Q2 2020 Magnolia Oil & Gas Corp Earnings Call
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Oh Gosh second quarter 2020, <unk> earnings release, some conference call.
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Please note today's conference is being recorded.
I wouldn't I wasn't part of the conference over to Brian Gross Vice President Investor Relations. Please go ahead Sir.
Thank you Rocco and good morning, everyone welcome to Magnolia oil and gas its second quarter 2020 earnings conference call participating on the call today are Steve Chazen, Nobody's, Chairman, President and Chief Executive Officer, and Chris Stavros, Executive Vice President President and Chief Financial Officer.
As a reminder, today's conference call contains certain projections and other forward looking statements within the meaning 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 company's annual report on form 10-K filed with the FCC.
Well safe Harbor can be found on slide two of the conference call slide presentation with the supplemental data on our website you can download Magnolia second quarter 2020 earnings press release, that's wells the conference call slides from the Investor section of the company website at Www Dot Magnolia oil gas dot com.
We'll now turn the call over to Mr., Steve Chazen.
Good morning, Thank you for joining us today My comments. This morning, we'll focus on our plans for the remainder of the year, putting an update on the Giddings field, Chris will review, our second quarter results and financial position.
It will also discuss our cost savings where it makes a good early progress to better align our cost structure the current product price environment.
[noise] provide some additional guidance before we take your question.
No its business model remains unchanged and we continue to focus our efforts on generating stock market value overtime.
The recent downturn as further solidified our strategy running a focused business.
Maintaining low financial leverage and spending within 60% of our cash flow, allowing us to generate consistent free cash flow.
Despite the challenging product price environment during the second quarter said, specifically during the month it may whatever but just awful.
Magnolias DNC capital was 60% 68% of our adjusted EBITDAX.
Based on our plan level of activity and using current product prices would expect our spending to be approximately 50% of EBITDAX. During the second half of the year and we remain committed to keeping within our 60% rule for the year.
Response, the sharp decline or product prices earlier. This year, we took actions to reduce activity in capital spending by dropping our operated rig in karnes <unk>.
Hi, good turf truck curtailing any completion of additional assets additional wells throughout our assets well we have not completed any operated wells since February we continue to walk run one operated rig and Giddings field. We're currently drilling a multi well pad in or no early stage development area.
Our ultimate level of activity it getting through remainder this year will depend on product prices that would allow us to keep our spending around 60% of our EBITDAX for the year at current product prices. We plan to start completing some of the ducks and getting towards the end of the third quarter. We do not currently planned to complete any of the operated ducs in the car.
During the remainder of the year, we believe that the pace of non op activity in Karnes is currently picking up.
We currently have more locations and docs, obviously, but because of the high initial production in.
Karnes, well basically you're gonna get $40 into dollar gas for it I think there's plenty of time to to read that maybe next year, but the big Giddings well talk about here in a minute. The the bulk of the production is spread over at least six months. So you get a more average oil price.
Look to spend to.
A few minutes, specifically on our giddings asset and we would turn your attention to slide four in the conference call presentation.
Since magnolias inception, two years ago, most of our dividend Giddings was focused on gaining a better understanding of our 63.
It was an plus eight gross acre position through a steady exploration appraisal program would drill a well then moved the Rick often many miles or sometimes several counties before drilling another about well. This was not designed with the intention to forming an efficient development program. Rather is focused on an effort towards learning more about our acreage.
Establishing a model that would increase our rate of success.
There was this appraisal we were able to outline a corollary of approximately 70000 acres where results have been very good.
Well there are also other areas that are getting station that sounds very positive results. It isn't this core area, where we have the most data and well results.
We currently have a total of 14 horizontal wells in this quarter I agree with that with that with at least 180 days of production.
Results have been very strong with an average while producing 1374 barrels of oil equivalent a day 180 days with half the production stream as oil.
Said, another well the average wells produced nearly 250000 barrels of oil equivalent in the first six months well about half of that being oil.
Production history are these well profiles demonstrates there are very different from a typical shale wells up typically reach peak production in the second 30 days and have a shallower production profile.
That our karnes wells and produce more oil the life of the well.
It's a lower rate of decline can be seen on slide four as these wells have 36, 30, 90, and 180 day oil rates of 781 barrels a day 783 barrels a day and 677 barrels a day respectively.
Our most recent wells have exceeded these average rates.
Our drilling activity.
This year and Giddings is focused on early stage development area.
At all with multi well pads first multi well pad that we discussed last quarter at an average well cost about $7 million. This was well below the eight and half million dollar average costs and we experienced last year.
Our well costs should it continue to decline towards $6 million per well as we see further efficiencies and gave more experienced drilling on the acreage.
As an example on our most recent three well pad that finished drilling in June two of the wells said company record per per foot drilling costs.
Additionally, since we have started this early stage development program. The average lateral well length has increased from about 5000 feet between six and 7000 feet. So our total well cost of drop of the average lateral length has increased.
The strong well results in this early stage development combined with the recent improvement in product prices, there's lots of drill additional pads and giddings and expect to begin completing wells here before the end of the of the current quarter.
The shallow shallower decline rates and lower well cost and improve our capital efficiency as we continue to pursue our development of the Giddings field.
The driver and all of our activities is keep our cash flow.
Around 60% spending at around 6% of our cash flow in summary, and looking at 2021, if we assume $40 oil at $2 natural gas.
And maintain our guidance of 60% of our cash flow, we would have modest growth.
Generates significant free cash flow.
I'll now turn the call over to Chris Debra.
Thank you Stephen Good morning, everyone as Steve mentioned I plan to review some high level points. During the second quarter results review, our financial position progress we've made on a cash cost and capital provide some guidance for turning it over for questions.
Clearly the largest driver of our second quarter financial results for this year decline in benchmark oil prices and then as a result of the sharpen Swift drop in oil demand. This negative impact on our price realizations was especially evident during the month of May four two short period of time resulted in much wider than normal basin differentials short term disconnect benchmark prices.
During the second quarter has now they did and we estimate our third quarter all price realizations to be approximately a $3 per barrel discount mph, which is in line with historical differentials.
Looking at the quarterly cash flows waterfall chart on slide five we began the second quarter with $146 million, a cash and generated $33 million of cash flow from operations before changes in working capital.
Costs incurred for DNC capital were $28 million during the quarter.
Working capital changes, including the changes associated with investing activities resulted in a cash dropped $34 million and we ended the quarter, where the cash balance of approximately $117 million.
Assuming we don't complete any oil and gas property acquisitions and a current product prices, we expect our cash balance to build back to levels seen at the at the end of the first quarter.
Turning to slide six we reported total production of 64.1 thousand barrels of oil equivalent per day, 53% oil and toward the higher end of our guidance range highlighting our production at getting our oil production up 6.4 thousand barrels per day during the second quarter declined only one of the half percent on a sequential.
Basis, even though we did not bring on any new wells during the period.
Steve pointed out this clearly demonstrates shallow decline rate of are getting development wells and production stream in the field.
Our adjusted EBITDAX was 40 million in second quarter with total drilling and completion capital costs of approximately $27 million.
We were able to keep our DNC spending at 68% of adjusted EBITDAX during the quarter. Despite the headwinds from very weak product prices.
Turning to cost and slide seven the benefit of our cost reduction initiatives as evident our second quarter results.
Total adjusted cash cost in the second quarter, including interest expense in DNA or $8.50 for be away at 29% decrease from similar to prior year period, and 18% sequential decline from the first quarter.
We remain on track to achieve the 55 million a total operating cost savings we outlined last quarter. We think we can exceed this amount through additional reductions in our Ela, we and gene egg costs.
As Steve noted our cost for drilling and completing wells in giddings continue to improve than we expect our overall well cost declined towards $6 million per well through further efficiency gains.
Including our DNA rate of $8.71 for via weeks, the second quarter, which approximated approximates our finding and development costs are full cycle costs. During the second quarter were $17.21 for via we as shown on slide seven.
Using this cost structure and a current product prices, we expect to generate positive net income and earnings per share during the second half of the year.
Our gross long term data $400 million and senior notes, which mature in 2026 remain unchanged in the quarter and we'd expect to ash issue any new debt.
We have approximately $570 million liquidity, including an undrawn $450 million credit facility.
Our condensed balance sheet liquidity as of June 30 are shown on slide nine.
Turning to guidance for the third quarter, we continue to target our capital spending for drilling completions and related production equipment to be approximately 60% of adjusted EBITDAX, which remains a core characteristic of our business model.
We're currently drilling a multi well pad and getting our one operated rig once this pad is finished we will have eight ducks in getting further drilling will be dependent on product prices and our ability to keep our spending within 60% of our EBITDAX.
We also have 10 ducs in the Karnes area, but do not plan to complete any clients operated wells during the remainder of the year.
While we did not complete any operated wells during the second quarter, we do expect to complete to be to begin completing wells giddings towards the ended the third quarter and production from these wells will be evident in the fourth quarter.
With no wells turned in line during the current quarter, we estimate our third quarter production to be in the range of 55 to 58000 Boe per day with oil production in the range of 50% to 52% of our overall volumes, we expect a third quarter to be the trough periods for the for this year in terms of our production.
As we begin.
To bring on wells later this year, we expect our production levels, both the fourth quarter and the 2020 exit rate to exceed our production in the third quarter.
Current product prices, we expect our DNC capital as a percent of our adjusted EBITDAX to declined during the second half of the year I'd be well below 60%.
Expect to generate free cash flow for the remainder of the year with our cash balance continuing to increase towards year end.
In summary, Magnolia as well well is financially well positioned with ample cash and liquidity, where you were able to manage activity levels in the sponsor product price fluctuations and allowing us to allocate capital towards attractive opportunities. We're now ready to take your questions.
Thank you.
I will now begin the question answer session.
Ask a question your press Star then one on your touched on so I.
You are using the speaker phone, we actually your plans for younger handsets will pressing the key.
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Today's first question comes from Neal Dingmann would choice Securities. Please go ahead.
Good morning, Steve My question is that you. Thanks for the data on those first 14 getting development wells. So really I mean, both my questions on that topic. So maybe I'll just get them. Both that's the first could you will speak to your plan to tackle games as you potentially return activity next year, and specifically would you focus more on the 70000 development.
Acres or you start delineated some of the remaining massive position there and then really just secondly.
You've talked about in that development area lowering cost and I'm just wondering.
How quickly are you know if you Ken Moelis cause how that development area would compete with cards. Thank you.
We'll start with the next year.
Our current plan is to take one rig continue drilling.
In the 70000 bigger piece, if we get out if we can manage it within the 60%, maybe we'll take a half or rig next year and news that to.
Exploring some of the other other places.
But it's all driven model drives off of how much cash flow gap.
Oil prices were $40 you get one so drilling activities at 50, you get another.
We would also expected at some point next year, we complete some of.
Karnes Wells, we also see that there'll be a pickup in activity in karnes.
From non op.
People.
So we don't have any real numbers for that.
The cost so the cost will come down what for sure because there are days drilling days to drill a well it declined sharply in the last.
Q2 months.
No we're getting really good progress at that it comes from drilling in the same area and you don't have to be quite as a cautious as you were in some some place three counties way, so I'm pretty confident in what declining well costs.
The current well just our shake differently.
You get a whole bunch of the production very quickly and then you have a.
A long period of modest production.
The current as well as you can see it all looks sort of like this.
You.
You have pretty flat production.
Are you start getting declines maybe maybe three months afterwards decline as much shallower and the ultimate recoverable barrels will be higher.
Significantly higher than the current well you get your money back quicker undercurrents well, but.
You have more barrels and if the arena.
Low price oil environment.
And you think it's going to get better over over time, you want to stretch your barrels over time.
Rather than sort of produce them all at once it's not particularly.
If you start with the 60% you say you're not going up.
Except for our inability to manage exactly.
You're not going to exceed that and that's that's that's what guides the business.
It actually creates the outcome.
$100 oil environment or $80 environment, we probably switch for all current drilling.
Exaggerating the number slightly but.
So so could you want to read that $80 or whatever it is as quick as you can get your money back real quick.
In a low price environment, you, what you want to stretch the production overtime first costcos they'll come down pretty pretty nicely.
There are already really down.
Great details thanks.
Our next question today comes from Justin Brown with Northland Capital markets. Please go ahead.
Morning, guys.
I wanted to continue digging in on getting and Steve I guess, just kind of curious and other than 70000 acres. You got 14 wells on it would you say that's all.
Recent degree de risked at this point based on how the dispersion of those 14 wells and then just kind of curious how much variability around that average you're seeing with an assortment.
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The answer is I think it's.
Yes.
They're not all but launched in one place if thats the question.
So I think it's pretty much.
Paul This is what's going on in the 70000 acres.
There are some variability most of the variability you might see in the results.
You might you might have a mechanical problem or something like especially some of the earlier wells.
Where we had some mechanical problems and so you'll see more variation that probably exists.
Theres some variation that theres, some current wells or.
I think I think were.
As we've got the laterals longer.
And because we have more confidence in our ability to not the mess up the well.
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We are getting we're getting better results. So generally speaking I you know I would view overtime that these averages would get better not worse.
Yeah.
A lot of location, it's a lot of locations if you want to running one break.
Yes.
Yes.
So this would be more it'd be more entertaining if I were 40, rather than 75.
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Good stuff out.
Great and then.
On the 25 on commentary you gave in your prepared remarks at 40 into you don't break the role you grow production I guess, just wanted to clarify that that kind of year over year growth exit to exit gross and then kind of heard your right Steve It sounds like a contemplates a giddings rig.
Some karnes operated docs and then some amount of our non op that kind of the main maintenance there, it's it'd be fourth quarter over you know.
The growth from the fourth quarter, where where we exit so that will be up from the third quarter. So.
But that's sort of what we think.
So you'll have the non op in karnes.
Completion of the docs in Karnes, and then one or one and a half.
Rigs in Giddings.
Okay got it at this for at this 42 sort of.
No there's a pretty Chris showed at one of the slide I mean, there's actually of the cash cost or not that great.
You got you generating a fairly wide cash margin here.
And the moral lastly, the DNA rate.
After the write down.
It is.
Pretty much are finding costs, maybe it's a little high to the finding costs, but.
It's sort of in that area. So you know the financial statements I think pretty accurately reflect what's going on at least for a little they don't usually over time, but right now there right now the reflecting what's.
Pretty pretty accurately whats gone.
Got it understood that person detailed in the guest.
Our next question comes from Steven Becker with Keybanc. Please go ahead.
Hey, Doug just wanted to see if you guys are getting and yet the from other operators in cards.
Not much.
We we believe that they're doing some but but really not much.
Hey.
Good.
I.
Can speculate as to why.
But if you looked at it.
Maybe that they have dry.
Leasing explorations or lease drilling commitments.
Other basins that they have.
Assets in which is what I guess is going on.
Got it okay, great. Thanks, that's it for me.
Next.
Our next question today comes from Greg Total solutions Energy. Please go ahead.
Thank you all and thanks for taking the time.
Curious as to what is driving the shallow decline and the giddings field is that a function of Sps choke management or just general reservoir quality.
General Reservoir, if you think about a giddings well.
Compared to accept cards as well.
So in getting there are natural fractures a lot of natural fractures.
Starkly the vertical wells were were the seismic and they drilled looking for the fractures, which provided natural fracking. If you want to think of it that way.
So if you drill horizontal well and you Frac Ed you will have the same some of this karnes like effect of just fracturing reservoir, but you will also open up.
Some of these natural fractures and they don't flow real quickly they takes a while for the for the oil to move in there. So it's a fundamentally different.
Overall number you got some that looks like.
A typical frac well, but it's nothing to do it we're not deliberately caused doing as well as the way that well drilling flow.
Gotcha Gotcha perfect.
I guess, maybe there's a question for Chris.
But the expectation of a growing cash balance towards the end of the year on year low cash burdens on a go forward basis, how should we think about the priority of.
Cash outflows at some point is that priority one debt pay down is that hitting the market or.
Maybe a mixture of those two and potentially even shareholder returns.
Well, there's only so many things you can do so.
Can you could buy your shares.
Paying the data, calling some of the debt over time.
We prioritized over the last certainly a couple of years with prioritize quite acquisitions, and we've acquired a bunch of oil and gas properties that have been accretive to the model and accretive to the stock. So if we can find some of those things.
We'd like to do some of those things that they're accretive.
And sort of PDP value at bats.
Maybe sort up to three times cash flow.
But otherwise.
I'd, let Steve talked to the dividend or something different but we started the deck does that make we've only got 400 million at that right.
So we've got six more years to go.
It's not exactly a big burden.
And were our coverages.
So certainly less than one.
Even in these prices.
So of there's no reason to do anything with that.
Gained in it I don't think.
Of sort of last resort.
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I think as far.
Well, we'll just see where we are and see what happens with the with really two things one is.
Will there be an opportunity to.
The market.
To acquire.
Things that fit in we're not going talking about go into some other basin, but things that fit in and give us where there is real synergies.
You never really want to buy from somebody that knows more new do about the asset.
So we don't want to be at least even with them. So.
So I.
And there are some small things we can do it.
Buying.
Increased working interest in our current properties.
And the second thing is that we we have bought stock in.
Occasion.
And.
But that's still.
Our option for us right now.
Perfect. Thanks, guys for the color and I appreciate you taking the time.
Sure.
Ladies and gentlemen, as a reminder, if you like to ask your question. Please press Star then one.
Today's next question comes from Nicholas.
For global please go ahead.
Good morning, guys.
Morning.
I just wanted to talk a little bit more.
Topic of a day I guess with getting.
How many of the wells the are looking at in the in that core area.
Have has magnolia drilled and completed versus what was kind of in place in those numbers dirt upon the acquisition.
Of the asset.
Manny.
The all 14 are ours other all years.
Yeah got it.
And when I look at like that just you kind of hit on the variance that we see I think this is a comfort with just.
A lot of investors with these chalk plays in the variability of kind of performance.
Yes, what did you kind of seen what.
Performance has been to date like when you start to project at the drilling program and getting.
What are the Magnolia expectations of variance on well performance in that core area going forward.
Well you know what we.
Side from you know.
The mechanical problem.
Or you know about you know some kind of drilling through.
Well the wells.
Our within a modest amount there are some considerably better that's true, but those are the ones that jump out on the screen I guess is.
The future wells that you guys have done there.
We didn't cherry picked the wells that these are the these are all the wells. These are all that we have 180 days of production.
Yes.
That's that's all the all there is.
Alright, Thats really isn't anybody else to drills in this area because we have all the acreage.
So that's all or is we didnt, we didn't pick any.
But it is and so you want to use the mill.
If you want to do a standard deviation you can do that but some of the some of the real but weaker wells are basically ones that had some mechanical problems. They are nothing fundamental not to say that there if you drill.
50 of these.
The that there won't be some near the edge as we as we move.
Try to expand the 70000 acres to 80000 or something like that you could run into an edge play I suppose.
But as far as far as drilling within the.
Sort of current boundaries.
This is what you're going to get you will get some variance there's no question about that.
We've shown you all the data there is.
We don't have anymore.
[laughter] I appreciate I appreciate that that obviously I I just wonder here you guys talk about that that makes sense. Thank you that's all it. Thanks.
And ladies and gentlemen, Sinclair is a question answer session. During the conference back over to the management team for any final remarks.
Thank you for participate in the call.
Thank you next quarter.
Thank you.
Today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines level order flow back.