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

Thank you, and good morning, everyone. Welcome to Magnolia Oil & Gas’ First Quarter Earnings Conference Call. Participating on the call today are Chris Stavros, Magnolia’s President and Chief Executive Officer; and Brian Corales, Senior Vice President and Chief Financial Officer. As a reminder, today’s conference call contains certain projections and other forward-looking statements within the meaning of the federal securities laws. These statements are subject to risks and uncertainties that may cause actual results to differ materially from those expressed or implied in these statements. Additional information on risk factors that could cause results to differ is available in the company’s annual report on Form 10-K filed with the SEC. A full safe harbor can be found on Slide 2 of the conference call slide presentation with the supplemental data on our website. You can download Magnolia’s first quarter 2023 earnings press release as well as the conference call slides from the Investors section of the company’s website at www.magnoliaoilgas.com. I will now turn the call over to Mr. Chris Stavros.

Thank you, and good morning, everyone. We appreciate you joining us today for a discussion of our first quarter 2023 results. I will make some brief comments about the latest quarter, talk about where we stand currently and address some actions that we are taking around our capital spending and how this will impact our outlook for the rest of the year. Brian will then review our first quarter financial results in more detail and provide some additional guidance before we take your questions. Our first quarter results delivered a solid start to the year, supported by strong well performance in both the Karnes and Giddings areas. Steady activity and ongoing operating efficiencies at Giddings provided production growth of 10% versus last year’s first quarter. Additional D&C efficiencies realized in our Giddings assets have helped to partly mitigate the higher costs. We generated more than $60 million of free cash flow during the quarter despite sustaining lower operating margins caused by weaker oil and gas prices as well as higher costs associated with oilfield service inflation. Since our inception, Magnolia’s focus has remained consistent and includes a disciplined approach toward capital spending, targeting moderate annual production growth with high pre-tax operating margins while generating reliable free cash flow. We strive to achieve these goals while continuously improving our per share metrics and maintaining a strong balance sheet with low levels of debt. Oil and gas prices have moved significantly lower since late last year and into 2023, while oilfield service and materials costs remained elevated. This combination has weakened our operating margins and returns. The current cost structure for oilfield services materials does not reflect the sharp decline in overall product prices as compared to last year. So how have we responded to this? Instead of allocating more capital to…

Thanks, Chris, and good morning, everyone. I will review some items from our first quarter and refer to the presentation slides found on our website. I’ll also provide some additional guidance for the second quarter of 2023 and the remainder of the year before turning it over for questions. Beginning with Slide 3. Magnolia continued to execute on our business model as demonstrated by our strong first quarter financial and operating results despite softer commodity prices. As Chris detailed, the objective for Magnolia is creating long-term value for our shareholders and with an eye towards focusing on our operating margins and returns. We believe the actions outlined today help to achieve that goal by taking prudent steps to better align our capital spending with the current product price environment to generate more free cash flow, which can be used to enhance the per share value of the company. During the first quarter, we generated GAAP net income of $107 million. Excluding the non-cash impairment associated with our Louisiana well, our total adjusted net income for the quarter was $119 million or $0.56 per diluted share. Our adjusted EBITDAX for the quarter was $217 million, with total capital associated with drilling, completions and associated facilities of approximately $140 million. First quarter production volumes grew 10% year-over-year to 79,300 barrels of oil equivalent per day and 8% sequential growth from the fourth quarter of 2022. During the first quarter, we repurchased 2.4 million shares and our diluted share count fell by 6% year-over-year. Looking at the quarterly cash flow chart on Slide 4, we started the first quarter with $675 million of cash. Cash flow from operations before changes in working capital was $214 million, with working capital changes and other small items impacting cash by $12 million. During the quarter, we…

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

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

Yes. Thanks, Neal. I guess I’ll address the cash aspect first from a capital angle, and then I’ll address it a little bit more on cash after capital. Again, just to be clear, we’re choosing to do this, take these actions that we talked about today really from a proactive approach towards our costs. We want to be sort of early movers on this rather than late movers. The reasons, as I said in my remarks, the reasons that we’re doing is really to get – try to get price concessions from our vendors and suppliers. It just – it’s a situation where going into the year, pricing and costs were out of kilter with prices that you’re seeing on the screen and certainly relative to last year. And so we can sort of mosey on along here and continue to do what we’re doing and not try to capture any improvements. But we’re basically capitalizing our reserves at last year’s higher costs. And I just don’t think that’s a good outcome. I would lean more on the savings – the capital savings coming from the benefit that we’re going to see on materials and services because I will tell you, at these prices, these things are going to start coming down even more than we probably already are thinking. On the growth, on the production growth, we adjusted that a little bit. But just keep in mind, we could grow faster if we wanted to. We’re just simply choosing not to, and we retain that option. In other words, the importance of reducing the capital from a cost perspective allows for more activity to fit into the program with time. So I think as things become more balanced, the growth could be better, but this is what the outcome…

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

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

Thank you so much.

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

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

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

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

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

Very helpful. Thank you.

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

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

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

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

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

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

Thanks, Geoff.

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

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

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

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

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

Understood. Thanks for the clarity.

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