Q3 2020 Magnolia Oil & Gas Corp Earnings Call
Good morning, and welcome to the Magnolia oil and gas third quarter 2020 earnings release Conference call.
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I would now like to turn the call over to Brian Corales, Vice President Investor Relations. Please go ahead.
Thank you Gary and good morning, everyone welcome to Magnolia oil and gas is third quarter 2020 earnings conference call participating on the call today are Steve Chazen, Magnolias, Chairman, President and Chief Executive Officer, and Chris Stavros Executive Vice President and Chief Financial Officer. As a reminder, today's conference call contains certain projections and other costs.
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 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 SEC.
See a full safe harbor can be found on slide two of the conference call slide presentation with the supplemental data on our website you can download magnolias third quarter 2020 earnings press release as well as the conference call slides from the Investor section of the company's website at Www Dot Magnolia oil gas Dot Com I will now turn the call over to Mr.
Steve Chazen.
Thank you.
And thank.
Thank you for joining us today.
My comments. This morning will begin with an overview of our business model let's.
Discussion of our plans and activities for the rest of the year, including an update on our Giddings development.
I will conclude with a general outlook for 2021, Chris will review, our third quarter results and our financial position. He will also provide additional guidance before taking your questions.
Magnolias business model, which focuses on spending approximately 60% of our EBITDAX on drilling completing wells in January meaningful consistent free cash flow, while maintaining low levels of debt remains unchanged.
Well suction more than two years ago. This model continues to position us well by providing significant flexibility in how we choose to allocate our free cash flow.
Since the beginning of 2019, we deployed approximately 165 million of cash hoard small and mid sized bolt on oil and gas property acquisitions repurchased more than 9 million shares of our stock well building additional cash on our balance sheet.
End of the third quarter with nearly 150 million of cash and we expect our cash balance to exceed $200 million by the end of the year.
Turning to our operations after.
After not completing are bringing on a new wells online during the last eight months, our third quarter total production of approximately 54000 barrels of oil equivalent per day represents the trough period for production this year we.
We ended the third quarter with eight docs and getting and 10 Bucks in the Karnes area, well wondering running one rig operated in Giddings, which continues to drilled development wells.
Began completing wells, it's getting late in the third quarter and recently brought on our first three well pad while still early the wells on the recent getting bad are performing better than the average of the initial 14 wells in our core development area that we discussed with you last quarter.
Of the eight wells, we plan to bring on during the fourth quarter, we expect two wells to be gassier, allowing us to take advantage of the recent increase in natural gas prices.
Our total <unk> fourth quarter production is expected to grow 7% to 10% sequentially and production and getting is expected to grow by at least 20% as a result, the docks being brought online.
Timing of these wells, we stagger throughout the quarter and the full impact will not be realized until the first quarter of next year.
Our optimism around the opportunity getting continues as we experience additional confirmation around well performance and further improvement on well costs currently.
Current average well costs are running about six and a half million dollars, which is down from eight and a half million during last year.
Operational efficiency improvements in giddings over the past year have been substantial.
As we have focused our activity in our initial core area transition to pad development and prove the quality improved the quality of our drilling crews drilling.
Drilling cost per lateral foot have declined nearly 55% and completion cost per lateral foot <unk> decreased 50%, resulting in total well cost per lateral foot declined 45% compared to 2019 levels.
These costs.
These these include total cost for drilling completion and associated facilities at Giddings.
We expect to further to capture further efficiencies as we execute our pad development with total well costs falling towards $6 billion next year.
Before turning the call over to Chris I want to provide some initial thoughts regarding our plan for 2021, putting a general framework for reinvesting our cash in the business and on the return of excess cash to the shareholders.
Our plan is to continue to spend approximately 60% of our gross cash flow on drilling completing programs as part of our organic program. We do not expect to offer this plan as a key characteristic of our business model provides discipline within the organization.
The current product price prices, we plan to run one rig at Giddings and our development area at current drill times improved efficiencies and lower costs puts us on pace to drill approximately 20 wells in Giddings next year we.
We expect to begin completing the ducs in the Karnes area in the first half of 2021, when we currently anticipate a modest increase in non non operated cards activities throughout the year. This plan is expect to deliver moderate organic growth compared to our fourth quarter 2020 production levels.
As I mentioned earlier, we expect our cash balance to exceed $200 million at the end of the year.
It's difficult to imagine that we would need to carry much more than this at any given time.
Overall balanced strength is important to us with only $400 million of a bonded indebtedness and not due until 2026 paying down debt is not likely to add material value to our stock price.
We will continue to look for small to mid sized bolt on oil and gas property acquisitions with similar characteristics to our existing asset base, although we cannot be certain these will occur we anticipate spending a sizable portion of our cash flows after capital and interest expense on acquisitions any acquisition we need.
To be accretive to the value of our stock improve our full cycle cost metrics.
Our increased confidence in the giddings asset here area makes us less likely that we would pursue a larger acquisition.
Transactions are most likely to be smaller bolt on top side, including could include producing properties or additional interest in our core areas.
In the absence of accretive acquisitions cash should be allocated to share repurchases.
Bolt on acquisitions and buying back our stock will improve our overall and per share metrics and should have done it generate additional stock market value over time.
I will continue to evaluate all cash flow allocation options, including dividends and.
And plan to provide more details around this as we rollout our full 2021 capital plan early next year and I will turn the call over to Chris.
Thank you, Steve and good morning, everyone as Steve mentioned I plan to review some high level points from the third quarter results review, our financial position and provide some guidance before turning it over for questions.
Starting on slide four Magnolia returned to profitability during the third quarter generating total adjusted net income of $15.6 million or six cents per diluted share.
Our adjusted EBITDAX was $76 million in the third quarter with total drilling and completion capital cost of approximately $27 million.
DNC capital represented 36% of our adjusted EBITDAX for the quarter and was better than our earlier guidance. We continue to expect our DNC capital spending to be approximately 60% of our full year 2020, adjusted EBITDAX, which is consistent with our strategy and business model.
For the total production of 54.3 thousand barrels of oil equivalent per day, 50% of which is oil.
Third quarter volumes were negatively impacted by 2000 Boe per day due to the delay of several non operated wells in karnes until the fourth quarter as well as some unplanned downtime Karnes third party processing facility. We've now completed any wells since February and did not bring on any new production during the third quarter.
Well prices stabilize during the third quarter after a very volatile and weak second quarter or third quarter oil and natural gas price realizations improved by 96% and 17% respectively on a sequential basis.
As a result of the recent sharp increase in natural gas prices, we took the opportunity to hedge 50000, and then beat you per day natural gas production or just under half of our total daily natural gas volumes using costless collars with a weighted average floor price of $2.31 Brendan Beach view and a weighted average ceiling price.
$3 per MBT yields from September 2020 through August 2021.
The hedge locks in a floor price of $2.31 per and then B to you that is well ahead of the price we realized thus far during 2020, while providing upside on half of our production volumes.
Gas prices rise over $3. We view this hedge is more opportunistic and have no plans to hedging you bar oil volumes.
Looking at the quarterly cash flow waterfall chart on slide five we began the third quarter with $117 million of cash.
And generated 69 billion cash flow from operations before changes in working capital.
DNC capital was $27 million during the quarter.
We completed a small bolt on acquisition in the quarter most of which was in it was an increase in working interest in our existing acreage, we repurchased 1.2 million shares of our common stock during the third quarter of two $7 million and have 6.8 million shares remaining under the existing repurchase authorization.
We generated $46 million of free cash flow and our cash balance grew by $32 million during the period ending the third quarter at $149 million.
At current product prices, we will continue to generate excess free cash flow after capital outlays through the end of the year.
Our $400 million of gross that is reflected in our senior notes, which do not mature until 2026, and we do not expect to issue any new debt.
I know he is undrawn $450 million revolving credit facility was reaffirmed by our bank group last month and are nearly $600 million to total liquidity is more than ample to execute our business plan.
Our condensed balance sheet and liquidity as of September Thirtyth are shown on slide six and seven.
Turning to guidance for the fourth quarter and shown on slide eight our total capital spending for drilling completion and facilities is expected to be approximately 55% of our adjusted EBITDAX during the during the period.
We exited the third quarter with eight Ducs at Giddings, which we plan to complete and bring online during the fourth quarter.
He's well completions combined with several non op wells coming online in karnes during the quarter should provide sequential quarterly production growth of 7% to 10%.
Production Giddings should increase by at least 20% as we bring on several multi well pads do.
Two of the wells that we plan to bring on line during the fourth quarter are expected to be gas year, allowing us to take advantage of higher gas prices. As a result of these gassier wells our gas production that is expected to be a little higher proportionately during the fourth quarter.
We plan to continue to operate one rig focused on drilling development wells in the Giddings initial core area.
Our old realizations are expected to be about a $3 per barrel discount I mean age and around the same as the third quarter and in line with historical levels.
In fact, our cash balance to exceed $200 million at the end of the year at the end of the year and as Steve noted.
We do not need to build much cash at all beyond this level.
Looking into 2021, we plan to invest approximately 60% of our adjusted EBITDAX on drilling and completing wells and consistent with the capital discipline that supported our business model since our inception.
The current product prices Magnolia plants to operate one rig focused on pad drilling into getting initial core area based on current your current drilling times in Giddings, we estimate a one rig program at our current pace could drill approximately 20 wells per year, which should provide moderate volume growth compared to our expected fourth quarter production levels.
In summary, magnolias financially well positioned with ample cash and liquidity further drilling efficiencies captured in giddings should allow us to do more with less providing us with excess cash to return to shareholders.
We're now ready to take your questions.
We will now begin the question and answer session.
To ask a 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 to withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
No it doesn't matter.
Dr Glass.
Our first question comes from Jeff Grampp with Northland. Please go ahead.
Yes.
Good morning.
Wanted to start maybe on a Christmas last point doing more with less and and you guys got going on getting from the well cost front do you guys think what seemingly good good line of sight to getting to 6 million dollar well cannot be sustainable longer term and even if we do at some point in time get.
Service companies, calling back some margins given that you guys, probably still have some more efficiencies to gain is that kind of a good longer term development well cost or how should we think about continued efficiency gains.
Well, it's all a gain income came from drilling drilling the wells quicker.
Which isn't or is it got from cutting the costs from the from the rig company. So you know I think the 20 wells for the year is also conservative.
So we're continuing to improve our time and so we might even be more than that so I think.
You know, we may be able to get it below $6 million, but do I think $6 million.
In almost any.
Any price environment that I could currently foresee or pray for.
It's probably about right okay.
Okay, great and just on the on the results front. They know we're still early days on that recent three well pad, but anything you guys can point to as far as why those are doing better is that geology are you tweaking completions and do it in the optimization on that front or anything you can kind of conclude at this point.
Well you know the average was it was a number of wells drilled over.
Couple of years or so maybe two three years.
So obviously the average was what was.
Reduced by some of the weaker wells that were drilled at one point or another.
That were done in a different way so we.
We were we expect that that will be above that average.
No.
We did all we drilled that well I guess, but but we.
We expect it will be above that average going forward.
All right.
I'll hop back in the queue. Thanks for the time.
Thank you.
Next question is from Neal Dingmann with Truest Securities. Please go ahead.
When it all.
My question for you or maybe even Chris is just you guys continue to generate some nice free cash flow and you talked I think in the press release about some of the stock repurchase My my question with incremental free cash flow do you see yourselves.
Again, just sort of building cash for that you don't have a ton of debt. So I'm just wondering what sort of uses nearer.
Nearer term uses of that between shareholder return or maybe even acquisitions.
So you know if we start so spend 60% of the EBITDAX on drilling completing wells and equipping them.
We roughly and.
Then we.
We would hope to do some bolt on acquisitions and any either giddings or karnes.
The market as far as tight right now so I know right now you couldn't do much I don't think.
The next priority is likely to be.
Share reduction.
Switching to share count.
And then.
Work that we are considering a dividend.
We'll have more to say about that next year the.
As far as paying down debt. It just doesn't make any sense, we have 400 million of debt.
We've got 200 million of cash with I don't I guess I could build the $400 million of cash, but I don't think that makes it makes a lot of sense.
Well in theory, we could start calling the debt next year, but I don't I don't see where we're having zero debt.
It's going to going to be real accrete to the shareholders. So I'd, rather do use the money for something else.
No great details and then just a follow up I know earlier. This year you you were pretty deliberate on about drilling in giddings and talking about the quicker sort of payback in karnes here.
Heaters, we have you know, let's assume again that we exit the year around 40 ish.
Again, knowing you don't have full details out for next year.
Oh, what are your thoughts about what you know again continued with getting versus current given the you know the.
The paybacks of the of the two.
Well you know the giddings wells have a better cash return.
Current well.
The current as well as fat comes back faster. So you have higher internal rates of return, but as far as you know money in the bank. The giddings wells over time will generate more money for us and more president of work for us.
So in a low lower price environment, you could do that.
Current well you know basically you're drilling and you're going to get $40 oil or whatever the oil current oil prices. The current level. It will be averaged over a few years. So in its current kind of environment. The giddings well is more attractive.
We have some karnes wells drilled from docs and.
Pending on product prices, we make will probably complete those sometime in the first half of the year.
And well and some wells, we'll probably be drilled next year.
But we'll just have to see the ideal environment for corn as well, even though the wells work just fine now.
You know I forget if you get 60 Bucks or 50 Bucks for the oil and you get your payback down around six months that's about right.
So you know that their locations aren't going away I guess and so with the priority now is to build the lower decline.
Good things.
Results with the low finding cost finding costs are in the six dollar area.
And so I.
Kind of finding cost.
All things considered in our program.
Right now that would be the I think the best uses of it for the drilling money.
Well well said thanks, Steve.
Thank you.
Next question is from the line should gray with Goldman Sachs. Please go ahead.
Hi, good morning, and thank you for taking my morning.
My first question is on.
I just wanted to follow up on a previous question commence.
If commodity prices do end up being hired.
And it's in the range of 50 to $60 oil men.
That would do deployed the incremental cash flows between content getting the lead it doesn't giddings is definitely.
It would have been.
And separately, if commodity prices do end up being higher or do you see the potential to spend less and deploy more cash towards acquisitions shred it but just.
Well, you know the formula sort of fit.
Fixes it.
So if EBITDA is $400 million, we spend 240 million drilling if EBITDA is $600 million, we spent $360 million drilling we would the extra money in that case would probably mostly go to cars, where we can get a higher price environment.
Where we could get faster payback and rig the rig.
Excellent economics there.
And but we wouldn't increase the.
Except by using the 60% that's the only way to adjust the program, we're not going to just a program by gone Crazy and spending 80, 90%. So so if our EBITDA were $600 million that would generate.
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$240 million less the interest so about $210 million for some kind of returned to shareholders, whether it be share reduction or divot.
Dividend just just depends on where we are at that time. So the answer is it the formula corrects itself for those sorts of things within reason.
$100 oil I don't know what I would do exactly.
That makes sense and.
And I guess my next question was on just Giddings area.
I understand it's early days and you still have your development plan had a few.
I was wondering if you can provide any initial color on 2021 production growth then capex outlook for getting specifically based on your plans to to look at one rig in that area.
So you should expect one rig roughly for the whole year, we were going to do a rig and a half but the efficiencies allowed us to do the same work with just one rig.
We may put us at a rate of somewhere in the middle of the year, maybe to drill some exploration type wells to see where we can expand but that's sort of at the.
Any any excess money would go into karnes drilling probably.
I don't I don't I'm not pressed to to enlarge the program program.
It's going to grow the wells you can look at the average we gave you.
Oh for last quarter, and even assume that again, there are fair to be doing better than that if you just assume that and you know were they are sort of 80% net revenue interest.
80, 590% working interest typically so you know you can you get some pretty impressive numbers.
Of growth over the period I mean, we said giddings next quarter's going to guidance on going in at least 20% and that's what part partial results really not even a full quarter of we're going to put 11 wells on or eight this year and three more next year as we continue to drill.
Over the next quarter.
Six.
Three four months and you know that that.
That will clearly.
We've chosen to 14, which are all the wells drilled you know.
You know at the end of the first quarter, we were going to show you 25 wells that you know I don't know how much more data you need.
No that was helpful. Thank you.
Thank you. The next question is from Zach Parker with JP Morgan. Please go ahead.
Hey, guys. Thanks for taking my question.
Sure.
In the past you all talked about having some productive gassy acreage in Giddings and you mentioned earlier in the call but to the eight giddings wells that will be turned in line in fourq you'll be gassier.
Just given the move in the 21 strip to near $3 could you potentially drill some additional gassy wells next year and I guess just in general can you talk.
Sorry go ahead.
That's the experiment silverware to see how these wells do.
To be candid.
Every time, we say, it's going to be Gassier turns out to be a great oil well.
So.
We'll see if that works that way, but.
Even the gassy wells produce a few hundred barrels a day of oil black oil.
So they are not just dependent on $3 gas, but $3 gas certainly helped we have a fair amount of gas prone acreage that could be developed in the $3 area.
But we're proceeding cautiously going the acreage isn't going anywhere, but that's that's the purpose of drilling the two wells to see what kind of results. We get we expect the results to be very strong.
Fair enough. Thanks for that color and just a follow up on the recent giddings completions on that three well pad can you give us some detail on how those wells are spaced and just any color on how you plan to space wells in that development program going forward.
They are extremely widely spaced at this time.
Because we got unlimited acreage.
And.
You know and we don't really know.
You know is the goal in life is not to actually drill as many wells as possible, but as few so if I could put one well in the middle of Washington County, and drain the whole county that would actually be the ideal outcome.
So.
I mean, the goal is each well.
Not.
Doesn't just accelerate the production, but also adds barrels and if you drill too closely you're accelerating the production and the interfere with each other and I think that's a mistake the industry.
He has made over the last few years. So we've got the in Giddings, we have enough plenty of acreage that we can space it extremely widely and the wells productivity. If you look at the curves is pretty good.
So there's no real reason to to to do tight spacing at this point.
Or really any point.
We'll see how these wells produce over the next four or five years and see how the curve flattens, but you know.
Hi, especially in a lower oil price environment or.
You really want to get the most you cannot have your 6 million dollar investment rather than do another one just accelerate some production.
We don't have the kind of issue some people have been trying to make banks happy with with coverage ratios. So we can be fairly thoughtful about the development program try not to waste too much money drilling wells.
Got it thanks guys.
Thanks.
The next question is from Lee Cooperman with Omega family Office. Please go ahead, I don't think I'm, saying anything that you don't understand I think you're very sophisticated but at the current strip what would you look at the net asset value of the company.
Gee I don't know.
Well you have you have an opinion.
Yes, I have I have a view.
Yes.
Certainly a lot more than $4.
The reason I raised the question is basically the market is it mid extraordinarily harsh and energy companies.
Makes me says they have no future. Okay. So every dollar you spend on drilling is being discounted in a significant way.
And if the market is right on the.
You know the dim future for energy.
We should basically not drill the money.
Automated drilling we should.
Hi back cash stock can aggressive fashion whenever it's selling at a material discount and navy.
Not you know.
Thank you, believing that because I just want to say in terms of the.
Discussion on this call about no allocation of capital it seems to me repurchased stock makes sense and only one scenario that you're buying something back is materially more valuable than the price you're paying for it.
Thanks.
That's a metric you believe that you understand that and I just want to encourage you that I I would I would reduce the drilling as long as the market is so disrespecting to the to the energy industry.
But no.
I agree with you as you know but.
It.
Purpose.
As Weve current is unknown area.
When when somebody values that.
No we.
We don't need to prove that that works.
No no I'm getting there.
The giddings area is different.
And so they get bought by investing in the Giddings area.
Yeah, we're running under 60% so.
We wanted to be.
So and we are now in the process of closing this year a reduction program, but we're not doing it just to reduce the shares.
No I think you're smart Guy you are like shareholder you understand that if you buy back stock at the wrong price you're screwing yourself.
So the analysts estimate is right price objective is 7060 cents almost twice the current price the stock. Some people have it were double digits and I would say that if you think that the that those numbers are right.
Then the repurchase has got to be the best use of capital.
And and it and it is but you also have to.
Art or to keep that $7. These these as these at this price if thats the right number.
Yeah. The Giddings program is necessary to do that.
I got you well have a lot of confidence that you will figure it out we are smarter than me.
I wouldn't say that.
Good luck anyway, and stay safe to say how thank you. Thank you.
Thanks.
The next question is from done Mackintosh with Johnson Rice. Please go ahead.
Morning, Steve just one more question kind of on the recent three well batch at giddings beyond.
Beyond spacing, what you talked about how the performance of those is exceeding what you saw in that first batch on this 70000 acre core just wondering kind of if there is any differences at a sub surface has a different landing zone or have you tweaked. The completion recipe even just any color there would be helpful. Thank you.
Oh, yes, we continue to improve.
The efficiency and there's some small tweaks.
But but.
The fundamental issue is that when you compare the.
These wells with the average there was some earlier you know less sufficient well whatever you want to call them in that average, but we showed you every well.
So you know that's that's the largest difference principally and there are some tweaks to make it better and we'll see how they how they perform over the next three or four months too.
All right. Thank you that's it for me.
Okay.
Next question is from Stephen Dechert with Keybanc. Please go ahead.
Hey, guys can you provide maybe some more color on what you're currently seeing any M&A market, just hoping to get a better sense of what we should expect you in the near term.
As far as an emphasis.
There, there's there's really very little.
Ill people are afraid to buy and sell and they know that they have unrealistic expectations most of the company's.
Small assets, we're looking at are have too much debt against some already in so that there is no net value I think it will be a while before that.
An active part of our business.
Okay, great. Thanks, and then can you just provide any like a rough dollar has meant for the for Q Capex number I understand it's 55% and.
Adjusted EBITDA, but just a rough number there would be great. Thanks.
Well I mean, you got to come up you got to come up the EBITDA and multiply that number up.
Yes.
No. The only reason would vary from that is that if you don't buy you know there are some I'm able to manage it to be sort of right around there, but you know it you know it would be.
Between 60, plus or minus 5%.
All the time and we just don't really know exactly because these are small numbers of energy.
Okay, Great you say, you're saying you're accurate for 2 million Bucks and I am not really that accurate.
Got it okay. Thank you.
This concludes our question and answer session and the conference is also now concluded. Thank you for attending today's presentation. You may now disconnect.
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