Magnolia Oil & Gas Corporation Class A

Good day and welcome to the Magnolia Oil and Gas fourth quarter 2021 in full year 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 telephone keypad. 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 Corral, Investor Relations. Please go ahead.

Thank you, Sarah, and good morning, everyone. Welcome to Magnolia Oil & Gas's fourth quarter and full year of 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 material 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 two of the conference call slide presentation with the supplemental data on our website. You can download Magnolia's fourth quarter and full year 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, Brian. Good morning, and thank you for joining us today. I'll provide some comments on our results and accomplishments in 2021. I will then give an update about our plans for 2022 and how we anticipate allocating our significant free cash flow. Chris will then review our fourth quarter and full year results, provide some additional guidance before we take your questions. We ended a very strong year on a high note, both operationally and financially. Last year's achievements further solidified the strength of Magnolia's business model and strategy, while also marking some important milestones. Higher product prices and our team's continued focus on managing our costs expanded our pre-tax operating margin to 56%. We continued our capital discipline, spending just 28% of our EBITDAX on drilling and completing wells, which generated significant free cash flow and resulted in year-over-year production growth of 7%. During the year, we returned approximately 65% of our free cash to our shareholders, in the form of significant share repurchases, as well as initiating our first dividend payment. We've repurchased more than 25 million shares, reducing our diluted share count by 10%. At the same time, our cash position nearly doubled, leaving us with about zero net debt a year ahead. Our greatest accomplishment last year was the execution of a full development program at Giddings. Giddings now represents more than half of our approved reserves, and key financial metrics. Improved confidence in the continued strong well performance at Giddings supported the addition of a second drilling rig in the field in mid-2021. Having recently increased our lateral lengths to greater than 7,000 feet and now averaging four wells per pad, our program continues to experience additional operating efficiencies. We plan to continue to operate a two-rig program this year, which we expect to generate high single digit full-year production growth. Operating efficiencies are expected to continue into this year, helping to offset some of the oil field service cost inflation. Our goal is to continue to allocate a sizable portion of the free cash flow we generate towards enhancing the existing business and improving our per share metrics. This could include some small, accretive bolt-on oil and gas property acquisitions with characteristics similar to our existing assets. As I mentioned, we returned approximately 65% of our free cash flow to investors during 2021, with the majority of this in the form of share repurchases, which reduced our fully diluted shares outstanding by 10%. Most of our share repurchases last year was stock purchased directly from Intervest, our largest shareholder. As Intervest sold throughout the year, we purchased approximately one quarter to one third of the amount they sold. Should Intervest continue to sell shares this year, we would expect to repurchase a similar proportion. To adequately plan for this, we expect to keep a higher level of cash in our balance sheet to allow for these repurchases. Beyond this year, we would expect to see a shift in how we allocate our free cash flow, which will likely lead to a more normalized level of share repurchases of about 1% per quarter. During the third quarter of last year, we paid our first semiannual dividend installment of $0.08 per share, which we believe is safe and secure at $40 oil. Earlier this month, we announced our second semiannual dividend of $0.20 per share. This brings the combined dividend payments on our 2021 financial results recast at $55 oil and $2.75 gas to $0.28 per share. Our dividend philosophy is meant to appeal to long-term investors who seek dividend safety, dividend growth, and a dividend that is paid out of actual earnings generated by the business. We expect that each of the dividend payments to grow annually as we continue to execute our business plan consisting of moderate production growth, the reduction of our outstanding shares. We ended 2021 with positive momentum that should benefit Magnolia into this year. We are very optimistic on the outlook for our 2022 operational plan, which includes development of both Giddings and Carnes, as well as some appraisal wells at Giddings. Improvement in drilling times at Giddings will result in more wells and more capital for the same number of rigs. As a result of our strong balance sheet, Magnolia fully captures current high product prices by remaining fully hedged, fully unhedged, I should say. Our capital reinvestment this year will be well below our limit of 55% of EBITDAX at current product prices, providing high single-digit growth and generating significant amount of free cash. The combination of organic production growth and share reduction is supportive of growing dividend at Magnolia's double-digit return investment proposition. I'll now return the call over to Chris.

Thanks, Steve, and good morning, everyone. As Steve mentioned, I plan to review some items from our fourth quarter and full year results and provide some guidance for first quarter and full year 2022 before turning it over to your questions. Starting with slide four in the presentation slides found on our website, which shows a summary of our fourth quarter, Magnolia delivered very strong fourth quarter 2021 financial and operating results and achieved several record levels. The company generated record total net income for the quarter of $192 million. or 82 cents per diluted share. Our adjusted EBITDAX was $261 million in the fourth quarter, with total D&C capital of $72 million, lower than our earlier guidance, and just 28% of our EBITDAX. Magnolia's fully diluted share count declined by 5 million shares sequentially, averaging $231 million during the quarter. Total company production volumes grew 3% sequentially and 15% year-over-year to 69.4,000 barrels of oil equivalent per day in the fourth quarter. Our financial performance, including adjusted EBITDAX, pre-tax operating margins, and earnings per share continued to improve throughout 2021 as we benefited from rising product prices, growing production volumes, and lower fully diluted shares outstanding. We expect to continue to benefit from improved product prices this year as Magnolia remains completely unhedged on its oil and gas production. Looking at the quarterly cash flow waterfall chart on slide five, we began the fourth quarter with $245 million of cash. Cash flow from operations before changes in working capital was $251 million during the period, with working capital changes and other small items benefiting cash by $8 million. Our DNC capital spending, including land acquisitions, was $74 million in the quarter. Cash allocated towards share purchases in the fourth quarter was $55 million, and we ended the year with $367 million of cash on the balance sheet, or more than $1.50 per share. Slide 6 shows our cash flows during the full year of 2021. For that full year, we generated cash flow from operations of $779 million before changes in working capital. We incurred $236 million drilling and completing wells, including leasehold acquisitions, and we spent $339 million on share purchases and paid $21 million in dividends. Summarizing our progress during the year, we grew our total production by 7% compared to 2020 levels, reduced our diluted share count by 25.3 million shares, or 10%, and leading to production per share growth of 18% over the period. This growth was all organically driven without incurring any debt and while building $174 million of cash. Turning to slide seven and looking at our cash costs and operating income margins. Despite the substantial increase in product prices during 2021, we realized only a modest increase in our costs during the year. Comparing the fourth quarter of 21, to year-ago levels, our total cash operating costs increased by about $1.50 per BOE, yet our revenue per BOE rose by $25 a barrel. Our total adjusted cash operating costs, including G&A, were $11.32 per BOE in the fourth quarter of 2021. Including our DD&A rate of $8.37 per BOE, which is generally in line with our F&D costs, Our operating income margin for the quarter was $31.63 per BOE, or 61% of our total revenue. Management's philosophy is to maintain our low leverage and a strong balance sheet. We currently have approximately zero net debt and expect to generate a significant amount of free cash flow through the year. Our $400 million of gross debt is reflected in our senior notes, which are callable later this year and do not mature until 2026. We have an undrawn $450 million revolving credit facility and including our $367 million of cash, our total liquidity is more than $800 million. Our condensed balance sheet and liquidity as of the year end are shown on slides eight and nine. As Steve mentioned, we returned approximately 65% of our free cash flow to our shareholders during 2021. Although we initiated our first dividend payment during the year, most of the cash returned to shareholders was in the form of share or purchases. Looking at slide 10, this illustrates the progress of our share reduction since we began repurchasing shares in the third quarter of 2019. During those two and a half years, we have reduced our total diluted share count by 36.8 million shares, or approximately 14%. Most of our share repurchases last year were stock purchased directly from Intervest, our largest shareholder. Earlier this month, Enervest sold 6.9 million additional shares to the market. In a separate transaction, Magnolia repurchased another 2 million shares from Enervest, or nearly a quarter of the total shares sold. We currently have 15.8 million shares remaining under our current repurchase authorization, which is specifically directed towards Class A shares repurchased in the open market. Class B shares purchased directly from Enervest do not count against the share repurchase authorization. Turning to slide 11, we declared our final semiannual dividend for 2021 of $0.20 share earlier this month. The dividend payment was based on our full year 2021 results recast at mid-cycle product prices of $55 oil and $2.75 natural gas. Inclusive of the interim dividend pay during the third quarter of last year, the total dividend associated with our 2021 results equated to $0.28 per share or yield of about 1.3%. We expect our dividend to grow at least 10% annually, which is in line with our expectation for mid single digit annual production growth and the reduction of our outstanding shares by at least 1% per quarter. Looking at our year end 2021 reserves and D&C costs on slide 12, Magnolia had a very successful organic drilling program during last year. Magnolia books only one year of proved undeveloped reserves, and as a result, 81% of our 2021 proved reserves were developed. The proved undeveloped reserves at year-end 2021 represent what we expect to convert to proved developed producing during 2022. Our drilling program added 31 million barrels of oil equivalent for adjusting for acquisitions and excluding price-related revisions. Last year's capital for drilling and completing wells totaled $232 million, resulting in approved developed F&D cost of $7.48 per BOE, while replacing 198% of our 2021 production. The F&D level is similar to the overall DD&A rate for our asset base and indicative of the capital efficiencies and low development costs in our Giddings asset. Turning to guidance for 2022, we plan to continue to run two operated drilling rigs across our assets. One rig will be dedicated to drilling development wells in Giddings, with the second rig drilling a mix of development wells in both Carnes and Giddings, in addition to also drilling some appraisal wells at Giddings. We continue to improve our efficiencies in the Giddings field, which should help to offset some of the anticipated oil bill cost inflation. Total D&C and facilities capital is estimated to be approximately $350 million for the year, and which includes a higher than average amount of spending on facilities associated with our core development area in Giddings, which is expected to provide future operational and economic efficiencies. Our non-op capital is estimated to be approximately the same as the 2021 levels. We expect that this program and activity level to deliver full year production growth in the high single digits with production at Giddings increasing by approximately 20%. As I mentioned earlier, we remain completely unhedged for both our oil and gas production, allowing us to fully capture higher product prices. Oil price differentials are anticipated to be approximately a $3 per barrel discount to MEH and in line with recent quarters. We expect our 2022 current effective tax rate to be in the range of approximately 5% to 8% with an equivalent amount of cash taxes. Looking at the first quarter of 2022, we expect total production to be approximately 70 to 72,000 barrels of oil equivalent per day. And our DNC capital is estimated to be in the range of 85 to $90 million. Our fully diluted share count for the first quarter should be approximately 228 million shares. We're now ready to take your questions.

Thank you. 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're 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. Our first question comes from Leo Mariani with KeyBank. Please go ahead.

Yeah, good morning, guys. A couple questions here on Giddings. Wanted to get a little better sense of roughly how many Giddings wells you guys expect to drill in 2022, and then kind of roughly how many of those are appraisal wells. And perhaps you could give us a little bit more color about what you think you might accomplish with the appraisal program here in 22 at Giddings.

Sure. Maybe a little oversight on Giddings quickly. At this point, we have two areas. that uh we've whatever the whatever the term of art is de-risked uh where we sort of know we sort of know what will happen when we drill the wells one is the traditional core area and one is a little smaller than that but not a lot smaller and a little gassier so it may add another month to the payback period on the wells so instead of four or five months it'll be five or six months of payback uh fair number of wells in that area is that another four or five areas which model well that are similar in size to these. And we'll spend this year looking at those and seeing how many of those we can bring to fruition. The other area, another driver, which I don't think we can underestimate, we're doing some experimental work to see what the appropriate spacing is. We space very widely currently, so there's no need to space tightly. But we've done some work, and the wells have only been on production for a few months, so we can't really tell, because the goal is to make sure that when you drill a daughter well or whatever the term of art is, that well actually generates more reserves for you, not just a faster production. And so we'll watch the curves of those pretty well, but so far it's encouraging. Obviously, you know, this has generated a large number of additional locations. So I think this year they'll be looking at spacing. We're looking at lateral lengths. We've extended from 4,000 to 7,000 feet, and we'll probably try longer ones than that. We already are trying longer ones, seeing what kind of economics we can have. We've got a number of areas that look promising that we'll be at least beginning the testing out phase. That testing out phase is going to last a couple of years. And to the extent we have more leases we could acquire there, we'll tell you absolutely nothing about it. But we're released up. I think we'll be slightly more forthcoming than in the past. We've got a very long running room in Giddings, you know, This location stuff is sort of a game of liars poker, so I don't really want to get into a location thing, but a lot of locations, and so as a large long-term shareholder, I feel confident that my heirs will still be cashing Giddings checks.

Okay. Very helpful overview for sure. Maybe just, you know, switching gears a little bit here, I just wanted to kind of clarify, I know you all have a plan to repurchase, you know, roughly 1%, you know, per quarter. I know it could be more than that as well. But when you all look at that, do you basically tell yourselves that, hey, you know, that 1% is what we'll just call kind of regular way through the market repurchases? And do you kind of view the purchases from Intervest to kind of be on top of that sort of a supplement to kind of this regular way 1%? Is that sort of the right way to think about it?

I think that's a good way to think about it. You know, if you look at a – remember, I always talk about comparing this to an industrial company as opposed to an oil company. And so what do industrial companies have? They have good balance sheets. They have regular growth. You know, there are cycles in every business, but generally regular growth. And they repurchase some shares every year. and they basically reduce their share count a little every year, and they pay growing dividends and predictably growing dividends. So that's the model. It's not really to see how much money we can distribute this year or any particular year. So if you look at the 1%, I view that as something we can do, you know, at this sort of pace of buying down shares, we'll be down close to 200 million shares, you know, you know, in a while. And so, you know, it's buying two million shares a quarter, which we can do in the open market once there's more shares distributed. We won't have to rely on Intervest. You know, I view Intervest as truly, you know, proving the value per share of the company. As we buy in their shares, I believe, perhaps wrongly, by the way, but I do believe firmly that I'm buying shares at a discount to what this business ought to be able to generate over time. And as I look at Giddings, and I look at Carnes, and I look at other nearby opportunities, I think we've got to hand in our so-called debt position, I don't know what to call it. But you say, you know, as a small private business, I just soon own this. I don't really know what the guys at the big companies are doing. So I look at this as would I like to own this stock for a long period of time? And the buying in the shares at 1% is part of a long-term plan. The Intervest thing I've always viewed as an opportunity, because you don't usually have an opportunity, is what they do is they go out and sell the shares to the market. And so let's say they want to sell 7 million shares. So the price they get is the clearing price for the 7 million shares. And I buy two or three million shares on top of that. So I'm getting a fair price. We're not just negotiating with them to get a price. We're actually market testing the price. So we're getting a little discount off of what we could do negotiated. And I think that's fair for the shareholders. But we're also careful, I'm also careful about not overpaying for the stock. So if the stock got, you know, should have, you know, overpriced by some measure, I think we'd probably slow up the process. Because the market's so volatile, you'll always have a chance.

Okay, that's very helpful. Maybe just a last quick one for you guys. So I know you have the 2022 production guidance out there, kind of high single-digit growth, certainly looks good. Just any rough indication of what you think the oil cut will come out to be here in 2022? Yeah, I

I would say similar to what we saw in 2021.

We can't tell exactly because if we shift a couple of wells to some of these, how far away Giddings locations, we actually don't know. We got a model that predicts it, but I wouldn't bet my life on the model. So there's some variance. And also, if we drill some Carnes wells, they're oilier. So, you know, we can... we can sort of manage this to whatever we want, really, and without really changing anything. And so we'll follow the economics here rather than trying to manage the number to exactly some number. Again, as we just talked about, you know, we're basically buyers of shares, not sellers.

Okay. Thank you, guys.

Our next question comes from Neil Dingman with Truist. Please go ahead.

Steve, I've got to ask the short-term return question a little bit different. I know you've always said your wife appreciates the dividends, so I'm just wondering, can we assume you'll be focusing on a bit more dividends in the near term?

Yeah, we like dividends at our house. So I think we're pretty well aligned. You don't really need to guess. I've got a 25-year, 22-year history of dividends that one could look at, unless there's been brain surgery between then and now. You can get a pretty... Chris will stop me if there's brain surgery, so he can drag me out of it. But Unless there's been some brain surgery, this returning money to shareholders is not a new concept for me. And so Oxy grew its dividends essentially every year. I could force the change. Grew the dividends every year for a very long period of time. And it's part of the culture of the business and part of what attracts people to businesses. We're smaller, so growth is also important for a small company. But the point of the growth is to generate more cash to pay more dividends. I mean, the point of the share repurchase is to generate fewer shares so each shareholder will get more dividends. Somebody said, well, I might want it right away, and somebody else will say it's okay to be deferred. We pick deferred. I mean, there's plenty of choices to pick people who want to pay it right away, and we just assume pick deferred because, you know, as the inevitable cycles occur, we'll still be there growing the dividend.

Okay, well said. And then my second, just on D&C, just amazing how it continues to spend. I think you said 20% of it's on the D&C with this solid growth. I'm just wondering, is that repeatable given what you're seeing out of Giddings? Maybe just address that a bit.

Thank you. Yeah, well, you know, we... Luckily, you don't see the forecasts that are given to us by our D&C team. The answer is I doubt it, because we had a lot of improvement without much cost change this past year. And I don't think we can repeat that. We've cut off.

Yeah, a lot of efficiencies.

A lot of efficiencies. So I don't think so, but it's going to be nowhere near 55% either. The problem with now talking about percentages is that all this money that's piling up in people's cash boxes is all on spreadsheets. And, you know, at the end of the year, you're going to have so much in your bank account, and I just assume wait for the money to get there. So I don't really know what the percentage is going to be, but it's certainly going to be anywhere near 55%. And the other point I would make is, you know, with only two rigs running, to add another rig is a 50% increase in capital roughly, and so we're not up for that either. So... I think that's pretty straightforward.

Yeah, very straightforward. Thank you.

Thanks.

Our next question comes from Zach Parham with JP Morgan. Please go ahead.

Hey, guys. Thanks for taking my question. I guess first off on cash return, you've obviously built up a pretty sizable cash balance. You've been buying back stock, but that's slowed a bit, somewhat out of your control, just given when and how much Intervest decides to sell. At correct commodity prices, you're going to generate a lot of free cash flow this year. If that cash balance continues to build, could you consider a variable or special dividend?

I don't think we go to a variable or a formula-based dividend. We have a formula, but we're not going to tell you what it is. So, Generally speaking, in a normal environment, whenever that is, next time we get to that, if we ever do again, we would spend around half the money on small boats, on acquisitions, half the free cash flow, around a quarter on dividends, and around a quarter on share repurchases, the 1%. There's no year like that. That's what the cash is for, to allow us to, if the opportunity came to buy something that was near, and I don't see much of that, by the way. You know, we could do that. We're not going to allow the cash to just build up. You know, there's no point to that. So could we put a, I'll call it a special dividend rather than a formula-based dividend. If it continues to build up and we get a clear line of sight on what Intervest is going to do, and I think by the end of this year, we'll have a clear line of sight. I think a single special dividend to sort of pay off some of the cash wouldn't be unreasonable. Again, at my house, that will always be welcome.

Got it. Thanks. That makes a lot of sense. I guess just one on the model on operating costs, both LOE and GP&T ticked a bit higher during 4Q. Can you just talk about what drove that and your outlook for operating costs in 2022?

I'll just say on LOE, LOE on a quarterly basis for a small company, even a large one, by the way, is volatile because workovers go in and out of that. So your workover activity is expensed. So it becomes part of LOE. And then, you know, the next quarter you don't do so many workovers. It looks like you did a better job and nothing happened. And you see it all the time. Even the largest companies, you see those changes. And it's almost always related to workovers. And they tend to do workovers in the fourth quarter. This has been true for a quarter century. I've been watching guys do workovers in the fourth quarter for some reason. I guess they figure nobody cares about their operating costs or something. So that's what you're really looking at in the LLE. I think Chris can answer that question. Yeah, on the GP&T, I think it's really related to the gas and NGL prices. Yeah, being higher. Being higher. I think it's sort of just some of them are a percentage of what you get, the contract. And so it costs, you know, when NGLs are $35 a barrel, you're going to pay more. You certainly saw that in the fourth quarter. Yeah. It works sort of like severance tax for part of it.

That's right. That makes sense. Thanks, guys.

Our next question comes from with Goldman Sachs. Please go ahead.

Thank you. Good morning, and thank you for taking my questions. My first question was around efficiency improvement in Giddings, which you mentioned is offsetting some inflationary pressures. Can you help us disaggregate the two? What is a secular efficiency improvement, and what are you seeing from a service landscape right now? And one more if I can tack on, how long do you think you can drill on lateral lengths in getting stadia?

What was that last question, Umang?

How long can you drill on lateral lengths in getting stadia?

How long? Well, we know how much we physically can do right now. We're up around 10,000 feet. The question simply is, is it worth doing? By adding the additional footage, are we gaining something? Because it costs more to drill longer. And that's really the question. And we could do maybe more than 10,000 feet because we have good understanding of the reservoir at this point. So it's more an economic question than a physical one. And we don't know the answer yet. And there may be a different answer in different parts of it also. As far as the service costs, you know, some of it, you know, I think it's like steel and stuff is pretty temporary. You know, steel guys, you know, they're like other service providers. They'll build capacity, and eventually there'll be plenty of steel. Probably not until late next year, I don't think, but eventually that'll fix itself. And some of that's sort of already come off. We don't have any purchasing issues this year. We're set for this year's program. On labor costs, which is truck drivers and that kind of stuff, we've been through a downturn in the oil business from the last couple of years. A lot of people who used to work in the business were driven out. They've gone to work somewhere else, Walmart, Amazon, whatever. And, you know, to bring them back is challenging. It's an age, especially in the field I'm talking about, and it's true for service companies as well as car operations. People tend to be a little older than the average, a little closer to retirement. Years ago, their kids used to take the jobs because they were good jobs, and now maybe there's less of that. I think the answer is there's a fairly sizable labor component that's going to increase. It will affect our G&A a little bit also. Some of our people, IT people, accounting people, who could work at Amazon or something, and our oil people are all going to get good-sized raises this year. They've been through a tough time. I'm not really bothered by all this. That's the way it is when you have a cyclical business. Cyclical business always have to pay more. Sometimes you forget that. It adds, it added about a dollar and a half a barrel equivalent this past. All in. All in. You know, which is, you know, so you're talking about when you're through probably a couple dollars total, you know, as it rolls through. So it's $2 a BOE. So I think the oil price went up more than $2. And so, you know, like I told you this before, it's not like Johnson & Johnson where, you know, they got to find somebody to pay more for the Band-Aids. We're already getting the money. And giving a little bit to the workers doesn't strike me as either unfair or unwarranted.

Makes sense. My next question is on non-op activity in Carnes. Any latest update there?

They don't tell us. You sort of get the bill and you pay it. You don't really know because a lot of these companies have big positions, not just in Carnes, but maybe in the Permian. And their leasing positions and that sort of thing is very different. Current, it's all held by production. And so you can drill a well today or you can put the thing off for two years without losing anything. It's probably not true in some of the leases somebody might have in West Texas where you have a lot of competitive pressure. So I would guess there'd be modest activity from those people who need to switch to continue to have a lot of activity in the Permian. A decent Carnes well would have no trouble competing with a Permian well on pure economics. But I do think that there's other issues in the Permian with leases and that sort of thing and competing people, forcing people to stand out on penalty if they don't go along with wells. You see a lot of that in the Permian. You don't see that much of it in Carnes. So all I would say is that I don't think there's gonna be a lot of activity. I could be wrong and we've got some extra cash somewhere to cover it if it turns out.

Got it, that's helpful, thank you.

Thanks.

Our next question comes from Noel Parks with Tule Brothers, please go ahead.

Hi, good morning. Morning. I sort of wanted to talk about a few macro topics as we just sort of look at what's happened just in the last three months or so when I think in November we had maybe just touched 80 for the first time and managed to hang in there. And then, of course, now we've seen 90. And so we've got some numbers. pretty clear motion in oil, but also, NGL, I think your realized prices were about $35 a barrel, and I can't remember the last time we saw NGL prices like that. So, just wondering, do you talk about your thoughts on the NGL outlook, how you feel about visibility there?

Well, NGL is mostly about gas. So 80% of the value is sort of gas, and 20% is sort of oil. So the pricing is really driven by gas prices and some by oil prices. The demand is very strong for the feedstocks. So I don't see weakness in it per se, but it does float with the gas price effectively. So gas prices are, you know, we're, I don't know, $5 and change before, now they're $4 and change and could be some other number tomorrow. People in the East forget that March and April follow February. And they have forgotten it for decades. My God, it's called February 15th. Right. And, you know, March and April come, and it somehow gets warmer every year. So, you know, it's a cyclical commodity, and it's heavily influenced by gas. So, you know, but I think the fundamental demand into the market is, you know, very strong petrochemicals, and that whole sector is, you know, on fire, really.

Right. Great. And, you know, another thing I wanted to ask you about is I know we've talked in the past about as far as the U.S.' 's ability to expand production that, you know, there are some pretty serious constraints, physical constraints on raising production. You know, just backwarded strip and the lead time it takes. you know, from standing up a rig to actually, you know, getting your cash back. I just wonder, given what's happened with the cost environment last few months, just what are your thoughts on, just sort of the macro thoughts on U.S. supply and, you know, what it really can do over the next year or two?

Well, not much this year. I think the constraints on steel and labor and stuff will stop people from large-scale increases. As we go into next year, most of the people that run E&Ps are drillers at heart. And they can hardly wait to drill more wells. And they see the margins at $80 oil. And, you know, it's pretty enticing. Remember, the so-called free cash flow number they talk about is simply the EBITDAX less what they choose to spend drilling. Right. Not some, you know, God-given number, just what they choose to spend. And so... You know, I think over time, you know, they'll choose to spend more because they'll see the margins that are available to them and how it's accretive to whatever. But probably not so much this year. I don't think they can really do much this year. Some of the private people might, but the public ones I think really can't. And so maybe next year may even take another, you know, another year beyond that. you know, you need to be cautious about U.S. production for the next, you know, 18 months, I think.

Right. Great. And just the last one for me. Any updated thoughts on what you're seeing in the A&D market in the Eagleford for non-operated interests? I know you've said in the past that might be kind of a sweet spot for A&D for you in the acquisition market.

If the non-operated interests were owned by people with IQs over about 100, that would be good. But what you're saying would be true. But they seem to think they should get the same price as an operated interest. Right. And so that's an interesting story, but Generally speaking, we're not really in the market for PDPs. We can generate PDPs really cheaply as a company, a lot cheaper than buying PDPs from some third party. If there were a fair number of undeveloped or locations or whatever you want to call it in the Carnes area where you had a real good grasp of it, that'd be a different story. you know, it would cost us two or three times our DD&A rate to buy a PDP in Carnes. When I could spend, you know, basically a DD&A rate or less, you know, in Giddings, you know, why am I here just to buy, just to make some private equity guy rich? I mean, so I really think that that's, not something we're much interested in. You know, if we can get locations, we get some upside with it, you know, I think we could talk about that. But absent a significant amount of upside, you know, the perfect acquisition was the original Giddings acquisition where we paid for the production, but there was a lot of optionality or upside to it. So as we look at acquisitions of, you know, anything other than a few million dollars where we're just buying fill-in locations, As we get to look at acquisitions, we're looking more for what can we do to make it better. And it's really not cost reduction. It's really locations that somebody didn't understand that they had. Because other than that, we don't need to do anything in that area. We can't find that. We'll just do nothing. We're not pressed. We don't have to worry about growth, and we don't have to worry about maintaining our margins.

Right. You know, it's interesting you said describing it as locations where somebody doesn't understand what they had. My first thought is, well, the Eagleford has been around long enough that there can't be many people like that. But on the other hand, when I think of how much energy comparatively has gone into the Permian over the last five years, I guess it dawns me, well, I guess there could be locations or acreage held by production in someone's hands that just hasn't received a lot. a lot of study, but I guess my question is, is that anywhere near your neck of the woods, where there'd be opportunities like that?

There's clearly some, but, you know, it's held that way for a reason, which it has to do nothing with the physical aspect with who owns it and whatever they think about that. So, you know, again, the perfectly rational party, you know what they would do, but There's no seller I ever met that was perfectly rational.

Fair enough. Thanks a lot.

Thanks.

Our next question comes from Nicholas Pope with Seaport Research. Please go ahead.

Morning, guys. Morning. Kind of following on that M&A question, I was kind of curious. You did have an acquisition during the quarter. What was the $7.5 million acquisition listed on the cash flow statement?

It was a small land acquisition. We were going to drill some wells. Some wells were going to be drilled there. We knew the wells were going to be drilled, and it was a price that made sense for us to buy the acreage, and I think the wells are being drilled.

Gotcha. And is that in Carnes County, or is it Giddings-related? No, it was a Carnes-related acquisition. Got it. I appreciate that. The comment on the repurchase of the Class B shares from Enervest, I kind of wanted to clarify there from the prepared remarks. The comment I think that Chris made was that the share repurchase from Enervest were not part of the repurchase. to repurchase the agreement. Is there any limit on that, or is it just as that comes available, you guys have flexibility to make purchases?

Because we're dealing with an insider, which is one of our directors who was the head or the nominal name party in Intervest, the board, excluding that person, approves each acquisition. because it's an insider trade, essentially. And so that's really, there's no real limit to that. You know, understand that they're not exactly shares. It has two parts. One is the partnership interest, which is what you care about, which is an interest in the whole business. And the second is a voting right, which is the share, but it has no economics with it. So when you buy it, you're buying a piece of the company directly, and that's extinguished when we buy it. So if we buy 1% of the B shares, that 1% ownership is spread over all the owners directly. So it's a little different than buying the stock exactly. But the reason why it doesn't count is because the board hasn't approved any B shares because they're done when it shows up and to ensure that it's an arm's length discussion with Intervest.

Got it. That makes sense. On the operations side, there was another comment in the release that activity was skewed to Carnes during 4Q versus Giddings. What was that split, like what was brought online in the quarter? Because I was a little off of my production modeling there.

It was mostly Carn's activity that we brought online.

Oh, it was mostly Carn's activity. When you're only running one completion crew, this quarter-to-quarter variation doesn't have any intrinsic meaning. Yeah, and the timing of, you know, when these things get turned in line can skew things. Skew things, and you try to make more of it than is warranted.

Got it. That's all I needed. I appreciate the time, guys. Thank you.

This concludes our question and answer session, as well as our call for today. Thank you for attending today's presentation. You may now disconnect.