pursuant to that certain Membership Interest Purchase Agreement, by and among Magnolia LLC and certain affiliates of EnerVest (the "Ironwood Sellers") (collectively, the “Business Combination”).

In connection with the consummation of the Business Combination, on July 31, 2018, the Karnes County Contributors received 83.9 million shares of Class B Common Stock, par value $0.0001 per share (“Class B Common Stock”), 31.8 million shares of Class A Common Stock, par value $0.0001 per share (“Class A Common Stock”), and approximately $911.5 million in cash; the Giddings Sellers received approximately $282.7 million in cash; and the Ironwood Sellers received $25.0 million in cash. On March 29, 2019, Magnolia and EnerVest consummated the final settlement of the Business Combination, with Magnolia LLC receiving a net cash payment of $4.3 million in cash and the Karnes County Contributors forfeiting to Magnolia 0.5 million shares of Class A Common Stock and 1.6 million shares of Class B Common Stock (and forfeiting a corresponding number of Magnolia LLC Units to Magnolia LLC).

In accordance with accounting principles generally accepted in the United States of America (“GAAP”), the Company has been identified as the acquirer in the Business Combination and the Karnes County Business was deemed to be the accounting “Predecessor”. The Business Combination was accounted for using the acquisition method of accounting and the Successor financial statements reflect a new basis of accounting based on the fair value of net assets acquired. As a result of the application of the acquisition method of accounting, the Company’s consolidated and combined financial statements and certain presentations of information therein are separated into two distinct periods to indicate the different ownership and accounting basis between the periods presented, the period before the consummation of the Business Combination, which includes the period from January 1, 2018 to July 30, 2018 (the “Predecessor Period”), and the period after the Business Combination, which includes the period from July 31, 2018 to September 30, 2018 (the “2018 Successor Period”), and the three and nine months ended September 30, 2019 (the “2019 Successor Period”).

The Company operates in one reportable segment and is engaged in the acquisition, development, exploration, and production of oil and natural gas properties located in the United States. The Company's oil and natural gas properties are located primarily in Karnes County and the Giddings Field in South Texas, where the Company primarily targets the Eagle Ford Shale and the Austin Chalk formations.

As of September 30, 2019, Magnolia’s assets in South Texas included 21,946 net acres in Karnes, Gonzales, DeWitt, and Atascosa counties and 428,682 net acres in the Giddings Field. As of September 30, 2019, Magnolia held an interest in approximately 1,618 gross wells (1,128 net), with total production of 66.3 thousand barrels of oil equivalent per day (“Mboe/d”) for the nine months ended September 30, 2019. In the third quarter of 2019, Magnolia operated two drilling rigs across its acreage, one rig in Karnes County and one rig in the Giddings Field.

Magnolia’s production averaged 71.3 Mboe/d for the third quarter of 2019, a 9.5% increase compared to 65.1 Mboe/d in the second quarter.  Third quarter oil production averaged 53.7% of total volumes. 

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In July, 2019, the Company exchanged all of its warrants for an aggregate of 9.2 million shares of Class A Common Stock. For more information, see Note 11 - Stockholders’ Equity in the Company’s unaudited consolidated financial statements included in this Quarterly Report.

Magnolia recognized net income attributable to Class A Common Stock of $7.8 million and $39.3 million, or $0.05 and $0.24 per diluted common share, for the three and nine months ended September 30, 2019, respectively. Net income attributable to Class A Common Stock for the three and nine months ended September 30, 2019 was reduced by $2.8 million related to the non-cash deemed dividend as a result of the warrant exchange. Magnolia also recognized net income of $17.4 million and $71.4 million, which includes noncontrolling interest of $6.8 million and $29.3 million related to the Class B Common Stock held by certain affiliates of EnerVest for the three and nine month 2019 Successor Period ended September 30, 2019, respectively.

On August 5, 2019, the Company’s Board of Directors authorized a share repurchase program of up to 10 million shares. The program does not require purchases to be made within a particular timeframe. During the three and nine months ended September 30, 2019, the Company repurchased 950 thousand shares at a weighted average price of $10.23, for a total cost of approximately $9.7 million.

Results of Operations

Factors Affecting the Comparability of the Historical Financial Results

The 2018 and 2019 Successor Period financial statements reflect a new basis of accounting for the assets acquired and liabilities assumed by the Company in the Business Combination that is based on their fair value. As a result, the statement of operations subsequent to the Business Combination includes depreciation and amortization expense on Magnolia’s property, plant, and equipment balances made under the new basis of accounting. Therefore, the Company’s financial information prior to the Business Combination may not be comparable to its financial information subsequent to the Business Combination. Certain other items of income and expense may not be comparable as a result of the following factors:

• For the periods prior to July 31, 2018, the results of operations reflect the results of solely the Predecessor, which, as described above, consists of only the results of the Karnes County Business, including, as applicable, its ownership of the Ironwood Interests, when the Predecessor was not owned by the Company, and do not include the results of the Giddings Assets;

• The results of operations of the Predecessor were not previously accounted for as the results of operations of a stand-alone legal entity, and accordingly have been carved out, as appropriate, for the periods presented. The results of operations of the Predecessor therefore include a portion of indirect costs for salaries and benefits, depreciation, rent, accounting, legal services, and other expenses. In addition to the allocation of indirect costs, the results of operations reflect certain agreements executed by the Karnes County Contributors for the benefit of the Predecessor, including price risk management instruments. For more information, please refer to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018. These allocations may not be indicative of the cost of future operations or the amount of future allocations;

• The Predecessor completed the acquisition of certain assets from GulfTex Energy III, L.P. and GulfTex Energy IV, L.P. on March 1, 2018 during the Predecessor Period, and accordingly the results of operations of the Predecessor reflect the impact of the assets acquired in that acquisition only from their respective acquisition date;

• As a corporation, the Company is subject to U.S. federal income taxes at a statutory rate of 21% of pretax earnings whereas the Karnes County Contributors were treated as partnerships for income tax purposes. As a result, items of income, expense, gains and losses flowed through to the owners of the Karnes County Contributors and were taxed at the owner level. Accordingly, no U.S. tax provision for federal income taxes is included in the financial statements of the Predecessor;

• On August 31, 2018, the Company acquired substantially all of the South Texas assets of Harvest Oil & Gas Corporation (the “Harvest Acquisition”) for approximately $133.3 million in cash and 4.2 million shares of the Company’s Class A Common Stock. The Harvest Acquisition added an undivided working interest across a portion of the Karnes County Assets and all of the Giddings Assets;

• On February 5, 2019, Magnolia Operating formed a joint venture, Highlander Oil & Gas Holdings LLC, to complete the acquisition of a 72% working interest in the Eocene-Tuscaloosa Zone, Ultra Deep Structure gas well located in St. Martin Parish, Louisiana (the “Highlander Well”); and

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• The financial results for the Successor Period reflect the adoption of ASU No. 2014-09, Revenue from Contracts with Customers, which the Company adopted on December 31, 2018 and applied to all periods presented in the Successor Period. The Predecessor Period continues to be reported under the accounting standards in effect for that period.

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

Three Months Ended September 30, 2019 Compared to the Three Months Ended September 30, 2018

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 barrels of oil equivalent (“boe”) basis in which natural gas is converted to an equivalent barrel of oil based on a ratio of six thousand cubic feet of natural gas (“Mcf”) to one barrel. This ratio may not be reflective of the current price ratio between the two products.

	Successor				Predecessor
(In thousands, except per unit data)	Three Months Ended September 30, 2019		July 31, 2018 Through September 30, 2018		July 1, 2018 Through July 30, 2018
Production:
Oil (MBbls)	3,520		2,023		897
Natural gas (MMcf)	10,763		5,341		1,153
NGLs (MBbls)	1,245		678		160
Total (Mboe)	6,559		3,591		1,249
Average daily production:
Oil (Bbls/d)	38,261		33,164		28,935
Natural gas (Mcf/d)	116,989		87,557		37,194
NGLs (Bbls/d)	13,533		11,115		5,161
Total (boe/d)	71,292		58,872		40,290
Revenues:
Oil revenues	$	207,840	$	143,202	$	68,487
Natural gas revenues	21,243		13,414		3,646
Natural gas liquids revenues	15,716		21,547		4,754
Total revenues	$	244,799	$	178,163	$	76,887
Average Price:
Oil (per barrel)	$	59.05	$	70.79	$	76.35
Natural gas (per Mcf)	1.97		2.51		3.16
NGLs (per barrel)	12.62		31.78		29.71

Oil revenues were 85%, 80%, and 89% of the Company’s total revenues for the 2019 Successor Period, the 2018 Successor Period, and the Predecessor Period, respectively. Oil revenues for the 2019 Successor Period were $3.8 million lower compared to the combined 2018 Successor Period and Predecessor Period due to a 19% decrease in average prices partially offset by 21% higher production. The higher volumes are attributable to the inclusion of the Giddings Assets, recent acquisitions, and continued development. Oil production was 54%, 56%, and 72% of total production volume for the 2019 Successor Period, the 2018 Successor Period, and the Predecessor Period, respectively.

Natural gas revenues were 9%, 8%, and 5% of the Company's total revenues for the 2019 Successor Period, the 2018 Successor Period, and the Predecessor Period, respectively. Natural gas revenues for the 2019 Successor Period were $4.2 million higher compared to the combined 2018 Successor and Predecessor Period due to a 66% increase in natural gas production primarily attributable to the Successor’s inclusion of the Giddings Assets and the acquisition of the Highlander Well, partially offset by a 25% decrease in average

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prices. Natural gas production was 27%, 25%, and 15% of total production volume for the 2019 Successor Period, 2018 Successor Period and the Predecessor Period, respectively.

Natural gas liquids revenues were 6%, 12%, and 6% of the Company’s total revenues for the 2019 Successor Period, the 2018 Successor Period, and the Predecessor Period, respectively. NGL production was 19%, 19%, and 13% of total production volume for the 2019 Successor Period, the 2018 Successor Period, and the Predecessor Period, respectively. Natural gas liquids revenues for the 2019 Successor Period were $10.6 million lower compared to the combined 2018 Successor Period and Predecessor Period due to a 60% decrease in average prices, partially offset by 49% higher production. The higher production volumes are primarily attributable to the Successor’s inclusion of the Giddings Assets, recent acquisitions, and continued development.

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

	Successor						Predecessor
(In thousands, except per unit data)	Three Months Ended September 30, 2019			July 31, 2018 Through September 30, 2018			July 1, 2018 Through July 30, 2018
Operating Expenses:
Lease operating expenses	$	24,344		$	11,016		$	3,681
Gathering, transportation and processing	9,270			5,353			2,240
Taxes other than income	13,333			9,351			2,087
Exploration expenses	3,924			11,221			40
Asset retirement obligations accretion	1,394			391			21
Depreciation, depletion and amortization	143,894			65,902			23,157
Amortization of intangible assets	3,626			2,418			—
General and administrative expenses	17,345			10,297			1,701
Transaction related costs	—			22,366			—
Total operating costs and expenses	$	217,130		$	138,315		$	32,927
Other Income (Expense):
Income (loss) from equity method investee	$	92		$	309		$	(345	)
Interest expense, net	(6,896		)	(4,959		)	—
Gain on derivatives, net	—			—			3,865
Other income (expense), net	21			(7,019		)	24
Total other income (expense)	$	(6,783	)	$	(11,669	)	$	3,544
Average Operating Costs per Boe:
Lease operating expenses	$	3.71		$	3.07		$	2.95
Gathering, transportation and processing	1.41			1.49			1.79
Taxes other than income	2.03			2.60			1.67
Exploration costs	0.60			3.12			0.03
Asset retirement obligation accretion	0.21			0.11			0.02
Depreciation, depletion and amortization	21.94			18.35			18.54
Amortization of intangible assets	0.55			0.67			—
General and administrative expenses	2.64			2.87			1.36
Transaction related costs	—			6.23			—

     Lease operating expenses are the costs incurred in the operation of producing properties which include expenses for utilities, direct labor, water disposal, workover rigs, workover expenses, materials, and supplies. Lease operating expenses were $24.3 million, $11.0 million, and $3.7 million for the 2019 Successor Period, the 2018 Successor Period, and the Predecessor Period, respectively. Lease operating expenses were $3.71 per boe, $3.07 per boe, and $2.95 per boe for the 2019 Successor Period, the 2018 Successor Period, and the Predecessor Period, respectively. Lease operating expenses for the 2019 Successor Period were $9.6 million higher than the combined 2018 Successor Period and Predecessor Period primarily due to the inclusion of the Giddings Assets, recent acquisitions, and continued development. The higher cost per boe in the 2019 Successor Period compared to the combined 2018 Successor Period and Predecessor

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Period was primarily due to the inclusion of the Giddings Assets as the Giddings Assets deliver less production per well than the Karnes County Assets, resulting in lease operating costs spread over fewer volumes.

Gathering, transportation and processing costs are costs incurred to deliver oil, natural gas, and NGLs to the market. Cost levels of these expenses can vary based on the volume of oil, natural gas, and NGLs produced as well as the cost of commodity processing. Gathering, transportation and processing costs were $9.3 million, $5.4 million, and $2.2 million for the 2019 Successor Period, the 2018 Successor Period and the Predecessor Period, respectively, or $1.41, $1.49, and $1.79 on a per boe basis. The $1.7 million higher costs in the 2019 Successor Period, compared to the combined 2018 Successor Period and Predecessor Period, were primarily due to the inclusion of the Giddings Assets as the Giddings Assets produce more gas than the Karnes County Assets and require more gathering, transportation, and processing than the Karnes County Assets. The lower cost per boe in the 2019 Successor Period compared to the combined 2018 Successor Period and Predecessor Period was primarily attributable to the adoption of the new revenue recognition requirements.

Taxes other than income include production and ad valorem taxes. These taxes are based on rates primarily established by state and local taxing authorities. Production taxes are based on the market value of production. Ad valorem taxes are based on the fair market value of the mineral interests or business assets. Taxes other than income were $13.3 million, $9.4 million, and $2.1 million for the 2019 Successor Period, the 2018 Successor Period, and the Predecessor Period, respectively. The $1.9 million higher taxes other than income incurred during the 2019 Successor Period compared to the combined 2018 Successor Period and Predecessor Period are primarily due to higher fair market values of mineral interest and business assets. Taxes other than income were $2.03 per boe, $2.60 per boe, and $1.67 per boe for the 2019 Successor Period, the 2018 Successor Period, and the Predecessor Period, respectively. The lower costs per boe in the 2019 Successor Period compared to the combined 2018 Successor Period and Predecessor Period were primarily due to lower production taxes in the 2019 Successor Period.

Exploration costs are geological and geophysical costs that include seismic surveying costs, costs of unsuccessful exploratory dry holes, costs of expired or abandoned leases, and delay rentals. Exploration expenses of $3.9 million in the 2019 Successor Period compared to the combined 2018 Successor Period and Predecessor Period were $7.3 million lower primarily as a result of a one-time purchase of a seismic license continuation in connection with the Business Combination in the 2018 Successor Period.

Asset retirement obligation accretion was $1.0 million higher during the 2019 Successor Period as compared to the combined 2018 Successor Period and Predecessor Period. The $1.4 million asset retirement obligation accretion incurred during the 2019 Successor Period was driven by the inclusion of the Giddings Assets. This resulted in higher accretion expense per boe in the 2019 Successor Period of $0.21 per boe.

Depreciation, depletion and amortization (“DD&A”) was $143.9 million, $65.9 million, and $23.2 million for the 2019 Successor Period, the 2018 Successor Period, and the Predecessor Period, respectively. DD&A was $21.94 per boe for the 2019 Successor Period as compared to $18.35 per boe for the 2018 Successor Period, and $18.54 per boe for the Predecessor Period. DD&A in the 2019 Successor Period was $54.8 million higher than the combined 2018 Successor and Predecessor Period primarily attributable to the increase in property, plant, and equipment and the increased production as a result of the Successor’s inclusion of the Giddings Assets, recent acquisitions, and continued development. The higher rate per boe for the 2019 Successor Period compared to the combined 2018 Successor Period and Predecessor Period is mostly due to Magnolia’s higher property, plant, and equipment balances recorded as a result of the new basis of accounting related to the Business Combination, recent acquisitions and decrease in proved reserves. The Predecessor’s reserves are based on a five-year development plan, whereas the vast majority of the Successor’s proved undeveloped reserves are planned to be developed within one year.

The amortization of intangible assets was $3.6 million and $2.4 million for the 2019 Successor Period and the 2018 Successor Period, respectively. In connection with the close of the Business Combination, the Company recorded an estimated cost of $44.4 million for the Non-Compete Agreement (the “Non-Compete”) entered into with EnerVest on the Closing Date as intangible assets on the Company’s consolidated balance sheet. The $1.2 million higher amortization of intangible assets in the 2019 Successor Period as compared to the 2018 Successor Period is due to three months of amortization in the 2019 Successor Period as compared to approximately two months of amortization in the 2018 Successor Period. These intangible assets have a definite life and are subject to amortization utilizing the straight-line method over their economic life, currently estimated to be two and one half to four years. There were no intangible assets in any of the Predecessor Periods.

General and administrative (“G&A”) expenses are costs incurred for overhead, including payroll and benefits for corporate staff, costs of maintaining a headquarters, IT expenses, and audit and other fees for professional services, including legal compliance expenses. The Company incurs G&A related to the Services Agreement (the “Services Agreement”) with EnerVest Operating L.L.C. (“EVOC”), in which EVOC provides the Company’s day-to-day field level and back office operations and support for the operation and development of the assets, subject to certain exceptions. As consideration for the services to be provided under the Services Agreement, EVOC is paid an annual fee of $23.6 million. In addition, the Company pays industry standard per well overhead payments to EVOC that are adjusted

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in accordance with industry standard inflationary measures and reimburses EVOC for certain costs incurred by EVOC in performing the services. G&A expenses were $17.3 million, $10.3 million, and $1.7 million for the 2019 Successor Period, the 2018 Successor Period, and the Predecessor Period, respectively. The $5.3 million higher G&A expenses incurred during the 2019 Successor Period compared to the combined 2018 Successor Period and Predecessor Period were primarily due to the Successor incurring certain additional G&A expenses related to fees payable to EVOC under the Services Agreement as well as increased salaries and wages and stock-based compensation costs.

Interest expense, net was $6.9 million for the 2019 Successor Period and $5.0 million for the 2018 Successor Period. Interest expense incurred in the 2019 Successor Period and the 2018 Successor Period is due to interest as well as amortization of debt issuance costs related to the Company’s 6.0% senior notes due 2026 (the “2026 Senior Notes”) and the senior secured reserve-based revolving credit facility (the “RBL Facility”).

Loss on derivatives, net was $3.9 million for the Predecessor Period. Magnolia has not engaged in any hedging activities with respect to the market risk to which the Company is exposed.

Nine Months Ended September 30, 2019 Compared to the Nine Months Ended September 30, 2018

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.

	Successor				Predecessor
(In thousands, except per unit data)	Nine Months Ended September 30, 2019		July 31, 2018 Through September 30, 2018		January 1, 2018 Through July 30, 2018
Production:
Oil (MBbls)	9,615		2,023		5,755
Natural gas (MMcf)	30,583		5,341		7,595
NGLs (MBbls)	3,389		678		1,097
Total (Mboe)	18,101		3,591		8,118
Average daily production:
Oil (Bbls/d)	35,220		33,164		27,146
Natural gas (Mcf/d)	112,026		87,557		35,825
NGLs (Bbls/d)	12,414		11,115		5,175
Total (boe/d)	66,305		58,872		38,292
Revenues:
Oil revenues	$	584,009	$	143,202	$	399,124
Natural gas revenues	71,208		13,414		22,135
Natural gas liquids revenues	51,215		21,547		27,927
Total revenues	$	706,432	$	178,163	$	449,186
Average Price:
Oil (per barrel)	$	60.74	$	70.79	$	69.35
Natural gas (per Mcf)	2.33		2.51		2.91
NGLs (per barrel)	15.11		31.78		25.46

Oil revenues were 83%, 80%, and 89% of the Company’s total revenues for the 2019 Successor Period, the 2018 Successor Period, and the Predecessor Period, respectively. Oil revenues for the 2019 Successor Period were $41.7 million higher compared to the combined 2018 Successor Period and Predecessor Period due to 24% higher production partially offset by a 13% decrease in average prices. The higher volumes in the 2019 Successor Period compared to the combined 2018 Successor Period and Predecessor Period are

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attributable to the inclusion of the Giddings Assets, recent acquisitions and continued development. Oil production was 53%, 56%, and 71% of total production volume for the 2019 Successor Period, the 2018 Successor Period, and the Predecessor Period, respectively.

Natural gas revenues were 10%, 8%, and 5% of the Company's total revenues for the 2019 Successor Period, the 2018 Successor Period, and the Predecessor Period, respectively. Natural gas revenues for the 2019 Successor Period were $35.7 million higher compared to the combined 2018 Successor Period and Predecessor Period due to 136% more natural gas production primarily attributable to the Successor’s inclusion of the Giddings Assets and the acquisition of the Highlander Well partially offset by a 15% decrease in average prices. Natural gas production was 28%, 25%, and 16% of total production volume for the 2019 Successor Period, the 2018 Successor Period and the Predecessor Period, respectively.

Natural gas liquids revenues were 7%, 12%, and 6% of the Company’s total revenues for the 2019 Successor Period, the 2018 Successor Period, and the Predecessor Period, respectively. NGL production was 19%, 19%, and 14% of total production volume for the 2019 Successor Period, the 2018 Successor Period, and the Predecessor Period, respectively. Natural gas liquids revenues for the 2019 Successor Period were $1.7 million higher in the 2019 Successor Period compared to the combined 2018 Successor Period and Predecessor Period due to 91% higher production partially offset by a 46% decrease in average prices. The higher production volumes are primarily attributable to the Successor’s inclusion of the Giddings Assets, recent acquisitions and continued development.

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

	Successor						Predecessor
(In thousands, except per unit data)	Nine Months Ended September 30, 2019			July 31, 2018 Through September 30, 2018			January 1, 2018 Through July 30, 2018
Operating Expenses:
Lease operating expenses	$	70,755		$	11,016		$	23,513
Gathering, transportation and processing	26,016			5,353			12,929
Taxes other than income	40,825			9,351			23,763
Exploration expenses	10,017			11,221			492
Asset retirement obligations accretion	4,095			391			104
Depreciation, depletion and amortization	385,942			65,902			137,871
Amortization of intangible assets	10,879			2,418			—
General and administrative expenses	52,648			10,297			12,710
Transaction related costs	438			22,366			—
Total operating costs and expenses	$	601,615		$	138,315		$	211,382
Other Income (Expense):
Income from equity method investee	$	608		$	309		$	711
Interest expense, net	(21,611		)	(4,959		)	—
Loss on derivatives, net	—			—			(18,127		)
Other expense, net	8			(7,019		)	(50		)
Total other expense	$	(20,995	)	$	(11,669	)	$	(17,466	)
Average Operating Costs per Boe:
Lease operating expenses	$	3.91		$	3.07		$	2.90
Gathering, transportation and processing	1.44			1.49			1.59
Taxes other than income	2.26			2.60			2.93
Exploration costs	0.55			3.12			0.06
Asset retirement obligation accretion	0.23			0.11			0.01
Depreciation, depletion and amortization	21.32			18.35			16.98
Amortization of intangible assets	0.60			0.67			—
General and administrative expenses	2.91			2.87			1.57
Transaction related costs	0.02			6.23			—

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     Lease operating expenses are the costs incurred in the operation of producing properties including expenses for utilities, direct labor, water disposal, workover rigs, workover expenses, materials, and supplies. Lease operating expenses were $70.8 million, $11.0 million, and $23.5 million for the 2019 Successor Period, the 2018 Successor Period, and the Predecessor Period, respectively. Lease operating expenses were $3.91 per boe, $3.07 per boe, and $2.90 per boe for the 2019 Successor Period, the 2018 Successor Period, and the Predecessor Period, respectively. Lease operating expenses were $36.2 million higher in the 2019 Successor Period as compared to the combined 2018 Successor Period and Predecessor Period primarily due to the inclusion of the Giddings Assets, recent acquisitions, and continued development. The higher per boe cost in the 2019 Successor Period compared to the combined 2018 Successor Period and Predecessor period was primarily due to the inclusion of the Giddings Assets as the Giddings Assets deliver less production per well than the Karnes County Assets, resulting in lease operating costs spread over fewer volumes.

Gathering, transportation and processing costs are costs incurred to deliver oil, natural gas, and NGLs to the market. Cost levels of these expenses can vary based on the volume of oil, natural gas, and NGLs produced as well as the cost of commodity processing. Gathering, transportation and processing costs were $26.0 million, $5.4 million, and $12.9 million for the 2019 Successor Period, the 2018 Successor Period and the Predecessor Period, respectively, or $1.44, $1.49, and $1.59 on a per boe basis. The $7.7 million higher costs in the 2019 Successor Period compared to the combined 2018 Successor Period and Predecessor Period were primarily due to the inclusion of the Giddings Assets as the Giddings Assets produce more gas than the Karnes County Assets and require more gathering, transportation, and processing than the Karnes County Assets. The lower cost per boe in the 2019 Successor Period compared to Combined 2018 Successor and Predecessor Period was primarily attributable to the adoption of the new revenue recognition requirements that were not retroactively applied to the Predecessor Period.

Taxes other than income include production and ad valorem taxes. These taxes are based on rates primarily established by state and local taxing authorities. Production taxes are based on the market value of production. Ad valorem taxes are based on the fair market value of the mineral interests or business assets. Taxes other than income were $40.8 million, $9.4 million, and $23.8 million for the 2019 Successor Period, the 2018 Successor Period, and the Predecessor Period, respectively. The $7.7 million higher taxes other than income incurred during the 2019 Successor Period compared to the combined 2018 Successor Period and Predecessor Period are primarily due to an increase in revenues. Taxes other than income were $2.26 per boe, $2.60 per boe, and $2.93 per boe for the 2019 Successor Period, the 2018 Successor Period, and the Predecessor Period, respectively. The lower costs per boe in the 2019 Successor Period compared to the combined 2018 Successor Period and Predecessor Period were primarily due to the inclusion of the Giddings Assets as the Giddings Assets incur lower production taxes.

Exploration costs are geological and geophysical costs that include seismic surveying costs, costs of unsuccessful exploratory dry holes, costs of expired or abandoned leases, and delay rentals. Exploration expenses of $10.0 million in the 2019 Successor Period were $1.7 million lower compared to the combined 2018 Successor Period and Predecessor Period as a result of a one-time purchase of a seismic license continuation in connection with the Business Combination in the 2018 Successor Period.

Asset retirement obligation accretion was higher during the 2019 Successor Period as compared to the combined 2018 Successor and Predecessor Period. The $4.1 million asset retirement obligation accretion incurred during the 2019 Successor Period was driven by the inclusion of the Giddings Assets. This resulted in higher accretion expense per boe in the 2019 Successor Period of $0.23 per boe.

DD&A was $385.9 million, $65.9 million, and $137.9 million for the 2019 Successor Period, the 2018 Successor Period, and the Predecessor Period, respectively. DD&A was $21.32 per boe for the 2019 Successor Period. DD&A was $182.2 million higher in the 2019 Successor Period compared to the combined 2018 Successor Period and Predecessor Period. The higher DD&A and the higher DD&A rate per boe for the 2019 Successor Period compared to the combined 2018 Successor Period and Predecessor Period is mostly due to Magnolia’s higher property, plant, and equipment balances recorded as a result of the new basis of accounting related to the Business Combination, recent acquisitions and decrease in proved reserves. The Predecessor’s reserves are based on a five-year development plan, whereas the vast majority of the Successor’s proved undeveloped reserves are planned to be developed within one year.

The amortization of intangible assets was $10.9 million and $2.4 million for the 2019 Successor Period and the 2018 Successor Period, respectively. In connection with the close of the Business Combination, the Company recorded an estimated cost of $44.4 million for the Non-Compete Agreement as intangible assets on the Company’s consolidated balance sheet. The $8.5 million higher amortization of intangible assets in the 2019 Successor Period as compared to the 2018 Successor Period is due to nine months of amortization in the 2019 Successor Period as compared to approximately two months of amortization in the 2018 Successor Period. These intangible assets have a definite life and are subject to amortization utilizing the straight-line method over their economic life, currently estimated to be two and one half to four years. There was no amortization of intangible assets in the Predecessor Period.

G&A expenses were $52.6 million, $10.3 million, and $12.7 million for the 2019 Successor Period, the 2018 Successor Period, and the Predecessor Period, respectively. The $29.6 million higher G&A expenses and higher G&A expenses per boe incurred during the 2019 Successor Period compared to the combined 2018 Successor Period and Predecessor Period were primarily due to the Successor

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incurring certain additional G&A expenses related to fees payable to EVOC under the Services Agreement as well as increased salaries and wages and stock-based compensation costs.

Interest expense, net was $21.6 million for the 2019 Successor Period, and $5.0 million for the 2018 Successor Period. Interest expense incurred in the 2019 Successor Period and 2018 Successor Period is due to interest and amortization of debt issuance costs related to the 2026 Senior Notes and the RBL Facility.

Loss on derivatives, net was $18.1 million for the Predecessor Period. During the 2019 Successor Period and the 2018 Successor Period, Magnolia has not engaged in any hedging activities with respect to the market risk to which the Company is exposed.

Liquidity and Capital Resources

Magnolia’s primary sources of liquidity and capital have been cash flows from operations and, at the close of the Business Combination, issuances of equity and debt securities. The Company’s primary uses of cash have been 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.

Magnolia believes that cash on hand, cash flows generated from operations, and the borrowings available under the RBL Facility will be adequate to fund Magnolia’s capital budget and satisfy the Company’s short-term liquidity needs.

The Company may also utilize borrowings under other various financing sources available to Magnolia, including 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.

As of September 30, 2019, 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, 2019, the Company has $714.5 million of liquidity comprised of the $550.0 million of borrowing base capacity of the RBL Facility and $164.5 million of cash and cash equivalents.

A decrease in commodity prices may adversely affect proved reserves values which would likely result in a proved property impairment. Negative revisions of estimated reserves quantities, increases in future cost estimates or divestiture of a significant component of the asset group could also lead to a reduction in expected future cash flows and possibly an impairment of long-lived assets in future periods.

Cash and Cash Equivalents

At September 30, 2019, Magnolia had $164.5 million of cash and cash equivalents. The Company’s cash and cash equivalents are maintained with various financial institutions in the United States. Deposits with these institutions may exceed the amount of insurance provided on such deposits, however, the Company regularly monitors the financial stability of its financial institutions and believes that the Company is not exposed to any significant default risk.

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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:

	Successor						Predecessor
(In thousands)	Nine Months Ended September 30, 2019			July 31, 2018 Through September 30, 2018			January 1, 2018 Through July 30, 2018
Sources of cash and cash equivalents
Net cash provided by operating activities	$	488,611		$	87,302		$	284,812
Issuance of common stock	—			355,000			—
Proceeds from issuance of debt	—			400,000			—
Proceeds withdrawn from Trust Account	—			656,078			—
Other	7,301			—			62,641
	495,912			1,498,380			347,453
Uses of cash and cash equivalents:
Acquisition of EnerVest properties	4,250			(1,219,217		)	—
Acquisitions, other	(93,221		)	(135,652		)	(150,139		)
Additions to oil and natural gas properties	(364,859		)	(33,724		)	(197,314		)
Payment of Contingent Consideration	—			(26,000		)	—
Repayments of deferred underwriting compensation	—			(22,750		)	—
Cash paid for debt issuance costs	—			(23,336		)	—
Repurchase of common stock	(9,722		)	—			—
Other	(3,629		)	(1,009		)	—
	(467,181		)	(1,461,688		)	(347,453		)
Increase in cash and cash equivalents	$	28,731		$	36,692		$	—

Sources of Cash and Cash Equivalents

Business Combination

The primary source of cash for the Business Combination in the 2018 Successor Period were proceeds from the issuance of common stock of $355 million, proceeds from issuance of debt of $400 million, and proceeds withdrawn from Trust account of $656.1 million related to the Company’s May 2017 initial public offering. See Overview of this Item 2 for more information on the Business Combination.

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, with the exception of certain non-cash expenses such as DD&A, asset retirement obligation accretion, and deferred income tax expense.

Net cash provided by operating activities totaled $488.6 million, $87.3 million, and $284.8 million for the 2019 Successor Period, 2018 Successor Period, and Predecessor Period, respectively. Cash provided by operating activities was positively impacted by the inclusion of the Giddings Assets in the Successor Period but was partially offset by interest expense payments, EnerVest service fee payments, and higher production tax payments. The 2018 Successor Period includes $22.4 million one-time transaction costs associated with the Business Combination, exploration expenses of $11.2 million primarily related to a one-time purchase of a seismic license continuation.

Uses of Cash and Cash Equivalents

Business Combination

The primary use of cash in the 2018 Successor Period was the acquisition of EnerVest properties which included an aggregate of approximately $1.2 billion in cash, cash paid for debt issuance costs of $23.3 million, and the payment of a deferred underwriting compensation liability of approximately $22.8 million.

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Other acquisitions

During the 2019 Successor Period, the Company completed leasehold and property acquisitions for a total cash purchase price of $93.2 million, comprised of the Highlander acquisition, and other acquisitions of additional oil and gas assets primarily located in Karnes County. The 2018 Successor Period activity of $135.7 million is primarily comprised of the Harvest Acquisition. The Predecessor Period activity of $150.1 million is comprised of the Subsequent GulfTex Acquisition.

Additions to oil and natural gas properties

The following table sets forth the Company’s capital expenditures for the 2019 Successor Period:

(In thousands)	Nine Months Ended September 30, 2019
Drilling and completion	$	344,179
Leasehold acquisition costs	8,556
Total capital expenditures	$	352,735

In the third quarter of 2019, Magnolia operated two drilling rigs across its acreage, one rig in Karnes County and one rig in the Giddings Field. The activity in the 2019 Successor Period was largely driven by the number of operated drilling rigs. The number of operating drilling rigs is largely dependent on commodity prices and the Company’s strategy of maintaining spending within 60% of adjusted EBITDAX.

Payment of Contingent Consideration

Pursuant to the Giddings Purchase Agreement, during the 2018 Successor Period, the Company paid the Giddings Sellers a cash payment of $26.0 million to fully settle the earnout obligation.

Capital Requirements

Repurchase of common stock

On August 5, 2019, the Company’s Board of Directors authorized a share repurchase program of up to 10 million shares. The program does not require purchases to be made within a particular timeframe. During the 2019 Successor Period, the Company repurchased 950 thousand shares at a weighted average price of $10.23, for a total cost of approximately $9.7 million.

Off-Balance Sheet Arrangements

As of September 30, 2019, there were no off-balance sheet arrangements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Interest Rate Risk

For variable rate debt, interest rate changes generally do not affect the fair market value of such debt, but do impact future earnings and cash flows, assuming other factors are held constant. The Company is subject to market risk exposure related to changes in interest rates on borrowings under the RBL Facility. Interest on borrowings under the RBL Facility is based on the LIBOR rate or alternative base rate plus an applicable margin as stated in the agreement. At September 30, 2019, the Company had no borrowings outstanding under the RBL Facility.

Commodity Price Risk

The Company has not engaged in, and does not expect to engage in any hedging activities with respect to the market risk to which it is exposed.

Magnolia’s primary market risk exposure is to the prices it receives for its oil, natural gas, and NGL production. The prices the Company ultimately realizes for its 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. Pricing for oil, natural gas, and NGLs has historically been volatile and unpredictable, and this volatility is expected to continue in the future. The prices the Company receives for

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production depend on factors outside of its control, including physical markets, supply and demand, financial markets, and national and international policies. A $1.00 per barrel increase (decrease) in the weighted average oil price for the nine months ended September 30, 2019 would have increased (decreased) the Company’s revenues by approximately $12.8 million on an annualized basis and a $0.10 per Mcf increase (decrease) in the weighted average natural gas price for the nine months ended September 30, 2019 would have increased (decreased) Magnolia’s revenues by approximately $4.1 million on an annualized basis.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) under the Exchange Act, Magnolia has evaluated, under the supervision and with the participation of the Company’s management, including Magnolia’s principal executive officer and principal financial officer, the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2019. Based on such evaluation, Magnolia’s principal executive officer and principal financial officer have concluded that as of such date, its disclosure controls and procedures were effective. The Company’s disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed by it in reports that it files under the Exchange Act is accumulated and communicated to management, including the Company’s principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure and is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC.

Changes to Internal Control Over Financial Reporting

As of September 30, 2019, there have been no changes in Magnolia’s internal control over financial reporting that have materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

From time to time, the Company is party to certain legal actions and claims arising in the ordinary course of business. While the outcome of these events cannot be predicted with certainty, management does not currently expect these matters to have a materially adverse effect on the financial position or results of operations of the Company.

Item 1A. Risk Factors.

Please refer to Part I, Item IA - Risk Factors of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018, and Part I, Item 3 - Quantitative and Qualitative Disclosures About Market Risk of this Quarterly Report on Form 10-Q. Any of these factors could result in a significant or material adverse effect on Magnolia’s business, results of operations or financial condition. There have been no material changes to the Company’s risk factors since its Annual Report on Form 10-K for the year ended December 31, 2018. Additional risk factors not presently known to the Company or that the Company currently deems immaterial may also impair its business, results of operations, or financial condition.

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

The following table sets forth the Company’s share repurchase activities for each period presented.

Period	Number of Shares of Class A Common Stock Purchased	Average Price Paid per Share		Total Number of Common Shares Purchased as Part of Publicly Announced Program (1)(2)	Maximum Number of Common Shares that May Yet be Purchased Under the Program
July 1, 2019 - July 31, 2019	—	$	—	—	—
August 1, 2019 - August 31, 2019	600,000	10.07		600,000	9,400,000
September 1, 2019 - September 30, 2019	350,000	10.52		350,000	9,050,000
Total	950,000	$	10.23	950,000	9,050,000

(1) In August 2019, the Company’s Board of Directors authorized a share repurchase program of up to 10 million shares.

(2) On September 30, 2019, the Company repurchased 50,000 additional shares that did not settle until October 2, 2019 and are not included in the table above.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

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Item 6. Exhibits.

The following exhibits are filed as part of, or incorporated by reference into, this Quarterly Report on Form 10-Q.

Exhibit Number	Description
3.1	Second Amended and Restated Certificate of Incorporation of the Company, dated as of July 31, 2018 (incorporated herein by reference to Exhibit 3.1 filed with the Current Report on Form 8-K filed on August 6, 2018 (File No. 001-38083)).
3.2	Bylaws of the Company (incorporated herein by reference to Exhibit 3.3 filed with the Registration Statement on Form S-1 filed on April 17, 2017 (File No. 333-217338)).
4.1	Amendment No. 1 to Warrant Agreement, dated as of May 4, 2017, by and between the Company and the Continental Stock Transfer & Trust Company (incorporated herein by reference to Exhibit 4.1 filed with the Current Report on Form 8-K filed on July 10, 2019 (File No. 001-38083)).
31.1*	Certification of Chief Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*	Certification of Chief Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**	Certifications Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*	XBRL Instance Document
101.SCH*	XBRL Taxonomy Extension Schema Document
101.CAL*	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*	XBRL Taxonomy Extension Label Linkbase Document
101.PRE*	XBRL Taxonomy Extension Presentation Linkbase Document
104*	Cover Page Interactive Data File (embedded within the Inline XBRL document).

* Filed herewith.

** Furnished herewith.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	MAGNOLIA OIL & GAS CORPORATION
Date: November 5, 2019	By:	/s/ Stephen Chazen
		Stephen Chazen
		Chief Executive Officer (Principal Executive Officer)
Date: November 5, 2019	By:	/s/ Christopher Stavros
		Christopher Stavros
		Chief Financial Officer (Principal Financial Officer)

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