Magnolia Oil & Gas Corp Q4 FY2021 Earnings Call

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 will share some insights on our results and accomplishments for 2021, followed by an update on our plans for 2022 and how we plan to utilize our significant free cash flow. Chris will then cover our fourth-quarter and full-year results and provide additional guidance before we open the floor to your questions. We concluded a strong year on a positive note, both operationally and financially. The achievements of last year further reinforced the robustness of Magnolia's business model and strategy while marking key milestones. Increased product prices and our team's ongoing focus on cost management boosted our pre-tax operating margin to 56%. We maintained our capital discipline by spending just 28% of our EBITDAX on drilling and completing wells, which created substantial free cash flow and resulted in a year-over-year production growth of 7%. Throughout the year, we returned roughly 65% of our free cash to shareholders via significant share repurchases and initiated our first dividend payment. We bought back over 25 million shares, lowering our diluted share count by 10%. Concurrently, our cash position nearly doubled, leading us to close the year with nearly zero net debt. Our most significant achievement last year was executing a complete development program at Giddings. Giddings now accounts for over half of our proved reserves and key financial metrics. Enhanced confidence in the continued strong performance of wells at Giddings justified adding a second drilling rig in the field in mid-2021. We recently increased our lateral lengths to over 7,000 feet, averaging four wells per pad, which has led to further operational efficiencies. We plan to maintain a two-rig program this year, which we anticipate will yield high single-digit full-year production growth. We expect operating efficiencies to persist into this year, helping to mitigate some of the inflation in oilfield service costs. Our objective is to continue investing a significant portion of the free cash flow we generate into enhancing our existing business and improving per-share metrics. This may involve some small, accretive acquisitions of oil and gas properties that share characteristics with our existing assets. As I mentioned, we returned about 65% of our free cash flow to investors in 2021, primarily through share repurchases, which lowered our fully diluted shares outstanding by 10%. Most of last year's share repurchases were made directly from EnerVest, our largest shareholder. Throughout the year, as EnerVest sold shares, we repurchased approximately one-quarter to one-third of the shares they sold. Therefore, as EnerVest continues to divest this year, we expect to repurchase a similar proportion. To accommodate these plans, we intend to maintain a higher cash balance on our balance sheet for these repurchases. Looking further ahead, we anticipate a change in how we allocate our free cash flow, likely leading to a more normal share repurchase level of about 1% per quarter. In the third quarter of last year, we paid our first semiannual dividend installment of $0.08 per share, which we believe is secure at $40 oil. Earlier this month, we announced our second semiannual dividend of $0.20 per share. This brings the total dividend payments based on our 2021 financial results recast at $55 oil and $2.75 gas to $0.28 per share. Our dividend strategy aims to attract long-term investors who prioritize dividend safety, growth, and payments from actual earnings generated by the business. We anticipate that each dividend payment will increase annually as we continue to implement our business plan focused on moderate production growth and reducing outstanding shares. We ended 2021 with positive momentum that should carry benefits into this year. We are optimistic about our 2022 operational plan, which includes developments in both Giddings and Karnes, alongside some appraisal wells at Giddings. Improvements in drilling times at Giddings will enable us to drill more wells and allocate more capital for the same number of rigs. Owing to our strong balance sheet, Magnolia fully capitalizes on the current high product prices by remaining completely unhedged. Our capital reinvestment this year will stay well below our limit of 55% of EBITDAX at current product prices, facilitating high single-digit growth and generating considerable free cash. The combination of organic production growth and share reductions supports a rising dividend and Magnolia's attractive double-digit investment return proposition. I will now hand 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%, 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 a separate transaction, Magnolia purchased another two million shares from EnerVest or nearly one-quarter 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 developing 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, 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. There may have been a slight oversight regarding Giddings. Currently, we have two areas that we've managed to derisk, where we understand what to expect when we drill the wells. One area is the traditional core region, and the other is somewhat smaller and has a bit more gas content. This may extend the payback period for the wells to five or six months, instead of the previous four or five months. There are quite a few wells in that area. Additionally, there are four or five other areas of similar size that we believe could be worthwhile. This year, we plan to explore those and determine how many we can develop. Another important factor is our experimentation with optimal spacing. We're currently using a wide spacing since there's no need for tighter configurations. We've conducted some research, but since the wells have only been producing for a few months, we can't draw definitive conclusions yet. Our aim is to ensure that when we drill additional wells, they actually yield more reserves rather than just quicker production. We're carefully monitoring the performance of those wells, and so far, the results are promising. This has led to an increased number of potential drilling locations. This year, we're focusing on spacing and lateral lengths, having increased from 4,000 to 7,000 feet, and we may even explore longer lengths. We're testing several promising areas, which may take a couple of years. If we secure more leases, we won't disclose details about them, but where we have leases, we plan to provide more information than in the past. We see significant potential in Giddings, though discussing specific locations feels like a game of poker, so I prefer not to delve into that. However, we have numerous locations available, and as a long-term shareholder, I am confident that my investments will continue to yield returns from Giddings.

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 believe that's a solid perspective. When I compare our company to an industrial firm rather than an oil company, it's clear that industrial companies typically have strong balance sheets and consistent growth. Every business experiences cycles, but generally, they demonstrate steady growth, repurchase some shares annually, which gradually decreases their share count, and pay dividends that grow predictably over time. That’s the strategy we're adopting, focusing not solely on how much we can distribute in any given year. Considering the 1% repurchase, I see that as achievable, and if we continue buying down shares at this pace, we could reduce our share count to around 200 million over time. We can purchase two million shares each quarter in the open market once more shares are available, without depending on EnerVest. I see EnerVest as confirming the per share value of the company. When we buy their shares, I firmly believe, possibly mistakenly, that I'm acquiring shares at a price lower than what the business should generate in the long run. Evaluating opportunities like Giddings and Karnes, we maintain a solid debt position. Viewing this as a small private business, I believe I should hold onto this investment for the long term. The 1% share buyback is part of that strategy. I've always regarded the EnerVest situation as a unique opportunity. Typically, this isn’t available since they sell shares to the market. For instance, if they sell seven million shares, the price they receive is the market price for those shares, and I can also acquire two or three million shares on top of that, ensuring a fair price. We’re not merely negotiating a price with them; we’re testing it in the market, which provides us a slight discount compared to what we might negotiate otherwise. This approach is advantageous for our shareholders, but I’m also cautious about not overpaying for the stock. If it seems overpriced in some capacity, we’d likely slow our purchasing pace, as the market's volatility will always present opportunities.

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 provide an exact figure because if we relocate a few wells to some of the distant Giddings locations, it's uncertain. We have a predictive model, but I wouldn’t rely solely on it. There is some variability. Also, if we drill in Karnes, those wells yield more oil, allowing us to adapt based on our preferences without making significant changes. We'll prioritize the economics instead of trying to hit a specific target number. As previously mentioned, our focus is on buying shares, not selling them.

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?

We appreciate dividends in our household, so I believe we are well aligned on that front. You don't have to guess about my stance; I have a long history of providing dividends that can be reviewed. Unless there have been significant changes in my thinking, returning money to shareholders is a concept I'm familiar with. Our growth efforts are aimed at generating more cash to increase dividend payments. The share repurchase program serves to reduce the number of shares, allowing each shareholder to receive a larger dividend per share. I understand that some investors prefer immediate dividends while others are okay with deferring them. We choose to prioritize deferred dividends, as we believe that during various market cycles, we will continue to grow our dividend payouts.

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...

There are a lot of efficiencies, so I don't think we'll reach that level. However, it won't be close to 55% either. The issue with discussing percentages is that all the money accumulating in cash boxes is just reflected on spreadsheets. By the end of the year, you’ll see a substantial amount in your bank account, and I prefer to wait for that money to materialize. Thus, I can't accurately predict the percentage, but I can assure you it won't approach 55%. Additionally, with only two rigs operational, adding another one would represent roughly a 50% increase in capital, which we are not looking to do. I think that makes it quite clear.

Very straightforward. 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 to 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...

You certainly saw that in the fourth quarter.

Yes.

It works sort of like a 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?

How long do you think you can drill on lateral lengths in the Giddings area?

We know what we can physically accomplish at this point, which is around 10,000 feet. The real question is whether adding more footage is worthwhile. It costs more to drill longer, so we need to consider if we're actually gaining anything from it. We might be able to drill even deeper because we have a good understanding of the reservoir, making it more of an economic consideration than a physical one, and we still don't have the answer. The answer could vary in different areas as well. In terms of service costs, some components like steel are temporary, and service providers will eventually build capacity. However, I don't expect any significant shifts in steel prices until late next year. We've already seen some reductions and currently don't have purchasing issues for this year's program. As for labor costs, we've faced a downturn in the oil industry over the last couple of years, pushing many who worked in the sector to find jobs elsewhere, like at Walmart or Amazon, making it challenging to bring them back, particularly in the field. This situation affects both service companies and our operations. Many workers now are older and closer to retirement, compared to when their children used to take these jobs as good opportunities. Thus, there's a significant labor factor that will increase costs and slightly affect our G&A expenses. Some of our employees have IT or accounting backgrounds which make them viable for jobs at companies like Amazon. As a result, our oil workers will receive substantial raises this year after tough times, which isn’t surprising in a cyclical business. Cyclical sectors often need to pay more, and while this might be overlooked sometimes, it added about $1.50 per barrel equivalent this past year, and we anticipate it reaching a total of about $2 as it continues. The oil price increased more than $2, and unlike consumer products like Band-Aids, we're already receiving the revenue, so providing fair compensation to workers seems reasonable and justified.

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?

NGL primarily involves gas, with approximately 80% of its value coming from gas and 20% from oil. Thus, gas prices significantly influence pricing, while oil prices have some effect. The demand for feedstocks remains very robust, and I don't perceive any inherent weakness. However, the market does fluctuate based on gas prices. Previously, gas prices were just over $5, but they have since dropped to around $4, and they could change again. It's important for people, especially in the East, to remember that March and April follow February, a point often overlooked. My instinct suggests looking at February 15, as the market trends toward warmer conditions year after year. NGL is a cyclical commodity, closely tied to gas prices, but I believe the underlying demand for petrochemicals is extremely strong, and the entire sector is thriving.

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 the 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?

There hasn't been much change this year. I believe the limitations in steel and labor will prevent large-scale increases in production. Looking ahead to next year, most operators in exploration and production are drillers by nature and are eager to drill more wells, especially with oil prices around $80, which are quite appealing. It's important to note that the free cash flow figure often discussed is essentially the EBITDAX minus their chosen drilling expenditures, not a predetermined figure. Over time, I expect them to allocate more funds for drilling as they recognize the profit margins available to them, but I don’t anticipate significant activity this year. While some private companies may take action, public companies are more likely to hold back. Therefore, be cautious about US production for the next 18 months.

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 non-operated 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.

That's an interesting situation. Generally, we're not really looking to acquire PDPs since we can create them at a low cost. It's actually cheaper than purchasing PDPs from outside sources. If there were many undeveloped sites in the Karnes area where we have a solid understanding, that would change things. However, the cost to buy a PDP in Karnes is two to three times our depreciation, depletion, and amortization rate, while I could spend the DD&A rate or less in Giddings. There's no point in acquiring just to benefit private equity. Therefore, we're not particularly interested in that. If we can obtain locations that offer some potential upside, we could consider it. However, without significant upside, the ideal acquisition was the original Giddings deal, where we compensated for the production but gained considerable optionality. When contemplating acquisitions beyond a few million dollars, we focus on how we can improve them. It’s not so much about cost reduction; it’s about finding locations that others may have overlooked. Aside from that, we have no pressing needs in that area. If we can't identify opportunities, we will refrain from any action. We’re not concerned about growth or 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 plan to drill some wells there, and we are confident that the drilling will take place. The price for acquiring the acreage was reasonable for us, and the wells are indeed being drilled.

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

No, it's Karnes related acquisition.

I appreciate that. I wanted to clarify the comment regarding the repurchase of the Class B shares from EnerVest. Chris mentioned that the share repurchase from EnerVest was not part of the repurchase agreement. Is there any limit on that, or do you have the flexibility to make purchases as they become available?

We are working with an insider, one of our directors, who was the head or the nominal party in EnerVest. The Board, excluding that individual, approves each acquisition separately because it qualifies as an insider trade. Therefore, there is essentially no real limit to that. It's important to understand that what we are dealing with is not exactly shares. It consists of two components: one is the partnership interest, which is the part you are interested in, representing an interest in the entire business, and the second is a voting right associated with the shares, which does not carry any economic benefit. When you purchase it, you are acquiring a portion of the company directly, which is nullified when we buy it. If we acquire 1% of the B shares, that 1% ownership is allocated among all the owners directly. This process differs slightly from buying stock outright. The reason these shares do not count is that the Board has not approved any B shares, as they are finalized upon occurrence, to ensure that there is 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 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.