Good morning, and welcome to the Magnolia Oil Fourth Quarter and Full Year 2019 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded.I would now like to turn the conference over to Brian Corales, Vice President of Investor Relations. Please go ahead.

Thank you, Andrew, and good morning, everyone. Welcome to Magnolia Oil & Gas’ fourth quarter and full year 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 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 fourth quarter and full year 2019 earnings press release as well as the conference call slides from the Investors section of the company’s website at www.magnoliaoilgas.comI will now turn the call over to Mr. Steve Chazen.

Thank you. Good morning, and thank you for joining us today. I will provide a summary of some of our achievements in 2019, our outlook and plan for 2020 as well as an update on our Giddings asset. Chris will review some of the details of the financials and provide some additional guidance for the year before we take your questions.We had many accomplishments as an organization during 2019, our first full calendar year as a public company, we’ve been in business for 18 months. And despite the continued challenging environment for the energy sector, the quality of our assets and the characteristics of our business model has served us well and continues to provide us with a strong foundation. Our strategy of focusing on generating free cash flow, combined with low levels of debt, supported our strong performance last year and position us well for this year.During 2019, we invested 60% of our cash flow to our drilling and completing wells and unrelated production equipment, collectively, the D&C capital. This is in line with our original objective and continues as part of our ongoing strategy. As a small company, part of our plan is also to generate moderate growth, and we were able to grow our production volumes by 10% in the fourth quarter of 2019 compared to the year-ago period. The free cash flow generated by the business provide us with options to allocate capital towards opportunities that are most accretive to the value of our stock. Our remaining free cash flow during 2019 was used to successfully complete multiple small oil and gas property acquisitions, further strengthening our overall asset base. These acquisitions would include producing properties, expand our acreage position in our core Karnes area by 30% and more than replaced our inventory of wells drilled…

Thanks, Steve, and good morning, everyone. I plan to review some of the highlights from the fourth quarter and full year 2019 results and provide some additional guidance for 2020 before turning it over to you for questions.Looking at Slide 4 of the presentation that’s posted on our website. We reported total net income for fourth quarter 2019 of $13.6 million or $0.05 per diluted share and $85 million or $0.28 per diluted share for the full year. Fourth quarter adjusted EBITDAX was $171 million with 42% spent on drilling completions and related production equipment or D&C capital, which was lower or better than our earlier outlook.For full year 2019 we spent 60% of our adjusted EBITDAX on D&C capital, which is consistent with our business model. As product prices declined, we stayed disciplined around our spending, reducing our D&C capital to 45% of our adjusted EBITDAX during the second half of 2019. Total production for the company averaged 68.3 thousand BOE per day during fourth quarter, a 10% increase compared to last year and with oil production representing 52% of our total volumes. We increased our net acreage position in the Karnes area by more than 30% during 2019 adding nearly 5,200 net acres through bolts-on acquisitions.As shown on Slide 5, our cash flow from operations before changes in working capital for the fourth quarter of 2019 was $163 million. Our total D&C cash outlays for oil and gas properties was $70 million during the period or approximately 43% of our cash flow from operations before changes in working capital. Like every quarter since the company’s inception, we generated free cash flow during the fourth quarter, generating $93 million of free cash after capital during the period. We repurchased 6 million Class B common shares of Magnolia stock in…

[Operator Instructions] The first question comes from Neal Dingmann of SunTrust. Please go ahead.

Good morning, Steve. My first question is on Giddings. You all mentioned moving the second rig to get in is to focus on development activity in the play. And I’m just wondering in your prepared remarks, you gave some detailed on a few sections. I’m just wondering, could you provide further details, you and Chris, on what gives you the increased confidence to begin that development process there?

Well, it’s pretty straightforward. We have a model for locating the wells. The model is delivering actually better results than the model predicted. So we have a certain part of it, which we have a very high degree of confidence. A lot of the activity that you see around is designed to extend that, but there’s part of it that they’re fairly predictable. So that worked this well though we just drilled just completing a two-well pad in this area. The wells are 1000 barrel-a-day wells. That’s oil, 3 million or 4 million a day of gas. But it’s pretty easy to see.You understand this is not a seismic shift, talking about one rig, 0.5 rig for a year, perhaps, basically 0.5 rig for a year basis. This is $30 million, $40 million shift. So – and it’s really driven by the high degree of non-op drilling by people around us in Karnes. So we – Karnes will be important, and we still see a lot of acquisition opportunities in Karnes over the next few years. So I think we have to get to the point where we know the pad drilling will work. The wells have fairly predictable ultimate recoverable reserves, and we know we can bring the cost down materially in this environment.There’s no reason not to do it, but again, we’re driven – I think, sometimes people – we’re driven principally, we start out with the 60%. And we’re only going to spend 60%. We’re not going to spend 100%. If we wanted to make – we can make any production growth we wanted just by doing all Karnes wells. The problem is that the wells have a sharp decline. And so what we’re trying to do is build a base of production that doesn’t decline as…

No. I agree with the shift, and hopefully, the market better realizes the value you have in Giddings, and then…

Well, we also have cash on our books. And so since we’re not – if the company doesn’t sell stock, then it might buy some. From our perspective, while it’s unpleasant maybe for a shareholder, frankly, I’d rather buy the stock at $9 than buy it at $25.

Well, right. And Steve, you really just funneled that right into my second question was your comment just on production growth. It seems your production growth has been a little bit flat here in the last couple of quarters. I know there’s been some comments out there. I think that’s what some investors has been commenting and maybe what’s been hitting the stock. Could you – you started to talk about this a little bit, to give your thoughts on how you and Chris view, just looking at production growth versus maybe free cash flow or other metrics that you all might use?

Yes. Production growth is an outcome of the cash flow discipline. It’s not the goal. So the goal is to use the money as efficiently as possible to generate as much value as possible. Value was in reserves and cash flow, current cash flow. But if we could make them to grow at any number you want. If we ran 85% for the whole year, we’d probably grow 15%. So we’re not going to do that. It takes about, near as I can figure – takes about 50% of cash flow at least to keep us flat. So – and anything above that will make us grow some.So we could drill more Karnes wells and make whatever number somebody wanted, but that’s not the business model we told investors we’re doing. The locations don’t go away for us. We don’t have any debt, so we don’t have any debt-coverage issues that some people have. We’re not trying to – make sure our revolver stays steady. So we’re not going to trip any covenants. So other people have different issues and they want growth. I mean, the world oil demand is going to grow, let’s say, less than 1% this year and people want the production to grow 20% and they wonder why oil prices are not so attractive, and it’s not the Saudis.So I – everybody’s – you got to be – live within your cash flow. And when oil prices are low, you have lower activity. When oil prices are high, you drill more, and that’s when the industry should react. Certainly, the gas industry is already reacting that way. Anyway, probably more you wanted to hear.

No. I appreciate all the details. Thanks so much.

The next question comes from Jeff Grampp of Northland Capital Management. Please go ahead.

Good morning, guys. I appreciate all the detailed thoughts here. Steve, I was wondering kind of big picture, you mentioned how the shift to Giddings and allocating more capital and growing that base kind of sounds like provides a better, I guess, stable production base for you guys to build off of going forward. And you also mentioned that kind of that – to get the 50% cash flow kind of maintenance level mode. I was just kind of wondering is this all part of, I guess, a bigger plan longer-term to kind of set up the dividend story for you guys and to the extent you feel comfortable putting out any kind of time line for when you think the business matures to that level? But I was just kind of wondering, is that kind of part of the strategy? Or is it really just more going forward…

Well, no. No. Generally, having money is always good. And so it’s always good to have money because it has flexibility. I generally believe in dividends as a way of providing management with discipline. But if management’s undisciplined, they do stupid things with the money like pay themselves $5 million a year. And so I think we just got – we’ll get to the dividends over time. I do think that this year, there will be some bolt-on acquisition opportunities in Karnes and as people get over the roller coaster ride they’ve been on. And we’d be able to add – get our total production up some. Some will come from drilling and some will come from bolt-ons. I don’t like debt. And I think we’re – I think it’s a practical matter.I think this year will be a busy year for us. And once we get to a more stable base and a little larger, if I can spread more overhead over a stable base, I think that’s the time to be talking about dividends. We’re not going to be able to compete with Exxon for dividends or the Occidental Petroleum Corporation or whatever for dividends. So you’re just not going to be able to compete with that sort of situation. So we got to compete on a value – total-value basis. I don’t – I think there’s no question about our commitment to free cash and not wasting the money. Maybe with some of the others, the dividend has proved that they now have religion, but I don’t know what the religion is.

Understood. I appreciate those comments. And for my follow-up, just going back to Giddings here. I was just kind of wondering, I guess, kind of the more medium-term plan. So the second rig comes in, is the idea that, that is there for the foreseeable future and, to the extent, you mentioned if kind of the front end of the curve bumps up, Karnes becomes more attractive? I mean, is that kind of a catalyst to tail back in?

That’s the catalyst. That’s the catalyst. We’re creating – I think, we’ll create more value with the rig on Giddings right now. If not offer goes down or the price of oil goes up, we’ll have more cash anyway. So I would expect we put the rig back into Karnes. So – but I would think a year from now, we’ll probably had the rig back in Karnes. It would be my guess if everything works okay, and we still might have two rigs in Giddings. So I – my hope is to run two rigs in Giddings, one in Karnes and then one shadow rig essentially from the non-op. So that’s where we’d like to be. But right now, it doesn’t – that doesn’t tie with the 60%. And when we get too – go ahead.

The idea would be with, I guess, some growth from Giddings, coupled with maybe a couple of bucks on the oil price, that can kind of allow you to put them on more gap into Karnes without breaking the model?

That’s right. That’s right. We can’t break the model. You could always fool yourself into spending more money. That’s the history of the industry.

Got it. It’s crystal clear. I hear it, Steve. Thanks for the time. I appreciate it.

The next question comes from Leo Mariani of KeyBanc. Please go ahead.

Hey, guys. Just a question on free cash flow. Obviously, you guys talked about some potential M&A later this year. I guess, you really didn’t do any deals in 4Q. It doesn’t sound like anything’s happening in the short term. It sounds like the dividends are way off. We obviously had the buyback that you did in 4Q, which seemed kind of one-off on the Class Bs. I just wanted to get a sense. Is that something we could kind of see in the future is potentially purchasing chunks of some of those Class Bs from time-to-time in the absence of M&A here in 2020?

I sure hope so. But again, I don’t control that process. I’d like to, but I don’t control the process. It’s controlled by EnerVest, and I have no idea what their plans are. I got a pretty high degree of confidence in the bolt-ons this year. So I wouldn’t take my comments to it as all that definitive. But we’ve got a number of people that are out there that tried to sell last year that couldn’t sell. They thought they might have a window when the oil price went up for a couple of hours. Prices come down. They get deflated. In the end, they’re better off. There’s never been a bad time in the last decade to selling oil assets, small oil assets.

Yes. No. That makes sense, for sure. And I guess, just wanted to touch on some of the non-op activity in the Karnes area. I guess, you guys were saying, hey, it’s up 15% to 20% this year. I guess, that being said, I mean, certainly, production lower. It sounds like in the first quarter, a lot of those wells may be coming on later. I just wanted to get a sense, did you guys have kind of good visibility on some of the timing of that production coming on in the Karnes area just given the – how long – the wells this year?

We got pretty good timing. We got pretty good algorithm. We have AFEs from them and a lot of those wells have been drilled and there’s completion crews on them. So it – what you – what it looks like sort of big picture is it was slow in the beginning of this first quarter production. And then it’s picked up sharply as the wells that were docks at the end of the year have been completed. So I think you’re – so that’s back-end loaded. Of course, you got 0.5 quarters on already. I – so as we go into second quarter, production should be up nicely.

Okay. No. That’s helpful for sure. And I guess, you guys also said that there were two recent wells, I guess, in the Giddings area and, I guess, one part of some of the prepared press release trends and maybe just recently fracked. I guess, those sounded particularly strong. I know you guys said you’re generally been surprised to the upside by the predictive model you guys are using. Just anything unique about those two new wells or anything, is it in a new area or?

No. No. They’re actually in the area that we have a high degree of confidence in, and we did it on a – up a path. So the wells, basically, the fact that the wells are the same, obviously, went in different directions. But the wells are the same gives us confidence that the model is not producing a variable result but actually a real result.

That’s helpful. And I guess that also gives you confidence on the well cost reductions on the 20% as well.

That’s right. And I would hope for more than 20%, to be honest. They only let me 20%.

Okay, great. Thanks a lot. I appreciate it.

The next question comes from Dun McIntosh of Johnson Rice. Please go ahead.

Good morning, Steve. I just wanted to clarify on the two new Giddings wells that Leo was just asking about. Are those two different than earlier in the call when you were referencing how you found that you all had an area like a 70,000 contiguous acre block that you were – it was more of a step-out and that you’re highly confident? Or are those the same two wells you’re talking about in both instances?

No. This acreage block is a part that we have a high degree of confidence in. These two new wells off the pad are within that block. The other wells are way off the block. All the other wells we’ve talked about are nowhere near the block.

Okay. That’s what I thought. I just wanted to clear up on that. And then on the third quarter, you talked about bringing on three new wells at Giddings for the fourth quarter. I mean, obviously, you came in with the two. Just wondering what kind of pushed that third one out. CapEx came in a little lower as well there. So helped you on that end, but…

It just got delayed. And it’s, I think, on now, sort of.

Okay. Great. And then for a quick follow-up, on the cost side, LOE and transportation came in ahead of what we were looking for. I’m just wondering if, kind of the $3.60, $3.70, is that kind of something that we can look at going forward? And what’s – what are kind of the drivers there on LOE with – as Giddings does become a bigger part of the program?

Yes, the LOE and the GP&T is – should be fairly consistent going forward. I mean, I don’t…

The Giddings area is – Giddings gets – a lot of Giddings oil is trucked. And so – and we’re – as the production builds up, we’re trying to figure out ways to reduce the trucking. And so we may do something to fix that because we think the volumes are so – the volumes are going to be large enough that we need to do something more permanent than put another truck.

Okay, great. Thanks, that’s it for me.

The next question comes from Kashy Harrison of Simmons Energy. Please go ahead.

Good morning, Steve, Chris, Brian. Steve, in your prepared remarks, you talked about the 400 locations with 1,000 barrels a day of the 90-day mark, 3 million cubic feet of gas. Really appreciate the color there. If I recall, you’ve also talked about Giddings having 1,000 locations conservatively in prior presentations. And so when you think about those remaining 600 locations that you’ve conservatively highlighted, how would we think about an average oil rate to go along with the 600?

I don’t know. The 70,000 was sort of an example of one area. So we didn’t know we’ve got several more areas. And in some of those areas, we only have one or two wells. In this larger block, we’ve got more. So I don’t really know, but it’s just hard to do it. I understand, we’ll probably not going to get to this in anybody’s, but with two rigs, it will take the rest of my – and certainly my natural life, maybe yours, to drill it up. So I – our interest is basically to find it and then figure out what the program, the development will be, and that’s going to take us a while. So I think the only point of the 400 locations was to say that we’ve got 10 years of activity as a minimum at with two rigs, maybe more. And you should view it as – I don’t know when we’re – we’ll do some exploration to sort of square it up. Some of those areas may be better than this block, by the way. So I – we just are not in a position to sort of forecast beyond this because it’s plenty for now.

Got it. Got it. And then you also talked about reducing the well cost by 20% or even more in 2020. Can you give us a sense of CapEx per well or CapEx per rig in the Giddings field today? And just based on what you know about the characteristics of the field, do you think it’s possible that those costs could eventually come down to the cost around the Karnes area?

So the wells to this point, we’ve done – we’ve taken core, there’s been a lot of science fair sort of stuff and to gather data so we sort of understand what we’re doing. So as we drop that, the wells should be in the $7 million range. The formation is deeper here than in Karnes. And because we have so much acreage, we’re drilling 6,000 foot laterals at this point because we know we’re not really restricted by acreage. So – and we may drill longer laterals at some point. It’s a more complicated drilling because of the field. But so I think around $7 million right now. And I would hope, at some point, we’d be down in the $5.5 million to $6 million. But I think that’s a little ways away.

Got it. No. That’s also very helpful. And then finally, I mean, I know you’ve talked about having a high confidence on bolt-ons for 2020. We’ve heard of assets outside the Permian. It sounds like they may be going for PDP, PV15s or maybe even PV20s these days. And so just wondering what you’re seeing on valuations in general in the Eagle Ford and the A&D space.

Yes. I mean, the problem is, look, no, we make a bid, we win, but they don’t sell because they want more. The fundamental issue is that we’re willing to pay a reasonable price for the PDPs and we’re not willing to pay very much for locations. And they want money for the locations because two years ago, some guy told them the locations were $5 million each or something. And so – and they’ve marked – a lot of these are private equity people that have mark-to-market of their assets on some basis that I don’t quite comprehend. So they and don’t want to take – they’re not prepared to just willing to take a loss.At some point, they’ll take the hit. But right now, they’re – they don’t really want to take the loss. But I’m not really concerned that there’s not a lot of buyers for this sort of asset. The only value really is in for somebody who can integrate the assets and spread your overhead. These companies may make 8,000, 9,000 10,000 a day, and they got overhead of $30 million or $40 million. We can make that all go away, and so that’s the only value.Somebody couldn’t buy it and run this asset and then make any money with – for that kind of overhead. So our principal objective is not just more locations, and that would be nice, but also to spread overhead because that’s a real value-add that we have compared to somebody else who’s going to start all over again.

That makes sense. Very helpful. Thank you.

This concludes the Q&A session and the Magnolia Oil fourth quarter and full year 2019 results conference call. Thank you for attending today’s presentation.

Thank you.

You may now disconnect.