Good day, and welcome to the Magnolia Oil & Gas Fourth Quarter 2021 and Full-Year Earnings Release and Conference Call. All participants will be in a listen-only mode. Please note, this event is being recorded. I would now like to turn the conference over to Brian Corales, Investor Relations. Please go ahead..

Thank you, Sarah, and good morning, everyone. Welcome to Magnolia Oil & Gas' fourth quarter and full-year 2021 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 2021 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. Steve Chazen..

Thank you, Brian. Good morning and thank you for joining us today. I'll provide some comments on our results and accomplishments in 2021. I will then give an update about our plans for 2022 and how we anticipate allocating our significant free cash flow.

Chris will then review our fourth quarter and full year results provide some additional guidance before we take your questions. We ended a very strong year on a high note, both operationally and financially. Last year's achievements further solidified the strength of Magnolia's business model and strategy while also marking some important milestones.

Higher product prices and our team's continued focus on managing our costs expanded our pre-tax operating margin to 56%. We continued our capital discipline spending just 28% of our EBITDAX on drilling completing wells, which generated significant free cash flow and resulted in year-over-year production growth of 7%.

During the year, we returned approximately 65% of our free cash to our shareholders in the form of significant share repurchases as well as initiating our first dividend payment. We've repurchased more than 25 million shares, reducing our diluted share count by 10%.

At the same time our cash position nearly doubled leaving us with about zero net debt at year date. Our greatest accomplishment last year was the execution of a full development program at Giddings. Giddings now represents more than half of our proved reserves and key financial metrics.

Improved confidence in the continued strong well performance at Giddings supported the addition of a second drilling rig in the field in mid-2021. Having recently increased our lateral lengths greater than 7,000 feet, now averaging four wells per pad our program continues to experience additional operating efficiencies.

We plan to continue to operate a two-rig program this year, which we expect to generate high-single-digit full year production growth. Operating efficiencies are expected to continue into this year, helping to offset some of the oilfield service cost inflation.

Our goal is to continue to allocate a sizable portion of the free cash flow we generate towards enhancing the existing business and improving our per share metrics. This could include some small accretive bolt-on oil and gas property acquisitions with characteristics similar to our existing assets.

As I mentioned, we returned approximately 65% of our free cash flow to investors during 2021 with the majority of this in the form of share repurchases, which reduced our fully diluted shares outstanding by 10%. Most of our share repurchases last year was stock purchased directly from EnerVest our largest shareholder.

As EnerVest sold throughout the year, we repurchased approximately one-quarter to one-third of the amount they sold. So, as EnerVest continue to sell shares this year, we would expect to repurchase a similar proportion. So, adequately planned for this, we expect to keep a higher level of cash on our balance sheet to allow for these repurchases.

Beyond this year, we would expect to see a shift in how we allocate our free cash flow, which will likely lead to a more normalized level of share repurchases of about 1% per quarter. During the third quarter of last year, we paid our first semiannual dividend installment of $0.08 per share which we believe is safe and secure at $40 oil.

Earlier this month, we announced our second semiannual dividend of $0.20 per share. This brings the combined dividend payments on our 2021 financial results recast at $55 oil and $2.75 gas to $0.28 per share.

Our dividend philosophy is meant to appeal long-term investors who seek dividend safety, dividend growth, and a dividend that is paid out of actual earnings generated by the business.

We expect that each of the dividend payments to grow annually as we continue to execute our business plan consisting of moderate production growth the reduction of our outstanding shares. We ended 2021 with positive momentum that should benefit Magnolia into this year.

We are very optimistic on the outlook for our 2022 operational plan which includes development of both Giddings and Karnes as well as some appraisal wells at Giddings. Improvement in drilling times at Giddings will result in more wells and more capital for the same number of rigs.

As a result of our strong balance sheet, Magnolia fully captures current high product prices by remaining fully hedged -- fully unhedged I should say. Our capital reinvestment this year will be well below our limit of 55% of EBITDAX at current product prices providing high single-digit growth and generating a significant amount of free cash.

The combination of organic production growth and share reduction in support of a growing dividend and Magnolia's double-digit return investment proposition. I'll now turn the call over to Chris. .

Thanks Steve and good morning everyone. As Steve mentioned, I plan to review some items from our fourth quarter and full year results and provide some guidance for first quarter and full year 2022 before turning it over to your questions.

Starting with slide four in the presentation slides found on our website which shows a summary of our fourth quarter. Magnolia delivered very strong fourth quarter 2021 financial and operating results and achieved several record levels. The company generated record total net income for the quarter of $192 million or $0.82 per diluted share.

Our adjusted EBITDAX was $261 million in the fourth quarter with total D&C capital of $72 million, lower than our earlier guidance, and just 28% of our EBITDAX. Magnolia's fully diluted share count declined by 5 million shares sequentially averaging $231 million during the quarter.

Total company production volumes grew 3% sequentially and 15% year-over-year to 69,400 barrels of oil equivalent per day in the fourth quarter.

Our financial performance including adjusted EBITDAX pretax operating margins and earnings per share continued to improve throughout 2021, as we benefited from rising product prices growing production volumes and lower fully diluted shares outstanding.

We expect to continue to benefit from improved product prices this year as Magnolia remains completely unhedged on its oil and gas production. Looking at the quarterly cash flow waterfall chart on slide 5, we began the fourth quarter with $245 million of cash.

Cash flow from operations before changes in working capital was $251 million during the period with working capital changes and other small items benefiting cash by $8 million. Our D&C capital spending including land acquisitions was $74 million in the quarter.

Cash allocated towards share repurchases in the fourth quarter was $55 million and we ended the year with $367 million of cash on the balance sheet or more than $1.50 per share. Slide six shows our cash flows during the full year of 2021. For that full year, we generated cash flow from operations of $779 million before changes in working capital.

We incurred $236 million drilling and completing wells, including leasehold acquisitions. And we spent $339 million on share repurchases and paid $21 million in dividends.

Summarizing our product progress during the year, we grew our total production by 7% compared to 2020 levels, reduced our diluted share count by 25.3 million shares or 10%, and leading to production per share growth of 18% over the period. This growth was all organically driven without incurring any debt and while building $174 million of cash.

Turning to slide 7 and looking at our cash costs and operating income margins. Despite the substantial increase in product prices during 2021 we realized only a modest increase in our cost during the year.

Comparing the fourth quarter 2021, to year ago levels our total cash operating costs increased by about $1.50 per boe and our revenue per boe rose by $25 a barrel. Our total adjusted cash operating costs including G&A were $11.32 per boe in the fourth quarter of 2021.

Including our DD&A rate of $8.37 per boe which is generally in line with our F&D costs, our operating income margin for the quarter was $31.63 per boe or 61% of our total revenue. Management's philosophy is to maintain our low leverage and a strong balance sheet.

We currently have approximately zero net debt and expect to generate a significant amount of free cash flow through the year. Our $400 million of gross debt is reflected in our senior notes which are callable later this year and do not mature until 2026.

We have an undrawn $450 million revolving credit facility and including our $367 million of cash our total liquidity is more than $800 million. Our condensed balance sheet and liquidity as of the year-end are shown on slides 8 and 9. As Steve mentioned, we returned approximately 65% of our free cash flow to our shareholders during 2021.

Although, we initiated our first dividend payment during the year most of the cash returned to shareholders was in the form of share repurchases. Looking at slide 10, this illustrates the progress of our share reduction since we began repurchasing shares in the third quarter of 2019.

During those 2.5 years we have reduced our total diluted share count by 36.8 million shares or approximately 14%. Most of our share repurchases last year were stock purchased directly from EnerVest our largest shareholder. Earlier this month EnerVest sold 6.9 million additional shares to the market.

In separate transaction Magnolia purchased another two million shares from EnerVest or nearly 1/4 of the total shares sold. We currently have 15.8 million shares remaining under our current repurchase authorization, which is specifically directed towards Class A shares repurchased in the open market.

Class B shares purchased directly from EnerVest do not count against the share repurchase authorization. Turning to slide 11. We declared our final semiannual dividend for 2021 of $0.20 a share earlier this month. The dividend payment was based on our full-year 2021 results recast at mid-cycle product prices of $55 oil and $2.75 natural gas.

Inclusive of the interim dividend paid during the third quarter of last year, the total dividend associated with our 2021 results equated to $0.28 per share or a yield of about 1.3%.

We expect our dividend to grow at least 10% annually, which is in line with our expectation for mid-single-digit annual production growth and the reduction of our outstanding shares by at least 1% per quarter. Looking at our year-end 2021 reserves and D&C costs on slide 12, Magnolia had a very successful organic drilling program during last year.

Magnolia books only one year proved undeveloped reserves. And as a result, 81% of our 2021 proved reserves were developed. The proved undeveloped reserves at year-end 2021 represent what we expect to convert to proved develop producing during 2022.

Our drilling program added 31 million barrels of oil equivalent after adjusting for acquisitions and excluding price-related revisions. Last year's capital for drilling and completing wells totaled $232 million, resulting in a proved developed F&D cost of $7.48 per boe, while replacing 198% of our 2021 production.

The F&D level is similar to the overall DD&A rate for our asset base and indicative of the capital efficiencies and low development costs in our Giddings asset. Turning to guidance for 2022. We plan to continue to run two operated drilling rigs across our assets.

One rig will be dedicated to drilling development wells in Giddings, with the second rig drilling a mix of development wells in both Karnes and Giddings in addition to also drilling some appraisal wells at Giddings.

We continue to improve our efficiencies in the Giddings Field, which should help to offset some of the anticipated oil field cost inflation.

Total D&C and facilities capital is estimated to be approximately $350 million for the year and which includes a higher-than-average amount of spending on facilities associated with our core development area in Giddings, which is expected to provide future operational and economic efficiencies.

Our non-op capital is estimated to be approximately the same as the 2021 levels. We expect that this program and activity level to deliver full year production growth in the high single digits, with production at Giddings increasing by approximately 20%.

As I mentioned earlier, we remain completely unhedged for both our oil and gas production, allowing us to fully capture higher product prices. Oil price differentials are anticipated to be approximately a $3 per barrel discount to MEH and in line with recent quarters.

We expect our 2022 current effective tax rate to be in the range of approximately 5% to 8%, with an equivalent amount of cash taxes. Looking at the first quarter of 2022, we expect total production to be approximately 70,000 to 72,000 barrels of oil equivalent per day and our D&C capital is estimated to be in the range of $85 million to $90 million.

Our fully diluted share count for the first quarter should be approximately 228 million shares. We're now ready to take your questions..

Thank you. We will now begin the question-and-answer session. Our first question comes from Leo Mariani with KeyBanc. Please go ahead..

Yeah, good morning guys. A couple of questions here on Giddings. I wanted to get a little better sense of roughly how many Giddings wells you guys expect to drill in 2022.

And then kind of roughly, how many of those are appraisal wells? And perhaps you could give us a little bit more color about, what you think you might accomplish with the appraisal program here in '22 with Giddings?.

Sure. Maybe a little oversight on Giddings quickly. At this point, we have two areas that we've -- whatever the term of art is derisked where we sort of know what will happen when we drill the wells. One is the traditional core area and one is a little smaller than that, but not a lot smaller and a little gassier.

So it may add another month to the payback period on the wells. So instead of four or five months, it will be five or six months of payback. A fair number of wells in that area. We've got another four or five areas which model well, that are similar in size to these.

And we'll spend this year looking at those and see how many of those we can bring to fruition. The other area -- another driver, which I don't think we can underestimate we're doing some experimental work to see how -- what the space with the appropriate spacing is. We space very widely currently, because there's no need to space tightly.

But we've done some work and the wells have only been on production for a few months. So, we can't really tell because the goal is to make sure that when you drill a daughter well or whatever the term of art is, that well actually generates more reserves for you, not just a faster production. And so, we'll watch the curves of those pretty well.

But so far, it's encouraging. Obviously, this has generated a large number of additional locations. So, I think this year, they'll be looking at spacing, we're looking at lateral lengths. We've expanded -- extended from 4,000 to 7,000 feet and we'll probably try longer ones than that.

We are already trying longer ones seeing what kind of economics we can have. We've got a number of areas that look promising that we'll be at least beginning the testing out phase. That testing out phase can last a couple of years. And to the extent we have more leases, we could acquire there, we'll tell you absolutely nothing about it.

But where we're leased up, I think we'll be slightly more forthcoming than in the past. We're -- we've got a very long running room in Giddings. This location stuff is sort of a game of wires poker. So, I don't really want to get into a location thing, but a lot of locations.

And so, as a large long-term shareholder, I feel confident that my errors will still be cashing Giddings checks..

Okay. Very helpful overview for sure. Maybe just switching gears a little bit here, I just wanted to kind of clarify. I know you all have a plan to repurchase roughly 1% per quarter. I know, it could be more than that as well.

But when you look at that, do you basically tell yourselves that hey, that 1% is what we'll just call kind of regular way through the market repurchases.

And do you kind of view the purchases from EnerVest to kind of be on top of that sort of a supplement to kind of this regular way 1%? Is that the right way to think about it?.

I think that's a good way to think about it. If you look at – remember, I always talk about comparing us to an industrial company as opposed to an oil company. And so what have industrial companies have, they have good balance sheets, they have regular growth.

There's cycles in every business, but generally regular growth, and they repurchase some shares every year. And they basically reduce their share count a little every year and they pay growing dividends and predictably growing dividends. So that's the model. It's not really to see how much money we can distribute this year or any particular year.

So if you look at the 1%, I view that as something we can do at this pace of buying down shares, we will be down close to 200 million shares in a watt. And so buying two million shares a quarter, which we can do in the open market once there's more shares distributed, we won't have to rely on EnerVest.

I view EnerVest as truly proving the value per share of the company. As we buy in their shares, I believe perhaps wrongly by the way, but I do believe firmly that I'm buying shares at a discount to what this business ought to be able to generate over time.

And as I look at Giddings and I look at Karnes, and I look at other nearby opportunities, I think we got debt position if you want to call that. But you can say as a small private business, I just should own this. I don't really know what guys and what the big companies are doing.

So I look at this as would I like to own this stock for a long period of time? And buying the shares at 1% is part of the long-term plan. The EnerVest thing I've always viewed as an opportunity as you don't usually have an opportunity because what they do is they go out and sell the shares to the market.

And so let's say they want to sell seven million shares. So the price they get is the clearing price for the seven million shares and I buy two million or three million shares on top of that. So I'm getting a fair price. We're not just negotiating with them to get a price. We're actually market testing the price.

So we're getting a little discount off of what we could do negotiated. And I think that's fair for the shareholders but we're also careful -- I'm also careful about not overpaying for the stock. So the stock got sale -- should overpriced by some measure.

I think we'd probably slow up the process, because the market is so volatile you'll always have a chance..

Okay. That's very helpful. Maybe just a last quick one for you guys. So I know you had the 2022 production guidance out there high single-digit growth certainly looks good.

Just any rough indication on what you think the oil cut will come out to be here in 2022?.

Yeah. I would say similar to what we saw in 2021..

We can't tell exactly because if we shift a couple of wells to some of these far away Giddings locations, we actually don't know. We can -- we got a model that predicts it but I wouldn't bet my life on the model. So there's some variance.

And also if we drill some Karnes wells, they're oilier, so we can manage this to whatever we want really and without really changing anything. And so we'll follow the economics here rather than trying to manage the number to exactly some number. Again, as we just talked about, we're basically buyers of shares not sellers..

Okay. Thank you, guys..

Our next question comes from Neal Dingmann with Truist. Please go ahead..

Hey, Steve, I want to ask a shareholder return question a little bit different. I know you've always said your wife appreciates the dividend.

So I'm just wondering can we assume we'll be focusing on a bit more dividends in the near term?.

Yeah. We like dividends at our house. And so I don't think -- I think we're pretty well aligned. I've got -- you don't really need to guess.

I got a 25-year -- 22-year history of dividends that one could look at, unless there's been brain surgery between then and now you can get a pretty -- Chris will stop me if there is brain surgery so drag me on -- but unless there's been some brain surgery, that's returning money to shareholders is not a new concept for me.

And so Occi grew its dividends essentially every year. I could force to change grew the dividends every year for a very long period of time. And it's part of the culture of the business and part of what attracts people to business. We're smaller. So growth is also important for a smaller company.

But the point of the growth is to generate more cash to pay more dividends. I mean the point of the share repurchase is to generate fewer shares, so each shareholder will get more dividend. Somebody said, well, I might want it right away and somebody else will say it's okay to be deferred. We pick deferred.

I mean there's plenty of choices to pick people who want to pay it right away and we just assume pick deferred, because as the inevitable cycles occur, we'll still be there growing the dividend..

Well said. And then my second just on D&C, just amazing you all continue to spend. I think you said 20% EBITDA on the D&C with just solid growth. I'm just wondering is that repeatable given what you're seeing out of getting maybe just address on a bit? Thank you..

Well, luckily you don't see the forecasts that are given to us by our D&C team. So the answer is I doubt it because we had a lot of improvement without much cost change this past year. And I don't think we can repeat that. We've caught off... .

Yeah, a lot of efficiencies... .

Lot of efficiencies. So I think that -- yeah so I don't think so. But it's going to be nowhere near 55% either -- and I don't -- the problem with going -- now talking about percentages is that all this money that's piling up in people's cash boxes is all on spreadsheets.

And at the end of the year, you're going to have so much in your bank account and I just assume wait for the money to get there. But -- so I don't really know what the percentage is going to be, but certainly going to be anywhere near 55%.

And the other point, I would make is with only two rigs running to add another rig is a 50% increase in capital roughly. And so we're not up for that either. So I think that's pretty straightforward..

Very straight forward. Thank you..

Thanks..

Our next question comes from Zach Parham with JPMorgan. Please go ahead..

Hey, guys. Thanks for taking my question. I guess first off on cash return. You've obviously built up a pretty sizable cash balance. You've been buying back stock, but that's slowed a bit somewhat out of your control just given when and how much EnerVest decides to sell.

At current commodity prices, you're going to generate a lot of free cash flow this year.

If that cash balance continues to build, could you consider a variable or special dividend?.

I don't think we got a variable or a formula-based dividend. We have a formula, but we're not going to tell you what it is.

So – but generally speaking, in a normal environment whenever that is next time, we get to that, if we ever do again we would spend around half the money on small bolt-on acquisitions half the free cash flow around a-quarter on dividends and around a-quarter on share repurchases the 1%.

But there's no performance, there's no year like that, right? So that's what the cash is for to allow us to – if the opportunity came to buy something that was near, and I don't see much of that by the way. We could do that. We're not going to allow the cash just build up, there's no point to that.

So could we put a – I'll call it a special dividend rather than a formula-based dividend, if it continues to build up, and we get a clear line of sight on what EnerVest is going to do. And I think by the end of this year, we'll have a clear line of sight. I think a single special dividend to sort of pay out some of the cash wouldn't be unreasonable.

Again, at my house, it'll always be welcome..

Got it. That makes a lot of sense. I guess, just one on the model on operating costs both LOE and GP&T ticked a bit higher during 4Q.

Can you just talk about what drove that and your outlook for operating costs in 2022?.

I'll just say on LOE, LOE on a quarterly basis for a small company even larger by the way is volatile, because workovers go in and out of that. So your workover activity is expensed that becomes part of LOE. And then next quarter, you don't do so many workovers. It looks like you did a bit of better job, and really nothing happened.

And you see it all time, even the largest companies you see those changes and almost all of these related to workovers. And they tend to do workovers in the fourth quarter for – this has been true for a quarter century. I've been watching guys do workovers in the fourth quarter for some reason.

I guess, they figured nobody cares about their operating costs or something. So that's what you're really looking at in the LOE, I think, Chris can you –.

Yeah. On the GP&T, I think it's really related to the gas and NGL prices being higher... .

Being higher – I think it's sort of just – some of them are percentage... .

That's right... .

The contract of what you get to the contract and so it costs when NGLs are $35 a barrel and you've got to pay more... .

You certainly saw that in the fourth quarter. .

Yes. .

It works sort of like severance tax, really for part of it that's right?.

Okay. That makes sense. Thanks, guys..

Our next question comes from Umang Choudhary with Goldman Sachs. Please go ahead..

Thank you. Good morning and thank you for taking my questions. My first question was around efficiency improvement in Giddings, which you mentioned is offsetting some inflationary pressures.

Can you help us disaggregate the two? What is the secular efficiency improvement? And what are you seeing from a service landscape right now? And one more if I can tack on like how long do you think you can drill on lateral lengths in Giddings area?.

What was the last question Umang?.

Long can you -- how long can you drill on lateral lengths in Giddings area?.

How long -- well we know how much we physically can do right now. We're up around 10,000 feet.

The question simply is it worth doing? By adding the additional footage are we gaining something because it costs more to drill longer -- and that's really the question and we could do maybe more than 10,000 feet because we have a good understanding of the reservoir at this point. So it's more an economic question than a physical one.

And we don't know the answer yet. And there may be a different answer in different parts of it also. As far as the service cost some of it I think is like steel and stuff is pretty temporary. Steel guys -- they're like other service providers. They build capacity and eventually there'll be funny to steel probably not till late next year I don't think.

But eventually that will fix itself. And some of that sort of already come off. And we're -- we don't have any purchasing issues this year. We're set for this year's program. On labor costs, which is truck drivers and that kind of stuff, we've been through a downturn in the oil business from the last couple of years.

We've a lot of people who used to work in the business were driven out. They've gone to work somewhere else Walmart, Amazon whatever. And to bring them back is challenging. It's an -- especially in the field I'm talking about. It's true for service companies as well as our operations.

People tend to be a little older than the average a little closer to retirement or years ago their kids used to take the jobs because they were good jobs. And now maybe there's less of that. So I think the answer is there's a fairly sizable labor component that's going to increase will affect our G&A a little bit also.

Some of our people IT people, accounting people which -- who could work at Amazon or something. And our oil people are all going to get good sized raises this year. I mean they've been through the tough time. I'm not really bothered by all this. That's the way it is when you have a cyclical business. Cyclical business always have to pay more.

Sometimes you forget that. Could add – added about $1.50 of barrel equivalent this past all in which is – so you're talking about when you're through probably a couple of dollars total as it rolls through. So it's $2 a BOE – so I think the oil price went up more than $2.

And so like I told you this before it's not like Johnson & Johnson, where they got to find somebody to pay more for the Band-Aids. We're already getting the money and given a little bit to the workers doesn't strike me as either unfair or unwarranted..

Makes sense. And my next question is on non-op activity in Karnes.

Any latest update there?.

They don't tell us, you sort of get the bill and you pay it. You don't really know because a lot of these companies have big positions not just in Karnes but maybe in the Permian. And their leasing positions and that sort of thing is very different. Karnes it's all held by production.

And so that you can drill a well today or you can put the thing off for two years without losing anything. It's probably not true in some of the leases somebody might have in West Texas, where you have a lot of competitive pressure.

So I would guess there'll be modest activity from those people who can – who need to switch to continue to have a lot of activity in the Permian. At least in Karnes, as well we have no trouble competing with the Permian well on pure economics.

But I do think that there's other issues in the Permian with leases and that sort of thing in competing people, it's been forcing people to stand out on penalty if they don't go along with wells. You see a lot of that in the Permian you don't see that much of it in Karnes. So all I would say is that I don't think there's going to be a lot of activity.

I could be wrong and we've got some extra cash somewhere to cover it as it turns out..

Got it. That’s helpful. Thank you..

Thanks..

Our next question comes from Noel Parks with Tuohy Brothers. Please go ahead..

Hi, good morning..

Good morning..

I sort of wanted to talk about a few macro topics as you just sort of look at what happened just in the last three months or so when I think in November, we had maybe just touched 80 for the first time and managed to hang in there. And then of course now we've seen 90.

And so we've got some pretty clear motion in oil but also NGL I think your realized prices were about $35 a barrel and I can't remember the last time we saw NGL prices like that.

So just wondering, can you just talk about your thoughts on the NGL outlook? How you feel about visibility there?.

Well, NGL is mostly about gas. And yes, so it's 80% of the value is sort of gas and 20% is all sort of oil. So the pricing is really driven by gas prices and some by oil prices. The demand is very strong for the feedstocks. So I don't see weakness in it per se, but it does float with the gas price effectively.

So gas prices were $5 and change before now they're $4 and change and it could be some other number tomorrow. People in the East forget that March and April follow February. And they have forgotten it for decades. So my gut is call February 15. And March and April come in and somehow gets warmer every year.

So it's a cyclical commodity and it's heavily influenced by gas. So I -- but I think the fundamental demand into the market is very strong petrochemicals and that whole sector is on fire really. .

Right. Great. And another thing I wanted to ask you about and I know we've talked in the past about as far as the US' ability to expand production that there are some pretty serious constraints physical constraints on raising production. Just backwarding strip and the lead time it takes from standing up a rig to actually getting your cash back.

I just wonder given what's happened with the cost environment last few months just what are your thoughts on just sort of the macro thoughts on US supply and what it really can do over the next year or two?.

Well not much this year, I think the supply -- the constraints on steel and labor and stuff will stop people from large-scale increases. As we go into next year, most of the people that run E&Ps are drillers at heart. And they can hardly wait to drill more wells and they see the margins at $80 oil and it's pretty enticing.

Remember the so-called free cash flow number they talk about is simply the EBITDAX less what they choose to spend drilling. Not some God-given number just what they choose to spend.

And so I think over time they'll choose to spend more because they'll see the margins that are available to them and how it's accretive to whatever but probably not so much this year. I don't think they can really do much this year. Some of the private people might, but the public ones I think really can't.

And so maybe next year, may even take another year beyond that. So you see to be cautious about US production for the next 18 months, I think. .

Right. Great. And just the last one for me. Any updated thoughts on what you're seeing in the A&D market in the Eagle Ford for nonoperated interest? I know you've said in the past that might be kind of a sweet spot for you in the acquisition market. .

Well if the non-operated interest were owned by people with IQs over about 100 that would be good. But what you're saying would be true. But they seem to think they should get the same price as in operated interest. .

Right. .

And so that's an interesting story. But generally speaking, we're not really in the market for PDPs. We can generate PDPs really cheaply as a company. got cheaper than buying PDPs from some third parties.

If there were a fair number of undeveloped or locations or whatever you want to call it in the Karnes area where we had a real good grasp of it that would be a different story.

But the cost is 2 or 3x our DD&A rate to buy a PDP in Karnes where I could spend basically a DD&A rate or less in Giddings -- why are my areas to buy just to make some private equity got rich I mean. So I really think that that's not something we're much interested in. If we can get locations, we get some upside with it.

I think we could talk about that. But absent a significant amount of upside, the perfect acquisition was the original Giddings acquisition where we paid for the production, but there was a lot of optionality or upside to it. So, as we look at acquisitions of anything other than a few million dollars where we're just buying fill-in locations.

If we get to look at acquisitions, we're looking more for what can we do to make it better. And it's really not cost reduction. It's really locations that somebody didn't understand that they had. Because other than that we don't need to do anything in that area. We can't find that. We just do nothing we're not impressed.

We don't have to worry about growth and we don't have to worry about maintaining our margins. .

Right. It's interesting you said describing it as locations where somebody doesn't understand what they had. And my first thought as well the Eagle Ford has been around long enough that there can't be many people like that. But on the other hand when I think of how much energy comparatively has gone into the Permian over the last five years.

I guess there could be locations or acreage held by production in someone's hands that just hasn't received a lot of study.

But I guess my question is, is that anywhere near your neck of the woods where there be opportunities like that?.

There's clearly some. But it's held that way for a reason which it has to do nothing with the physical aspect with who owns it. and whatever they think about that. So again the perfectly rational party you know what they would do but there's no seller I ever met that was perfectly rational. .

Fair enough. Thanks a lot..

Thanks..

Our next question comes from Nicholas Pope with Seaport Research. Please go ahead..

Good morning guys..

Good morning..

Kind of following on the M&A question. I was kind of curious you did have an acquisition during the quarter.

What was the $7.5 million acquisition listed on the cash flow?.

It was a small land acquisition. We're going to drill some wells -- some wells are going to be drilled there. We know the wells are going to be drilled and it was a price that made sense for us to buy the acreage and I think the wells are being drilled..

Got you.

And is that in Karnes County or is it Giddings related?.

No, it's Karnes related acquisition..

Got it. I appreciate that. The comment on the repurchase of the Class B shares from EnerVest. I kind of wanted to clarify there from the prepared remarks. The comment I think was -- Chris made it was that the share repurchase from EnerVest were not part of the repurchase agreement.

Is there any limit on that, or is it just as that comes available you guys have flexibility to make purchases….

Because we're dealing with an insider, which is one of our directors, who was the head of -- or the nominal name party in EnerVest. The Board excluding that person approves each acquisition separately, because it's an insider trade essentially. And so that's really -- there's no real limit to that. Understand that they're not exactly shares.

It has two parts. One is the partnership interest, which is what you care about, which is an interest in the whole business. And the second is a voting right, which is the share, but it has no economics with it. So when you buy it, you're buying a partner -- a piece of the company directly and that's extinguished when we buy it.

So the -- if we buy 1% of the B shares that 1% ownership is spread over all the owners directly. So it's a little different than buying the stock exactly. But the reason why it doesn't count is because the Board hasn't approved any B shares, because they're done when it shows up and to ensure that the -- it's an arm's length discussion with EnerVest..

Got it. That makes sense. On the operations side, there was another comment in the release that your activity was skewed to Karnes during 4Q versus Giddings. What was that split? Like what was brought online in the quarter? Because I was a little off of in my production model in there..

It was mostly Karnes activity that we brought online..

But we're only running one completion crew this quarter-to-quarter variation doesn't have any intrinsic meaning..

Yes. And the timing of when these things get turned in line can skew things….

Skew things and you try to make more of it than is warranted..

Got it. That's all I needed. I appreciate the time guys..

Thank you..

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