Magnolia Oil & Gas Corporation (MGY) Q1 2019 Earnings Report, Transcript and Summary

Good morning and welcome to the Magnolia Oil & Gas First Quarter 2019 Earnings Release and Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Brian Corales. Please go ahead.

Thank you, Kate, and good morning everyone. Welcome to Magnolia Oil & Gas' First Quarter 2019 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 materially from those expressed or implied in these statements. Additional information on the 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 now download Magnolia's first quarter 2019 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. Good morning and thank you for joining us. I'm going to provide a brief update on the overall business and Chris will go into some of the details of the financials and provide some additional guidance for the year, before we take your questions. We are reporting our second full quarter as Magnolia Oil & Gas and our corporate strategy is unchanged compared to when the initial deal was put together more than one year ago. As we've said from the start, we are a free cash flow focused business, this means generating free cash flow is part of our core philosophy. We've generated free cash flow since our inception last year and plan to generate free cash flow this year and going forward. We are not striving to get there, we're already there, and the free cash flow we generate creates options for us, either to supplement the existing business or to return it to shareholders. As a small company, we also recognize the importance to grow. So we have designated 60% of our annual cash flow for capital towards growing organically and we expect this to add 6,000 boe a day of production to our base each year. We view the remaining 40% of the cash flow as undesignated. While the use of these free cash flow may change or evolve, management philosophy is to allocate this with the goal to generate stock market value over time. First quarter of 2019 was a good period for Magnolia, as it helped lay a foundation for the remainder of the year. As we mentioned on last quarter's call, we indicated the capital for the first quarter would run hot and be at the highest level for the year. We began the quarter with three operated rigs, made the decision to drop one of our two rigs in Karnes, which occurred in the later part of the quarter. We took this action, partly in response to lower product prices at that time, but also due to the anticipated increase in our non-operated activity. Our drilling and completions capital should decline through the remainder of the year and we continue to expect our total capital for 2019 to be within 60% of our EBITDAX. Production per day for the quarter saw a slight sequential increase and was in line with our plan. The first quarter capital program should provide a meaningful increase in our production over the next couple of quarters. We had a lot of activity in process in Karnes during the period, both from our operated and non-operated programs. We expect our production to rise between 3% and 5% in the second quarter and our third quarter production volumes to be more than 70,000 boe a day. Most of the production growth expected during the remainder of the year is organic and our outlook for the third quarter represents more than a 20% increase in production compared to the two months of third quarter 2018 successor period. Last few months, we have also been active around M&A with the deal flow for smaller bolt-on acquisition opportunities more robust than we anticipated. We've already closed on or agreed to acquire oil and gas properties that we expect should add more than 4,000 boe per day in production in the third quarter. After bolting on nearly 2,000 net acres in Karnes towards the end of last year, we've also agreed to acquire another 4,600 net acres through several transactions, providing numerous attractive drilling locations. These additions bring our total position in the Karnes area to approximately 21,500 net acres, which represents a 50% increase to our footprint in Karnes, since we started Magnolia last year. We expect these transactions to close by the end of the second quarter. Each acquisition cost significantly less than $100 million. We remain disciplined in our approach to this process. For example, in a recent acquisition, the successful party paid more than twice the amount we offer. In spite our purchases, we expect balance sheet cash will increase in the second quarter over the ending balance in the first quarter. We continue to avoid large and public company deals. To summarize, we expect the exit – to exit the year with an additional 6,000 boe of organic production compared to last year's fourth quarter. Acquisitions we've already closed on and agreed to are expect to add more than 4,000 boe to our third quarter production. And the current active deal flow for small properties creates potential for additional opportunities later this year. We expect to accomplish all this by spending within 60% of our EBITDAX, drilling and completing wells and without adding any new debt. Just for clarity, we do not expect to have drawn anything against our line any time this year. In Giddings, our current appraisal and exploration program is proceeding quite well and our recent results have increased our optimism around this resource, where we have a position of approximately 650,000 gross acres. Our Giddings acreage position is almost entirely held by production. So we have the benefit of being able to proceed more methodically with our drilling and appraisal, to better assess the acreage, the application of science and microseismic. While still early in our program, we've learned a great deal in a relatively short period of time. Based on our successful results and improved understanding and pending the outlook for product prices, we plan to evaluate adding a second rig in Giddings later in the year. Although, we are in the early stages of the company, we are quite encouraged with the results and the progress we've made so far, and remain optimistic towards achieving our goals this year. I'll now turn the call over to Chris.

Thank you, Steve, and good morning everyone. I will go through some of the highlights around the first quarter results and then provide some additional guidance before turning it over for questions. For reference, any variance in my remarks related to the first quarter will be compared to the fourth quarter of 2018. From a reporting standpoint, the first quarter was somewhat easier to understand and more straightforward than prior reporting periods during last year. Looking at Slide 4 of the presentation that's posted on our website. We reported GAAP net income attributable to the Class A common stock of $13 million or $0.08 per diluted share for the first quarter of 2019. Total adjusted net income for the period, which includes the non-controlling interest and excluding transaction costs, was approximately $23 million or $0.09 per diluted share, which includes both Class A and B common stock. Investors and analysts should use the adjusted net income and method of calculating EPS when comparing us to similar companies. This compares to total net income of $58 million or $0.23 per diluted share for the fourth quarter of 2018. Broadly speaking, most of the sequential decline in income was the result of lower product prices. Our total production averaged 62.4000 boe per day during the first quarter, representing a slight sequential quarterly increase and in line with our previous guidance. Turning to Slide 5. Revenues totaled $219 million in the first quarter, which is down sequentially, primarily due to lower realized oil prices. Although benchmark oil prices declined sequentially, we continue to receive a premium to WTI with our realizations averaging 108% of the benchmark or $4.17 a barrel in the first quarter. One final point I'd make on product prices. NGL prices were particularly weak during the first quarter, averaging $18.12 per barrel or 33% of WTI, compared to 38% in the fourth quarter. Relative decline in NGLs is mainly due to the sharp drop in natural gas prices during the quarter. Turning to costs, and looking at Slide 6. Our LOE during the fourth quarter was $3.83 per boe, compared to $3.46 per boe in the prior quarter due to higher workover expenses in both Karnes and Giddings. We expect our LOE expense per boe to trend lower in the second half of the year and average approximately $3.75 per boe for 2019. Our first quarter DD&A rate was $20.64 per boe, compared to $19.65 in the fourth quarter, due to a small adjustment in reserves based on lower FCC product prices and mainly for oil and NGLs. We expect our DD&A rate to average about $20 per boe for 2019. Exploration expense was $2.5 million or $0.45 – or $0.44 per boe in the first quarter compared to $0.12 a boe in the prior quarter. The increase is mainly due to the application of microseismic, related to our appraisal and exploration program in Giddings. First quarter G&A expenses were $16.2 million or $2.88 per boe, which declined compared to $18.5 million or $3.25 per boe last quarter and partly due to lower cost for consulting and other professional services. The first quarter G&A costs also include $2.4 million of non-cash stock compensation expense. On a unit basis, these costs will fluctuate from period-to-period as we incur some additional expenses related to the build-out of our corporate structure and IT systems, although we expect G&A to average about $3 a boe for the full year. The effective tax rate was approximately 14% in the first quarter, a slight increase compared to the prior quarter and partly due to higher state taxes. We expect the full year 2019 tax rate to be about 15% due to the accounting treatment of the non-controlling interests. Our adjusted EBITDAX, as shown on Slide 7, was $160 million for the first quarter, and the sequential decrease was largely due to lower commodity prices. Our capital associated with drilling and completing wells was $139.8 million during the first quarter, which includes capital accruals. Looking at our first – at our cash flows for the first quarter on Slide 8. We had cash flow from operations before changes in working capital of $154 million and our change in working capital was a negative $38 million. Our cash outlays for capital spending, including drilling and facilities, were $128 million and we spent $52 million of cash acquiring oil and gas properties. We ended the first quarter with $76 million of cash on the balance sheet and an undrawn $550 million credit facility, providing us with ample liquidity to continue to execute on our strategy. Our long-term debt at the end of the first quarter was approximately $389 million. We do not expect to increase our [indiscernible] indebtedness, which is in line with our policy of maintaining low leverage. Summary balance sheet as of March 31 is shown on Slide 9. Shifting to some thoughts on guidance for 2019, and as Steve mentioned in his remarks. In terms of our capital spending and activity related to acquisitions, first quarter has really set the table for the rest of the year. We had a significant amount of activity and process during the first quarter and recently, a lot of this capital is related to the preparation and build-out of new pads in Karnes, and as you get ready to bring on new wells. This is partly why the capital was heavier in the first quarter. So mainly due to timing and the cadence of our activity, this is expected to start benefiting us in the second quarter. However, the total impact of this activity won't be fully evident until the third quarter. Moving to Slide 10. Based on both our organic activity and acquisitions, we're expecting production for the second quarter of 2019 to grow 3% to 5% sequentially and production for the third quarter should be greater than 70,000 boe per day. Our proportion of oil production, which was 52% in the first quarter, is expected to be about 54% during the second half of the year. As we have often stated, we continue to focus on smaller bolt-on transactions. Individually, these may not be material, but collectively they have had a meaningful and positive impact to our asset base. The common aspect of these acquisitions is that they do have familiar – similar financial and operational characteristics to the existing Magnolia business and fit our strategy well. In the beginning of August, we expect to increase our Karnes net acreage position about 50% from a little over 14,000 net acres to an expected level of approximately 21,500 net acres by the end of the second quarter 2019. We expect the transactions that Steve referenced in his comments and shown in Slide 10 to close by the end of the second quarter. Once closed, the acquired assets are expected to add at least 4,000 boe per day of production to our volumes in the third quarter. Our capital spending for drilling and completing wells is expected to decline through the remainder of the year, as we continue to expect that our full year 2019 capital to be within 60% of our 2019 EBITDAX. So, for example, if you were to use consensus EBITDAX for 2019 and multiply by 0.6 and subtract what we spent in the first quarter, you sort of get a feel for what we're likely to spend for the rest of the year. Our total shares outstanding, a combination of both Class A and B common stock fell by approximately 2 million shares at the end of the first quarter, due to the final settlement related to the transaction with EnerVest. Product price changes at current prices affect our earnings before income taxes by roughly $12 million on an annualized basis for every $1 per barrel change in oil prices, and $4 million on an annualized basis for a $0.10 per MCF change in natural gas prices. To wrap up, sort of where Steve began with his comments, I point you to Slide 11, which shows what we've done with all the cash during the eight months that we've been in business since last August. Our production is expected to climb – our production is expected to be at 20% higher, generated by a combination of organic growth and acquired properties. And we have not incurred any additional debt. We're now ready to take your questions.

We will now begin the question-and-answer session. [Operator Instructions] The first question is from Neal Dingmann of SunTrust. Please go ahead.

Good morning, nice details. My question is around just, Steve or you, Chris, just around M&A. You guys have been successful adding around the Karnes area. I'm just wondering about the appetite and opportunities you see, even after this one is closed here in the second quarter, going forward, either, call it, around the whole general Karnes area.

There's a number of small players, well – but not public companies or well known large players that are around that are – they drilled a couple of wells and they've – who knows what their plans were. And so, we continue to look at them. We're pretty disciplined in this. We don't need to own everything. So, basically, we buy at PDP values and get the locations for free. PDP values are cash flow multiples well below where we trade. So every acquisition is designed to be accretive to the metrics that we were measured by; earnings, cash flow, free cash flow, and add some locations to build inventory a little bit. So we're not looking to make a big splash here. Just build and spread overhead over the base, that sort of thing. So you should not look for large-scale M&A. We look at everything, but as far as the likelihood of doing a large deal, I would say it's quite well.

Okay. And then moving over to Giddings, you obviously have a massive position there, fair amount of production coming there. I'm just wondering how should we sort of view benchmarks or sort of progress there. I know you're kind of focused in some key areas. I'm just wondering, again, as the year of sort of progresses and into next year, maybe Steve on broader terms, how do you think about or how should we think about it on that large asset progressing?

So what our plan this year is to focus principally on trying to figure out what we own. We have a lot of acreage and we're trying to make a model that allows us to predict where the good wells are and where the less good wells are, and one or the other would be fine. So that's really the business plan this year. As we find areas that we hadn't drilled before, tested before and if they appear to be working, we will go – lot of times there's leases around them, we're not talking about buying companies or something, but they're on leased acreage. So we'll be fairly cautious about discussing that, because once we have all the acreage, I guess we can talk about it. But, until then, we don't want to drive the acreage costs up in any shape, manner or form. So we'll continue to lease around where we've been successful and – but as success occurs, we'll be looking to build a position. I mean, nothing worse than find something and then benefit somebody else. So I think we're pretty cautious. We're not – our leasing isn't going to be that expensive, but – and you should be able to track the production. It's lumpy, because the wells take a while and completion crews are – one completion crew we have is mostly building in Karnes. So the completions come slowly and eventually, we are required to report the well results to the state, but sometimes a little slower than other times. So I think our objective is to figure out where we are. You'll be able to see the production go forward over the next few quarters. So I think it's progressing well, probably better than – maybe not as good as we had hoped, but better than we expected, I guess is the way to say it.

That’s fair enough. Look forward to the activity. Thanks guys.

Thanks.

The next question is from Lenny Raymond of Johnson Rice. Please go ahead.

Thanks guys, for taking my question. You guys have done a great job in messaging your business model and achieving everything else you said you are going to do. And you alluded to in the prepared remarks that the company might evolve. So at what point in the business model you have to shift to a different strategy and what might that strategy look like at that time?

Well, I don't know exactly. We will say that, but I think as the EBITDA passes $1 billion, the growth rate will decline from the current, say, 20% to something else. We're not going to press the acquisition business to put large acquisitions that throw a bunch of dirt in your ear, like some might do. And so we'll start a process then of probably paying dividends. My wife has always liked dividends and so at some point the dividends will come into play. I'm guessing it won't be this year, but I think the evolution will be to pay small regular dividends and then if we build up cash, a larger – a special dividend. Buying in shares, as thinly traded as we currently are, I don't think it's a particularly thoughtful strategy. If that were to change in some way over time then, yes, we might shift to some share repurchases, but principally, you're looking at a – over the next couple of years a dividend sort of strategy – increasing dividends. Our goal is not to have, by the way, an MLP. Our goal is for the stock appreciation and the dividends are just greasing the skids.

That’s great, and that’s all the questions I have today. Thank you.

Thank you.

The next question is from Jeff Grampp of Northland Capital Markets. Please go ahead.

Good morning, guys.

Good morning.

Curious on the commentary about looking at maybe adding another rig here in Giddings. Can you talk about, Steve, maybe the decision tree or strategy on, I guess adding a Giddings rig versus going back to two rigs at Karnes and what do you guys kind of view as the – I guess one versus the other, and how you guys think about that drilling?

Yes, one – there's a lot of non-op activity in Karnes. So even though we're only running one rig, effectively we're running two and maybe more if we were to sort of do it more analytically. So I'm not worried about the Karnes production. The issue you have when drilling in Karnes is that every time you drill a well, some wells get shut in around it, while the completion is going on. And so you lose some production. In Giddings, as we see the opportunity grow, I want to understand what we are doing well, see if our models are working and see if there's more to acquire now, before – if we wait too long, I am afraid that lease costs will go back up. And right now they are moderate. So I think we are – as you think about it, we'll look at the non-op activity in Karnes and make sure it's delivering, together with what we are doing, the right amount of growth. Locations aren't going away. And in Giddings we will look at how we're doing and what sort of opportunity there is to test different parts of it, because as the theories evolve, we may find more areas that work than we currently think.

Got it. Okay, definitely makes a lot of sense. And on that second rig, I think in the past you guys have talked about maybe a second rig being more of a, I guess, developmental focused rig, but it sounds like this is going to continue to be in appraisal program. I just want to make sure I was interpreting that right.

Yes, I think an appraisal program for this year and probably part of next year, probably with that second rig would go to development probably later, a year from now sort of. There are some areas, which I think are – were bought up and I don't think there's much more to acquire. So we'll probably shift into those areas, one rig later. And then the appraisal stuff, I think is where the time fuse is to get it before the – the mistake I made years ago and you got to say old guys always think about things we should have done at the start, but didn't. So when we went into the Permian, I should have been a lot more aggressive when it was really cheap. So I don't want to make the same kind of mistake here.

Understood. Appreciate the time, guys.

Yes. Thanks.

The next question is from Irene Haas with Imperial Capital. Please go ahead.

I would like to ask you specifically what did the microseismic did for you to make you feel more confident about Giddings? And of the 440,000 net acres, would you be able to share with us the percentage that has been high graded because of this effort?

Well, the answer to your second question is, there people have done this now, miracle work on it and they've come up with about 20%. Yes, 20%, 25% and it may be that or a little bit more, maybe, but – at this point. But that doesn't mean anything about the other 75%. I don't think you need to read anything into that. Microseismic, historically production in Giddings came from fracture production. And what you find is, is where there's fractures, the production is not so predictable and because the fractures could be large or small or might drain a much wider area or a much more narrow area. So we're trying to look at fracture patterns and see if we can figure out how to orient the well, so that it drains. The fractures are our friend, frankly, in the process. So it isn't just the fracing process, but also the fractures that we see through the microseismic that allows us to drain – make better wells. By better wells what we're saying is, Karnes well has a very high decline and sort of at some point in future levels out. The Giddings wells start out weaker and they get better over the first, say, six months and then the decline rate is much less. And what that is, is this microfracture production coming in. And so if we can do a better job of picking those locations, we can drill better wells. We know we're not going to be able deterministic to figure everything out, we just want to boost our odds.

Got you. May I have a follow-up question? Any color on the fourth quarter volume, you left that out? I was just curious what that might be for this year.

We’re lucky we can – I thought the third quarter was pretty good, so we can do that. So we don't really know. It supposed to be more than 70,000 a day.

Okay. Great. Thank you.

The next question is from Jeffrey Campbell of Tuohy Brothers Investment. Please go ahead.

Hi, Steve and Chris, and congratulations on an active quarter. You've said in the past that Giddings might be breakeven on CapEx as you test your acreage – cash flow neutral. I'm just wondering is that's sort of the standard do you look at when you try to determine if you want to add a second rig?

Pretty much. We might go negative for a quarter or something like that. But on an annual basis, the answer is – again, I think we've talked about this in the past, I've used the analogy of portfolio managers. You give a portfolio manager $10 billion and say, give me your best ideas, you've got whole book full of them. If you said no, I really meant $10 million, you get sort of two ideas. And so we're looking for the two ideas out of our geologists.

Okay. Thank you. Regarding the acreage acquisitions in the quarter, I was just wondering was there any Magnolia equity in the mix, because as I recall, you've told me in the past that some prior sellers actually requested stock?

One of them has requested some, we haven't closed yet, but one has requested some. And so there will be some. Because we're buying this at a very low cash flow multiple and because the guy has sort of – he doesn't have any real liquidity aside from us, because of the nature of the asset. So they have taken some stock and we're to lock in them up for a while, but it's not a lot. It's pretty small in stock.

If I could ask one last one, I just wondered if, aside from the production and the additional locations that you're getting with the 4.6K bolt-on acres in Karnes, will it have any effect on the ultimate lateral length of the wells that you can drill?

It might in a few cases, but generally we're pretty satisfied with the lateral length here. You know, we're not – it's not so much – even if we owned it all, I am not sure we will be much longer, because this is where we think the economics work best. And I think while there might be a couple where that's different, but practically I think that we're pretty satisfied with the lateral lengths we have now.

Okay, great. Thanks for the color, I appreciate it.

The next question is from Brian Downey of Citigroup. Please go ahead.

Great. Thanks for taking the questions. Following up on Giddings, we appreciate the additional color or comments around Magnolia's oil cut for the remainder of the year. We noticed now that you're grouping Giddings and other together. It's a little harder to discern oil cut at Giddings. I believe last quarter it was somewhere around 26% of Giddings, it looks like it's in the same ballpark this quarter, if you back out some of the acquired gas production. But could you comment on how you see that trending as you're bringing on more oil at Giddings development? I know it's noisy well by well, but maybe what's embedded in the 52% to 54% corporate oil cut for the remainder of the year?

Yes, no, it's going to rise through the rest of the year. It will go up. The underlying Giddings wells, if I can do it this way, a new well that's worked the way it was supposed to, not true about every well, it is probably 60% oil, back oil.

Okay, so that's…

So, yes, we're not going to get to 60% for the whole thing obviously. But as we – as those leak in – remember, you've got 10 million – you've got the gas underlying it that holds the acreage. And it was all gas, got the gas from The Highlander well, and you got the new wells. So I think you're going to – the percentage will go up, but it won't go to the full – the full thing at Giddings. It will just go up over time, because you're always going to have a base of 12, 13 equivalent a day and gas production doesn't decline. And that provides cash flow – that provides cash flow to run the rest of the business, you don't have to put any capital in it.

Makes sense. But it sounds like incremental production you're assuming somewhere around 60% cut there?

Yes.

Okay. Perfect. All right. Thanks for taking the question.

The next question is from Betty Jiang of Credit Suisse.

Good morning. Steve, would you be able to give us any color just on the nature of the acquired assets, whether at all operated, whether it's more or less developed versus the existing current acreage and then any chance we can get a sense on the magnitude of the acquisition spend expected for second quarter?

Well, we told you the production – it's – and we said that we're going to – we're going to build cash. We are buying basically the values. So you're buying it uncertainly – under four times EBITDA and probably less, some is operated and some isn't operated. Some we operate and we are buying the non-op interest to go with it. It's sort of a mix, it's a series of pretty small deals.

And as we said before, we won't build – we'll build cash and we won't draw on the revolver. So yes.

I mean, it's mostly a cash flow generating activity with the locations sort of coming with it.

Got it. Okay. And then, Chris, earlier you mentioned – talked about the elevated facility CapEx during 1Q. Could we just get a bit more detail on the differences you'd expect on facility spend, operated and non-operated activity going forward, to give us a bit more comfort on CapEx trending lower through the year?

Yes, the capital– as I said, the facilities, if you will, really associated with the pads that we're doing in Karnes, and so a lot of that is just sort of lumpiness timing as you prepare to bring new wells on. And so there's pads that will – that you're in preparation in the first quarter and recently and that'll sort of be manifested in additional production in the second and third quarters and even later in the year, but it will gravitate down, it's really just a function of lumpiness. So I think it provided the answer when he said, look, whatever you're thinking about in terms of EBITDAX, 60% of that is what you should think about as far as capital for the year, and you saw what we spent in the first quarter and you can do the rest.

Got it. That’s clear enough, okay. Thank you.

The next question is from Tim Rezvan of Oppenheimer. Please go ahead.

Hey, good morning, folks. My first question on the Karnes acreage that you're buying, do you believe all of that is prospective for the Chalk as well? And the reason I ask is, EOG continues to be sort of fairly guarded about how pervasive that is under the Eagle Ford and Karnes?

The answer is no. We do not expect that it's all prospective for the Chalk. Chalk is not you baked it out, roductivity everywhere in the area and some parts have – it's not complicated to figure, by the way. This isn't some mystical thing, and it's about – the really good acreage for Eagle Ford is generally really good for Austin Chalk. A sort of mediocre Eagle Ford acreage turned out to be pretty mediocre for Chalk. So, I mean the good gets better and not so good stays the same. So, it's not everywhere, clearly not everywhere, people will tell you it's everywhere, are not right. And I think EOG's view of it is probably correct. Based on the data we have and our talk – you talk about the really great wells, but they are – it's not everywhere. So some would be prospective for Chalk, but by and large these are Eagle Ford wells and we're pricing them basically based on – nothing in the Chalk. Basically, we are saying this is just Eagle Ford production and you get mostly PDP acquisitions.

Okay. Thank you. Thank you for that color. And I just wanted to follow up on the acquisition front. $52 million in the first quarter, and if I heard correctly, it sounds like it may be a little bit under $100 million for the year. We saw the cash balance come in, in the year. We expect organic free cash flow generation. But is there sort of an internal limit on kind of what your A&D budget is, because the more acquisitions you do, the more some shareholders may think you're kind of muddying the free cash flow generation thesis for the company?

Our thesis is that – making the stock go up. And as long as we can add acreage that's well below where our stock is trading on all its metrics, whatever metric you pick and where we can spread our overhead and our technical skills over more, we'll continue to do that, because we think that's in people's interest. There is nothing large that works like that, small things can do and we will continue to do that. We said from the beginning that there would be – that there was a lot of very small acquisitions to be done. $100 million number I passed out and said no acquisitions are driven that, rather than a cumulative total. Right now I don't really know to keep the total be, but based on – and we'll continue to look for stuff and when we find it, we will acquire at accretive values. If we can acquire at accretive values, we won't just pass. So I think people generally should, especially in the early stages of the company understand that. So the switch to a different model will come the cash flow in the company grows to a point where we can't really do that anymore.

Thank you.

Sure.

Next is a follow-up from Jeffrey Campbell of Tuohy Brothers. Please go ahead.

Thanks for letting me back. And I just wanted to pull together a couple of things that were said real quick. You mentioned, or at least the press release mentioned that you wanted – you are going to keep CapEx below 60% of EBITDA – annual EBITDA and you've also talked a lot today about upside non-op activity. I just wonder what's the order of priority to keep the CapEx in line if the non-op activity continues to exceed expectations?

What's in our control, which is our rigs.

Okay. So you will take the non-op, it comes up and then you'll tailor your activity – your operated activity?

Yes, because our locations aren't going anywhere. And they are all held by production. Next year, when the non-asset activity goes down, typically the non-op activity, while it's not predictable on a quarterly basis, it's sort of predictable on an annual basis. Generally, we find when product prices are weaker, they spend more in Karnes, because the well work at any well for us. And when product prices are strong, they shift their spending to the high cost areas like the Permian.

Okay, great. Thank you. I appreciate it.

This concludes the question-and-answer session and today's conference call. Thank you for attending today's presentation. You may now disconnect.