Magnolia Oil & Gas Corp Q2 FY2023 Earnings Call

Good morning, everyone. And thank you for participating in Magnolia Oil & Gas Corporation's Second Quarter 2023 Earnings Conference Call. My name is Marlese and I will be your moderator for today's call. At this time, all participants will be placed in the listen-only mode, as our call is being recorded. I will now turn the conference over to Magnolia's management for their prepared remarks, which will be followed by a brief question-and-answer session. Please go ahead.

Thank you, Marlese, and good morning, everyone. Welcome to Magnolia Oil & Gas's second 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 second quarter 2023 earnings press release, as well as the conference call slides from the Investor section of the company's website at www.magnoliaoilgas.com. I will now turn the call over to Mr. Chris Stavros.

Thank you, Jim. And good morning, everyone. We appreciate you joining us today for a quarterly update and comments around our second quarter 2023 results. I plan to reiterate some of Magnolia's primary corporate goals and discuss some of what we've accomplished recently to help us achieve those goals and objectives. I'll also briefly speak to our latest quarterly results, specifically around the strong execution we've had related to our cost reduction efforts. Brian will then review our second quarter financial results in more detail and provide some additional guidance before we take your questions. As we marked our fifth anniversary earlier this week as a publicly traded company, Magnolia is recognized for having established a unique organization with high quality assets and a differentiated business model for EMP companies. This is guided by the principles of low debt, high operating margins, and a focus on capital discipline. These principles provide us with an orderly framework to help achieve our overall goals. In terms of our objectives, first, Magnolia strives to be the most efficient operator, possess best-in-class oil and gas assets, and generate the highest returns on those assets while employing the least amount of capital for drilling and completing wells. Second, we aim to return a substantial portion of our free cash flow to our shareholders in the form of share repurchases and a secure and growing dividend. Finally, we intend to utilize some of the excess cash generated by the business to pursue oil and gas property acquisitions that will help improve our overall business, sustain our high returns, and increase our dividend payout capacity. As we reach this milestone as an organization, it is important to recognize some of our achievements toward these goals. Five years ago, Magnolia was a much smaller company with a production base weighted towards our Karnes asset with a large, relatively unknown acreage position in Giddings. Five years later, our teams have been instrumental in transitioning Giddings into full development, making it an asset that competes with some of the best shale plays in the U.S. in terms of growth, low reinvestment rates, and returns. The majority of Magnolia's current production now comes from Giddings, where we have learned a lot and is still in its earlier stages of development. This has enabled Magnolia's total production and reserves to each grow by more than 50% over the past five years. We achieved this growth through the efficient reinvestment of only 45% of our cumulative operating cash flow for drilling and completing wells, allowing us to generate significant free cash flow while maintaining a strong balance sheet. We utilized 23% of our cumulative operating cash flow, or more than $850 million, to repurchase 22% of our outstanding shares, continuously improving per share metrics. We established a secured dividend which has grown by 64% since 2021, reaching an annualized rate of $0.46 a share. Our cumulative capital returned to our shareholders over the past five years has exceeded $1 billion. We've also enhanced our business and added to our asset base by completing numerous bolt-on acquisitions totaling more than $460 million. The strength of our second quarter financial and operating results was supported by our efforts initiated earlier this year to address higher capital and operating costs, which did not appropriately reflect the decline in product prices compared to last year. Our teams were proactive in engaging early and working cooperatively with our oilfield service partners and material suppliers to reduce costs while sustaining activity levels. That work is evident in our lower capital spending for the quarter, which was approximately 15% below our earlier guidance, in addition to our cash operating costs, which declined 18% sequentially. The current product prices are expected to provide improved pretax operating margins and more free cash flow to potentially redeploy the business during the latter part of the year. With the benefit of these cost savings initiatives, we now expect total drilling and completion capital for 2023 to be in the range of $425 million to $440 million, below our previous guidance of $440 million to $460 million. This represents a 14% reduction from our initial 2023 capital spending plan. This year's capital outlays are now expected to be lower than our full year spending during 2022. The reduction in our capital spending and cash operating costs reflects our focus on capital efficiency, generating high operating margins, and delivering strong and consistent free cash flow. We also continue to see strong well productivity from our Giddings asset, where most of our drilling and completion capital is being allocated. As a result, we're raising guidance for full year 2023 production growth to between 7% and 8% compared to earlier growth expectations of 5% to 7%. This highlights the high quality of our assets and aligns with our goal of being a low-cost, capital efficient operator. Our D&C spending is approximately half of our cash flow. With lower capital spending and increased production, our free cash flow generation has improved, providing us with greater flexibility. During the quarter, Magnolia generated $93 million of free cash flow, supporting our dividend and share repurchase program, with approximately three quarters of the free cash flow returned to our shareholders through these initiatives. Earlier this week, our board of directors increased our share repurchase authorization by 10 million shares, bringing the total current remaining authorization to just over 14 million shares, allowing us to opportunistically repurchase our stock into next year. We plan to continue to repurchase at least 1% of our outstanding shares per quarter. Finally, at the end of July, we closed on a small oil and gas property acquisition in the Giddings area for approximately $40 million. This exemplifies our ongoing strategy of pursuing bolt-on assets and adding to our high-quality bench in areas we understand well, thereby enhancing our overall business. This asset is outside of our core development area in Giddings and was a direct outcome of some of the appraisal efforts and substantial knowledge we've acquired through operating in Giddings. We'll continue to pursue similar transactions that expand and complement our asset base and improve our business. I'll now turn the call over to Brian.

Thanks, Chris. And good morning, everyone. I will review some items from our second quarter and refer to the presentation slides found on our website. I'll also provide some additional guidance for the third quarter of 2023 and the remainder of the year before turning it over for questions. Starting with Slide 3, despite lower commodity prices, Magnolia continued to execute on our business model as demonstrated by our excellent second quarter financial and operating results. As Chris detailed, Magnolia's focus is creating long-term value for our shareholders through a differentiated operating model and a balanced approach to shareholder returns. We have been successfully executing our strategy during the first five years as a public company and plan to continue our disciplined approach going forward. During the second quarter, we generated total GAAP net income of $105 million, with total adjusted net income for the quarter at $97 million, or $0.46 per diluted share. Our adjusted EBITDAX for the quarter was $203 million, with total capital associated with drilling, completions, and associated facilities of $86 million, well below our expectations and a testament to our team's hard work in reducing costs. Second quarter production volumes grew 10% year-over-year to 81,900 barrels of oil equivalent per day, and 3% sequentially from the first quarter of 2023. During the second quarter, we repurchased 2.3 million shares, and our diluted share count fell by 5% year-over-year. Looking at the quarterly cash flow waterfall chart on Slide 4, we started the second quarter with $667 million of cash. Cash flow from operations before changes in working capital was $204 million, with working capital changes and other small items impacting cash by $26 million. During the quarter, we allocated $49 million towards share repurchases, paid dividends of $25 million, and added $7 million of bolt-on acquisitions. We ended the quarter with $677 million of cash, above the level we started the quarter. Looking at Slide 5, this chart illustrates the progress in reducing our total outstanding shares since we began our repurchase program in the second half of 2019. Since that time, we have reduced our total diluted share count by 57 million shares, or approximately 22%. Magnolia's weighted average fully diluted share count declined by more than 2 billion shares sequentially, averaging 211.4 million shares during the second quarter. As Chris discussed, the board recently approved a 10 million share increase to our share repurchase authorization, leaving 14.2 million shares remaining under our current repurchase authorization, which are specifically directed towards repurchasing Class A shares in the open market. Turning to Slide 6, our dividend has grown substantially over the past few years, including a 15% increase announced earlier this year to $0.115 per share on a quarterly basis. Our next quarterly dividend is payable on September 1, and this provides an annualized dividend payout rate of $0.46 per share. Our plan for annualized dividend growth of at least 10% is an important part of Magnolia's investment proposition and is supported by our overall strategy of achieving moderate annual production growth and reducing our outstanding shares by at least 1% per quarter. Magnolia benefits from a very strong balance sheet, and we ended the quarter with a net cash position of $277 million. Our $400 million of gross debt is reflected in our senior notes, which do not mature until 2026. Including our second quarter ending cash balance of $677 million and our undrawn $450 million revolving credit facility, our total liquidity exceeds $1.1 billion. Our condensed balance sheet and liquidity as of June 30 are shown on Slides 7 and 8. Turning to Slide 9 and looking at our per-unit cash cost and operating income margins, total revenue per BOE declined by nearly 50% due to substantial decreases in product prices in the second quarter of 2022. Our total adjusted cash operating costs, including G&A, were $10.33 per BOE in the second quarter of 2023, a decrease of $3.71 per BOE or 26% compared to year-ago levels. The year-over-year decrease was primarily due to lower production taxes and GP&T, lower exploration expenses, and reduced G&A. Our DD&A rate of $10.34 per BOE increased roughly 20% compared to last year and is related to higher well costs resulting from increased oilfield service material and labor costs. Our adjusted operating income margin for the second quarter was $16.29 per BOE, or 43% of our total revenue. The year-over-year decrease in our pretax operating margin was driven by the significant decrease in commodity prices. Turning to Slide 10, we are delighted to have recently published our third annual sustainability report, detailing Magnolia's progress on ESG metrics. Key highlights from the report, such as a record low flaring rate, are highlighted on the slide, and the full report can be accessed on our website. Continuing with guidance for the third quarter and the remainder of 2023, we are currently operating two rigs and plan to maintain this level of activity through the end of the year. One rig will continue to drill multi-well development pads in our Giddings asset, while the second rig will drill a mix of wells in both Karnes and Giddings areas, including some appraisal wells in Giddings. As Chris mentioned, we are further reducing our drilling and completion capital guidance for 2023 to between $425 million and $440 million, which represents approximately a 14% reduction from our original guidance this year. Despite lower capital spending expectations, we are increasing our full year 2023 production growth guidance to between 7% and 8%, with the growth expected to come from our development program at Giddings. For the full year 2023, we expect our effective tax rate to be approximately 21%, with most of this being deferred. Our cash tax rate is expected to be approximately 6% for 2023. Looking at the third quarter of 2023, we expect total production volumes to be similar to the second quarter, and our drilling and completion capital is estimated to be approximately $100 million, with some small amount of variability subject to the timing of our activity. Oil price differentials are anticipated to be a $3 per barrel discount to MEH. Our fully diluted share count for the third quarter is estimated to be approximately 210 million shares, which is 4% below year-ago levels. We're now ready to take your questions.

Thank you. We will now begin the question-and-answer session. Our first question is from Neal Dingmann from Truist. Neal, please go ahead.

Good morning. Nice quarter. My first question is on your $40 million Giddings bolt-on oil and gas acquisition. Specifically, maybe Chris, is there anything we could read into this deal, such as any near-term potential for you all and now it's more delineated acres or how you're thinking about the existing 20,000 acres delineated based on what you seem like you're seeing out there?

Sure. Thanks, Neal. So I have to be careful about what I say on this a little bit. But look, the facts are that we purchased approximately 20,000 acres in the Giddings field area, and that came with a very small amount of production, no more than a few hundred BOE a day. The acreage is outside of our core development area, and it was generated as I said out of our appraisal program and from the broad work we did in the field through much of the learnings that we picked up over the years. So this is an area that we like, and it wasn't a marketed deal, which is a better approach for us in most cases. It's more direct and often leads to a better outcome. Look, obviously, this is a very competitive industry and business. So for competitive reasons, I wouldn’t want to say too much. But we may have discovered a potentially new area for development. I think it's a little too early for us to say for sure, but we like what we see so far. So that's about all I can say about this, and hopefully more will come.

No, that's going to be exciting to hear. My second question is about the GOR specifically. Can you discuss the GOR mix for the remainder of the year or 2024? I'm curious if changes in product will influence well placements or if it depends on operations or other factors, and how we should think about this.

The answer is we don't know. There is uncertainty, and results can vary significantly from quarter to quarter depending on the mix, the timing of new wells, and Karnes activity, both operated and non-operated. We'll have to see how it plays out. However, some of our previous strategies are worth repeating. We have often highlighted our capital allocation and activity over the years, which has focused more on Giddings than on Karnes. Generally, Giddings wells are gasier, although that's not always the case. It’s important to note that Giddings wells usually produce more hydrocarbons and oil throughout their lifespan compared to Karnes wells. The finding and development costs in Giddings tend to be lower, and overall returns are higher there. Additionally, the decline rates for Giddings wells are typically less steep than those of Karnes wells. We appreciate our operations in the Karnes area, which have resulted in double-digit production growth while reinvesting less than half of our free cash flow. The outcomes we've achieved are reflected in our financial results. We are pleased with the returns and see potential for further growth, although we are still in the early stages of this process. It’s amusing to consider that not long ago, people wanted us to drill more gas-focused wells, and now we find ourselves in this position.

No, I see all the upside. Thanks, Chris, for the details.

Our next question comes from Umang Choudhary from Goldman Sachs. Umang, please go ahead.

Sure. Hi, good morning. And thanks for taking my questions. My first question was on the strong performance, which you indicated in Giddings. Can you give us some color in terms of where the wells were drilled and what is driving the performance? And just trying to understand if there's some read across to your appraisal program, which you highlighted earlier.

Sure. I'm not going to disclose exactly where the wells were drilled. Generally, most of the wells have been drilled in our core development area that we've been pursuing for the past couple of years and where the results have been very strong and continue to generate good results. The appraisal program, as evidenced by the acquisition we made, has unearthed some opportunities here that we can pursue, and we have pursued and will continue to pursue. The benefit of improving our capital efficiency through the cost reductions we've experienced allows us to maintain better margins, generate more free cash flow, and increases our optionality with respect to doing other things during the latter half of the year and into next year as we have better aligned our costs with what's happening with gas and NGLs, etc. So I feel pretty good about that. We will also do a little experimentation because we always try to do that when we can, provided it fits the overall financial scheme. It enhances our opportunity set. That might sound a little generalized, but that's essentially what we've been doing.

That makes a lot of sense. Thank you. I have some quick questions about operations. First, regarding the service cost environment, you mentioned a 15% cost savings and expressed a desire to implement a flexible program with increased spot exposure based on our current pricing perspective. Do you have any thoughts on committing to a fixed arrangement for a certain period? Also, as a housekeeping question, you mentioned last quarter that there were plans to defer completions. Can you update us on the status of those wells? Are you planning to bring them online this year, or have they been postponed to next year?

Sure. On the cost side, we're not necessarily engaging in spot pricing. And I don't want to delve too deeply into exact contract-related items. But as you know, steel and OCTG really doubled, I guess, at the beginning of this year, and we recognized that peaking early in the first quarter. Pressure pumping and stimulation costs rose about 50% for drilling services as well. So far this year, we've reduced OCTG costs by around 30% and pressure pumping costs by a quarter. I like where this is going. Frankly, I believe there's potential for further reductions. Locking in right now isn't something I feel would be particularly beneficial to us. We'll see how it plays out. We kind of operate from a position of strength here. We don’t have a lot of financial risk. Therefore, it will be what it will be. But I think there’s the opportunity for further reductions in the back half of the year, and we’ll see where things land for '24. I feel optimistic.

And I think just a housekeeping question on the deferred completions. I think last quarter, you had talked about deferring some completions in Q2. Just trying to understand if you plan to bring those wells in the back half of the year or is that more for next year?

We haven't made that call yet. Again, I think we’ll try to create increased and improved alignment between our costs and commodity prices. We'll see where things go. I think, Umang, we mentioned this back in the spring when we started this effort, that the deferrals don't really amount to much. Most of the reduction in costs has come through our own efforts as a result of concessions from our service providers working closely with them, aligning ourselves with them, and also our materials vendors. So this was never about deferrals as much as it was aligning our costs. The deferrals of DUCs were just a result of pushing things out to see if we could create a bit more optionality for ourselves. If commodity prices improve, primarily gas and NGLs later this year into next year, we’ll revisit that. But those wells can be counted on one hand.

Got it. Make sense. Thank you.

And our next question comes from Leo Mariani from ROTH. Leo, please go ahead.

Yeah, thanks. I just wanted to follow up a little bit on Karnes activity here. I mean, kind of looking at production, Karnes has fallen for the last couple of quarters. Just wanted to get your thoughts on how you expect that to trend the rest of the year. It seems like that’s really what's driven the oil cut reduction here between 1Q and 2Q was that Karnes was down a fair bit and Giddings was up substantially, so that obviously is a different mix. So maybe just can you talk about kind of the directionality on Karnes? And I just want to get a sense, you don't have a very large acreage position there. It's obviously pretty mature there in the Eagle Ford. Can you give us a sense of how much inventory you think you might have left there? Is it kind of a handful of years? Or where do you stand on Karnes?

Yeah. We have things that we can drill. As I mentioned, due to timing, scheduling, planning, permitting, and other factors, we haven't executed much this year. Additionally, there hasn't really been significant or non-op activity to show up. So that explains part of it. I expect that given the generally higher rate of decline in Karnes, we will continue to see some downturn. But again, it may be inconsistent. There might be some activity that we're integrating or blending in during the latter part of the year. We could have some further activities in 2024, we'll just have to wait and see. Nevertheless, we have locations we can develop. We've just skewed our focus toward Giddings because over time, the returns are higher. That has been the plan.

Okay. That's helpful. And then just on Giddings. Obviously, you made an acquisition here in July and also kind of made one in the fourth quarter. I think that was also more in and around Giddings and some of these appraisal areas. I know you don't want to give away specific well locations, which totally makes sense, still competitive business. But can you maybe give us a sense of how many appraisal wells you have drilled? I know you've been appraising outside of the core area for the last couple of years. Again, 10 wells in, 15 wells in? I mean, any sense you can give us? I mean, have you kind of tested a fair amount of areas outside the core? And as a result, do these two deals sort of represent the culmination of that?

Yeah. I mean, look, we've drilled a handful of appraisal wells. There’s a substantial amount of work that goes into it prior to drilling these appraisal wells. We're not just sort of wandering around the field necessarily. These are very well studied and there’s extensive subsurface work and other preparation done prior to this. We have some sense of what we believe might be the outcome, but we’re sometimes surprised in either direction. And what we've done, directly to your point, led us to the small acquisition we made in the fourth quarter, which I firmly believe is in an area that our subsurface team and technical staff favors and will ultimately turn out well. The area we mentioned is also quite intriguing. This may be the start of something worthwhile. Consequently, I believe there could be additional opportunities. The 400,000 acres we have is expansive. As we move around, we may find additional opportunities on the fringes that we’d like to incorporate over time, and that’s essentially our ongoing approach.

Yes. Okay. That's helpful. And then just on the cost side here. Your LOE was down like $1 a barrel here in the second quarter. Obviously, it sounds like there's been a big company focus to reduce costs, both capital and operating. Can you kind of give us a better sense of whether a large part of this was just fewer workovers, or was a significant portion of this actually due to your ability to cut some costs related to chemicals, electricity, labor, etc.? Just trying to determine how much of these savings are looking to be sustainable?

Yeah. Certainly, there was some lower workover activity that contributed to that decrease. However, it accounted for less than half of the overall benefit. The majority of the savings, I believe, are sustainable moving forward. Workover activity can vary a bit each quarter depending on product price shifts, but most of it should be durable and is a direct result of reduced oilfield service costs, as you noted, including chemicals and other factors. The labor component is a little more rigid, as you’ve probably heard from others, but generally, I’d expect these improvements to endure throughout the rest of the year.

Okay, thank you.

Sure.

We now have a question from Oliver Huang from TPH & Co. Oliver, please go ahead.

Good morning, Chris, Brian, and team. Just had a question on the CapEx side when looking at the budget for the rest of the year. It seems to imply about $100 million, give or take, per quarter. Just trying to understand if there’s anything within that number, like higher non-op, a larger working interest, and operated wells, increased activity levels, or faster cycle times besides the Q2 run rate.

Yeah. I think a lot of it is timing, Oliver. As stated, as things get better aligned between costs and our desire to yield returns and behavioral efficiency through the actions we’ve taken, there might be an opportunity for us to integrate additional items as necessary. We’ll see how it evolves. On a run rate basis, I don't think that the $100 million level that we cited is unreasonable at this time. Let’s just see.

Okay. That makes sense. And for the second question, just on the topic of LOE. One were thinking about that lower print for Q2 being driven by low workovers and service costs incrementally using across disciplines that you kind of highlighted. How big of a factor is the increased Giddings contribution to driving that lower? In other words, should we consider the LOE cost structure in Giddings being lower relative to Karnes as it becomes a more significant contributor each quarter?

We continue to focus on this in a relentless manner concerning trying to lower costs. As I mentioned, labor and contract workers tend to be more stable. On a BOE run rate basis, as we increase volumes, we should look fairly similar, if not improve over time as we strive to enhance efficiencies in the field continuously. Giddings should contribute positively over time.

We now have a question from Zach Parham from JPMorgan. Zach, please go ahead.

Hey, guys. Just one question. Following up on Oliver's question about CapEx. You've provided guidance of a $100 million run rate for the second half. Any thoughts on what that might look like as you approach '24, if you’re still running the two-rig program? Is that $100 million run rate kind of a good number to use as a placeholder for now?

Yeah. Clearly, it feels early for '24. I know you guys love to utilize these figures at this point of the year. So I believe it's a reasonable perspective. I mean, that seems to fit for now. I think it’s safe to assert that we won’t stray from our objectives, which is to remain disciplined and efficient in our spending. We anticipate this will yield and deliver mid-single-digit growth. If pressed, however, I’d estimate that for capital going into next year, $400 to $425 feels like a reasonable range.

Got it. That's extremely helpful information. That's all I had, guys. Thanks a lot.

Okay, thanks.

And at this time, our last question comes from Tim Rezvan from KeyBanc. Tim, you may go ahead.

Yeah, thanks, everybody, for taking my questions. First, I want to ask about the repurchase program. The average share price was down considerably for you and all your peers in the second quarter. However, the number of shares repurchased was down, and you still generated significant free cash flow. I’m trying to understand how formulaic is your program and how tactical is it? Because I thought you might have picked up more shares when they were selling off.

Yeah. It is tactical. We don’t deliver the program to any particular broker per se, and it’s just how we feel on any given day. We look for opportunities to be a little more aggressive or otherwise around the share repurchase program. We have our own self-imposed not rigid, but at least 1% of the outstanding per quarter. I would like to use that as a target, but we could do more. I mean, perhaps someone was on vacation, or such that we did not engage as aggressively as I would have liked. We’ll evaluate how the shares perform relative to absolute numbers. I aspire to think of it as an investor or shareholder would think when purchasing or owning shares.

Okay. Fair enough. I appreciate the comments. And I just wanted to circle back on Giddings disclosures. I appreciated the context on the $40 million bolt-on, and you mentioned not wanting to say much about potential areas for new development. However, to be candid, you haven’t discussed your older development areas or your current development areas extensively. As we take a broader picture view of the stock this year, it has slightly underperformed. Short interest has been increasing, and valuations are starting to look rich compared to mid-cap peers. This is at a time when it is challenging for the energy sector to gain mindshare with investors. Given this context, do you feel the need to restore some clarity around the depth and quality of your acreage in Giddings and what your true development area looks like? Any context would be greatly appreciated.

No, I appreciate the question. I don’t feel the need to disclose anything more specific. The reality is, and the results speak for themselves with regard to the growth and returns we've produced, alongside the free cash flow. Everything has been very well executed in Giddings. As I mentioned, we have a large array of wells that are highly economic, and we can, and we will continue to drill. Regarding the acquisition, again, at $40 million, this is a relatively inconsequential amount in terms of capital. I hope to pursue many more opportunities like this because we are always on the lookout for ways to improve the footprint in Giddings and the sustainability of our asset base. This is nothing compared to what many other companies have executed in terms of larger-scale acquisitions, while simultaneously being more transparent in discussing their economic inventory, runway, or potential growth.

Thanks, Chris. I appreciate your insight, and I know it’s a challenging situation. Just to wrap up, regarding these bolt-on acquisitions, should we expect you to continue this opportunistic strategy in the call-it $20 million to $100 million range? Do you anticipate more opportunities appearing as you can acquire acreage from peers or privately held entities?

That's an interesting observation regarding the underperformance, and I am cognizant of this as well. It doesn't escape me that there's a substantial amount of cash on the balance sheet, and I don't mean this to imply that we're going to use that cash hastily or in a manner that doesn’t align with our core strategy. This should not be viewed merely as a rainy day fund. We've built up cash during a time of significantly higher product prices, which I referred to as 'winnings.' We remain prudent with those winnings and want to allocate them appropriately to foster higher returns. A significant cash hoard of $600 million to $700 million on the balance sheet captures attention but does not positively impact outcomes unless deployed effectively to generate better returns. It's quite capital inefficient, which I know is evident to you and the audience. Therefore, my goal is to identify avenues that would allow us to deploy capital wisely, instead of merely maintaining it on the books. That remains our focus.

Thanks. I appreciate all the answers.

Okay, thanks.

Pardon me. We are going to take a question from Paul Diamond from Citigroup. Paul, good morning.

Hi, good morning. Thanks for taking my call. I just have a quick question. Regarding your perspective on inflation, how do you measure that? What narrative do you believe is unfolding based on what you observed earlier this year? Are you factoring that in, or is it more about comparing the costs with overall pricing?

Well, we can assess benchmarks for OCTG items, steel prices, rig activity, and we try to judge ourselves based on how we're faring relative to market pricing, etc. We take this into account frequently and thoroughly. We believe we’re capturing much of what we can, perhaps even sooner than others have done. I think this reflects the proactive measures we've implemented earlier this year. I believe we’ll see additional gains in the second half of the year, and we'll evaluate where this takes us in 2024. I think we’ve done reasonably well in benchmarking ourselves against broader market indicators and material costs.

Understood. Thanks for the clarity. I'll leave it there.

And the conference has now concluded. We all thank you for attending today's presentation. You may now disconnect. Have a good day.