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Operator: Good day, and welcome to the Magnolia Oil & Gas First Quarter 2023 Conference Call. Please note that this event is being recorded. I’d like to turn the conference over to Mr. Jim Johnson. Please go ahead.

Jim Johnson: Thank you, and good morning, everyone. Welcome to Magnolia Oil & Gas’ First Quarter Earnings Conference Call. Participating on the call today are Chris Stavros, Magnolia’s President and Chief Executive Officer; and Brian Corales, Senior 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 2 of the conference call slide presentation with the supplemental data on our website. You can download Magnolia’s first quarter 2023 earnings press release as well as the conference call slides from the Investors section of the company’s website at www.magnoliaoilgas.com. I will now turn the call over to Mr. Chris Stavros.

Chris Stavros: Thank you, and good morning, everyone. We appreciate you joining us today for a discussion of our first quarter 2023 results. I will make some brief comments about the latest quarter, talk about where we stand currently and address some actions that we are taking around our capital spending and how this will impact our outlook for the rest of the year. Brian will then review our first quarter financial results in more detail and provide some additional guidance before we take your questions. Our first quarter results delivered a solid start to the year, supported by strong well performance in both the Karnes and Giddings areas. Steady activity and ongoing operating efficiencies at Giddings provided production growth of 10% versus last year’s first quarter.

Additional D&C efficiencies realized in our Giddings assets have helped to partly mitigate the higher costs. We generated more than $60 million of free cash flow during the quarter despite sustaining lower operating margins caused by weaker oil and gas prices as well as higher costs associated with oilfield service inflation. Since our inception, Magnolia’s focus has remained consistent and includes a disciplined approach toward capital spending, targeting moderate annual production growth with high pre-tax operating margins while generating reliable free cash flow. We strive to achieve these goals while continuously improving our per share metrics and maintaining a strong balance sheet with low levels of debt. Oil and gas prices have moved significantly lower since late last year and into 2023, while oilfield service and materials costs remained elevated.

This combination has weakened our operating margins and returns. The current cost structure for oilfield services materials does not reflect the sharp decline in overall product prices as compared to last year. So how have we responded to this? Instead of allocating more capital to achieve higher growth, which would drive our F&D costs higher and further dilute our margins, we have taken prudent actions to better align our capital spending to reflect the current environment. Beginning in the first quarter, we proactively worked with our top service providers and material suppliers to reduce our costs while planning to defer only a modest amount of our operated activity. So how do we expect this to impact Magnolia? These measures should result in at least a 10% reduction in this year’s capital spending, deliver full year 2023 production growth in the range of 5% to 7% and provide us with greater operating flexibility while generating greater amounts of free cash flow during the year.

We currently expect our total D&C capital for 2023 to be in the range of $440 million to $460 million, which represents at least a 10% reduction from our original guidance. This new level of spending, which is expected to be lower than our full year 2022 capital focuses on achieving improved returns and higher free cash flow until service and material costs are better aligned with oil and gas prices. As I mentioned, the discussions with our service providers and suppliers and the modest adjustments to our activity began during the first quarter and were proactive decisions on our part to reduce our capital costs. The impact of our actions is expected to be immediately evident and is reflected on our second quarter guidance for D&C capital of approximately $100 million, which is about 30% lower than first quarter levels.

This plan also allows for operational flexibility, should the cost and commodity environment become more aligned later this year. The overall outcome is consistent with our business model, which includes limiting our capital spending approximately 55% of our EBITDAX, along with achieving mid-single-digit annual production growth. I want to praise our teams for working collaboratively and creatively to find solutions in adapting to the current environment to preserve our capital and maximize efficiencies. Our valued partners with whom we build strong relationships continue to work cooperatively with our teams to help us reduce costs, which allows us to maintain a steady pace of activity without losing the momentum around operating efficiencies that we have worked hard to achieve.

Despite the deferral of a modest amount of our operated activity, we plan to continue operating 2 drilling rigs through the remainder of the year. One will drill development wells at Giddings while the other rig will drill in both Karnes and Giddings, including some appraisal wells at Giddings. We continue to gain efficiencies at Giddings with several recent pads establishing new company records for completion stages per day. These efficiencies provide us further flexibility and options to maximize our free cash flow. Giddings is currently producing well over 50,000 BOE per day and represents approximately two-third of the total company production. Most of Magnolia’s growth this year will come from our Giddings asset as a larger proportion of our capital is allocated to this area.

Our disciplined approach around capital allocation ideally positions us to create value through the cycle while supporting our differentiated return of capital program, which focuses on increasing the per share value of the company in pursuing actions to increase our dividend payout capacity. This balanced strategy is underpinned by targeting moderate annual production growth we are purchasing at least 1% of our outstanding shares each quarter and pursuing small accretive bolt-on oil and gas property acquisitions. These activities reinforce our investment proposition of providing 10% annual production growth over time. I’ll now turn the call over to Brian.

Brian Corales: Thanks, Chris, and good morning, everyone. I will review some items from our first quarter and refer to the presentation slides found on our website. I’ll also provide some additional guidance for the second quarter of 2023 and the remainder of the year before turning it over for questions. Beginning with Slide 3. Magnolia continued to execute on our business model as demonstrated by our strong first quarter financial and operating results despite softer commodity prices. As Chris detailed, the objective for Magnolia is creating long-term value for our shareholders and with an eye towards focusing on our operating margins and returns. We believe the actions outlined today help to achieve that goal by taking prudent steps to better align our capital spending with the current product price environment to generate more free cash flow, which can be used to enhance the per share value of the company.

During the first quarter, we generated GAAP net income of $107 million. Excluding the non-cash impairment associated with our Louisiana well, our total adjusted net income for the quarter was $119 million or $0.56 per diluted share. Our adjusted EBITDAX for the quarter was $217 million, with total capital associated with drilling, completions and associated facilities of approximately $140 million. First quarter production volumes grew 10% year-over-year to 79,300 barrels of oil equivalent per day and 8% sequential growth from the fourth quarter of 2022. During the first quarter, we repurchased 2.4 million shares and our diluted share count fell by 6% year-over-year. Looking at the quarterly cash flow chart on Slide 4, we started the first quarter with $675 million of cash.

Cash flow from operations before changes in working capital was $214 million, with working capital changes and other small items impacting cash by $12 million. During the quarter, we allocated $46 million toward share repurchases and paid dividends of $25 million. We ended the quarter with $667 million and approximately at the same level that we started. Looking at Slide 5. This chart illustrates the progress of the reduction in our total outstanding shares since we began our repurchase program in the second half of 2019. Since that time, we have reduced our total diluted share count by 54.7 million shares or approximately 21%. Magnolia’s weighted average fully diluted share count declined by 2.4 million shares sequentially averaging 213.9 million during the first quarter.

We currently have 6.5 million shares remaining under our current repurchase authorization, which are specifically directed towards repurchasing Class A shares in the open market. Turning to Slide 6. Our dividend has grown substantially over the past few years, including a 15% increase announced earlier this year to $0.115 per share on a quarterly basis. Our next quarterly dividend is payable on June 1 and provides an annualized dividend payout rate of $0.46 per share. Our plan for annualized dividend growth of at least 10% is an important part of Magnolia’s investment proposition and supported by the overall strategy of achieving moderate annual production growth and reducing our outstanding shares by at least 1% per quarter. Magnolia has the benefit of a strong balance sheet, and we ended the quarter with a net cash position of $267 million.

Our $400 million of gross debt is reflected in our senior notes, which do not mature until 2026. Including our first quarter ending cash balance of $667 million and our undrawn $450 million revolving credit facility, our total liquidity is more than $1.1 billion. Our condensed balance sheet and liquidity as of March 31 are shown on Slides 7 and 8. Turning to Slide 9 and looking at our per unit cash cost and operating income margins, our total adjusted cash operating costs, including G&A, were $12.65 per BOE in the first quarter of 2023. That’s a decrease of $0.53 per BOE compared to year-ago levels. The year-over-year decrease was primarily due to lower production taxes, lower GP&T and lower exploration expense, partially offset by higher LOE.

Our DD&A rate of $9.90 per BOE increased roughly 20% compared to last year and is directly related to higher well costs resulting from rising oilfield service, material and labor costs. Excluding our non-cash impairment, our adjusted operating income margin for the first quarter was $19.98 per BOE or 46% of our total revenue. The year-over-year decrease in our pre-tax operating margins is primarily driven by the decrease in commodity prices. Turning to guidance for the second quarter and for the remainder of 2023, we are currently operating 2 rigs and plan to continue this level of activity through the end of the year. One rig will continue to drill multi-well development pads in our Giddings asset. The second will drill a mix of wells in both Karnes and Giddings areas, including some appraisal wells in Giddings.

As Chris mentioned, we’d expect our total D&C capital for 2023 to be in the range of $440 million to $460 million, which represents at least a 10% reduction from our original guidance. The reduction comes from a mix of both cost savings and a modest decrease in activity. At this level of reduced spending, we expect to deliver full year 2023 production growth of between 5% to 7% with most of the growth expected to come from our development program at Giddings. The reduction to our capital is expected to generate more free cash flow for Magnolia and provide us with increased flexibility going forward. For the full year 2023, we expect our effective tax rate to be approximately 21%, with most of this being deferred. Our cash tax rate is expected to be approximately 6% for 2023.

Looking at the second quarter of 2023, we expect total production volumes to be approximately 80,000 barrels of equivalent per day with overall volumes anticipated to be more gas weighted compared to the first quarter. Our D&C capital was estimated to be approximately $100 million, which is approximately 30% sequential decrease. Oil price differentials are anticipated to be a $3 per barrel discount to MEH. Our fully diluted share count for the second quarter is estimated to be approximately 212 million shares, which is 5% below year-ago levels. We are now ready to take your questions.

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Operator: Thank you. First question will be from Neal Dingmann of Truist. Please go ahead.

Neal Dingmann: Hi, good morning, thanks for the time. Chris, I definitely appreciate the latest CapEx change and how you guys have always been among the most capital disciplined company. My question is, has your thoughts on uses of the cash balance you have now changed as the commodity overall market continue to break down?

Chris Stavros: Yes. Thanks, Neal. I guess I’ll address the cash aspect first from a capital angle, and then I’ll address it a little bit more on cash after capital. Again, just to be clear, we’re choosing to do this, take these actions that we talked about today really from a proactive approach towards our costs. We want to be sort of early movers on this rather than late movers. The reasons, as I said in my remarks, the reasons that we’re doing is really to get – try to get price concessions from our vendors and suppliers. It just – it’s a situation where going into the year, pricing and costs were out of kilter with prices that you’re seeing on the screen and certainly relative to last year. And so we can sort of mosey on along here and continue to do what we’re doing and not try to capture any improvements.

But we’re basically capitalizing our reserves at last year’s higher costs. And I just don’t think that’s a good outcome. I would lean more on the savings – the capital savings coming from the benefit that we’re going to see on materials and services because I will tell you, at these prices, these things are going to start coming down even more than we probably already are thinking. On the growth, on the production growth, we adjusted that a little bit. But just keep in mind, we could grow faster if we wanted to. We’re just simply choosing not to, and we retain that option. In other words, the importance of reducing the capital from a cost perspective allows for more activity to fit into the program with time. So I think as things become more balanced, the growth could be better, but this is what the outcome is at the current level of costs.

On the cash, some of the winnings – the cash winnings were accumulated during a period, peak period of the cycles. Certainly, we’re not looking to squander the winnings. So we’ll continue to run the business model using what I would call a balanced approach, which again calls for this mid-single-digit growth, share repurchases on the order of 1% per quarter of outstanding. Certainly, if things get out of whack or the stock sort of doesn’t perform as well as we think or doesn’t perform in line with the model or perform in line with the peers, we could sort of lean in more on that. We have the ability to do that. And we continue to expect to pay our base dividend, which will grow as we talked about, 10% a year just based on the outcome of the model and strategy.

The M&A market, I figured somebody who asked sort of may as well address it. So it’s soft right now. And as you can imagine, with all the volatility and uncertainty of product prices, there’s been things that have just been yanked from the market or sellers are lesser inclined, certainly around natural gas assets, lesser inclined to offer up assets that just might not command what they’re interested in getting. We’ll continue to be disciplined around this and focus on things that look more like singles and doubles as opposed to Grand Slams. And I think it’s very much an opportunistic approach and ground game strategy that we have around improving the business and looking to pick up assets here and there that fit into the model just as we are with Giddings.

And I think there’s some things that we can do around that. But I wouldn’t expect or anticipate that you’re going to see something very large from us right now. I just don’t see that. But I think there’s some things that, like I said, more single type opportunities. So, that’s – we’re happy with the cash balance. We don’t want to squander it. We want to use it in a good way because things are more challenging now than they were just a few months ago.

Neal Dingmann: Yes. I really like your optionality. I’m glad you guys have been methodical with that. And my follow-up is just on prospective locations. Are you able to give an idea of the number of top tier locations you believe you still have, I mean, getting to obviously a big, big area and then maybe what you have in Karnes or I don’t need exact details, maybe just on broader color around sort of how you’re seeing each of these assets sit today?

Chris Stavros: Yes. It’s an interesting question. I mean especially as we come up on Magnolia’s 5-year anniversary this year, 5 years ago, we talked about a planning process that incorporates sort of 5 years of activity. And here we are 5 years after the fact. And I would tell you, we’re still talking about 5 years of activity. We have lots of things to keep us busy, lots of things to work on. And so I don’t see this as any issue around inventory or whatnot. So we’ll be able to sort of keep our two rigs busy for a while.

Neal Dingmann: Thank you so much.

Operator: Thank you. And the next question will be from Umang Choudhary of Goldman Sachs. Please go ahead, sir.

Umang Choudhary: Hi, good morning, and thank you for taking my questions. My first question was on your updated guidance. I mean, a lot of moving pieces that you highlighted plans to defer completions, also things that benefit from service cost deflation and ongoing Giddings efficiencies. Can you help us unpack these points from a modeling perspective? Like how many plans – how many wells are you planning to defer? And any color you can give us on the cost trend, trying to understand the cadence of production and completions this year?

Chris Stavros: Yes. I mean on the material side, we’re seeing costs come down for most of our materials, some of our services well, but certainly a lot on the material side, steel, OCTG, tubular goods, valves, fluids, granular completion materials, otherwise known as sand, pressure pumping. So everything is coming down. Some things may be a little bit more stickier than others, some labor-related items, some service-related items. But in this environment, I would anticipate them continuing to see declines over time. And it certainly lines up better for the second half of the year. Not to mention the next thing on tap for us to go after and address is our field expenses, lifting costs, LOE. And so my belief is that we’ll be able to make some progress there in the back half of the year, too. So that’s sort of how I would see it. In terms of the wells, it amounts to just a few wells. You’re just looking at some deferred completions, that’s about it.

Umang Choudhary: And this deferred completions, is it more in Q2? Because if you look at the way the contango is there on the gas curve, it would probably imply a more pronounced weakness in Q2 and a little bit better pricing in the back half of this year?

Chris Stavros: No, I wouldn’t say we’re that time it could be that we’re that smart around it. I mean, look, it’s sort of spread out through the year. I would tell you that there’s probably – for the remainder of the year, on average, you’re looking at capital of about $100 million a quarter. There might be a little bit of lumpiness, a little bit of lower capital in 2Q that might bump up again in 3Q, come down in 4Q, hard to really say, but it might be a little bit lumpy, but on average, about $100 million per quarter for the rest of the year.

Umang Choudhary: Very helpful. Thank you.

Operator: Thank you. And the next question will be from Geoff Jay of Daniel Energy Partners. Please go ahead.

Geoff Jay: So, hey, guys. If I can just beat the service dead horse a little longer. Just curious if you – if the script kind of held out here and was right, you have a six handle for the next remainder of this year and next year. How far down do you think service costs need to come in order for you to sort of, I guess, get back to the rate of activity you would kind of planned on at the beginning of the year?

Chris Stavros: Well, Geoff, I mean, we still haven’t – right now, all we’re clawing back is some of the stated increases going into 2023. And so this still is not reflective of some of the ramp up that you saw in 2022. And so you’re probably – and look, I’m a little bit sort of finger in the wind here. But my view is that another 15%, 20% may be down the path in order to get things better aligned.

Geoff Jay: Got it. Probably that makes sense. It’s always sort of an interesting calculus, right, because obviously, I think the service guys would say, hey, we just started to make money at some point last year. So trying to figure out where you thought the right balance was?

Chris Stavros: Well, we realize that, and that’s why we’ve tried to work collaboratively with the vendors and the service providers and say, look, if you want to keep your crews and your activity going, all we’re trying to do is work with you so we can continue that relative consistency and steadiness going through time here rather than creating a situation where they have to drop folks or drop activity themselves and sort of stall it out.

Geoff Jay: Cool. Well, that’s great color. I appreciate it. Thanks, guys.

Chris Stavros: Thanks, Geoff.

Operator: Thank you. This time next question will be from Paul Diamond of Citi. Please go ahead.

Paul Diamond: Hi, good morning all. Thanks for taking my call. I just wanted to touch base quickly. I know we had spoken about – or we see some volatility in pricing realizations as well. I just wanted to kind of get your take on how you see that progressing through the year given the current kind of dislocated or dislocating pricing?

Chris Stavros: Yes. Hey, Paul, I mean if we look at the oil price in general, we’ve guided $3 off MEH for several years, plus or minus $1 around that. There is a little volatility, but we still think that’s a good number long-term and to continue to use. Now gas has seen a lot more volatility, especially we sell most of our gas at Ship Channel. And as you know, with Freeport outage, there’s been some wider spreads that we’ve seen, not just Magnolia, but just Ship Channel compared to Henry Hub. And so I think those are the largest contributors. Oil, I think, will be relatively consistent, roughly about that $3 off of MEH, but Ship Channel, I mean it has narrowed, but it was stubbornly wide for several months.

Paul Diamond: Understood. Thank you. And just one quick follow-up, just kind of talking about some of the appraisal wells up in Giddings. Just wanted to know if there was any sort of update on there, if there’s been a change in cadence or trend that we – that you guys have seen?

Chris Stavros: Not really. I mean just in terms of pace of activity a little bit, as I mentioned, just some deferrals, but really around things like what we’re doing, Giddings more, I would characterize more tweaking, trying to optimize results. And as I said, we’re still seeing quite a bit in the way of efficiencies on completion timing.

Paul Diamond: Understood. Thanks for the clarity.

Operator: Thank you. That concludes our question-and-answer session. The conference has now concluded. You may now disconnect. Thank you for attending.