Magnolia Oil & Gas Corporation Class A

Good day and welcome to the Magnolia Oil third quarter 2022 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 a touch-tone 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. Please go ahead.

Thank you, Marlise, and good morning, everyone. Welcome to Magnolia Oil and Gas' third quarter earnings conference call. 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 third quarter 2022 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 President and CEO, Mr. Chris Stavros.

Thanks, Brian, and good morning, and thank you for joining us today. The most recent quarter was filled with some mixed emotions. We're humbled by our continued strong financial and operating results and performance, the recent passing of Steve Chasen, Magnolia's founder and former CEO. I'm incredibly grateful for Steve's guidance and counsel, his steady leadership, and importantly, his friendship. While he will be deeply missed, we expect his legacy to continue to live on through Magnolia for years to come. Despite our loss, I am very confident that Magnolia's best days are ahead. Magnolia's original business model remains sound, and the old saying here applies, if it ain't broke, don't fix it. There can be a tendency for leaders in transition to feel that they must put their mark on an organization in some significant way, and even if it is unnecessary. Some of this is simply human nature. I promised myself that I would not do this. The principles of the business model that Steve established during Magnolia's founding over four years ago are expected to remain largely unchanged, and my objective is to always do what is in the best interest of the Magnolia shareholders. We will continue our discipline around capital spending while maintaining low levels of debt. And we expect our record of achieving moderate annual production growth while generating significant free cash flow and strong pre-tax margins to continue. Magnolia delivered very strong financial and operating results in the third quarter, driven by record quarterly production and pre-tax operating margins of 65%, and despite a sequential quarterly decline in oil prices of more than $15 per barrel. Third quarter 2022 production of 81,500 BOE per day increased by 21% year over year and 10% sequentially and well above the high end of our earlier guidance. Stronger than anticipated production was seen in both our Giddings and Carnes asset areas and was primarily the result of better than expected well performance, continued efficiencies primarily at Giddings and slightly higher non-op activity. These results were achieved while spending just 30% of our adjusted EBITDAX during the quarter. Relative to consensus estimates, the third quarter represented an 8% beat for our production and roughly a 12% beat on many of the key financial metrics, including cash flow and earnings per share. Magnolia's production per share grew by 31% in the third quarter compared to the same period a year ago. We repurchased 3 million shares during the quarter, reducing our diluted share count by 8% from the same period last year, and paid our regular quarterly dividend of 10 cents a share. Including share of purchases and dividends, Magnolia returned 36% of the free cash flow generated during the quarter, while ending the period with nearly $700 million of cash. We continue to gain momentum in progressing the efficiencies at Giddings. Excluding our appraisal work, the drilling fee per day at Giddings has improved by approximately 30% compared to 2020 levels, and has nearly doubled when compared to 2019. Even more significant is that the total cost per stimulated foot for development wells drilled this year is 26% lower than wells drilled in 2019, despite this year's inflationary environment around materials and oilfield service costs. Our improvements are directly attributable to the efficiencies that have been captured at Giddings, including faster drilling and completion rates, drilling longer laterals and multi-bowl pads, and an improved understanding of the asset through our operating experience. Close cooperation with our vendors and our ability to establish strong partnerships has saved us about $25 million on our capital and other costs this year, helping to secure supply despite some of the industry shortages that have impacted both products and services. Said another way, the $25 million of savings amounts to about a half a million dollars per well for us, or about 5% to 6% of the total well cost. While we continue to strive for the lowest costs, There is much to be said around the importance of continuously communicating with our vendors, working closely with them to plan ahead, and sending a message that our strategy is to run a consistent business plan. This goes a long way in creating a healthy and secure partnership with critical vendors. I would credit both our supply chain management and operating team's efforts, as they've done a terrific job around this, which importantly allows us to execute on our plans. And we believe that we can capture additional savings into next year through further initiatives. Magnolia continues to operate two drilling rigs with one completion crew and expects to maintain a similar level of activity through next year. One rig will continue to drill multi-well development pads in our Giddings area. The second rig will drill a mix of wells in both the Carnes and Giddings areas, including some appraisal wells at Giddings. This level of activity should provide full with our drilling and completion capital expected to be well below 55% of our EBITDAX at current product prices. This level of production growth would represent the second consecutive year in which Magnolia's growth exceeded its business plan, reflecting the quality of our asset base and the continued efficiencies that we're seeing at Giddings. We're planning a very active operating program for the fourth quarter, which should provide us with significant momentum heading into 2023. Our largest pad in Giddings to date, an eight-well pad, is scheduled to come online during the latter part of the current quarter. This should allow our production levels to exit the year higher than our volume seen during the third quarter and with most of the benefit to be realized during the first half of 2023. Magnolia's strong financial position provides us with ample flexibility to navigate through both product price volatility and periods of economic uncertainty. Our position of strength also allows us to patiently seek attractive opportunities to allocate our capital and free cash flow in a disciplined manner to enhance the per share value of the company. We will continue to carry out our business model, which should result in moderate annual production growth and a consistent reduction of our total shares outstanding in order to fulfill our investment proposition of providing annual dividend growth of at least 10%. We plan to revisit our dividend rate early next year and after evaluating our full year 2020 financial 2022 financial results. Finally, I'm pleased to announce that Brian Corrales, Magnolia's VP of Investor Relations, has been promoted to the position of Chief Financial Officer. Brian's done an excellent job at Magnolia since 2018 in helping both manage and communicate the company's strategy, as well as shaping our message to the broad financial community and other stakeholders. Magnolia's strong focus on its shareholders and emphasis on generating improved stock market value over time make Brian uniquely qualified to serve as CFO. The selection and elevation of a qualified internal candidate to the CFO role is indicative of Magnolia's strong bench of talent within our team. I'll now turn the call back over to Brian.