Q3 2019 Earnings Call

Good day and welcome to be at Magnolia oil and gas third quarter 2019 earnings release and conference call.

<unk> expense will be they listen only mode should you need assistance, we Cigna only conference specialist by pressing the star key followed by zero on your telephone keypad.

After today's presentation, there will be an opportunity to ask your questions.

To ask your question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then too. Please note. This event is being recorded I would now let's turn the conference over to Brian Corales, Vice President of Investor Relations. Please go ahead.

Thank you Sean and good morning, everyone welcome to Magnolia oil and gas is third quarter 2019 earnings conference call.

Participating on the call today are Steve Chazen, I know these chairman President and Chief Executive Officer, Chris Stavros, Executive Vice President and Chief Financial Officer.

As a reminder, today's conference call contain certain projections and other forward looking statements within the meeting of the Federal Securities laws. These statements are subject to risks and uncertainties that may cause actual results to differ materially from those expressed or implied in these statements additional information on risk factors that could cause results to differ is available in the companies.

Annual report on Form 10-K filed with the FCC a full safe harbor can be found on slide two of the Covenant conference call Slide presentation with the supplemental data on our website you can download I know magnolias third quarter 2019 earnings press release as well as the conference call slots from the Investor section of the company's website.

At Www Dot Magnolia oil gas dotcom I'll now turn the call over to Mr., Steve Chazen.

Thank you.

Good morning, Thank you for joining us today I'll provide an update on our business.

HM some comments about getting.

Chris will go into some of the details for financials and provide some additional guidance for the year before we take your questions.

Strategy and business model, we laid out over a year ago has served us probably well despite the poor sentiment around the energy sector.

And all these most recent quarterly results were cleared cotton continue to demonstrate our ability to deliver on our model generating mater production growth well spending within 60% of our cash flow for drilling completing wells maintaining low financial leverage.

Overall strategy remains unchanged.

Operationally, we executed well during the third quarter production grew roughly 10% sequentially nearly all of which the generated from our organic drilling program.

The same time or capital spend on drilling completing wells declined 24% comprising less than half of the EBITDAX generated during the period.

We actually grew our production with less capital.

Model continues to generate significant free cash flow, we built $68 million of cash during the quarter. After our GNC capital after spending $10 million repurchasing our own shares.

Our total capital spending level are expected to decline modestly in the fourth quarter, which should lead to a further building cash through year end.

Most of free cash we've generated during the past years been allocated towards small bolt on acquisitions boiling gas properties, that's similar financial characteristics as our underlying asset base.

Well, we continue to pursue these types of opportunities.

Tivity has been more tempered in the second half of this year.

We remain confident disciplined in our process towards assessing asset acquisition opportunities and dissipate the pace of activity could pick up in early next year.

And getting to continue to make progress towards our.

Through our exploration appraisal program in order to better defined our large position in this field.

As noted in our press release, we brought two wells on getting late in the third quarter and using our current our method current methodology, which is refine process for targeting drilling locations based on what we've learned.

Combined these two more recent wells produced more than 27 under BOE per day in their first 30 days on line, which included 1700 barrels of oil per day.

6400 Mcf per day gas. These two the two wells, which are 15 miles apart are currently producing about 2900 barrels of oil equivalent a day approximately 62% of this is black oil.

Our investment activity in getting to date has already yielded data improving our understanding that field, providing us with greater confidence we expect that we expect will lead to crude development as asset overtime.

We plan to complete three additional wells and getting later in the fourth quarter as part of our ongoing appraisal program just for clarity. These are by no stretch of the imagination development wells all of these wells are wouldn't even be classified as field extensions.

They are pretty far away from current production and resigned to guide our leasing program as we go forward.

I'll now turn the call over it Chris.

Thank you, Steve and good morning, everyone I'll go through a few the details around the third quarter results provide some additional guidance and then summarize what we've accomplished since the company's inception before turning it over for questions looking at slide for the presentation. That's posted on our website. We reported total adjusted net income for the period of $16 million.

Six cents per diluted share, which excludes noncash special item associated with our earlier warrant exchange.

As shown on slide five our cash flow from operations, excluding changes in working capital for the third quarter was $173 million and $495 million for the first nine months of 2019.

Our total cash outlays for drilling completions facilities and the acquisition of oil and gas properties were $99 million. During the third quarter. We also spent $10 million a cash purchasing Magnolia common stock and we had approximately 259 million total shares outstanding at the end of the third quarter, we generated excess cash of 68.

$8 million almost 30 cents a share after these outlays and ended the third quarter with $164 million a cash on the balance sheet.

Our long term debt at the end of the third quarter was approximately $390 million with our net debt as a percent of total equity of approximately 8%, we do not expect to increase our level of bonded indebtedness.

Or draw on October $550 million credit facility, which is in keeping with our strategy of maintaining low leverage.

Our quarterly interest expense of $7 million was only 4% of our cash flow from operations summary balance sheet as of September thirtyth as shown on slide six.

Total production for the company average 71.3 thousand Boe per day during the third quarter, representing a nearly 10% sequential quarterly increase and slightly ahead of our guidance.

Third quarter oil production of 38.3 thousand barrels per day represented nearly 54% of our total volumes, which was at the high end of our guidance range.

The higher oil percentage as a result of additional current operated wells turned in line during the quarter.

Looking at slide seven revenues totaled 245 million in the third quarter up slightly compared to the second quarter, mainly due to higher production and partly offset by lower product prices.

We continue to realize a premium for oil sold relative to W. CCI, recognizing a 105% of the benchmark price in the third quarter.

Well continues to be the primary driver for Magnolia as both natural gas and NGL prices have a much smaller impact on our revenue and cash flows.

Turning to cost and slide eight our total cash operating cost declined by 9% to $9.96 per be away from $10, a 98 cents per Boe in the second quarter.

Hello, we came in at $3.71 per BOE Weve for the third quarter compared to $4.20 per Boe in the prior period to the combination of high production and lower Workover expense.

We expect our cash operating costs on absolute basis to be similar in the fourth quarter.

Third quarter, DNA expenses, or $70 million or $2.64 per BLE compared to $19 million or $3.22 per Boe in the second quarter.

Third quarter DNA also included $2.8 million or 43 cents per via we have noncash employee stock compensation costs.

Sequential decline of DNA as result of lower professional services and consulting fees as some of these activities have been assumed the Magnolia corporate staff.

We still expect DNA cost to fluctuate moderately from period to period as we continue to incur some additional expenses related to the buildout of our it systems and other corporate staff functions.

We anticipate that our DNA cost for the full year 2019 to average below $3, a BLE, including employee stock compensation.

Our effective tax rate for the third quarter was 16.9% compared to 14% in second quarter increase is primarily due to additional state taxes and a decrease in the non controlling interest due to additional shares outstanding as result of the warrant exchange.

I expect our fourth quarter tax rate to be approximately 16%.

Our third quarter adjusted EBITDAX as shown on slide nine was $183 million.

Third quarter DNC capital declined by 24% sequentially, representing 48% of our adjusted EBITDAX and in line with our ongoing strategy.

We expect our fourth quarter DNC capital to be slightly lower on absolute basis compared to the third quarter.

Turning to guidance for the fourth quarter, we expect our total production to be similar compared to volumes in the third quarter, which accounts for the lower level of DNC capital during the second half of the year.

While our drilling uptick activity during the last two quarters has been more heavily focused in karnes, we've already shifted towards additional activity in giddings for the remainder of the year.

As Steve mentioned, we brought two wells online and Giddings late in the third quarter, which are currently producing about 2900 Boe per day, including more than including more than 1800 barrels per day of oil and approximately 6700 Mcf per day of gas.

We also plan to bring online three additional wells and getting later in the fourth quarter. These new wells should allow our production in the getting dairy to grow approximately 10% sequentially in the fourth quarter.

Slide 10 summarizes have magnolias advance in the briefly 14 months.

That we've been in business.

The $816 million a cash flow from operations generated during this period $507 million or approximately 60% was spent on DMC and facilities capital as part of our organic drilling program with $233 million of cash spent on acquiring oil and gas properties. In addition, the 7 million shares issued.

As consideration for these acquisitions.

As shown on slide 11, our production grew by more than 20% over this period to 71.3 thousand Boe per day.

We've also increased our net acreage position in the karnes area by more than 50%, adding nearly 7500 net acres through bolt on acquisitions.

We had 48 million dollar dollars' worth of more of additional cash on the balance sheet at the end of the third quarter. Then when we started and we did not incur any new debt.

We're now ready to take your questions.

We will now begin the question and answer session to ask your question you May Press Star then one on your telephone keypad.

If you are using a speakerphone please pick up your handset before pressing the keys.

At any time. Your question has been addressed and you would like to withdraw your question. Please press Star then too.

Our first question today will come from Jeff Grampp with Northland Capital markets. Please go ahead.

Good morning, guys.

What's curious Steve you mentioned, the acquisition market slowing down a bit but thinking it'll it'll pick back up.

Early next year, what was just kind of curious is you're kind of I guess reading. The tea leaves here do you think you can get back to kind of the acquisition levels that we saw in the first half of this year.

Or just I guess, hoping it will but more color on what you guys are CNN and expecting on the acquisition front.

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The issue is not somebody's outbidding as.

Simply that the whole.

We don't meet the whole values seller fab.

No that basically say well, maybe it'll be better next year.

Which has been a losing strategy for the last five years.

So that's what that's really what's going on.

And we're not willing to overpay for for the assets.

So I know I'm hopeful that.

Next year they'll be.

More rationality.

In the sellers.

They don't want to really want to realize a loss on the asset sale.

At this point, maybe they're raising your fund or something so I mean guidance Im hopeful for next year with.

Yes, there's no way really to know.

Sure sure Okay, great Great present, those comments and my follow up on the Giddings results here you mentioned I think in the prepared remarks that the two wells or about 50 miles apart from each other.

I was wondering if either of those.

Or in any I guess close proximity to the first handful of wells that you guys first announcing a way back on the on the spec transaction and then just kind of taken a step back was wondering how you guys kind of feel about I guess your confidence level in the thousand or sell locations that you guys had preliminarily quoted in the play is there I guess.

And an increased confidence given these recent results and upcoming or just overall I guess was hoping to get a little bit more qualitative thoughts on the prospectivity of the play given what we've seen here today, yes.

These these wells are fair distance from our other saw.

We're not given locations right now eventually it'll show up in this day records, but we're not giving locations right now because we might want to at least around that that might be some I don't think there's a company, but that might be some leases that we could buy we could get at a reasonable price.

We're not trying to be clever about it.

We've we've gone to sort of a multivariate analysis to ignore to pick our locations we start outsource simple minded one.

And then the Gulf to one there's a lot of data in the field. So our confidence level is rising. These next three wells are pretty risky wells actually a fair distance from from other production.

So we'll see how they turn out and see how good the multivariate analysis as.

We are clearly feeling better about theres a lot of no we could easily turn into a development program.

When we get ready, but I think I think we're always away from that.

I'd like to define field, maybe pick up some more acreage where we can see.

Opportunity.

All right understood parts of the time guys good quarter.

Thank you.

Our next question will come from Brian Downey with Citigroup. Please go ahead.

Hi, good morning, and thanks for taking my questions I'm curious on Fourq you your commentary that fourth quarter production should be similar to Threeq, you levels, but completions will be weighted more towards getting.

Should we think about the oil cut trending within your 50% to 54% range for next quarter I realize the the early time data on the two new Giddings wells actually looks slightly above corporate average, although getting on average tends to be gassier than current so curious how that all shakes out when you run those numbers through the calculator for fourth quarter or oil cut.

Yeah.

Predicting between 1% or so of oil for oil cut is certainly beyond my skill level of my advance space.

So.

No.

Whether it's going to be 54, 53, or 52, I really don't know it depends on how much gases produce bye bye.

By the Giddings wells.

When it when exactly the well gets turned on and that sort of thing.

It's very similar to what this quarter could be a little more a little less.

The giddings wells or not.

All that gassy, the new ones.

Giddings is because if there.

Historic production, there that that acts as a base.

But but the new wells are fairly loyalty.

So I don't I don't think it changes the mix very much.

Yes, there'll be fewer wells turned in karnes would probably have more effect.

And then whatever happens.

Great appreciate the color there and then on those new getting as well as any any changes to lateral length or completion design or anything like that we should be aware of compared to the the older wells.

Well spend on how much older but.

Compared to the more recent well done last year no.

Yes.

Either widely spaced wells either miles apart.

So we have a lot of leaseholds.

No reason.

Very though.

Lateral length very much.

So no there shouldn't be any difference, but there.

There were there fern park.

And in different various different county.

Maybe a couple of counties apart.

That you that youre going to have natural variation.

Oh.

Yes, that's more important here than that.

How we complete well, obviously, we can Boston completion.

Uh huh.

Great appreciate next quarter. Thanks, guys.

Thanks.

As a reminder, she would like to ask your question. Please press Star then one our next question will come from Neal Dingmann with Suntrust. Please go ahead.

Hey, guys access wells here.

On the you spoke to karnes, the maybe not the bid ask getting wider but the Andy market being a little bit seized up can you talk to to get it seems that you guys still seem relatively little competition.

There and what do you think they're running room might be if you Oh, we have success on these next three.

Well I mean.

We're looking for leases.

Not really.

An acquisition than usual sense of the or.

So we're not we're not interested in buying somebody else's problems.

So.

Out of the stuff that is for sale is real gassy.

In.

It doesn't really fit the model we're trying to.

We're looking for leases.

Yeah, if you've got information that other people don't have.

I mean.

Our interest to use that information to to lease up.

So.

I don't really know how much we already have 450000 that acres.

600, and some thousand gross.

Could you add 50000 more net ya'll.

Could you double it I doubted.

So.

We're looking for strategic ads.

Not necessarily a lot more acreage, we're looking for ads, where we can put a large scale development program to work.

And really not move the rig at all.

These acreage.

Walks that seemed to work at this point.

Fairly large contiguous acreage blocks and we're just looking to fill in and extend them around the edges.

Okay that makes sense and then.

For my follow up.

You mentioned that the lateral links and completion design are relatively similar on these two new wells reported.

Is that the two vertical depth is that substantially different I mean is that something that'll move the needle on the on the well costs or or not so much no well actually I think.

We'll start to see the well costs reduced a little bit.

Maybe a little less science fair project on each well.

And.

You know rig costs have declined a little bit.

So.

Not huge but so we should start to.

As we move into next year, we'll be focused on reducing the cost per well.

As we go forward, but it wont be anything other than that.

Perfect. Thank you got so much.

Thanks.

This will conclude the question answer session as well as today's conference. Thank you for attending today and you may now disconnect.