This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk01: Good morning and welcome to the Magnolia Oil and Gas third 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 star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star and then one on your telephone keypad. To withdraw your question, please press star and then two. Please note this event is being recorded. I would now like to turn the conference over to the Vice President of Investor Relations, Mr. Brian Corrales. Please go ahead, sir.
spk02: Thank you, Chris, and good morning, everyone. Welcome to Magnolia Oil & Gas' third 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 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 on slide two of the conference call slide presentation with the supplemental data on our website. You can download Magnolia's third 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.
spk04: Thank you. Good morning, and thank you for joining us today. My comments this morning provide a brief update on our business and operations, how we plan to allocate our free cash flow, and how we plan to allocate our free cash flow for the remainder of the year. Chris will then review our third quarter results, provide some additional guidance before we take your questions. Our strong third quarter financial results demonstrate the quality of our assets and the efficiency of our capital program. We continue to execute in our business model, which prioritizes disciplined capital spending, moderate production growth, high pre-tax margins, and low levels of debt. These principles, combined with an improved lower overall cost structure, as well as an unhedged production, allows us to achieve several records during the quarter, including EBITDAX, free cash flow, net income margin, and earnings per share. We generated $143 million of free cash flow after capital outlies and interest on our debt, and repurchased 5 million shares of stock during the third quarter, or about 2% of our total outstanding shares, for approximately $79 million. Despite the $79 million allocated this per share value-enhancing activities, our cash balance grew by nearly 30% during the quarter to $245 million. For the year to date, the largest use of our free cash flow has gone towards opportunistically repurchasing our own stock. So far this year, we have repurchased 22.6 million shares, or about 9% of the total shares outstanding, when compared to the fourth quarter of 2020's fully diluted share count. Therefore, we have returned 9 percent to our shareholders in the form of share repurchases for the first nine months of this year. Since establishing the share repurchase program in the third quarter of 2019, we have spent approximately $396 million acquiring our own stock and reducing our diluted share count by 34 million shares. Our share repurchase efforts continue to enhance our per share metrics We expect to continue to repurchase at least 1% of our shares each quarter. Magnolia also paid its first interim semiannual dividend of 8 cents per share during the third quarter, which is secure at oil prices under $40 a barrel. We plan to make the remaining dividend payment in the first quarter of 2022 based on our full year 2021 results and adjusted for oil prices of $55.00. Our total production volumes grew 4% sequentially during the third quarter as a result of continued strong well performance, despite lower non-operated activity and investing only 30% of our EBITDAX on drilling and completing wells. The quality of our asset base is reflected in the continuing overall growth of our production volumes, low reinvestment rates and finding costs, and high full-cycle margins. We currently have two operator drilling rigs across our assets and plan to remain at this level into next year. At current product prices, this level of activity would result in the D&C capital program well below our cap of 55% for our adjusted EBITDAX. One rig will continue to drill development wells that are a Giddings asset. While still in the early stages of development in Giddings, the results of our drilling program have become more repeatable and increasingly predictable. The second rig will drill wells in both Carnes and Giddings areas, including some appraisal wells in Giddings. We continue to see improvement in our operating efficiencies at Giddings while maintaining well productivity. The 2021 development plan program has averaged four wells per pad, with lateral lengths averaging greater than 7,000 feet per well. This compares favorably to the prior year, where we averaged less than three wells per pad, with average lengths about 6,000 feet. More wells per pad combined with longer laterals while increasing the average drilling feet per day have helped in driving further efficiencies at Giddings and partly offsetting some materials and oil field-related inflation. Our ability to generate moderate annual production growth with strong operating margins together with our ongoing share repurchase program and the payment of a secure, sustainable, and growing dividend are important components of Magnolia's Total shareholder return proposition. I'll now turn the call over to Chris Davros.
spk05: Thanks, Steve, and good morning, everyone. As Steve mentioned, I plan to review some items from our third quarter results and provide some guidance for the fourth quarter and some initial thoughts for 2022 before turning it over for questions. Starting with slide four in the presentation found on our website, which shows a summary of our third quarter, Magnolia delivered a very strong third quarter 2021 financial and operating results, achieving several records. The company had adjusted net income for the quarter of $158 million or $0.67 per diluted share compared to total net income of $116 million or $0.48 per diluted share in the second quarter of this year. Our adjusted EBITDAX was $221.5 million in the third quarter, with total D&C capital of $67 million, or 30% of our EBITDAX. Magnolia's fully diluted share count declined by 6 million shares sequentially, averaging $236 million during the third quarter. Total production volumes grew 4% sequentially to 67.4 thousand barrels of oil equivalent per day in the third quarter. Production in Giddings now represents 55% of total company volumes, as Giddings has grown by 80% year over year. Sequential improvement in our quarterly financial results benefited from higher product prices, especially for natural gas and NGLs, increased production volumes, and lower total costs. Product prices have risen further into the fourth quarter, and as a reminder, we're completely unhedged on all our oil and gas production. Looking at the quarterly cash flow waterfall chart on slide five, We began the third quarter with $190 million of cash. Cash from operations before changes in working capital was $211 million during the period, with working capital changes and other small items benefiting cash by $6 million. Our DNC capital spending, including land acquisitions, was $68 million, and we generated free cash flow of $143 million during the third quarter. Cash allocated to our share of purchases was $75 million, We paid our first dividend of $0.08 per share in September, or $19 million, ending the quarter with $245 million of cash on the balance sheet, or more than $1 per share. Slide 6 shows our cash flow through the first nine months of 2021. For the year to date, we generated cash from operations of $528 million for four changes in working capital. During the nine-month period, we incurred $163 million in drilling and completing wells, We spent $284 million on share purchases and paid $19 million in dividends. Summarizing our progress during the first nine months of the year, we've grown our total production by 11% from fourth quarter 2020 levels, reduced our diluted share count by 22.6 million shares or 9%, leading to 20% production per share growth over the period. This growth was all organically driven without incurring any debt and while building $52 million of cash. Looking at slide 7, this illustrates the progress of our share reductions since we began repurchasing shares in the third quarter of 2019. Since that time, we have reduced our total diluted share count by 34.1 million shares, or approximately 13% in two years. We plan to continue to repurchase at least 1% of our outstanding shares each quarter and currently have 8.5 million shares remaining under our repurchase authorizations. Management's philosophy is to maintain a strong balance sheet, and we do not plan to issue any new debt. Our $400 million in gross debt is reflected in our senior notes, which are not callable until next year and do not mature until 2026. We have an undrawn $450 million revolving credit facility and total liquidity of $695 million, including our $245 million of cash and our condensed balance sheet and liquidity as of September 30th are shown on slides 8 and 9. Turning to slide 10 and looking at our cash costs and operating income margins, our total operating costs and expenses declined by nearly $10 million sequentially, and despite the increase in product prices. Most of the improvement was in the form of lower G&A expenses and other associated costs as a result of the termination of the operating services agreement with Enervest in the second quarter. Our total adjusted cash operating costs, including G&A, were $9.66 per DOE in the third quarter, representing a 14% sequential decline compared to the second quarter of 2021. Including our DD&A rate of $7.74 per BOE, which is generally in line with our F&D costs, our operating income margin for the third quarter was $27.66 per BOE, or 60% of our total revenue. Turning to guidance for the fourth quarter, we continue to run two operated rigs across our assets and expect our fourth quarter capital to be approximately $80 million. This is lower than our earlier guidance and primarily due to ongoing efficiencies at Giddings. Total production is expected to be in the range of 68 to 70,000 barrels of oil equivalent per day during the fourth quarter. As I mentioned earlier, we are completely on hedge for both our oil and gas production should benefit from any further improvement in product prices. What price differentials are anticipated to be approximately $3 per barrel discount to MEH during the fourth quarter and in line with recent quarters? We expect our fourth quarter 2021 effective tax rate to be approximately 2%. The fully diluted share count is expected to be approximately 232 million shares in the fourth quarter, and we expect this to decline further into next year as we continue repurchasing our shares. Looking into 2022, our current plan is to continue to run two operated rigs on our assets, and our operated activity should be similar to the level seen during the second half of 2021. One rig will continue to drill development wells in Giddings, with the second rig drilling a mix of development wells in both Carnes and Giddings, in addition to drilling some appraisal wells at Giddings. This level of activity should generate year-over-year production growth in the mid to high single digits. As Steve mentioned earlier, we continue to see improvement in our operating efficiencies at Giddings while maintaining well productivity. Some of these improvements include increased drilling efficiencies up to 10% compared to last year in terms of drilling feet per day, a 14% increase in average lateral lengths per well to more than 7,000 feet, and a greater than 30% increase in the average wells per pad, leading to fewer pads. Since we're still in the early stages of development in Giddings, these improvements should allow us to partially mitigate some of the materials in order to fill inflation into next year. To summarize, Magnolia's high-quality assets and capital efficiency should continue to generate strong operating margins and sizable free cash flow, allowing us to execute our strategy. Our strong balance sheet provides an element of security amidst product price volatility and is also an advantage in creating optionality for us to opportunistically repurchase our shares, pursue small bolt-on accretive acquisitions, and pay a safe, sustainable, and growing dividend. We're now ready to take your questions.
spk01: Thank you, sir. Ladies and gentlemen, we will now begin the question and answer session. To ask a question, you may press star and then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star and then two. The first question comes from Neil Dingham of SunTrust. Please go ahead.
spk07: Morning all. Steve, great quarter, by the way, guys. Steve, I can't help but notice you continue to have very impressive efficiencies that, to me, most recently resulted in this 4% sequential production growth with only about a 30% EBITDA spend. And so my question around that is, would you suggest the crux of this is coming from Giddings upside or really just what else should we read into this?
spk04: It's really driven by Giddings. You know, the current is pretty predictable. Costs are predictable. Production is reasonably predictable. Now, the only, you know, the variation, you know, running two rigs, you're going to have some variation. A well gets delayed or starts a week earlier or later. It looks like something's happening, and really nothing's happening. But, you know, it's basically efficiencies at Giddings. You know, we continue to look for additional opportunities there outside the current area, and we'll continue to do that in the next year. You know, the only, I don't know if I'd call it disappointment, but the only difference this year is that we haven't had a lot of non-off activity. It's been much less than historical. And so next year, so what's happened is we drilled less net wells than we thought we would drill. Generally speaking, the non-off was like running half a rig for the year, and it's maybe half of that this year, maybe not even that. If that continues, we may add a rig sometime next year to make the net wells work to compensate for the non-op. That's the only change I see. That rig would probably be mostly focused on new opportunities in the Giddings area. We see a number of areas that look interesting. We've drilled some wells. We don't have 90 days of results to talk about, but the No, I, you know, I remain optimistic about it over the next decade or so.
spk07: And great, great points. And that's kind of what I thought I'm getting. And then just to follow up, you'll continue to, you've bought now back quite a fair amount of stock back. And I'm just wondering, given your stock has gone up like others, do you still see the discount when you look at the options to do with the shareholder return? does that still look to be most accretive, the best use of your proceeds, or maybe just talk about that a little bit, given the run that you all have had in the stock?
spk04: For 40 years, I've never talked about the value of the stock. So I'm not a stock market expert. And if I were, I'd be wrong around half the time, maybe more, but at least half. Because, you know, it's either wrong or right, so I guess it's 50-50. So, you know, the stock is – it depends on your view about oil prices. You know, the industry works reasonably well at $60 oil and, you know, works almost too well at $85. So, you know, I'm not a believer in $85. But $60 works really well for us. And so I think the share repurchase makes sense. We have a shareholder, a sizable shareholder. And I don't want him, I don't have any control over him or don't know what he's going to do. But I also don't want him to be harming the existing shareholders. So, you know, we buy shares in quantity at the same price he gets, which is basically set by the market forces. And, you know, that's worked out for us. I don't know what our average price is, about 13 bucks or something. Less than that. Less than $13 for all the shares we purchased. So, you know, it's worked out well for the people who bought the stock in the offering, and it's worked out well, I think, for the shareholders. You know, stock's gone up a lot, that's for sure. Luckily, my wife doesn't, you know, doesn't compute this for me. But she does count dividends, you know. But, you know, I just hate to get into, you know, valuation. But I think, you know, as a practical matter, once we set the dividend in February, we could fairly easily grow that dividend 10% a year for a very long time. And for me, that's an attractive investment. It's not Tesla or something like that, but it's a fairly attractive investment. And I just think that's the way I think about it. How much can we distribute that we can give and and take in my case. And how much can we continue to grow? The M&A market is not real attractive right now. Almost everything is diluted to us. You know, we've got a low finding cost and a purchase of PDP production, maybe two or three times our finding cost to go in. And the locations that come with these PDP packages you know, basically wouldn't meet our economic standards for drilling. We wouldn't drill them. Somebody might, but it wouldn't be us. So, you know, it makes it very difficult to drill, to buy anything in the current environment. You know, we'd find some small pieces here and there in our existing areas. But other than that, you know, so, you know, the share repurchases and dividends for the next few years I think will be the driving force. And once Intervest has gotten to whatever level of ownership, if any, that it wants, then we'll shift to a more dividend-intensive strategy.
spk07: I guess, Steve, you better be careful when you do if your wife is watching those dividends close. Thank you again.
spk03: Sure.
spk01: Thank you, sir. The next question is from Leo Mariano of KeyBank. Please go ahead.
spk02: Hello. Hello? Are you on mute?
spk04: Yeah.
spk06: Yeah, hello, guys. Can you hear me?
spk04: Yeah, now we can hear you.
spk06: Okay, great. I just wanted to dig a little deeper into Giddings here. Clearly, you guys have increased, you know, your ability to drill more wells per pad, longer laterals. I know you kind of historically talked about kind of a rough $6 million, you know, type well cost, but clearly laterals are getting longer. So I just wanted to get a sense if maybe you could Give us a little idea of kind of what the cost per foot maybe you've done during the course of 2021. And it sounds like you guys are optimistic that you might be able to continue to reduce those maybe a little even in the face of inflation. And then just any comments you could make on results in the development area, the 70,000 development area at Giddings. I think you guys did say repair to marks that they're looking more consistent these days, so maybe a little more color if you had to run that.
spk04: In the existing area, they look very much like what we showed you before. We drilled more wells. There really isn't enough difference to talk about. It's a little better, but it's about the same. Again, we have a repeatable model, so it's designed to do that. It's not designed for large swings. Outside of it, we continue to look for areas. Some of them are a little gassier, but the economics are the same, especially now with gas at reasonable prices. And NGLs, yeah. And NGL pricing. So the economics are basically the same, even though you're drilling a gassier well, because there's always some oil, a fair amount of oil associated with the wells. So I'm pretty optimistic about that over next year. You know, we were cautious this year on our capital and what we spent, and, you know, we'll be cautious next year, but, you know, probably a little less cautious next year than we were this year. So, you know, I think the Giddings thing is working reasonably. As far as the cost per well, you know, we basically overcome the inflation so far. I mean, inflation is basically steel and labor costs. And the labor costs, I'm really not bothered with. You know, we want good crews. We want the best crews. If you've got to pay a few dollars more per hour or whatever it is, I'm really not worked up over that. These are small bucks. You know, this isn't, I always tell people, this is not 3M, where we've got to raise the price of the scotch tape, you know, in order to pay for the for the stock. We already got the raise. So there's no question about passing it through. So I just think that if it goes up, the total cost goes up a buck or two, that's about all we see right now. I mean, it's driven by the fundamentals. The well cost I don't think will move very much. even with a little longer laterals and stuff. It's sort of doing what it's supposed to do. And we're getting better at it. So, you know, I just, I wouldn't worry about this for, until you get a lot more inflation and a lot more craziness. Now people start, you know, increasing their capital program by 100% and things like that to capture this, you know, and you put more pressure on the, On the service companies, I think that's one thing. But with the small program we have, we can have good crews and manage this reasonably well. If you had some other company with 25 or 30 rigs running, it's a lot more complicated. But with two or three rigs, that's the advantage of a small company. There are disadvantages, but that's the major advantage is you get to keep this under control.
spk06: Okay, that's helpful. And just a couple things around some of the comments that you folks made. Steve, you did mention potentially adding what sounded like a third rig in 22 to offset the fact that there isn't much non-op activity. Just wanted to make sure I understood that. Would that be kind of a partial rig for the year to maybe compensate from a lack of non-op?
spk04: It's intended for a short period of time. And, you know, so we probably would send the whatever you want to call it, the development or exploration, you know, or whatever you want to call that activity to that rig. Because, you know, you'd be drilling single wells or maybe a two-well pad with it. And that would be simpler to do than that and then focus the other two rigs on pure development. And the idea is, you know, It's a certain number of net wells in our mind to create the production growth we're looking for. And, you know, we're not getting the net wells because we overestimated how much this year, overestimated how much the non-off would be. Now, the Giddings wells did better than we thought, so it sort of compensated for some of that. But we still have a vision of what the net wells ought to be. And so the well rig would be, you know, I would guess sometime in the spring and for a relatively short period of time to just make sure we drill in the right number of net wells. It's not going to generate a lot more capital spending, I don't think. But, you know, we're spending at such a low level, we're only spending, you know, whatever it is, 30-some percent. of our EBITDA, you know, it wouldn't be the end of the world to go to 40.
spk06: Yeah, that makes a lot of sense for sure. And then just a couple number of clarifications from you guys. Certainly noticed that in the last couple quarters, cash taxes have started to come in a little bit. Still a low level, but, you know, they were kind of zero next year. So I wanted to see if you guys had any thoughts on where those may go. And then also just noticed on the oil cut, it was 49% in the second quarter, 46% in the third quarter. Where do you guys anticipate that going as we get into 4Q here on the oil cut?
spk04: We'll let them answer about the cut. But as far as the taxes are concerned, you know, if we continue to spend, you know, 40%, 45%, and you have these earnings, which are, you know, our financial statements are fairly accurate because, you know, we're looking at real finding costs. And while we have some tax loss carry-forwards, and some increased DD&A from the conversion of the B shares, eventually you're going to pay taxes. It's not going to be full tax rate, I don't think, next year, but I would think that the cash taxes will go up some next year. I really don't know how much, but it's probably not a huge number. But if you only spend 35%, 40%, and, you know, you're generating EBIT margins of 50%, 60%, you know, at some point you're going to pay taxes, which is not the end of the world. I mean, you should, you know, it's better to pay taxes than to generate net operating losses, to be honest.
spk06: No doubt. All right, guys, I appreciate it.
spk04: Thank you.
spk05: Can I answer the question on the cut? Yeah, I think on the cut, on the oil cut, I mean, part of it is for sure, you know, timing, drilling timing. And part of it is, certainly for this year, is a bit of the lower non-op spending and drilling and activity in Carnes that Steve mentioned. And so I think had that come in as we had originally expected, you probably would have had the oil cut. a little bit higher. And so that's not to say that what we're seeing in Giddings is sort of very strong on the oil cut and relatively better than what we probably thought early days.
spk06: Thanks, guys. Appreciate it. Thanks.
spk01: Thank you. The next question is from Umang Chidhari of Goldman Sachs. Please go ahead.
spk00: Great. Thank you for taking my question. Just one from me. Steve, you mentioned the sector looks healthy at $60 oil price, and oil prices are currently much higher. Would love your thoughts around the macro and your long-term oil price expectation of $55. I know there are a lot of moving pieces here on the macro. Say oil prices are higher longer term, how does that impact your free cash flow deployment between dividends, share repurchase, organic drilling, and completions?
spk04: Well, you know, I'm sort of return-driven. And so if oil prices were, say, $65 or $70 on a long-term basis rather than my view at around $60, you know, eventually the intervest shares will be gone. You know, they'll go to whatever level they're going to be, and so we're then looking at buying shares in the open market, which is very difficult to buy shares of our stock in the open market at this point. There's just not enough volume, and that's just a fact. So the share repurchase part of it just won't be executable at the level that we're doing now. So it leads really, I mean, there's only so many things you can do. As far as raising the capital goes, I think spending a lot of money is the road to hell. We're capped at 55%, and I might reduce it to 50%. I think that's the road to bad returns. It only leaves you with dividends.
spk00: So I guess that's your answer. And then given you have like a cap of 50% towards dividends, right, like would that mean that a variable dividend would be on the cards once the NOS shares are gone?
spk04: No, I don't like rateable dividends because dividend investors, in my limited experience, care about three things. They care about balance sheet quality. They want to make sure the dividend is safe. They care that the dividends are paid out of earnings. So you don't pay them out of so-called cash flow, but you pay it out of what you earn. And then finally, they care about growing dividends. So if we had some excess, we would just pay a special dividend and, you know, wouldn't be part of the normal dividend stream. The normal dividend streams, at least our working assumption would be that once you see the dividend in February, you can plan on at least a 10% increase in that every year. So we want to keep that for the standard dividend investor. And if we build too much cash, we can pay a special dividend, but we're not going to put a formula in there. Again, I'm very cautious about tying payments to things that aren't related to earnings. You know, this cash, this free cash flow thing is, you know, free cash flow is the difference between your EBITDA and your capital. And so I don't know what that means exactly. You know, you could spend more money or less money and generate more or less free cash flow, and I don't know whether that's permanent or not. And so I look at this permanent dividend level, and the growth in that is the way to, so that investors can rationally look at the company, and if we build too much cash, you know, we can distribute them in, you know, sort of a one-time sort of thing to sort of distribute the cash. My wife will like that.
spk00: That makes a lot of sense. Thank you.
spk01: Thank you very much. The next question is from Charles Mead of Johnson Rice. Please go ahead.
spk03: Good morning, Steve and Chris and the whole crew there. I'd like to go back to the question of the the product mix for Q4 and, and, uh, I appreciate your earlier comments that, that it relates to, um, to non-op activity, um, particularly in, in the Carnes area, which, you know, for, for reasons we don't need to go into much, uh, you know, it can be difficult to forecast, but, um, are, are there, are there things, are there things, uh, are there things happening in 4Q either with your, your turn in line schedule or other things that, that would, um, that would make the mix change versus 3Q? I mean, it looks like there was actually a slight decline on oil quarter on quarter, and I'm guessing that without knowing anything else, I would expect to see that same trend play out in 4Q, especially with the strength in Gideons. But what are the pieces there?
spk04: Well, don't forget, most of the wells are going to be producing in the fourth quarter are producing now. You know, we're halfway through the quarter. And so whatever we do is probably going to affect the first quarter or the second quarter more than the fourth quarter at this point. So, you know, I think it's roughly similar to the third quarter because, you know, the carryover works that way.
spk03: Right.
spk04: You lose sight of the fact that, you know, one or two or three or four or six wells even doesn't move the thing very much. The other thing is, you know, while I'm sure some people believe natural gas prices and NGL prices are going to double from here, you know, we are attracted to drilling in – gas and NGL areas because the profitability is exceptional on those wells. We've got a lot of NGLs. We were getting, I think, $9 a barrel or something like that for NGLs a year ago, and we're getting over $40 now. I really underestimate the windfall effects of that.
spk05: Yeah, Charles, we did tell you last quarter that we were steering some of our activity towards the completion of some gassier wells in Carnes and some ducts, and so that had an influence over the cut in the third quarter and sort of dribbles into the fourth quarter as well. It did also have a bunch of oil, but they were generally a little more gassy.
spk04: A little more gassy. I think it was deliberate. Right. you know, a deliberate way of thinking about it because, you know, I, I, I view, you know, $5 gases, a lot of gas in the United States. I don't know if you noticed. And so, you know, if it's, if it's, if it sits at $5 very long, you're going to be going to be a lot more. So, uh, despite their hedging.
spk03: Yeah. A lot of hot air in the United States too. Um, but, um, You anticipated it a bit. My second question, Steve, you talked about the results of getting becoming not just more repeatable but predictable. Another piece of the picture there is there's been some really eye-opening, strong well results offsetting your position. I'm curious. As you look at 22, and I guess you've already approached it a bit or adjusted it a bit with the, you know, saying you're more open to those more gassy areas, how is that playing out between some of these your well results, offset well results becoming strong versus the tilt to gassier areas? And how are you guys approaching that and what should we look for?
spk04: You know, the acreage is ours forever, so, you know, locations don't go away. We look at what other people are doing and we try to see how that fits into the modeling we have. We sort of like them drilling their acreage up because generally we have offsetting acreage. So, you know, we're always happy to have somebody prove it up for us. So that, you know, from my perspective, we'll let them experiment and, you know, we can drill it next year or the year after. So I'm not really, you know, I view it, one of the problems in Giddings historically for us was that there was nobody else drilling, so nobody believed the results. So, you know, we hope these guys drill and, you know, make good money and that would be swell and because we got more acreage than they got by a lot.
spk03: Got it. Thanks for that, Steve. Thanks.
spk01: Thank you. Ladies and gentlemen, just a reminder, if you wish to ask a question, please press star and then one. The next question is from Noel Parks of Tuhu Brothers. Please go ahead.
spk08: Hey, good morning.
spk01: Morning.
spk08: Just had a couple of things. And when I was thinking as you look ahead in your modeling and sort of plan various scenarios, are we at the point that as you essentially self-funding your maintenance drilling, are we at the point essentially where the interest rate environment is irrelevant or neutral as you look ahead and think about cost of capital as you forecast?
spk04: Well, you know, for us, we're not borrowers of money. And, you know, when we said that, I didn't even want to borrow the $400 million that we did when we started. I complained about that. So, you know, we got $24 million in interest expense, roughly. You know, we could borrow cheaper, I guess, than that now if we wanted. But, you know, I don't think With the kind of returns we're making, even at a $60 or $65 oil price, I'm not sure leverage is particularly helpful or anything. And if we didn't have any interest expense, we could pay more dividends. My wife would like that better. So I just think that it doesn't really matter to us at this point what the interest rate environment is. Now, the extent of the interest rate, you know, oil is about demand. People always want to look at what the Saudis are doing or Russians are doing, and certainly they can muck things up for a while, you know, if they make an error. But it's really about demand, and demand is going to be strong, you know, in the next year. Now, I don't know, you know, what it will be over time, but certainly in the next year as, you know, economies open up, international flying bills, which is a major user of it. You know, so, you know, you're looking for a very strong demand pull on oil prices. So I think for the next some period of time, that's important, a lot more important than what the Fed or some, you know, somebody does. And, you know, the extent that we were bound and determined to weaken the dollar, but just, you know, when we get oil is paid in dollars, And so, you know, we'll make more dollars. We may not be able to buy anything with it, but, you know, we'll make more dollars. So, you know, I think this is about demand. You're in a clearly strong demand growth area at the time. And, you know, as the world economy opens up, you're going to have a lot of demand pull in the Saudis and Russians for their own reasons. are feeding to some of the growth. But frankly, my guess is they like $80 oil or $75 oil.
spk08: Fair enough. And thinking about the Eagleford from the technology standpoint, Do you view the Eagleford as having essentially caught up technology-wise with the advances, you know, a few years ago when there's a lot of capital flowing into the Permian and less into the Eagleford? Do you view the play as having essentially caught up with technology advances from other basins? I guess I'm talking about pre-COVID days when we had a lot more activity. Or is there still, you know, fruit to harvest, some gap that might still be closed.
spk04: The Eagleford will, I'm talking not the chalk, but the Eagleford itself and Carnes and the rest of that play. In the general play, I think there's more room. There's a lot of inefficiencies in the play if you look. Well, Carnes is extremely well-developed because the wells were so good. But as you move to the weaker areas, which are gassier, they're probably not as efficient as they could be. On the other hand, for us, where we are, monkeying with that is not an efficient use of capital. We could put that capital to work in getting or even some of our car and stuff, and make a lot more money over the next five years than trying to do some kind of science project in sort of marginal production.
spk08: Okay. Okay, great. Thanks a lot.
spk04: Thank you.
spk01: Thank you very much. Ladies and gentlemen, we have no further questions, and the conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.
Disclaimer