Magnolia Oil & Gas Corporation Class A

Good day and welcome to the Magnolia Oil and Gas Second Quarter 2021 Earnings Release and Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Brian Corrales, Investor Relations. Please go ahead.

Thank you, Eileen, and good morning, everyone. Welcome to Magnolia Oil & Gas' second quarter 2021 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 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 SEC. 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 Magnolia's second quarter 2021 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. Good morning, and thank you for joining us today. My comments this morning will focus on our first partial semi-annual dividend that we cleared yesterday and some thoughts around our differentiated dividend framework. I will also discuss how we plan to allocate our capital and free cash flow for the remainder of the year. Chris will then review our second quarter results, provide some additional guidance before we take your questions. Magnolia's business model and disciplined approach to our capital investment has not changed since our inception almost exactly three years ago. Despite the volatility around product prices, we continue to consistently execute on our plan as demonstrated by the strength of our second quarter performance, which included record net income and earnings per share. While our plan has not changed, we believe that business has fundamentally improved, resulting in the strong productivity and efficiency in our Giddings asset. Another of our key corporate goals was to generate EBIT equal to 50% or more of our realized BOE price. This is defined as accounting profits after all costs, including DD&A, but before interest and taxes. Our average realized price in the quarter was $42.42 per BOE, and we had EBIT of $21.85. Strong margins are a direct result of our team's focus on cost control, safety, wealth productivity, and this is especially pleasing to me because it's always been a corporate goal to earn half of the product price. The quality of our assets in a business unburdened by large debt should allow for continued modern production growth with high operating margins will generate significant free cash flow at much lower prices. We now believe this could be achieved by spending within 55 percent of our EBITDAX on drilling completing wells compared to spending within 60 percent previously. Our total shareholder return is allocated into two main buckets, the largest being to improve per share metrics of the company by reducing our share count. In the first half of the year, we repurchased 7 percent of the total shares. And assuming we repurchase 1% of the shares each of the next two quarters, it would provide investors with a 9% return before paying the recently announced dividend. Our differentiated dividend framework is aligned with the principles of our business model and designed to reinforce our plan. We would not characterize our dividend as special, nor is it a function of windfall product prices. Instead, our approach is meant to appeal to long-term investors who seek dividend security and sustainability, moderate and regular dividend growth, and dividend that's paid out of actual earnings. We believe our framework provides for this rather than stretching for yield or trying to mimic an MLP or royalty trust. Dividend announcement yesterday conveys our continued confidence in the business plan and the quality of our assets. The first interim semiannual dividend of $0.08 a share is payable next month. It's secure and sustainable. at oil prices below $40 a barrel and natural gas and NGL prices around half their current levels. We plan to declare the remaining annual dividend next February with the release of our full-year 2021 results. The second payment will be based on our longer-term view of product prices, or approximately $55 a barrel for oil, as well as the prior year's results. We expect that each of these regular dividend payments should grow annually based on our ability to execute our business plan, which includes moderate production growth and reduction of our outstanding shares. While a dividend will be paid out of real earnings, the total annual payment will not exceed 50% of the prior year's reported net income. While stock prices are often volatile and will behave unpredictably, we want the dividend to reflect the reality of the business. Our intent is to use this dividend framework to demonstrate the underlying results of our business in a stable product price environment. Including the dividend, this framework provides ample free cash flow to repurchase our shares as well as to pursue small, both on oil and gas property acquisitions that are accretive to our stock and improve our per share metrics. The goal is to provide superior total shareholder return by improving the per share value of the enterprise while providing a secure and growing dividend. Our participant capital investment provided 4 percent sequential organic volume growth in the second quarter, with most of our free cash flow allocated towards repurchasing our shares. During the first half of 2021, we generated approximately $235 million of free cash, spent more than $200 million, reducing our share count by 17.6 million shares, or about 7 percent of the total shares outstanding. This approach for allocating our capital and free cash flow has provided a volume growth of 7% compared to the fourth quarter 2020 level, while enhancing our per share metrics and leaving our cash position nearly unchanged at around $190 million at mid-year. We plan to continue to repurchase at least 1% of our outstanding shares each quarter. We added a second operating rig at the end of the second quarter, which is currently drilling wells in Giddings Field. Our plan is for this rig to drill wells in both the Carnes and Giddings areas, including some appraisal wells in Giddings. The other operating well will continue to drill multi-well paths in their Giddings area. Our capital run rate is expected to increase in the back half of the year to the additional rig and activity, although our total capital will be far below Our normal business model spending level is a percent of adjusted EBITDA tax. A portion of our capital and activity in the back half of the year will be directed toward drilling and completing some gassier wells in Carnes and Kiddings and to benefit the recent strength in natural gas prices. Basically, this is a Carnes thing. We had some ducts in Carnes. We were going to turn the wells on later in the year when gas prices were strong. We looked at the screen and we saw gas prices. We're already strong. We remain unhedged on oil and natural gas that we put in place a year ago has expired, so we fully benefit from a higher price. Finally, the interbreast operating and other agreements were terminated at the end of the quarter. Result of the conclusion of the operating agreement, we expect realized G&A savings of approximately $0.60 a barrel going forward. To summarize our consistent, significant free cash flow generation, combined with improved efficiencies and greater productivity and giddings, we can do more with less, all while maintaining our low-cost structure and strong balance sheet. Less production is needed to generate moderate growth, resulting in more free cash, allowing us to further enhance our business through sharing purchases and small bolt-on acquisitions. A small, irregular, secure, and growing dividend is an outcome of this plan. The current environment for Magnolia presents a significant opportunity set. We have strong cost management, low capital intensity, and an unexpected high product prices. This generates significant amounts of free cash flow. Magnolia has very little debt and continues to build cash. At the same time, the stock market, in my view, is not anywhere near intrinsic values for us and many others in our industry. We believe we have the opportunity over the next 18 months to make large purchases of stock. This confluence of events may give us a chance to materially reduce our share account. This is usually difficult to achieve. A material reduction of share account without changing debt levels will inevitably lead to higher returns on capital employed and faster growth in earnings, cash flow, and free cash flow per share than we could have achieved without the buyback. will set a dividend rate at a secure level based on moderate long-term prices. By dedicating the vast majority of our free cash flow to significant, sensible share repurchase, future predictable and important dividend growth is highly likely without increasing financial risk. I'll turn the call over to Chris.