Good day, and welcome to the Magnolia Oil Third Quarter 2022 Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask question. [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, Malice, and good morning, everyone. Welcome to Magnolia Oil and Gas’ third quarter earnings conference call. As a reminder, today’s conference call contains certain projections and other forward-looking statements within the meaning of the Federal Securities Laws. These statements are subject to risks and uncertainties that may cause actual results to differ materially from those expressed or implied in these statements. Additional information on risk factors that could cause results to differ is available in the Company’s Annual Report on Form 10-K filed with the SEC. A full Safe Harbor can be found on Slide 2 of the conference call slide presentation with the supplemental data on our website. You can download Magnolia’s third quarter 2022 earnings press release as well as the conference call slides from the Investors section of the Company’s website at www.magnoliaoilgas.com. I would now turn the call over to President and CEO, Mr. Chris Stavros.

Thanks Brian and good morning and thank you for joining us today. The most recent quarter was filled with some mixed emotions. We are humbled by our continued strong financial and operating results and performance. Deeply saddened by the recent passing of Steve Chazen, Magnolia’s founder and former CEO. I’m incredibly grateful for Steve’s guidance and counsel, his steady leadership and importantly his friendship. While he will be deeply missed, we expect his legacy to continue to live on through Magnolia for years to come. Despite our loss, I’m very confident that Magnolia’s best days are ahead. Magnolia’s original business model remain sound and you will saying here applies for ain’t broke, don’t fix it. There can be a tendency for leaders in transition to feel that they must put their mark on an organization in some significant way. And even if it is unnecessary, some of this is simply human nature. I promised myself that I would not do this. The principles of the business model that Steve established during Magnolia’s founding over four years ago are expected to remain largely unchanged. And my objective is to always do what is in the best interest of Magnolia shareholders. We will continue our discipline around capital spending while maintaining low levels of debt. And we expect our record of achieving moderate annual production growth while generating significant free cash flow and strong pre-tax margins to continue. Magnolia delivered very strong financial and operating results in the third quarter driven by record quarterly production and pre-tax operating margins 65% and despite a sequential quarterly decline in oil prices of more than $15 per barrel. Third quarter 2022 production of 81,500 boe per day increased by 21% year-over-year and 10% sequentially, and well above the high end of our earlier guidance. Stronger…

Thanks, Chris. I will review some items from our third quarter and refer to the presentation slides found in our website. Also provide some additional guidance for both the fourth quarter and our initial view on 2023 before turning it over for questions. Beginning with Slide 3, which shows a summary of our third quarter, Magnolia continue to execute on our business model as demonstrated by our very strong financial and operating results. Once again, we had record production, which was supported by the absence of hedges, which in turn provided very strong product price realizations. We generated total net income for the quarter of 287 million and diluted GAAP earnings per share of $1.29. Our adjusted EBITDAX for the quarter was 386 million, and total capital associated with drilling completions and facilities was 114 million, or just 30% of our adjusted EBITDAX. Overall Company production volumes grew 10% sequentially, and 21% on a year-over-year basis to 81.5000 barrels of oil equivalent per day in the third quarter. Looking at the quarterly cash flow waterfall chart on Slide 4, we started the third quarter with 502 million of cash. Cash flow from operations before changes in working capital was 361 million during the period with working capital changes and other small items benefiting cash by 31 million. Our DNC capital incurred including land acquisitions was 116 million. During the quarter we purchased three million shares for 66 million and ended the quarter with 690 million of cash on our balance sheet. Looking at Slide 5, this illustrates the progress of the reduction in our total outstanding shares since we began our repurchase program, in the second half of 2019. Since that time, we have reduced our total diluted share count by 50 million shares or 19%. After repurchasing three million…

We will now begin the question-and-answer session. [Operator Instructions] At this time, we will pause momentarily to assemble our roster. Thank you. Our first question comes from Leo Mariani from MKM. Leo please go ahead.

I wanted to ask quickly here on capital. Obviously seeing a bit of a healthy increase again here in 4Q, but it sounded like maybe that was just kind of an unusually heavy activity quarter. As we look into next year, should we not assume that we should take the fourth quarter level and kind of annualized that for 2023? You think it probably won’t be end up being less than that just because it looks like for Tucson heavy?

It is a little heavier than what we have been running on average, certainly this year. I wouldn’t make much of it. I mean, I think maybe set a different way, Leo, is that if you just look at our full-year 2022 capital, and probably say it is going to be 10%, higher in 2023, that would probably get you to approximately what we are thinking right now at least based on what we know today. And that should more or less cover it. So I think almost any way you slice it for the fourth quarter that probably gets you something that that is enough for 2022 and then adding 10%. On that is not unreasonable for 2023.

Okay that is helpful. And then just wanted to ask a little bit on Giddings here. Is there any update in either the recent appraisal results that you have kind of had out there and goes to kind of referred in your prepared comments seeing some efficiencies, which have driven some of the costs down there, which I know have been somewhat offset by inflation, but can you give us a sense kind of what the well costs for lateral foot now are at Giddings?

Yes, so on the appraisal, as we have talked about many times, we have had a pretty active appraisal program this year. And we expect that to continue into 2023. It is led to our identifying several new and frankly, promising areas and Giddings, but we probably need a little bit more work in these areas. And in order to improve some of our understanding around it, that is about all I can say right now. But I think certainly looks good, very promising, and perhaps, sort of an extension of Giddings that could ultimately lead to other areas for development in time. The well cost, we are so we are sort of running roughly 1100 per lateral foot. That probably is about right.

Okay, thanks guys.

Sure.

Our next question comes from Neal Dingmann from Truist Securities. Neal, please go ahead.

Chris, just definitely want to say it is certainly bittersweet call today, but it is great how well the company is doing, great remarks by yourself. Turning to my first question, which is also on getting a little bit on the development program, maybe a little bit broader. It seems like Giddings most of the development activity continues to be kind of in that other corner of Washington County. So I was wondering if you look at the thinking about the 2023 development plan. Will that continue to be mostly in the broader areas or will you be able to, when you think about maybe expanding that a little bit and then just wondering on pad size as well, so maybe talk about the regions and just sort of pad size?

Sure, no it will be a mix as I said in my remarks. One of the rigs will focus or be dedicated largely in that core development area, and then the second rig will do a mix of things, including ongoing appraisal work, which I think right now will be equal to in terms of activity for next year as it was this year, and maybe more so, we will just sort of see how it goes. On the pad size, I mean, I wouldn’t tell you that exactly that was a one off, but I don’t anticipate drilling on a regular basis eight well pads. Up to now and more recently, we have been doing pads that of average sort of four wells, and that would be more the norm for us occasionally so to see that three, four, five well pad size. You might see one that might be larger, but more likely not.

Okay, fair enough. And then maybe turn my second question to capital allocation specifically. I always appreciated Steve’s candor on the comments, discussing buybacks versus dibs. So Chris, hoping to hear how you would think about it going forward especially, look, I think your stock has done well, but I still think it is quite discounted. So just wondering how you think about the allocation going forward?

Well, it is going to be a mix, Neal, as it has always been. So I don’t think you are going to see significant changes. I mean, clearly, we have got a good amount of cash on the balance sheet. And that is not such a terrible thing on this uncertain economic environment. You have earning a little bit better interest income now, thanks to the Fed and it probably pays for our treasury department. The mix is probably not going to be very different. I mean, what we have, as you know, we have talked about quite regularly is, we still have a relatively large private equity holder that, probably plans over time to sell down and that will continue. And what we have done is try to accommodate some of those sales by buying shares next to them, or helping them in that process, and that has worked out just fine over time. And so we also have our open market, separate open market authorization for share repurchases. And dividend is sort of a different comment, maybe then what some people would say. I mean, our approach towards dividends is somewhat different than some of the other E&P companies and something different is just fine whether it is them or us. In some ways, I feel like this is a sequel to a movie where you are hoping that the sequel is at least as good as the original, but usually, it doesn’t turn out that way. So I feel like I have seen this movie before. And this is just another sequel and the series this time, it is called revenge of the E&P company dividends part five. And maybe this time, it will be different. I certainly hope so. But just as a reminder, you just…

Great details. Brian congratulations.

Thank you.

Our next question comes from Charles Meade from Johnson Rice. Charles, please go ahead.

Good morning Chris and Brian. Chris, I think this may be his question for you, if you could help me understand the production get the drivers behind the production beat in 3Q with an eye at trying to, say what, what is a onetime thing and what is maybe Mechanoid being on a different trajectory, and I’m really thinking about me, you can have well out performance, you could have, up performance versus your schedule for turn lines. And there is also maybe pirate expected non-op activity. So if that that framework makes sense to you how does it look to you in 3Q?

Yes, no, that is a fair question. Look it was - they didn’t have us back there turning the knobs on production to sort of change the outcome necessarily. So just to let you know, I mean, it wasn’t anything very different than what we had planned for, really. I think, at the end of the day, the wells turned out to perform better in both areas, as we said, better performance, clearly, we did have a little bit more non-op. And some of those efficiencies that we talked about very early in this year continue to sort of come through in the way of just longer laterals and it leading to essentially more net wells for us. And so there was some of that. I wouldn’t attribute it to something that I would call one-off. The assets are just performing better than we thought. And it may not always be that way. But it certainly turning out to be that way, or has turned out to be that way. Maybe a different way to say this is if we could, it wouldn’t be as noticeable or as visible to you, if we reported once a year. But we report quarterly. So what can I say? I mean, we are trying to the outcome that we are suggesting for the fourth quarter is sort of our risk assessment of how we anticipate things are going to go combined with sort of the timing as we suggested the timing of the wells coming online. The mix of non-op and just the planned activities so it is our best guess at what we think is likely at this stage.

That is helpful President Chris. And I means also perhaps maybe a good segue to my second question. There is an operator just north of you guys, who is looking to sell and that hasn’t been part of your strategy at Magnolia, but on the other hand, you guys have had more success with the efficient and repeatable success and this Giddings or Eastern New York or whatever you want to call it. You have had more success than anyone else and so it seems to me that that asset would be much more valuable in your hands then than anyone else’s. So can you give us a sense of, what it would take for you guys to participate in a sales process there?

Well, look I mean we are going to continue to look at opportunities that provide us with upside optionality in terms of future high quality drilling locations that compete with our existing position. Now, someone once told me that the goal of any acquisition is to make the company better, not worse. This same very wise person also told me that if you can’t come up with at least four bullet points that clearly spell out and explain why you are doing something, then it is probably not a good idea. So, you shouldn’t anticipate or if you did anticipate us doing large M&A, you would probably be disappointed. So we are going to continue to pursue opportunities that are truly more smaller bolt on transactions, that makes sense for us, and that are sort of attractive and add to value, accretive to value over time. So we are going to be real particular about this.

Got it, thank you guys.

Thanks.

Next question will come from Umang Choudhary from Goldman Sachs. Umang, please go ahead.

Hi good morning and thank you for taking my questions. Most of my questions have been asked, so hopefully two quick ones from me. First, I appreciate the comments on the dividend growth. I wanted to revisit thoughts around a special dividend giving you a net cash position of $300 million at the end of 3Q. Especially if we don’t see any further sell down from EnerVest?

Yes, Umang thanks for the question. I mean, a special dividend probably I have sort of talked a lot about dividends, but a special dividend probably wouldn’t be my first choice. My plan and hope would be to find a better use of the money that would actually help to benefit our share price. And as opposed to simply giving back all the money through dividends, but never say never and so we will just have to see how things play out. But like I said, it would not be my first choice.

Got you. And then the follow-up, would there be any other opportunities, which you would look for with that net cash balance sheet like anything, which can further enhance the business like you said, bolt-on transactions before on the call? And then can you remind me as well where are you on the lateral and then getting sent if there is any opportunity to further enhance it next year?

Yes. I think, the assets landscape in areas where we are in and around where we are current conditions seem fairly I guess the word is right. And that is to say that, there is certainly a lot of things out there for sale, but we are going to be real particular and said we always look at opportunities, you could describe this as professional tire kickers. But again, the best way to think about is we will continue to look and execute on truly smaller bolt on, through bolt on transactions oil and gas property acquisitions that we believe are created to value. So that is what I think about it. I’m sorry, your question on Giddings?

On Giddings, it is just under lacquer lamp. Where are you today? And is there any opportunity to further enhance it next year?

Yes, it really depends sort of by unit by area where we are, I mean, we have made quite a bit of improvement on lateral lengths certainly over the last several years, I want to say it has sort of been like, increasing 1000 feet almost per year. And on a percentage basis, I would tell you, there is probably a little bit more there but I think the bigger changes have been already seen, certainly on a percentage basis.

That is very helpful. Thank you.

The next question comes from Tim Rezvan from KeyBanc Capital Markets. Tim, please go ahead.

Hi good morning everybody and congratulations on the promotions. I wanted to ask a little bit on disclosures that you provide on Giddings. If you go back to 2018, Magnolia was generally a stock that traded cheap to peers because of uncertainty on the asset. And now, you could argue the stock trades at a pretty healthy premium as you have addressed that area. And so I guess, Chris, and your new role as CEO, how do you think about the disclosure you are providing to investors and how do you think about kind of defending the premium multiple, with this kind of big sandbox in Giddings that you have?

Yes, Tim, I mean, the valuation is going to be valuation, there is probably - the market is going to decide on that on its own, frankly, but our job is to try to put up the results and make the most out of the asset that we can. And our operating teams have done, just an exceptional job I think. When we first acquired Giddings, it was sort of one of those assets that - there was an amount of risk around, and we viewed it as something that had a lot of optionality to it. And it was producing of about 10,000 equivalent a day, and now Giddings says, more than quadrupled in a fairly short period of time. So I think that part of that record stands on its own, it was also fun to wait gaps here. And the wells, the wells that we have drilled and completed, have tended to be more oily so we brought that that oil percentage up as well. That is not to say that there aren’t plenty of more gas prone areas throughout our acreage, which there are. So, early days, I think we wanted to put up and talk about some more specific data around well results. I’m not really sure outside of what, the type of growth that we have put up how necessary that really is at that stage. I would think that some of this speaks for itself. And so, I’m not really sure what more there is to say about it. I suppose we certainly could. I just don’t know what the benefit would be.

Okay. Yes, I guess I was just getting that with the successful delineation, you have really proved up portions of this area. But Steve was hesitant to give too much granularity. But do you think there is a point where you can give some more color to the investment community on kind of what you have derisked and how you think about core inventory in the area?

Yes. I’m not overly excited about more granularity that, to me, that is never - usually not led to a great outcome. Because there is an endless number of ways it can be sliced and diced. And so, anyway, I mean, I think that with time, there will be more to say about our delineation program or delineation around areas that we are still appraising. So I think there will be more information and more to talk about over time that you will see, we are just not there yet.

And okay that is fair, I appreciate that. And if I could just switch topics, onto repurchases. I saw you all were fairly aggressive in the third quarter, as shares sold off. You have committed to - it looks like about a million shares performance quarter, you have about nine million left in your program. Shares are up sharply quarter to date, you are within $3 of an all time high. Are those repurchases sort of set in stone at that $1 million per level or how do you think about the value. I know people run internal math, but how do you think about that for the future?

Yes. Our commitment, if you will, is sort of 1% per quarter 1% of the shares outstanding. And I think we have largely met that every period, in one way or another, either by buying EnerVest shares or shares from an investor in the open market, typically, it is been more than the 1%. You got to keep in mind too that we have a better idea of what is going on than you all out there. And so we have maybe a different perception or understanding of value or what Magnolia and what the Magnolia assets are capable of doing overtime. So the markets assessment of what is going on and our assessment may be two different things. And so, as we continue to sort of move on here - it is interesting, the share price can move up or down on obviously, the market and product prices, et cetera. But, I look at running that particular program as opportunistic, and there is plenty of opportunities given the volatility to be involved in the market or not. But we will continue to sort of run it that way.

Thank you.

Our next question will come from Geoff Jay from Daniel Energy Partners. Geoff, please go ahead.

Hey guys. Real quick kind of pedestrian question. But quickly about the sequential increase in CapEx for Q4. What is the magnitude of non-ops in there and as some of that sorting by the Giddings eight well pad completions?

Just like the caveat, it is very well as being completed. And yes, the higher spend in 4Q is largely due to an eight well pad completion and as well as some non-op more so than we had originally thought. So it is really both, but yes, the eight wells is a huge impact to that.

Got you. And so I guess, I’m just sort of looking at, I mean, it is obviously you guys are going back to the original question about sort of 2023 capital, sort of saying like, I guess it is 10% run rate from here. It just looks like there is probably an extra is kind of punished million than or so in the fourth quarter, and just kind of wondering how that sort of un-pop. And I’m guessing then that really, it is just going to be sort of lumpier if you get sort of bigger pads in the mix?

100% correct. And so just looking at one quarter in time does not correlate to the average of next year. This was our one of our most active quarters, in 2022. And that is why capital is a little bit higher than other quarters.

Yes, I would not take up I would not take any one particular period or quarter that I mean, that is part of the deal when you are running two rigs and one completion crew, it is going to be lumpy. And certainly when you throw in the mix an eight well pad, things tend to stand out. So I wouldn’t say that this is necessarily indicative of an average border.

Excellent. Thanks guys. I appreciate it.

[Operator Instructions] Our next question comes from Paul Diamond from Citi. Please go ahead Paul.

Good morning, thank you for taking my call. I want to take a step back a bit from the more of a macro perspective, you guys have laid out a pretty stable kind of cadence to your drilling program next year, with the two wells split between Giddings and Karnes. Is there anything on the horizon or I guess, at what point in the horizon would you guys start to reevaluate that? Is that a pricing mechanism or is that pretty much set in stone for the next 12-months to 18-months?

When you say reevaluate, are you talking about our activity or pace of activity?

Yes, just the shift in where you decide to drill or the cadence of it, or the pace and is there anything in the horizon that would cause any modifications to that?

Yes, no, Paul, I don’t think they are going to change markedly with respect to that. I mean, you look at it, sort of, again, 35,000 feet, however you want to say it and you say, okay, we were going to grow sort of 15% this year and 10% next year, that is in excess of our business model. And so again, the outcome here has been pretty good. And we anticipate expected to continue to that to be that way. And so, I don’t see a need to necessarily shift the plan the pace of activity right now at all in this environment.

Okay, understood. And then just a quick follow-up. With the, just as more of a holistic like ethos, how comfortable you guys with your current cash balance, is it something you have no problem like holding that closer to a billion if it goes through the next quarter or at what point or is there a point where you start not wanting to deploy that to the more expert either expeditious manner?

Well, the goal is to always try to deploy it as best we can in order to drive value in returns over time, and we will do that. But again, we just want to be patient and opportunistic and certainly there is quite a bit of uncertainty right now going into next year with regard to the economy we don’t know. That is not to say that holding this amount of cash is the best thing to do, but we will just continue to evaluate opportunities and be patient and prune around it as they come up as I said, we are active tire kickers on opportunities, but these are more likely to be smaller than would be necessary out of the use of our cash. So that gives you any color.

Understood. Thanks for the clarity.

This concludes our question-and-answer session as well as this conference. Thank you very much for attending today’s presentation. You may now disconnect.