Magnolia Oil & Gas Corporation (NYSE:MGY) Q2 2023 Earnings Call Transcript

Magnolia Oil & Gas Corporation (NYSE:MGY) Q2 2023 Earnings Call Transcript August 2, 2023

Operator: Good morning, everyone. And thank you for participating in Magnolia Oil & Gas Corporation Second Quarter 2023 Earnings Conference Call. My name is Marlese and I will be your moderator for today’s call. At this time, all participants will be placed in the listen-only mode, as our call is being recorded. I will now turn the conference over to Magnolia’s management for their prepared remarks, which will be followed by a brief question-and-answer session. Please go ahead.

Jim Johnson: Thank you, Marlese, and good morning, everyone. Welcome to Magnolia Oil & Gas’s second quarter earnings conference call. Participating on the call today are, Chris Stavros Magnolia’s President and Chief Executive Officer and Brian Corollas, 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 second quarter 2023 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. Chris Stavros.

Chris Stavros : Thank you, Tom. And good morning, everyone. We appreciate you joining us today for a quarterly update and comments around our second quarter 2023 results. I plan to reiterate some of Magnolia’s primary corporate goals and discuss some of what we’ve accomplished most recently help us achieve those goals and objectives. I’ll also briefly speak to our latest quarterly results, specifically around the strong execution we’ve had related to our cost reduction efforts. Brian will then review our second quarter financial results in more detail and provide some additional guidance before we take your questions. As we marked our fifth anniversary earlier this week as a publicly traded company, Magnolia is recognized for having established a unique organization with high quality assets and a differentiated business model for EMP companies.

This is guided by the principles of low debt, high operating margins and a focus on capital discipline. These principles provide us with an orderly framework to help achieve our overall goals. In terms of our objectives, first, Magnolia strives to be the most efficient operator have best-in-class oil and gas assets, and generating the highest returns on those assets while employing the least amount of capital for drilling and completing wells. Second, the return of a substantial portion of our free cash flow to our shareholders in the form of share repurchases and a secure and growing dividend. And finally, utilizing some of the excess cash generated by the business to pursue both on oil and gas property acquisitions that helped to improve our overall business, sustain our high returns and increase our dividend share per share payout capacity.

As we crossed this milestone as an organization is important to recognize some of our achievements toward these goals. Five years ago, Magnolia was a much smaller company with a production base weighted towards our Karnes asset with a large relatively unknown acreage position and Giddings. Five years later, our teams have been instrumental in transitioning Giddings into full development, and an asset to compete with some of the best shale plays in the U.S. in terms of growth, low reinvestment rate and returns. The majority of Magnolia’s current production now comes from Giddings where we have learned a lot, and is still in its earlier stages of development. This has enabled Magnolia’s total production and reserves to each grow by more than 50% over the past five years.

We achieved this growth through the efficient reinvestment of only 45% of our cumulative operating cash flow for drilling and completing wells, allowing us to generate significant free cash flow while maintaining a strong balance sheet. We utilized 23% of our cumulative operating cash flow, or more than $850 million to repurchase 22% of our outstanding shares, and toward continuously improving per share metrics. We established the security dividend which has grown by 64% since 2021, to an annualized rate of $0.46 a share. Cumulative capital return to our shareholders over the five years has exceeded $1 billion. We’ve also improved our business and added to our asset base by completing numerous bolt-on acquisitions totaling more than $460 million.

The strength of our second quarter financial and operating results were supported by our efforts initiated earlier this year to address higher capital and operating costs, which did not appropriately reflect the decline in product prices as compared to last year. Our teams were proactive and engaging early and working cooperatively with our oilfield service partners and material suppliers to reduce costs while sustaining activity levels. That work is evident in our lower capital spending for the quarter, which was approximately 15% below or earlier guidance, in addition to our cash operating costs, which declined 18% sequentially. The current product prices or action should provide improved pretax operating margins and more free cash flow to potentially redeploy the business during the back half of the year.

With the benefit of these cost savings initiatives, we now expect a total D&C capital for 2023 to be in the range of $425 million to $440 million to below our previous guidance of $440 million to $460 million. This represents a 14% reduction from our initial 2023 capital spending plan. This year’s capital outlays are now expected to be lower than our full year spending during 2022. The reduction in our capital spending and cash operating costs result of our efforts highlight Magnolia’s focused on capital efficiency, generating high operating margins and delivering strong and consistent free cash flow. We also continue to see strong well productivity out of our Giddings asset, and where most of our D&C capital is being allocated. As a result, we’re raising guidance for a full year 2023 production growth to between 7% and 8% compared to earlier growth expectations of 5% to 7%.

Again, this speaks to the high quality of our assets, and matches our goal of being a low-cost capital efficient operator those assets with D&C spending to only about half of our cash flow. With lower capital spending and increased production, our free cash flow generation has improved and providing us with greater flexibility. During the quarter Magnolia generated $93 million of free cash flow, supporting our dividend and share repurchase program with approximately three quarters of the free cash flow return to our shareholders through these initiatives. Earlier this week, our board of directors increased our share repurchase authorization by 10 million shares, bringing the total current remaining authorization to just over 14 million shares and allowing us to opportunistically repurchased our stock into next year.

We plan to continue to repurchase at least 1% of our outstanding shares per quarter. Finally, at the end of July, we closed on a small oil and gas property acquisition and the Giddings area for approximately $40 million. This is an example of continuing to execute on our strategy of pursuing bolt-on assets and adding to our high quality bench in and around areas that we understand well, and then improve our overall business. This asset is outside of our core development area in Giddings and was a direct result of some of the appraisal efforts and significant knowledge we’ve gained through operating in the Giddings seal. We’ll continue to pursue similar type transactions that add to and complement our asset base and improve the business. I’ll now turn the call over to Brian.

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Brian Corales : Thanks, Chris. And good morning, everyone. I will review some items from our second quarter and refer to the presentation slides found on our website. I’ll also provide some additional guidance for the third quarter of 2023 and remainder of the year before turning it over for questions. Heading with Slide 3, despite lower commodity prices, Magnolia continue to execute on our business model as demonstrated by our excellent second quarter financial and operating results. As Chris detailed, Magnolia focus is creating long-term value for our shareholders through a differentiated operating model and a balanced approach to shareholder returns. We have been successfully executing our strategy during the first five years as a public company and plan to continue our disciplined approach going forward.

During the second quarter, we generated total GAAP net income of $105 million with total adjusted net income for the quarter of $97 million or $0.46 per diluted share. Our adjusted EBITDAX for the quarter was $203 million with total capital associated with drilling, completions and associated facilities of $86 million, well below our expectation and a testament to our team’s hard work and reducing costs. Second quarter production volumes grew 10% year-over-year to 81,900 barrels of oil equivalent per day and 3% sequentially from the first quarter of 2023. During the second quarter, we repurchased 2.3 million shares, and our diluted share count fell by 5% year-over-year. Looking at the quarterly cash flow waterfall chart on Slide 4. We started the second quarter with $667 million of cash.

Cash flow from operations before changing in working capital was $204 million with working capital changes and other small items impacting cash by $26 million. During the quarter, we allocated $49 million towards share repurchases, paid dividends of $25 million and added $7 million of bolt-on acquisitions. We ended the quarter with $677 million of cash and above the level that we started the quarter. Looking at Slide 5. This chart illustrates the progress in reducing 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 57 million shares or approximately 22%. The Magnolia’s weighted average fully diluted share count declined by more than 2 billion shares sequentially, averaging 211.4 million shares during the second quarter.

As Chris discussed, the board recently approved a 10 million share increase to our share repurchase authorization, leaving 14.2 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 September 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 our overall strategy of achieving moderate annual production growth and reducing our outstanding shares by at least 1% per quarter.

Magnolia has a benefit of a very strong balance sheet, and we ended the quarter with a net cash position of $277 million. Our $400 million of gross debt is reflected in our senior notes, which do not mature until 2026, including our second quarter ending cash balance of $677 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 June 30 are shown on Slide 7 and 8. Turning to Slide 9 and looking at our per unit cash cost and operating income margins. Total revenue per BOE declined by nearly 50% due to substantial decrease in product prices than in the second quarter of 2022. Our total adjusted cash operating costs, including G&A, were $10.33 per BOE in the second quarter of 2023, a decrease of $3.71 per BOE or 26% compared to year ago levels.

The year-over-year decrease was primarily due to lower production taxes and GP&T, lower exploration expenses and reduced G&A. Our DD&A rate of $10.34 per BOE increased roughly 20% compared to last year is related to higher well costs resulting from increased oilfield service material and labor costs. Our adjusted operating income margin for the second quarter was $16.29 per BOE or 43% of our total revenue. The year-over-year decrease in our pretax operating margin was driven by the significant decrease in commodity prices. Turning to Slide 10. We are happy to have recently published our third annual sustainability report, detailing Magnolia’s progress on ESG metrics. Key highlights from the report, such as such a record low flaring rate are highlighted on the slide and the full report can be accessed on our website.

Turning to guidance for the third quarter and for the remainder of 2023, we are currently operating two 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 rig will drill a mix of wells in both Karnes and Giddings areas, including some appraisal wells in Giddings. As Chris mentioned, we are further reducing our D&C capital guidance for 2023 to between $425 million to $440 million which represents approximately a 14% reduction from our original guidance this year. Despite lower capital spending expectations, we are increasing our full year 2023 production growth guidance to between 7% and 8% with the growth expected to come from our development program at Giddings.

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 third quarter of 2023, we expect total production volumes to be similar to the second quarter, and our D&C capital is estimated to be approximately $100 million, with some small amount of variability subject to the timing of our activity. Oil price differentials are anticipated to be a $3 per barrel discount to MEH. Our fully diluted share count for the third quarter is estimated to be approximately 210 million shares, which is 4% below year ago levels. We’re now ready to take your questions.

Q&A Session

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question is coming from Neal Dingmann from Truist. Neal, please go ahead.

Neal Dingmann : Good morning. Nice quarter. My first question is on your $40 million Giddings bolt-on on oil and gas acquisition. Specifically, maybe Chris, is there anything we could read into this deal, such as any near-term potential for you all and now it’s more delineated acres or how you’re thinking about the existing 20,000 acres [ph] delineate based on what you seem like you’re seeing out there?

Chris Stavros : Sure. Thanks, Neil. So I got to be careful on what I say on this a little bit. But look, the facts are that we purchased approximately 20,000 acres in the Giddings field area. And that came with a very small amount of production, no more than a few hundred BOE a day. The acreage is outside of our core development area, and it was generated, as I said, out of our appraisal program and some of the details and broader work we did in the field through a lot of the learnings that we picked up over the years. So this is an area that we like, and it was not a marketed deal, which is also sort of a better way for us to go about things. It’s more direct and usually leads to a better outcome. Look, obviously, this is a very competitive industry and business.

And so for competitive reasons, I wouldn’t want to say too much. But we may have stumbled on a potentially new area for development. I think it’s a little too early for us to say for sure, but we like what we see so far. So that’s about all I can say about this and hopefully more to come.

Neal Dingmann : No, that’s that’s going to be exciting to hear. And then my second question, maybe just on the GOR specifically. Can you speak — I know you kind of have an ebb and flow on what goes on in the GOR and the mix. But I’m just wondering, how should we think about that GOR mix maybe for the remainder of the year or ’24? I’m just wondering, if the change product where placing wells or with your ops or there other drivers or just how to think about this?

Chris Stavros : Yeah. The answer is we don’t know. And not just because of just uncertainty because I don’t know, I just — things are tend to be lumpy quarter to quarter just in terms of the mix, and it depends on the timing of the wells coming online the inclusion of any Karnes activity, both operated and non-op. So we’ll sort of see. But some of what we’ve done, probably we should repeat here. We talked about this a lot, and you can see this in terms of where we’ve allocated the capital and activity over the last several years. The emphasis for us has been skewed towards Giddings more so than in Karnes. Giddings wells are generally a little gassier than Karnes, but that’s not always the case. We’ve talked about this before, but as I said, it probably bears repeating, our wells in Giddings typically produce more hydrocarbons and more oil over their life than a Karnes well.

The F&D costs in Giddings are generally lower and the full cycle returns are higher. And the decline rates of the Giddings wells are normally shallower than Karnes well. And so we like our Karnes area. Better full cycle returns. This is an asset that has driven double-digit production growth in the area with a reinvestment rate of less than half of our free cash flow. So I think it’s sort of evident in terms of what we’ve done, the outcome that is and in the financials. And so the returns have been good. We like where this is headed, and it’s still in its relatively early stages. So we’ll see. I mean I smiled to myself whenever I get this question because it wasn’t very long ago like within the last calendar year, that people wanted us to drill more gassy wells or gassier wells, and so there you go.

Neal Dingmann : No, [indiscernible] all the upside. Thanks, Chris for the details.

Operator: Our next question comes from Umang Choudhary from Goldman Sachs. Uman, please go ahead.

Umang Choudhary: Sure. Hi good morning. And thanks for taking my questions. My first question was on the strong performance, which you indicated in Giddings. Can you give us some color in terms of where the wells were drilled and what is driving the performance? And just trying to understand if there’s some read across to your appraisal program, which you highlighted earlier.

Chris Stavros : Sure. I’m not going to tell you exactly where the wells were drilled. But I mean, generally, the wells — most of the wells have been drilled in our core development area that we’ve been pursuing for the last couple of years and where the results have been very strong and continue to generate good results. The appraisal program as is evidenced by the acquisition that we did, it’s sort of unearthed some opportunities here that we can pursue, and we have pursued and frankly, we will pursue. Part of the benefit of improving our capital efficiency through cost reductions that we’ve seen and all the efforts around that, including our cash operating costs. This provides us with better margins, more free cash flow as I said, and gives us some optionality with respect to doing other things in the back half of the year, into next year as we have better aligned our costs with what’s going on with certainly gas and NGLs, et cetera.

So I feel pretty good about that. And we’ll do a little bit of experimentation because we always try to do that if we can, if it sort of fits into the overall financial scheme and mix. And so we do that where we can because we think that it’s useful, helpful to improve the business over time. And as I said, it enhances our opportunity set. That may sound a little generalized, but I mean that’s sort of what we’ve been doing.

Umang Choudhary : That makes a lot of sense. Thank you. And then quick questions on operations. First on service cost environment. I mean you talked about a 15% cost savings. You’d like to run a flexible program with more spot exposure, given where we are from a rate perspective — our pricing perspective right now, any thoughts around locking it up for a period of time? And then one housekeeping question. I think last quarter, you indicated plans to defer completions. Can you remind us where we are for those wells? Have you — are you planning to bring them online this year? Or are they moved for next year?

Chris Stavros : Sure. On the cost side, we’re not really spot necessarily. And I don’t want to get too caught up in exactly all the contract-related items. But I mean, look, we — as you know, steel and OCTG really doubled, I guess, into this year, and we saw that sort of peaking early in the first quarter. Pressure pumping, stimulation, 50% higher drilling services up in that direction as well. So far this year, we’ve reduced OCTG costs by probably 30%-ish, pressure pumping cost by a quarter. I like where this is going. And frankly, I think there could be some more. So to lock in right now, I’m not really sure what — how helpful that is to us. We’ll just sort of see where things go. We kind of operate from a position of strength here.

We don’t have a lot of financial risk. And so this will be what it will be. But I think there’s some opportunity for further reductions into the back half of the year, and we’ll sort of see where things land for ’24. So I’m feeling pretty good.

Umang Choudhary : And I think just a housekeeping question on the deferred completions. I think last quarter, you had talked about deferring some completions in Q2. Just trying to understand if you plan to bring those wells in the back half of the year or is that more for next year?

Chris Stavros : We haven’t made that call yet. And again, I think we’ll try to create increased and improved alignment between our costs and commodity prices, we’ll just sort of have to see where things go. I think, Umang, we said this, I think, back in the spring when we started this effort, too, that the deferrals don’t really amount to much. Most of the reduction in costs have come through our own efforts as a result of concessions from our service providers working closely together with them, aligning ourselves with them and also our materials vendors. So this was never an effort around sort of deferrals as much as it was just to align our costs. This was sort of a little bit of deferrals or DUCs, if you will, were just a consequence of pushing things out and seeing if we could create a little bit more optionality for ourselves.

And if commodity prices improve, mainly gas and NGLs later into the year into next year, we’ll revisit that. But again, I could count these wells on sort of one hand.

Umang Choudhary : Got it. Make sense. Thank you.

Operator: And our next question is coming from Leo Mariani from ROTH. Leo, please go ahead.

Leo Mariani : Yeah, thanks. I just wanted to follow up a little bit on Karnes activity here. I mean kind of looking at production, Karnes has fallen for the last couple of quarters. Just wanted to kind of get your thoughts on how do you expect that to kind of trend the rest of the year? And it seems like that’s really maybe what’s driven the oil cut reduction here between 1Q and 2Q was that Karnes was down a fair bit and Giddings was up substantially, so that obviously is a different mix [indiscernible]. So maybe just can you talk about kind of directionality on Karnes? And just trying to get a sense, you don’t have a very large acreage position there. It’s obviously pretty mature there in the Eagle Ford. Can you give us a sense of kind of how much inventory you think you might have left there? Is it kind of a handful of years? Or where do you stand on Karnes?

Chris Stavros : Yeah. We have things that we can drill. And I said, because of timing, scheduling, planning, permitting other factors, we haven’t done a lot of that this year. The other thing is that there hasn’t really been much or any real non-op activity that’s shown up. So that’s certainly a portion of it. I expect that given the generally higher rate of decline in Karnes that it will continue to see a little bit of that. But again, it may be lumpy. There may be some activity that we’re morphing in or blending in into the back half of the year. There may be some more into next year. We’ll sort of see — we’ll see how it goes. But we have things that we can do there. We’ve just skewed our focus, as I said, more so to Giddings because overtime, the returns are higher. So that’s been the plan.

Leo Mariani : Okay. That’s helpful. And then just on Giddings. Obviously, you made an acquisition here in July and also kind of made one in the fourth quarter, which correct me if I’m wrong, was also more kind of in and around Giddings in some of these appraisal areas. I know you don’t want to give away specific well locations, which totally makes sense, still competitive business. But can you maybe give us a sense of like how many appraisal wells have you drilled? I know you’ve been appraising outside of the core area for the last couple of years again. 10 wells in, 15 wells in? I mean, any sense you can give us? I mean, have you kind of tested a fair bit of stuff outside the core. And as a result, these two deals are sort of the culmination of that?

Chris Stavros : Yeah. I mean, look, we’ve tested — we’ve drilled a handful of appraisal wells. There’s a lot of work that goes into it prior to drilling these appraisal wells. We’re not just sort of sort of wandering around the field necessarily. These are very well studied and there’s a lot of work, subsurface work and other work that goes into it prior to that. So and we have some sense of what we believe may be the outcome, but sometimes we’re surprised well, and sometimes we’re surprised in the other direction. And what we’ve done directly to your point led us to the smallish acquisition that we did back in the fourth quarter that we closed. That — I’m very — that’s an area that our subsurface team and tech folks like a lot and will turn out to be, I think, very good.

This area as I said is also very interesting. And this may be the start of something. So we’ll see. And I think there could be other things. And the 400,000 sort of net acres for us is kind of pretty vast. And as you trot around, you may find other things to find on the fringes that you’d like to fill in over time, and that’s sort of what we’ve been doing.

Leo Mariani : Yes. Okay. That’s helpful. And then just on the cost side here. Your LOE was down like $1 a barrel here in the second quarter. Obviously, it sounds like there’s been a big company focus to reduce costs, both capital and operating. Can you kind of give us a little better sense of — was maybe a lot of this just less workovers or was a big chunk of this, actually ability to kind of reduce some of those costs, whether it’s chemicals, electricity, labor, et cetera? Just trying to get a sense of where we think kind of LOE costs are going to go in the second half of the year. I’m trying to figure out how much of these savings are kind of recurring?

Chris Stavros : Yeah. I mean, certainly, there was some lower workover activity that helped us along that way. It was certainly less than half of the benefit. The majority of the savings, I believe, are sustainable moving forward. The workover stuff can vary a little quarter-to-quarter depending on the movement in product prices, but the majority of it should be sustainable and was directly result of reduction in oil field service costs, to your point, around chemicals and other things, a litany of things. So the labor component is a little bit sticky as you probably heard from others, all that is true. But I think things are generally — I would expect it to be sustainable through the remainder of the year, it feels to me.

Leo Mariani : Okay, thank you.

Chris Stavros : Sure.

Operator: And our next question comes from Oliver Huang from TPH & Co. Oliver, please go ahead.

Oliver Huang : Good morning, Chris, Brian and team. Just had a question on the CapEx side when kind of looking at the budget for the rest of the year. It seems to imply that $100 million, give or take, per quarter. Just trying to understand if there is anything within that number, whether higher non-op, higher working interest and operated wells, increased activity levels or faster cycle times relative to the Q2 print run rate.

Chris Stavros : Yeah. I think a lot of it is timing, Oliver. And I think we — as I said, as things get better aligned between the costs and our desire to generate returns and improve our efficiency as a result of the actions, we’ve taken we may sneak in some additional things. We will sort of see how it’s going. We may have baked in some other items, whether it’s an appraisal well or whatever that may be in there. So we’ll see. On a run rate basis, I don’t think that level that we talked about $100 million roughly or so is reasonable, I think, for the time being. I think that’s about how the business is right now. So we’ll see.

Oliver Huang : Okay. That makes sense. And for second question, just on the topic of LOE one were kind of thinking about that lower print for Q2 being driven by low workovers and service costs flow through that you all kind of highlighted, how much of a factor is the increased Giddings contribution to driving that lower? In other words, should we be thinking about the LOE cost structure being lower on the Giddings side relative to Karnes as it becomes a more significant contributor with each subsequent quarter?

Chris Stavros : Well, we continue to focus on this in a relentless way in terms of trying to drive down the costs. As I said, there’s labor things and contract workers that tend to be a little bit sticky. Generally, on a BOE run rate basis as we add volumes, things should look similar, if not, hopefully, better with time as we try to drive efficiencies through the field as well. So we’ll continue to work at this. And I think certainly Giddings should be a positive contributor over time.

Oliver Huang : Awesome. Appreciate the color.

Operator: We now have a question from Zach Parham from JPMorgan. Zach, please go ahead.

Zach Parham : Hey, guys. Just one question. Following up on Oliver’s question on CapEx. You’ve guided to $100 million run rate for the second half. Any thoughts on what that looks like as you go into ’24 if you’re still running the two-rig program? Is that $100 million run rate kind of a good number to use as a placeholder for now?

Chris Stavros : Yeah. Clearly, it feels still early for ’24, but I know you guys love to have these things at this stage of the year. So yeah, I think it’s reasonable. I mean I think if — I think it’s a reasonable way to look at it for the moment. If pressed, we won’t deviate from our objectives, which means we’ll be disciplined and efficient around the spending. And this will yield and provide mid-single-digit growth. But if I had to be pressed on an amount for capital and based on our current pace of activity and where product prices are around now, I think while we pressed on a number, I think 400 to 425 feels like a reasonable range at the moment going into next year.

Zach Parham : Got it. That’s very helpful color. That’s all I had, guys. Thanks a lot.

Chris Stavros : Okay, thanks.

Operator: And at this time, our last question comes from Tim Rezvan from KeyBanc. Tim, you may go ahead.

Tim Rezvan : Yeah, thanks, everybody for taking my questions. First I want to ask on the repurchase program. The average share price was down pretty sharply for you and all your peers in the second quarter. The number of shares repurchased, though was down and you still generated a lot of free cash flow. Just trying to understand how sort of formulaic is your program and how tactical is it? Because I thought you might have picked away some more shares when they’re selling off.

Chris Stavros : Yeah. I mean it is tactical. I mean, it’s — we don’t sort of deliver the program to any particular broker per se and just sort of how we feel on any given day. We look for opportunities to be a little bit more aggressive or not around the share repurchase. We sort of have our own self-imposed not rigid, but at least 1% of the outstanding per quarter. I’d like to use that as a bit of a bogey, but we could do more. Look, Tim, I mean maybe if somebody was on vacation like me or something like that, did get added, as aggressively as I wanted to. But we’ll look at how the shares perform on a relative and absolute basis. And I’d like to think about it as the way an investor or shareholder would think about buying stock or owning the stock.

Tim Rezvan : Okay. Okay. Fair enough. I appreciate the comments. And then I just wanted to circle up and ask another question sort of related to Giddings disclosures. I appreciated the context on the $40 million bolt-on and you said you don’t want to talk a lot about this potential in new development area. But to be frank, you haven’t talked a lot about your old development areas and your current development areas. And as we take a bigger picture view of the stock this year, it’s been a little bit of an underperformer. Short interest has been creeping up and valuations are now starting to look rich relative to kind of mid-cap peers. This is at a time when it’s hard for the energy sector to kind of get mind share with investors.

So given that setup, do you still — is it at some point, do you feel like you need to kind of pull back the curtain a little bit because there are a lot of questions from investors on sort of the depth and quality of your acreage in Giddings and sort of what your true development area looks like. So any context would be kind of appreciated. Thank you.

Chris Stavros : Yeah. No, I appreciate the question. I don’t feel the need to pull back the curtain. I feel like these — this kind of direction is almost inducing us to say something weird like you can’t handle the truth or something. Now the truth is, and the facts are that it’s borne out or manifested in the outcome of the growth that we’ve seen, the returns that we’ve seen, the free cash flow. So all that has worked out very well in Giddings. And as I said, we have large corral of wells that — highly economic wells that we can continue to drill and we will. On the acquisition, again, a $40 million acquisition, this sort of barely moves the needle in terms of the money. And my hope, frankly, is that we can do more of these things because I’m always looking — we’re always looking for opportunities to further enhance the footprint in Giddings and improve the quality and sustainability of the asset base.

This is nowhere nothing near anything most other companies — or many other companies have done in terms of larger scale acquisitions. While at the same time, having been very upfront or more so upfront in terms of pulling back the curtain on what they have talked about having in terms of runway or economic inventory or whatever you want to say. This is sort of — look, no one’s really pushed other folks as far as why would you’ve done billions of dollars of deals when you claim you got a pathway to the next decade or whatever. So I’m perfectly comfortable with what we’ve done and how we’ve set it and how we framed it. I think I’d be giving away too much competitive information, if I said much more on the acquisition and some other things. So I don’t know if that helps you, but my job really is to improve the value of the business every day and with everything we do.

And so if the valuation is better — that means we’re doing the right thing and the outcome is borne out in that premium.

Tim Rezvan : Thanks, Chris. I appreciate the color and I know it’s a tough situation. And just to close the loop though, I mean these sort of bolt-on pieces, is that — are you going to continue to be opportunistic in that call it $20 million to $100 million size, we could expect them more to come down the pike as you can shake off acreage from peers or privates.

Chris Stavros : Well, you mentioned an interesting point about around the underperformance, and I look at this, too. It doesn’t — I understand the valuation and all, and I get that. We have quite a bit of cash on the balance sheet, and I don’t say that to say, well, we’re going to use the cash tomorrow to do something large or out of place, you won’t find us doing that. It’s just not — I don’t think it’s in our DNA. But this is not — this shouldn’t be perceived as a rainy day fund. The cash is designed and was built up in a period of much higher product prices, and I’ve referred to it as the winnings and you don’t want to squander the winnings, you just want to allocate it appropriately to generate higher returns. While it might be interesting to look at $600 million, $700 million of cash on the balance sheet, it’s interesting but that’s it.

It doesn’t do anything much for you unless you start to deploy it in a way that can generate better returns. So it’s frankly a bit capital inefficient, and I know that’s not lost on you and the audience. And so my goal would be to try to find something that we could do with it that’s better than just polishing it on the balance sheet. So that’s the plan. I’d like to find some other opportunities that make sense for us and fit within our skill set and that we can manage and operate and improve the business. And that’s the plan.

Tim Rezvan : Thanks. Appreciate all the answers.

Chris Stavros : Okay, thanks.

Operator: Pardon me. We are going to take a question from Paul Diamond from Citigroup. Paul, good morning.

Paul Diamond : Hi, good morning. Thanks for taking my call. Just a quick one for me. Regarding your inflationary view, I guess — what — how do you benchmark that? I guess, what should we think about as the narrative that you guys saw coming earlier this year really playing out. Do you guys have it in mind? Or is it more just seeing — comparing the cost side to the aggregate pricing side.

Chris Stavros : Well, we look at benchmarks for OCTG items, for steel prices, for rig activity, and we try to gauge ourselves based on how we’re doing relative to market pricing, et cetera. So we look at this pretty often and pretty carefully and pretty diligently. So we think — we believe we’re capturing a lot of what we’re able to capture and maybe more so sooner than what others have done. And I think that speaks to the first mover actions that we took much earlier this year. And I think we’ll continue to see a bit more in the back half of the year, and we’ll see where it takes us for 2024. But I think we’ve done a decent job sort of benchmarking ourselves on larger-scale market items, materials.

Paul Diamond : Understood. Thanks for the clarity. I’ll leave it there.

Operator: And the conference has now concluded. We all thank you for attending today’s presentation. You may now disconnect. Have a good day.