Magnolia Oil & Gas - Q2 2023

Transcript

Moderator (participant)

Good morning, everyone, thank you for participating in Magnolia Oil & Gas Corporation's second quarter 2023 earnings conference call. My name is Marlise, I will be your moderator for today's call. At this time, all participants will be placed in a 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.

Speaker 10

Thank you, Marlise, 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 Corrales, 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.

Chris Stavros (President and CEO)

Thank you, Tommy. 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 most recently and help us achieve those goals and objectives. I'll also briefly speak to our latest quarterly results, and 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 E&P 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 of best-in-class oil and gas assets and generating the highest returns on those assets, while employing the least amount of capital for drilling and completing wells. Second, the return of a substantial portion of our free cash flow to our shareholders in the form of share repurchases and a secure and growing dividend. Finally, utilizing some of the excess cash generated by the business to pursue bolt-on oil and gas property acquisitions that help to improve our overall business, sustain our high returns, and increase our dividend share, per share payout capacity. As we cross 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 the Giddings Field. Five years later, our teams have been instrumental in transitioning Giddings into full development and an asset that can compete with some of the best shale plays in the U.S. in terms of growth, low reinvestment rate, 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 reserve 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 and toward continuously improving our per share metrics. We established a secure dividend, which has grown by 64% since 2021 to an annualized rate of $0.46 a share. Cumulative capital returned to our shareholders over the five years has exceeded $1 billion. We have also improved 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 were 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 as compared to last year. Our teams were proactive in engaging early and working cooperatively with our oil field 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 is approximately 15% below our earlier guidance, in addition to our cash operating costs, which declined 18% sequentially. At current product prices, our actions should provide improved pre-tax operating margins and more free cash flow to potentially redeploy in the business during the back half of the year.

With the benefit of these cost savings initiatives, we now expect our total D&C capital for 2023 to be in the range of $425 million-$440 million and below our previous guidance of $440 million-$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 as a result of our efforts, highlight Magnolia's focus on capital efficiency, generating high operating margins, and delivering strong and consistent free cash flow. We also continue to see strong well productivity out of our Giddings asset and where most of our D&C capital is being allocated.

As a result, we're raising the guidance for our full year 2023 production growth to between 7% and 8% compared to earlier growth expectations of 5% to 7%. This speaks to the high quality of our assets and matches our goal of being a low-cost and capital-efficient operator of those assets, with D&C spending to only about half of our cash flow. With lower capital spending and increased production, our free cash flow generation has improved and 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, and 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 is an example of continuing to execute on our strategy of pursuing bolt-on assets and adding to our high-quality bench in and around areas that we understand well and that improve our overall business. This asset is outside of our core development area in Giddings and was a direct result of some of the appraisal efforts and significant knowledge we have gained through operating in the Giddings Field.

We'll continue to pursue similar type transactions that add to and complement our asset base and improve the business. I'll now turn the call over to Brian.

Brian Corrales (SVP and CFO)

Thanks, Chris, 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 remainder of the year before turning it over for questions. Beginning 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 5 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 of $97 million, or $0.46 per diluted share. Our adjusted EBITDA for the quarter was $203 million, with total capital associated with drilling, completions, and associated facilities of $86 million. Well below our expectation and a testament to our team's hard work in reducing costs. Second quarter production volumes grew 10% year-over-year to 81.9 thousand barrels of oil equivalent per day, 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 four, we started the second quarter with $667 million of cash. Cash flow from operations before changing 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 and above the level that we started the quarter. Looking at Slide five, 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 million 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 1st and 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 supported by our overall strategy of achieving moderate annual moderate annual production growth and reducing our outstanding shares by at least 1% per quarter. Magnolia has the benefit of 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 is more than $1.1 billion. Our condensed balance sheet and liquidity as of June 30 are shown on Slides 7 and 8.

Turning to Slide 9, looking at our per unit cash cost and operating income margins. Total revenue per BOE declined by nearly 50% due to the substantial decrease in product price compared to 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 oil, oil field 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 pre-tax operating margin was driven by the significant decrease in commodity prices. Turning to slide 10, we're happy 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. Turning to guidance for the third quarter and for the remainder of 2023, we are currently operating 2 rigs and plan to continue this level of activity through the end of the year. 1 rig will continue to drill multi-well development pads in our Giddings asset.

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 D&C capital guidance for 2023 to between $425 million-$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%-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 D&C 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.

Moderator (participant)

Thank you. We will now begin the question and answer session. To ask a question, you may press Star, then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press Star then two. At this time, we will pause momentarily to assemble our roster. Our first question is coming from Neal Dingman from Truist. Neal, please go ahead.

Neal Dingmann (Equity Research Analyst)

Morning, guys. Nice quarter. My first question is on your $40 million Giddings bolt-on oil and gas property acquisition. Specifically, maybe, Chris, you know, is there anything we can read into this deal, such as any near-term potential for y'all to announce more delineated acres, or how you're thinking about the existing 300+ thousand acres you can delineate based on, you know, what seems like you're seeing out there?

Brian Corrales (SVP and CFO)

Sure. Thanks, Neal, and good morning. I gotta be careful on what I say on this a little bit. You know, look, the facts are that we purchased approximately 20,000 acres in, in the Giddings Field area, and that came with a very small amount of production, you know, no more than a, a few hundred BOE a day. You know, the acreage is, is outside of our core development area, and it was generated, as I said, out of our appraisal program and some of the details and broader work we did in the field through, you know, a lot of the learnings that we picked up over the years.

This is an area that we like, and it was not a, a marketed deal, which is also, you know, sort of a better way for us to go about things. It's more direct and usually leads to a better outcome. You know, look, obviously this is a, you know, very competitive industry and business, and so for competitive reasons, I wouldn't want to say too much, but we may have stumbled on a potentially new area for development. You know, I think it's a little too early for us to say for sure, but, you know, we like what we see so far. That's about all I can say about this and, you know, hopefully more to come.

Neal Dingmann (Equity Research Analyst)

No, that's interesting. That's gonna be exciting to hear. Then my second question, maybe just on the GOR specifically. Can you speak, I know you kind of have an ebb and flow on what goes on on your, their GOR and the mix, but I'm just wondering, how should we think about that GOR mix maybe for the remainder of the year or 2024? I'm just wondering if the change product where you're placing the wells or, you know, with your ops or their other drivers or just, you know, how to think about this.

Brian Corrales (SVP and CFO)

Yeah, you know, the answer is we don't know. not just because of-

Chris Stavros (President and CEO)

... because I, I don't know. I just, you know, things are, are tend to be lumpy quarter to quarter, just in terms of the mix, and it depends on the timing of the wells coming online, the inclusion of any Karnes activity, both operated and, and non-op. We'll sort of see. You know, some of what we've done, probably we should repeat here. You know, we've talked about this a lot, and you can see this in terms of where we've allocated the capital and activity over the last several years. The emphasis for us has been skewed towards Giddings more so than, than in Karnes. Giddings wells are generally a little gassier than Karnes wells, but that's not always the case. We've talked about this before, but as I said, it probably bears repeating.

Our wells in Giddings typically produce more hydrocarbons and more oil over their life than a Karnes well. The F&D costs in Giddings are generally lower, and the full cycle returns are higher, and the decline rates of the Giddings wells are normally shallower than a Karnes well. We, we like our Karnes area. You know, better full cycle returns. This is an asset that is, is driven double-digit production growth in the area with, with a, a reinvestment rate of less than half of our free cash flow. I think it's sort of evident in terms of what we've done, the outcome that is, and, and in the financials. You know, the returns have been good. We, we like where this is headed, and it's still in its relatively early stages. You know, we'll see.

We'll see. I smile to myself whenever I get this question because, you know, it wasn't very long ago, like within the last calendar year, that people wanted us to drill, you know, more gassy wells or gassier wells, and so there you go.

Neal Dingmann (Equity Research Analyst)

No, love all the upside. Thanks, Chris, for the details.

Moderator (participant)

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

Umang Choudhary (Analyst)

Sure. Hi, good morning. Thank you for taking my questions.

Chris Stavros (President and CEO)

Sure.

Umang Choudhary (Analyst)

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? Just trying to understand if there's some read across to your appraisal program, which you highlighted earlier.

Chris Stavros (President and CEO)

Sure. I'm not gonna tell you exactly where the wells were drilled, but I mean, generally, the wells, most of the wells have been drilled in our core development area, that we've been pursuing for, you know, the last couple of years, and where the results have been very strong, and continue to generate good results. The appraisal program, you know, as is evident by the acquisition that we did, you know, it's, it's sort of, unearthed some opportunities here that, you know, we can pursue, and we have pursued, and frankly, we will pursue.

Part of the benefit, of you know, improving our capital efficiency, you know, through cost reductions that we've seen and, and all the efforts around that, including our cash operating costs, you know, this provides us with better margins, more free cash flow, as I said, and gives us some optionality with respect to, you know, doing other things, you know, in the back half of the year into next year, as we have better aligned our, our costs with, with what's going on with, you know, certainly gas and NGLs, et cetera. I feel pretty good about that. We'll, we'll do a little bit of, you know, experimentation because, you know, we always try to do that if we can, if it sort of fits into the overall, you know, financial scheme and mix.

We do that where we can, because we think that it's useful, helpful to improve the business over time. As I said, it, enhances our, our opportunity set. That, that may sound a little generalized, but I mean, that's, you know, that's sort of what, what we've been doing.

Umang Choudhary (Analyst)

That makes a lot of sense. Thank you. Then, quick questions on operations. First, on service cost environment, I mean, you, you talked about a 15% cost savings. You'd like to run a flexible program with more spot exposure. Given where we are from a rates perspective right now, our pricing perspective right now, any thoughts around locking it up for a period of time? Then, 1 housekeeping question. I think last quarter, you indicated plans to defer completions. Can you remind us where we are for those wells? Have you are you planning to bring them online this year, or are they more for next year?

Chris Stavros (President and CEO)

Sure. on the cost side, we're, we're not, we're not really spot necessarily. I don't want to get too caught up in, in exactly, all the contract, related items. I mean, look, we've as you know, steel and OCTG really doubled, I guess, into this year, and we saw that sort of peaking early in the first quarter. Pressure pumping, stimulation, 50% higher, drilling services up in that direction as well. So far this year we've reduced OCTG costs by probably 30-ish percent. Pumping costs by 25%. I like where this is going, and frankly, I think there could be some more.

To lock in right now, I'm not really sure what how helpful that is to us. We'll just sort of see where things go. Yeah we kinda operate from a position of strength here. We don't have a lot of financial risk, and so this will be what it'll be. I think there's some opportunity for further reductions, you know, into the back half of the year, and we'll sort of see where things land for 2024. I'm feeling pretty good.

Umang Choudhary (Analyst)

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?

Chris Stavros (President and CEO)

We haven't made that call yet. Again, I think we'll try to create better alignment between our costs and commodity prices. We'll just have to see where things go. As we mentioned back in the spring when we started this effort, the deferrals don't really amount to much. Most of the reduction in costs has come through our own efforts, concessions from service providers, and alignment with materials vendors. This effort was never about deferrals—it was about aligning costs.

This was sort of a little bit of deferrals or DUCs, if you will, were just a consequence of pushing things out and seeing if we could create a little bit more optionality for ourselves. If commodity prices improve, mainly, you know, gas and NGLs, later into the year, into next year, you know, we'll, we'll, we'll revisit that. But again, I could count these wells on sort of one hand.

Umang Choudhary (Analyst)

Got it. Makes sense. Thank you.

Moderator (participant)

Our next question is coming from Leo Mariani, from Roth. Leo, please go ahead.

Leo Mariani (Analyst)

Yeah, thanks. I just wanted to follow up a little bit on, on Karnes activity here. I mean, kind of looking at projections, you know, Karnes has fallen, you know, for the last, you know, couple quarters. Just wanted to kinda get your thoughts on how do you expect that to kinda trend, you know, the rest of the year? It seems like that's really maybe what's driven, you know, the oil cut reduction here between 1Q and 2Q, was that, you know, Karnes was down. A fair bit in Giddings was up substantially, so that obviously is a, you know, different mix, you know, in the asset. Maybe just... can you talk about kind of directionality on, on Karnes?

Just trying to get a sense, you know, you, you don't have a very large acreage position there. It's obviously pretty mature there in the Eagle Ford. Just, can you give us a sense of, of kinda how much, you know, inventory you think you might have left there? Is it kind of a handful of years, or where do you stand on Karnes?

Chris Stavros (President and CEO)

Yeah, we, we have things that we can drill. You know, as I said, you know, because of, of timing, schedule, scheduling, planning, permitting other factors, you know, we, we haven't done a lot of that this year. The other thing is that there's, you know, there hasn't really been much or any real non-op activity that's shown up, so that's certainly a portion of it. I, I expect that given the generally higher rate of decline in Karnes, that it will continue to see a little bit of that, but it, again, it may be lumpy. There, there may be some activity that, you know, we're, we're morphing in or, or blending in, into the back half of the year. There may be some more into next year. We'll sort of see. You know, we'll see how it goes.

You know, we, we have things that we can do there. We've just, you know, skewed our focus, as I said, more so to Giddings, because over time, the, the returns are higher. That's, that's been the plan.

Leo Mariani (Analyst)

Okay, that's helpful. Then just on Giddings, obviously, you, you made an acquisition here in July, and you also kind of made one in the, in the fourth quarter, which, correct me if I'm wrong, was also, you know, more kind of in and around Giddings, you know, in some of these, you know, appraisal areas. I know you don't want to give away specific well locations, which totally makes sense, still competitive, you know, business. Can you maybe give us a sense of, like, how many appraisal wells have you drilled? I know you've been appraising outside of the core area for the last couple of years. Are you 10 wells in, 15 wells in? I mean, any sense you can give us?

I mean, have you kinda tested, you know, a fair bit of stuff, outside the core, and as a result, these, these two deals are sort of the culmination of that?

Chris Stavros (President and CEO)

Yeah. I mean, look, we've, we've tested and we've drilled a handful of appraisal wells. You know, there's a lot of work that goes into it prior to, you know, drilling these appraisal wells. We're not, we're not just sort of, you know, sort of wandering around the field necessarily. These are very, you know, very well studied, and there's a lot of work, subsurface work, and other work that goes into it prior to that. So we-- and we have some sense of what we believe may be the outcome, but sometimes we're surprised well, and sometimes we're, we're, you know, surprised in the other direction. You know, what we, what we've done-... directly to your point, you know, led us to the, smallish acquisition that we did back in the, in the fourth quarter that we closed.

That I'm very, you know, that, that's an area that, that our subsurface team and tech folks like a lot. You know, will turn out to be, I think, very good. You know, this area, as I said, is also very interesting, and this, this may be the start of something. We'll see. I, I think there could be other things. You know, the, the 400,000 sort of net acres for us is, is kind of pretty vast. As you, you know, trot around, you, you know, you may find other things to find on the fringes that you'd like to fill in over time, and, and that's, you know, sort of what we've been doing.

Leo Mariani (Analyst)

Yep. Okay. That's helpful. Then just on the, the cost side here, your LOE was down like $1 a barrel here, you know, in the second quarter. Obviously, it sounds like there's been a, a big company focus to reduce costs, both capital and, and operating. Can you kinda give us a, a little better sense of, you know, was, was maybe a lot of this just, you know, less workovers, or was a, a big chunk of this actually ability to kind of, you know, reduce some of those costs, whether it's chemicals, electricity, labor, you know, et cetera? Just trying to get a sense of where we think kinda LOE op costs are gonna go in the, the second half of the year. Trying to figure out how much of these savings are kinda recurring here.

Chris Stavros (President and CEO)

Yeah, I mean, certainly there was some lower workover activity that, that helped us along that way. It was, you know, certainly less than half of the benefit. The majority of the savings, I believe, are sustainable moving forward. You know, the workover stuff can vary a little quarter to quarter, depending on the move in product prices, but the majority of it should be sustainable and was directly a result of, you know, reduction in oil field service costs, you know, to your point around chemicals and, and other things, a litany of things. You know, the labor component is a little bit sticky, as you've, you've probably heard from others. All that is true. You know, but I think things are generally.

You know I would expect it to be sustainable through the, through the year, feels to me.

Leo Mariani (Analyst)

Okay, thank you.

Chris Stavros (President and CEO)

Sure.

Moderator (participant)

Our next question comes from Oliver Huang, from TPH & Company. Oliver, please go ahead.

Oliver Huang (Analyst)

Good morning, Chris, Brian, and team.

Chris Stavros (President and CEO)

Morning.

Oliver Huang (Analyst)

Just had a question on the CapEx side. When kind of 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 is anything within that number, whether higher non-op, higher working interest in operated wells, increased activity levels or faster cycle times relative to the Q2 print run rate.

Chris Stavros (President and CEO)

Yeah, I think a lot of it is timing, Oliver, and, and I think, you know, we, as I said, you know, as, as things get better aligned between the costs and our desire to generate returns and improve our efficiency as a, as a result of the actions we've taken, we may sneak in some additional things. We'll sort of see how it's going. We may have baked in some other items, whether it's an appraisal well or whatever, that, that may be in there. We'll, see. On a run rate basis, you know, I don't think that level that we talked about, $100 million roughly or so is reasonable, I think for the time being. I think that's about how the business is right now. We'll see.

Oliver Huang (Analyst)

Okay, that makes sense. For a second question, just on the topic of LOE, when we're kind of thinking about that lower print for Q2 being driven by lower workovers and service costs flow through that you all kind of highlighted, how much of a factor is the increased Giddings contribution to driving that lower? In other words, should we be thinking about the LOE cost structure being lower on the Giddings side relative to Karnes, as it becomes a more significant contributor with each subsequent quarter?

Chris Stavros (President and CEO)

Well, we continue to focus on this in a relentless, relentless way, in terms of trying to drive down the costs. As I said, there's, there's labor things and, and contract workers that, that can tend to be a little bit of, little bit sticky. You know, generally, on a, on a, on a BOE run rate basis, as we add volumes, things should look similar, if not hopefully better, with time as we try to drive efficiencies through the field as well. We'll continue to work at this, and, and I think certainly Giddings is a, should be a positive contributor over time.

Oliver Huang (Analyst)

Awesome. Appreciate the color.

Moderator (participant)

We now have a question from Zach Parham, from J.P. Morgan. Zach, please go ahead.

Zach Parham (Equity Research Analyst)

Hey, guys. Just, just one question.

Chris Stavros (President and CEO)

Hey.

Zach Parham (Equity Research Analyst)

Following up on, on Oliver's question on CapEx. You know, you've guided to the $100 million run rate for the second half. You know, any thoughts on what that looks like as you go into 2024, if you're still running the 2 rig program, is that $100 million run rate, kind of a good number to use as a placeholder for now?

Chris Stavros (President and CEO)

Yeah, you know, clearly it, it feels a little early for 2024, but I know you guys love to ask these things at this stage of the year. Yeah I think it's, it's reasonable. I mean, I think it's a reasonable way to look at it for the moment. You know if pressed, you know we won't deviate from our objectives, which means we'll be disciplined and efficient around the spending. You know, this will yield and provide mid-single digit growth.

If I had to be pressed on an amount for capital, you know, and based on our current pace of activity and, you know where product prices are around now, I think you know, if I had to be pressed on a number, I think $400-$425 feels like a reasonable range at the moment, going into next year.

Zach Parham (Equity Research Analyst)

Got it. That's a very helpful color. That's all I had, guys. Thanks a lot.

Chris Stavros (President and CEO)

Okay, thanks.

Moderator (participant)

At this time, our last question comes from Tim Rezvan from KeyBanc Capital Markets. Tim, you may go ahead.

Tim Rezvan (Analyst)

Yeah. Thanks, everybody, for taking my questions. First, I want to ask on the repurchase program. You know, the average share price was down pretty sharply, you know, for you and all your peers in the second quarter. The number of shares repurchased, though, was down, and you still generated a lot of free cash flow. Just to understand how sort of formulaic is your program and how tactical is it? I thought you might have picked away some more shares when they, when they were selling off.

Chris Stavros (President and CEO)

Yeah, I mean, it's tactical. I mean, it's we don't sort of deliver the program to, to any particular broker per se. It's just, you know, sort of how we feel on any given day. We look for opportunities to be, you know, to, to be a little bit more aggressive or not around the share repurchase. We sort of have our own self-imposed, not rigid, but, you know, 1%, at least 1% of the outstanding per quarter. I like to use that as a, as a bit of a bogey, but, you know, we could do more. You know, look, Tim, I mean, I, you know, maybe we somebody was on vacation like me or something like that, didn't get at it as aggressively as I wanted to.

You know we'll look at how the shares perform on a relative and absolute basis. You know I like to think about it as, as the way an investor or shareholder would think about, you know, buying the stock or owning the stock.

Tim Rezvan (Analyst)

Okay. Okay, fair enough. I appreciate the, the comments. I just wanted to circle up and, you know, ask another question sort of related to Giddings disclosures. I appreciated the context on, on the $40 million bolt-on, and, and you said you didn't want to talk a lot about this potential new development area. You know, to be frank, you haven't talked a lot about your, your old development areas and your current development areas. As we take a bigger picture view, you know, of the stock this year, it's been a little bit of an underperformer. Short interest has been, been creeping up, and, you know, valuations are now starting to look rich relative to kind of mid-cap peers.

This is at a time when it, it's hard for the energy sector to kind of, you know, get mind share with investors. Given that setup, you know, do you still... Are, you know, is it at some point, you feel like you need to kind of pull back the curtain a little bit? Because there are a lot of questions from investors on sort of the depth and quality of your acreage in Giddings and, and sort of what, you know, your true development area looks like. Any context would be kind of appreciated. Thank you.

Chris Stavros (President and CEO)

Yeah, no, I appreciate the question. I don't feel the need to pull back the curtain. You know I feel like these, this, this kind of direction is, is almost inducing us to say something weird, like, you know, you can't handle the truth or something. No there, the truth is, and the facts are, that it's borne out or manifested in the outcome of you know, the growth that we've seen, the returns that we've seen, the free cash flow. You know, so I-- all of that has worked out very well in Giddings, and as I said, we have a large corral of wells that, you know, highly economic wells that we can continue to drill, and we will. You know, this, the...

On the acquisition, again, a $40 million acquisition, this, this, you know, sort of barely moves the needle in terms of, of the money. You know, my, my hope, frankly, is that, you know, we can do more of these things because I'm, I'm always looking, we're always looking for opportunities to further enhance, you know, the footprint in Giddings and improve the quality and sustainability of the asset base. This is nowhere, nothing near anything, most other companies, many other companies have done in terms of larger scale acquisitions, while at the same time having been very upfront or more, more so upfront in terms of pulling back the curtain on what they have talked about having in terms of runway or economic inventory or whatever you want to say.

You know, this is sort of. No one's really pushed other folks as far as why would you have done $ billions of deals, when, you know, you claim you got, you know, a, a pathway to, you know, the next decade or whatever? I'm perfectly comfortable with what we've done and how we've said it and how we framed it. I think, I'd be giving away too much, competitive information if I said much more on the acquisition and, and some other things. you know I don't know if that helps you, but, you know my job really is to improve the value of the business every day and with everything we do.

If the valuation is, is, better, that means we're, we're, we're doing the right thing, and the outcome is borne out in that premium.

Tim Rezvan (Analyst)

Thanks, Chris. I appreciate.

Chris Stavros (President and CEO)

Okay.

Tim Rezvan (Analyst)

the color, I know tough situation. Just to close the loop, though, I mean, after these sort of bolt-on pieces, is that? Are you gonna continue to be opportunistic and in that, you know, $20 million-$100 million size, we could expect them, you know, more to come down the pike as you can shake off acreage, you know, from peers or privates?

Chris Stavros (President and CEO)

Well, you, you know, you mentioned an interesting point about around the underperformance, you know I look at this, too. It doesn't, you know, I understand the valuation and all, and I get that. You know we have quite a bit of cash on the balance sheet, and I don't say that to say, "Well, we're gonna use the cash tomorrow to do something large or out of place." You know, you won't find us doing that. It's just not, I don't think it's in our DNA. You know, this is not, this shouldn't be perceived as a rainy day fund.

The cash is, is designed and was built up in a period of, of much higher product prices, and I, I've referred to it as, as the winnings, and you don't want to squander the winnings, you just want to allocate it appropriately to generate higher returns. While it might be interesting to look at, you know, $600 million-$700 million of cash on the balance sheet, it's, it's interesting, but that's it. It doesn't do anything much for you unless you start to deploy it in a way that can generate better returns. It's frankly, a bit capital inefficient, and I know that's not lost on you and the audience. My, my goal would be to try to find something that we could do with it that's better than just polishing it on the balance sheet.

You know, that's, that's the plan. I'd like to find some other opportunities that make sense for us and fit within our skill set and that we can manage and operate and that improve the business. That's, and, and that's the plan.

Tim Rezvan (Analyst)

Okay, thanks, Chris. I appreciate all the answers. Thanks.

Chris Stavros (President and CEO)

Okay, thanks.

Moderator (participant)

Pardon me. We are going to take a question from Paul Diamond from Citigroup. Paul, please go ahead.

Paul Diamond (Analyst)

Hi, good morning, all. Just thanks for taking my call. Just a, a quick one from me. Regarding your inflationary view, I guess, how do you guys benchmark that? I guess, what, what should we think about as, you know, the narrative that you guys saw coming earlier this year really playing out? Is there a bogey you guys have in mind, or is it more just seeing, you know, comparing the cost side to the, you know, aggregate pricing side?

Chris Stavros (President and CEO)

Well we look at, you know, we look at benchmarks for OCTG items, for, for steel prices, for rig, rig activity, and we try to gauge ourselves based on how we're doing relative to, you know, market pricing, et cetera. You know, we look at this pretty, pretty often and pretty carefully and pretty diligently. You know, we, we believe we're, we're capturing a lot of what we're able to capture and maybe more so sooner than what others have done. I think that, that speaks to the, you know, first-mover actions that we took much earlier this year. I think we'll continue to see a bit more in the back half of the year, and, and, you know, we'll, we'll see where that takes us for 2024.

I think we've, we've done a decent job, sort of benchmarking ourselves on, you know, larger scale, market items and materials.

Paul Diamond (Analyst)

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

Moderator (participant)

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