Magnolia Oil & Gas Corporation Class A

You need assistance, please signal a conference specialist by pressing star, then zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touch-tone phone. To withdraw a question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Brian Correos. Please go ahead.

Thank you, Operator, and good morning, everyone. Welcome to Magnolia Oil and Gas's fourth quarter and full year 2020 earnings conference call. Participating on the call today are Steve Chazen, Magnolia's 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 forward-looking statements within the meaning of the federal security 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 SEC. A full safe harbor can be found in Slide 2 of the conference call slide presentation with the supplemental data on our website. You can download Magnolia's fourth quarter 2020 earnings press release as well as the conference call slides from the investor section of the company's website at www.magnoliaoilgas.com. I will now turn the call over to Mr. Steve Chazen.

Thank you, Brian. Good morning, and thank you for joining us today. My comments this morning will focus on how we plan to employ the characteristics of our business model to drive shareholder returns and update you on our gettings, drilling progress, and activity. Chris will review our fourth quarter and full year results, including year-end 2020 reserves, provide some additional guidance before we take your questions. When starting the company a few years ago, we developed a business model with characteristics that we thought would appeal to generalist investors. The model was supported by maintaining low financial leverage, philosophy of disciplined capital spending sufficient for moderate growth, while generating significant and consistent free cash flow and strong pre-tax margins. We limit our capital spending to within 60% of our EBITDAX, which also helps instill financial discipline throughout the organization. The chart on slide four of the conference call presentation shows how we've allocated our operating cash flow since our inception in 2018. While drilling completion capital has averaged 60 percent, most of the remaining 40 percent of the unallocated cash flow has been used to enhance value on a per share basis, either through acquiring small bolts on oil and gas properties or repurchasing our shares. We've also built a significant amount of cash over this period. Last quarter, I indicated that we end the year with a cash flow balance around $200 million. Since this has now been reached, we no longer need to continue to build cash, and as a result, more cash will be available for share enhancing activities. The guiding principle within our business model of limiting drilling, completions, and infrastructure spending to within 60% of adjusted EBITDAX will not change. We expect that most of the unallocated cash flow will continue to be used either for acquiring small full-time property or repurchasing Magnolia shares. In the absence of acquisitions, the available cash flow would be used to repurchase our shares. We repurchased 2.4 million shares in the fourth quarter, approximately 1% of our total shares outstanding. We plan generally to continue this pace of share repurchases, which will reduce our overall share count by 4% each year. Aligned with this plan, our board recently increased our share repurchase authorization by an additional 10 million shares, and we currently have approximately 13.5 million shares available for repurchase under the authorization. Just for clarity, we view the 1% as not the cap in this, but it could be, depending on the stock price and how much cash we have, it could be more than the 1% per quarter. In addition to these value-enhancing activities, Magnolia intends to begin paying a cash dividend in mid-2021. The first small fixed semiannual dividend will be paid after announcing our second quarter results. The second payment will include the fixed dividend, plus a variable component to be paid around this time next year based on the full year 2020 financial results combined with the current business outlook. The total cash dividend outlook outlays will be capped at 50% of annual reported net income. Initiating a cash dividend at this time demonstrates our overall confidence in executing our business plan and the strength of our underlying assets. The dividend is also an additional element of our plan to focus on share enhancing activities. This will continue to allow us to deliver moderate production growth while spending within 60% of our cash flow while providing flexibility to allocate the remaining unallocated cash flow in a manner that is most accretive to shareholder value. Turning to our operations, we made significant strides last year in advancing the Giddings asset from appraisal mold to a multi-well pad development. Turning to slide five of the presentation, our Giddings asset reached record production levels in the fourth quarter. Total production in Giddings increased 39%, with oil production rising 70% on a sequential quarterly basis. Results in the fourth quarter are still in the early stages of reflecting how development would look like for this asset. Efficiencies for both drilling and completing wells continues to improve, resulting in faster cycle times and lower overall well costs. To date, we have drilled two or three wells per pad. Going forward, our plan is to increase some pads to four wells, and we may consider a few larger pads. This should help continue to improve efficiency in the field. We expect total well costs to average approximately $6 million during this year. Importantly, well productivity continues to improve. The six new wells we brought online in the fourth quarter in our initial core area performed better than the average of the previous 14 wells drilled in this area. With a total of 20 wells online for the last 90 days in the 70,000-acre initial core area, these wells have averaged 840 barrels a day of oil, and 4.7 million cubic feet of gas a day. This production rate has increased by 4% from the prior level of 783 barrels of oil per day and 4.6 million cubic feet of gas per day for the previous 14 wells. Additionally, we completed two wells in Giddings located in an area about 20 miles away from our initial core area that were expected at the time to be gassier. These wells had an average 90-day production rate of 550 43 barrels of oil a day, and 7.3 million cubic feet of gas per day. While these wells did prove to be gassier, the amount of oil production was better than we originally estimated. This area could provide for additional high return development potential over time. Although product prices have improved significantly from 2020 levels, the discipline policy around our capital spending remains unchanged. We're currently running one development rig in the initial core area at Giddings. The approved efficiency of Giddings has provided us with the ability to drill at a pace of 20 to 24 wells per year. This is basically twice what we were running last year. We also plan to complete 10 operated ducts in the Carnes area, mainly during the first half of the year, and are expecting a modest increase in our non-operated activity in Carnes. Our 2021 D&C capital is expected to be between 50% and 60% of our adjusted EBITDAX. Although at current product prices, spending is likely to be in the lower half of this range. I think I could say that we're running way behind that 50% level this quarter and probably into the second quarter too. So as we build out in the back half of the year, it's going to be difficult to catch up. In summary, we ended 2020 with a very strong operational financial performance, providing us with solid operational momentum that should benefit us during 2021. We are optimistic on the outlook for a full year of development at Giddings. We remain focused on activities that enhance our per unit metrics while further lowering our F&D costs and reducing our G&A costs to improve our pre-tax margins and earnings per share. Our plan to spend 50% to 60% of our adjusted EBITDAx on drilling and completing wells is expected to result in mid-single-digit year-over-year production growth. A combination of mid-single-digit organic growth and reducing our share count by 4% a year would result in production per share growth of approximately 10% per year. That doesn't include the dividend payment. I'll now turn the call over to Chris.