Q1 2024 Magnolia Oil & Gas Corp Earnings Call

Participants

Tom Fitter; IR Contact Officer; Magnolia Oil & Gas Corp

Christopher Stavros; President, Chief Executive Officer, Director; Magnolia Oil & Gas Corp

Brian Corales; Chief Financial Officer, Senior Vice President; Magnolia Oil & Gas Corp

Neal Dingmann; Analyst; Truist Securities

Leo Mariani; Analyst; Roth MKM

Charles Meade; Analyst; Johnson Rice & Company

Oliver Huang; Analyst; TUDOR PICKERING & CO. SEC

Zach Parham; Analyst; JPMorgan

Noah Mist; Analyst; Bank of America

Arnie Burke; Analyst; Goldman Sachs

Juan Lin; Analyst; Wells Fargo

Sean Mitchell; Analyst; Daniel Energy Partners

Paul Diamond; Analyst; Citi

Presentation

Operator

Good morning, everyone, and thank you for participating in Magnolia Oil & Gas Corporation's first-quarter 2024 earnings conference call. My name is Megan, and 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 call over to Magnolia's management for their prepared remarks, which will be followed by a brief question-and-answer session.

Tom Fitter

Thanks, Megan, and good morning, everyone. Welcome to Magnolia Oil and Gas's first-quarter earnings conference call. Participating on the call today are Chris Stavros, Magnolia's President and Chief Executive Officer; and Brian Corales, Senior Vice President and Chief Financial Officer.
As a reminder, today's conference call contains certain projections and other forward-looking statements within the meaning of the federal securities laws. These statements are subject to risks and uncertainties that may cause actual results. 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 at full safe harbor can be found on slide 2 of the conference call slide presentation. With the supplemental data on our website, you can download Magnolia's first-quarter 2024 earnings press release, as well as the conference call slides from the Investors section of the Company's website at www.magnoliaoilgas.com.
I will now turn the call over to Mr. Chris Stavros.

Christopher Stavros

Thank you, Tom, and good morning, everyone. We appreciate you joining us today for a discussion of our first quarter 2024 financial and operating results. I will provide some comments on our first quarter, noting the progress of our development plan so far this year discuss an important bolt-on acquisition that we recently completed and highlight some actions we're taking at the field level to reduce our cash operating costs. Brian will then review our first quarter financial results in greater detail and provide some additional guidance before we take your questions.
Starting on slide 3 of the investor presentation. Magnolia delivered a strong first quarter with total adjusted net income of $101 million in keeping with our consistent business model, we continued our capital-efficient D&C program by spending $119 million or 52% of adjusted EBITDA ex while generating $117 million of free cash flow. As part of our goal to return significant portion of our free cash flow to our shareholders.
We returned 68% of our free cash through our ongoing share repurchase program and our recently increased dividend payment. Total company production was toward the top end of our guidance at 84,800 barrels of oil equivalent per day, representing year-over-year production growth of 7%. Production at Giddings was 61,400 BOE per day, providing overall growth of 17% compared to last year's first quarter, including oil production growth of 16%.
Total company oil production during the quarter was ahead of expectations coming in at 37,500 barrels of oil per day, benefiting from strong well performance activity in Karnes and solid performance from the assets we acquired late last year. We had planned for this year's program to be a little oilier than last year, and our first quarter production provides some early evidence of that plan.
Last week, we closed on a very meaningful bolt-on acquisition of oil and gas properties in the heart of our Giddings acreage. These assets were acquired from a private operator for $125 billion, have similar attractive operational financial characteristics to our core acreage position at Giddings.
As I've often mentioned, a key part of our strategy is to use some of the excess cash generated by the business to seek out attractive bolt-on acquisition opportunities with the goal of making Magnolia better, not by simply replacing the oil and gas that is produced, but to improve the future opportunity set of our overall business and enhance the capability and sustainability of our high returns.
This latest bolt-on acquisition adds new high-quality acreage that's contiguous to our existing core footprint in Giddings, while also increasing our working interest in some of our current acreage. The transaction leverages the significant knowledge we have gained through operating in this field and extends our deep inventory of high-return development opportunities opportunities in Giddings from both new locations and incremental working interest.
As shown on slide 4, the majority of the properties are located in the core of Giddings with acreage in Washington, Lee and Fayette counties, representing an additional 27,000 net acres spanning over 80,000 total gross acres. The properties include a relatively small amount of base production of approximately 1,000 BOE per day and about 35% oil with Magnolia operating most volumes.
This is an ideal acquisition for Magnolia, which significantly enhances our position in Giddings and strengthens the company moving forward. Magnolia continues to operate two drilling rigs and one completion crew with the majority of this year's activity planned at Giddings. Our full year 2024 guidance for D&C spending remains unchanged and is expected to be in the range of $450 million to $400 million following on last year's success in reducing our well costs by nearly 20%.
Our drilling and completions have gotten off to a strong start in 2024, and we continue to drive further operating efficiencies. While this year's program includes drilling somewhat longer laterals, we have realized considerable recent improvement in reducing our drilling days per well. Our well costs, combined with improved operating efficiencies allow for more wells to be drilled, completed and turned in line during 2020 for helping to support Magnolia's overall high-margin growth.
As I mentioned earlier, we expect to use this year's development program to be oilier than last year and our strong first quarter oil volumes support the plan. We anticipate that this year's oil production should remain resilient as a portion of our activity will focus on some of the oilier assets acquired last year. Some of our drilling activity leaned away from natural gas early in the year due to very weak prices. And we expect that our natural gas production should reassert its growth as the year progresses with the view that gas prices would see some recovery later in the year.
Lastly, our operations and supply chain teams have initiated a field level optimization and cost reduction program throughout our assets. Part of these efforts will employ improved field management systems that will increase efficiencies and optimize processes across the field and targeting such areas such as contract labor utilization, surface repair and maintenance and procurement, just to name a few, are capturing synergies from the acquired assets.
These and other initiatives to lower our cash costs are expected to deliver a 5% to 10% reduction in our cash LOE per BOE during the second half of the year compared compared to the first quarter as Magnolia has grown and learned while operating our assets over the past six years. We believe this is an appropriate time in our evolution to embark on this program.
Our goal is to improve on our track record for generating high operating margins while providing additional free cash flow to either return to our shareholders or efficiently reinvest in the business. And these actions should help us achieve these objectives.
I'll now turn the call over to Brian to provide more details on our first-quarter financial and operating results.

Brian Corales

Thanks, Chris, and good morning, everyone. I will review some items from our first quarter results and refer to the presentation slides found in our website also provide some additional guidance for the second quarter of 2020 for the remainder of the year before turning it over for questions beginning on slide 5.
And as Chris discussed, Magnolia had a solid first quarter across the board. During the quarter, we generated total GAAP net income attributed to Class A. common stock of $85 million, with total adjusted net income of $101 million or $0.49 per diluted share.
Our adjusted EBITDA for the quarter was $228 million, with total capital associated with drilling completions and associated facilities of $119 million or [50] for 52% of our adjusted EBITDAX and almost [10] plus 10% below our guidance. First quarter total production volumes grew 7% year over year to 84,800 barrels of oil equivalent per day, and our diluted share count fell by 5% year over year to 204.3 million shares.
Looking at the quarterly cash flow waterfall chart on Slide 6. We started the year with $401 million of cash cash flow from operations before changes in working capital for the first quarter was $218 million with working capital changes and other small items increasing cash by $6 million.
We spent $27 million on bolt-on acquisitions, primarily in Giddings paid dividends of $27 million and allocated $51 million towards share repurchases. Total capital was $121 million, and we ended the quarter with $399 million of cash and relatively flat from year end 2023 levels.
Looking at slide 7, this chart illustrates the progress in reducing our total outstanding shares since we began our share repurchase program in the second half of 19. Since that time, we have repurchased $64.3 million shares, leading to a change in diluted shares outstanding of over 20% net of issuances and supports our goal of improving our per-share metrics.
Magnolia's weighted average fully diluted share count declined by more than $2 million shares sequentially averaging $204.3 million shares during the first quarter. We have $6.9 million shares remaining under our current share repurchase authorization, which are specifically directed toward repurchasing Class A. shares in the open market.
Turning to slide 8. Our dividend has grown substantially over the past few years, including a 13% increase announced earlier this year to $0.13 per share on a quarterly basis. Our next quarterly dividend is payable on June third and provides an annualized dividend payout rate of $0.52 per share.
Our plan for annualized dividend growth is an important part of Magnolia's investment proposition and supported by our overall strategy of achieving moderate annual production growth, reducing our outstanding shares and increasing the dividend payout capacity of the Company.
By now, you have benefits from a very strong balance sheet and we ended the quarter with approximately zero net debt and $399 million of cash. Our $400 million of principal debt is reflected in our senior note notes, which do not mature until 2026, including our first quarter ending cash balance of $399 million and our undrawn $450 million revolving credit facility. Our total liquidity is approximately $850 million. Our condensed balance sheet as of March 31st is shown on slide 9.
Turning to slide 10 and looking at our per unit cash costs and operating income margins. Total revenue per BOE declined year over year due to decrease in natural gas and NGL prices when compared to the first quarter of 20 of 23.
Our total adjusted cash operating costs, including G&A were $11.86 per BOE in the first quarter of 24, a decrease of $0.79 per BOE or 6% compared to year-ago levels. The year-over-year decrease was primarily due to lower production taxes in GTP. Our operating income margin for the first quarter was $16.15 per BOE, or 39% of our total revenue. The year-over-year decrease in our pretax operating margin was driven by the decrease in commodity prices and higher DD&A rates.
Turning to guidance, we are reiterating our expected 2020 for D&C capital spending to be in the range of $450 million to $480 million, which includes an estimate of non-operated capital that is about the same as 2023 levels. Total production and oil production are still expected to grow high single digits on an annual basis.
For the second quarter. Our D&C and associated facilities capital expenditures are expected to be approximately [100, 22 hundred] and $25 million, with total production for the second quarter estimated to be approximately [89 million. 2 million] barrel sorry, 89,000 barrels equivalent a day oil production oil price differentials are anticipated to be approximately a $3 per barrel discount to Magellan East Houston and Magnolia remains completely unhedged for all of its oil and natural gas production.
Fully diluted share count for the second quarter of 2024 is expected to be approximately 203 million shares, which is 4% lower than second quarter 2023 levels. We expect our effective tax rate to be approximately 21% and with increased oil prices our cash tax rate is expected to be approximately 9% to 10% for 2020.
We're now ready to take your questions.

Question and Answer Session

Operator

We will now begin the question-and-answer session. (Operator Instructions) Neal Dingmann, Truist.

Neal Dingmann

And we've always talked about the returns and breakeven. I'm just wondering, could you talk about the latest breakevens, the latest breakeven when you look at Giddings right now. I'm just wondering, could you talk about how that breakeven maybe compares to Karnes or Chris, just maybe how you're thinking about the returns there these days versus even a year ago?

Christopher Stavros

Yes, morning. Now back to you, Bob. Yes, you know, I certainly wish gas prices were a little bit better, but frankly, all in oil, all in all of the Giddings wells of better full cycle returns than than the wells we were drilling and completing Karnes. I mean that's just just the basic Frank thoughts around at least the Giddings wells, certainly in our core area and most of the wells we drill off and pay out in a year or less.
And we've talked about this quite often. And if they produce more oil over their life than a typical Karnes well. So the Giddings well returns are very high and even in this environment. And so you wouldn't do anything necessarily differently in terms of scaling our slant team, our activity to Karnes per se, just to sort of capture return and the Giddings wells also have a shallower rate of decline. So I think it benefits us all in all, it includes limits.
Would you write down the breakeven desert, your operational efficiencies have continued while our well costs have come down quite a bit. And much of that was captured through our efforts last year by working with our service providers, material vendor. And as I said, I've said this before we probably prop well costs down about 20% and some of that is continuing into this year. So the well costs are currently probably at 1,100 a foot more or less and probably coming down a little bit further. We've made some inroads, as I said, to one on drilling faster. So things are just working out real well on that side. So the efficiencies and the breakevens are some sort of continuing to come down a little bit.

Neal Dingmann

Great to hear. And then maybe just a quick second one on M&A specifically. I really like to comment on how the bolt-ons you're not simply just replacing oil and gas, but improves in that opportunity set. I'm just wondering if you could give us a bit more color on the latest on the $25 million deal, maybe what that that did as far as terms of location or how that did improve your opportunity set there yes, sure.

Christopher Stavros

Um, we said this for a long time, and I know, Steve, you say it, but it's true the way to make money in the business and the oil businesses theatre guests right on the commodity price or acquire attractive optionality at a low cost or maybe even for free. And when it comes to PDP. deals, you're going to pay full value or strip prices for that at the very least. And and yes, there's not much to that arm in terms of real upside amount. We're going to inherit a lot of production and have to overcome a decline rate.
So this particular deal in this is a sort of a great fit. And in terms of what we look for start-up as far as our bolt-on strategy, specifically lower PDP volumes, but very importantly, significant high return development opportunities at a low cost and with potential upside. And so we show this on the map or at least tried to I've said it a lot of new acreage and increased our working interest in existing acreage in a very, very productive area of Giddings, right next door to where we've been busy with our current development.
So this transaction represents a unique opportunity, and I'm very confident that it provides us with a minimum of probably a couple of years of high return net drilling locations and at our current pace of drilling in Giddings. So I think that it's more here than meets the eye and frankly, more than more bang for the buck.

Neal Dingmann

Fantastic. Thanks, Chris.

Operator

Leo Mariani, Roth MKM.

Leo Mariani

Again. I wanted to start off with just focusing a little bit here on oil cut. So oil cut was definitely, I guess, stronger than expected in the quarter. Just wanted to kind of get a sense of how you kind of see that playing out? I think it's kind of the highest quarterly oil cut you've had in a couple of years here.
Or do you think that can kind of get maintained throughout the course of the year. I know some of the focus a little bit more on some of the oily drilling or do you see that may be starting to soften as we get later in the year?

Christopher Stavros

Yes. Thanks, Leo. So for the first quarter with production, we obviously, as I said, saw good performance, strong overall well performance across the business. Our strong performance from the assets that we acquired. We had some oilier Karnes activity that came online during the quarter.
This year's development plan will be oilier than last year in our first quarter volumes on oil support that some of the drilling, as I said, will weigh a little bit from natural gas early in the year, but that should recover and reassert itself, as I said, as the year moves forward. But I also expect that tissues will have production is going to remain pretty pretty buoyant as a portion of our activity is going to focus on some of those earlier assets that we acquired.
Some rather simply President simply focusing on the oil mix or percentage. I would characterize our absolute oil volumes is having the ability to remain pretty robust throughout the year. So that gives you a little color on what it's going to be a little lumpy as we as we move forward in a quarter to quarter as it typically is. But I think oil is going to be pretty good, and that was part of the plan.

Leo Mariani

Again, I appreciate that. And then just going back to the acquisition that you did here. So it sounds like you guys are pretty excited about it certainly noticed that you're not changing your production or capital guide up for the year. I know it adds kind of a small amount of volumes, but that kind of maybe implies that you're not doing a whole lot in terms of B and C on the asset this year, just kind of want to get a little better sense for what your plan.
Is that something you're going to integrate in the program next year in terms of, you know, drilling into some of this is just additional interest on what you already own, but presumably there's some some new stuff to drill as well and then just how do you see other opportunities like this out there? I guess it's kind of your your second DC a little bolt on in the last, you know, six months. So just trying to get a sense of what the plan is going forward.

Christopher Stavros

Yes, thanks. That's a lot packed in there. So on the on the guidance, part of part of my job is to manage the external expectations and within our capability of delivering solid results right now, things are going rather well on the drilling and completion side on the production volumes acquired from the deal represent what the assets are currently producing. And since we'll only own it for two thirds of the year, the overall production doesn't amount to very much.
And actually, that's just fine because we didn't acquire these properties for the PDP. We acquired it for the high-quality undeveloped opportunities, which, as I said, I think are quite significant in my view, some maybe there's a touch of conservatism here or on the way I think about it, maybe a little bit of Murphy's Law me, but I prefer not to get too cute with the guidance.
So with that in mind, I think our total production and oil production should grow in the high single digits this year or maybe even a high high single digits, but certainly high. And on the acquisition itself, it's hard to time these things, these types of opportunities. This is something that it started evolving really last year on the it was unique from a private operator.
I'm not going to pretend to speak for individuals who made very personal decisions, but started to take shape last year and it took a lot of effort and cooperation by both parties to make it happen. That's about all I have to say about the process. But yes, sure. I hope I hope there there would be or could be opportunities like this one that would be great.
The objective is to sort of do these things within our capability of managing them. Some that are not necessarily a size for size sake. The objective is to make us better, not necessarily bigger and to save to sustain ourselves with our high margins and our business model profile model for the long term. And so that's how we look at things.
I think the the acquisition itself will get folded into our broader Giddings program because, you know, that's what it is it just will fold in some wells this year will fold in more wells next year. It's that it will be it will look like Giddings because that's what it is.

Leo Mariani

Okay. Thanks for the color. Appreciate it.

Christopher Stavros

Sure.

Operator

Charles Meade, Johnson Rice.

Charles Meade

I'm wondering, Chris and Brian and everyone on the Magnolia team there. Chris, I want to take a run at the at the acquisition, and I'm wondering if you could characterize for us how developed it is in the target zones. You're going after? And then maybe that might differ if you have more than one target up and down the column hub, how undeveloped is it in your targets? And then how many net locations you think you're bringing in?

Christopher Stavros

Well, it's not very developed. In fact, I would characterize it as frankly, undeveloped that has not developed as cheap as you can imagine. So there's there's low hanging fruit here. There's all upside of an eye that's about all I can say has too high, but on anyway. So there's a lot of potential opportunity for ourselves here is it's unique, as I said, and yes, I'm confident in the fact that we've added a couple of years' worth at our pace of net locations.
And because we we can see this and we understand it real well from a subsurface perspective and our ability to drill wells that look very similar to some of our better executed pads and wells in some of the core areas are getting so yes, and then you got to tie me down. I'm pretty excited about the fact that we were able to pull this one off, and it's it's quite good, Cai. I don't know how much more I can say, but it's at our pace currently, it's about a couple of years' worth of drilling that's a helpful data point.

Charles Meade

Thank you, Chris, and that's it for me.

Operator

Oliver Huang, Tudor, Pickering, Holt & Company.

Oliver Huang

Good morning, Chris, and Brian, and thanks for taking my questions. As you all continue to bolt-on in the Giddings area, which you've acknowledged having better route relative economics to the inventory that remains in Karnes, generally speaking, how should we think about the mix of capital allocation between Karnes and Giddings versus that 20s split you're running this year on a go forward basis?

Christopher Stavros

Yes, thanks, for the question. I think I think it's going to be about that more or less. I don't I don't see it changing dramatically. And you know otherwise. And I'm speaking operated non-operated and on Karnes, and it's a little hard for us to predict. But generally that 80 20, I think sort of applies here for a while, as far as I can see right now.

Oliver Huang

Okay. That's helpful. And maybe just to touch on efficiencies a little bit more previously, kind of mentioned how the frac side of things was a big driver of lower well costs last year and that the drilling side is a much bigger focus for 2024. Just wondering if you could maybe talk to the progress you've seen to date. And also when we're kind of looking at the Q1 CapEx coming in a little bit below your guidance, if there's any color behind if it was more well cost efficiency driven working interest or just more of a timing aspect?

Christopher Stavros

I think here I think there's certainly some timing to that, which is really why you see in the second quarter, some of the capital got shifted into the second quarter. So there's always going to be little or no matters around timing for that. And frankly, we could we could see more of that it just sort of depends. I think, you know the numbers that we've that have been borne out up to now in the first quarter and the guide for the second quarter sort of plus or minus what it looks like right now.
But that's that's without trying to bake in potential improvements that we can continue to make if we're drilling faster on that that has come, you know, an outcome to it to some extent. And so there may be more that comes in to play into the program that this is a good thing by the way. I mean, it creates more cushion for us and an optionality for the remainder of the year.
So I think that works out favorably for us and that's fine on and the weakness or the softness in natural gas prices, certainly sort of continues to have an impact on on materials pricing in LOCTG. is sort of in our still softish and is probably seen in a single digit price softness into the second quarter. I'll tell you, rig and pressure pumping crew availability has ample in our operators competing on price quality performance. And as I said, I think that it will see some of these small benefits. It factored into those well costs numbers that I quoted earlier.

Oliver Huang

Makes sense. Thanks for the time, Chris.

Christopher Stavros

Okay, thanks.

Operator

Zach Parham, JPMorgan.

Zach Parham

I guess the answer to that question. First, just wanted to ask on the cash return program. You've been pretty consistent for quite some time with the buybacks, but you've got a lot of cash on the balance sheet at some point, could it make sense to accelerate the buyback and use some of that cash to back?

Christopher Stavros

Yes, it could. I mean, I like the consistent consistency of the program and of the model. So I don't want to get too specific on on pointing out the number, but it feels like in this sort of range of pricing, product pricing you're looking at it sort of a two thirds, our return of free cash flow and a mix of share repurchases and dividend.
There may be some flexibility on the dividend on the share repurchases rather just given our somewhat price sensitivity around that on now we'll get the stock is sort of weak for some particular reason that we can't necessarily justify or figure out. We're happy to lead it or not. And so we'll just sort of see how it goes.
I not know favorably inclined to just keeping a bunch of cash on the balance sheet just because I've joked about this, we're not a bank, it's sort of weighs on our returns, and I'd rather put it to use to generate higher returns. If we can come right now, having no real net debt is obviously very comfortable and it makes people feel better. But dumb, you don't necessarily need to have that much cash sitting around.

Zach Parham

Got it. Thanks for that color. And my follow up, just on LOE, can you give us a little more detail on what you're doing to reduce LOE and maybe any thoughts on what LOE looks like in 2Q before declining in the back half of the year?

Christopher Stavros

Yes. We've already started on this. I mean, we were first talking about it now but we've already been at it here for a little bit. And so my hope is that you'll start to see some improvement even sooner than in the back half of the year and frankly into the second quarter. But I think the larger improvements gain should be more evident in the third and fourth quarters of the year.
But I'm very confident that the first quarter would have been the highest loss cash operating costs per BOE for the year. As I said it, we'll employ things like some of this field management systems that will lead to improved efficiencies and optimization across the fields, well optimization of contract field labor, surface repair, maintenance of procurements, some synergies from the acquired assets, I mean is a lot of low hanging fruit that I think we can capture.
So I'll even call this a little bit like spring cleaning, we've been at this for a while in terms of operating both Giddings and Karnes over the last six years, and we've learned and grown with it, but I think this is an appropriate time for us to pursue it. And we're in a portion of the cycle that I think is a lot stronger. And so the organization can look at areas to improve in a more thoughtful way rather than being forced to to make more knee-jerk reactions or draconian decisions if we were in a much weaker environment. So I think this is a good time to do it. Our field folks have embraced it and everybody's on board, and I think it's starting to work out pretty well.

Zach Parham

It. The picture is actually.

Operator

Noah Mist, Bank of America.

Noah Mist

Sorry, I was on mute on product. I just wanted to ask a quick question here on the on the deal again on it looks like it fills in a lot of acreage gaps. And does it does this allow you guys to potentially have longer laterals than the 8,500 feet that you guys are drilling this year or does it unlock potentially stranded acreage? And then also, are there any contingency payments associated with this deal similar to what we saw with the November deal that closed in November now there's no contingency payments whatsoever, the cost of the transaction. And as we stated on the answer on our longer laterals and unlocking additional acreage.

Christopher Stavros

Yes. And yes, I'm not going to tell you that although the wells are locations will be longer than what we're currently drilling this year on average, which will be about 85 hundred feet. But certainly there would buy. I expect that there will be some longer for sure. We're taking a closer look at that in terms of what what it may be able to unlock as far as some lease lines, et cetera. But yes, I think there's there's opportunity for that.

Noah Mist

Great. And then just switching over to the on to the oilier assets. You guys are looking to drill later this year hub, how do those economics compare to core Giddings today, just given how the forward curve has moved up handy? Could you give any color on maybe when do you think those wells will come online, 3Q or 4Q?

Christopher Stavros

Yes, I think you'll probably be able to see that later this year and the datasets that are out there. I know there'll be some financial data, some production that you'll you'll be able to have quantify it as far as at returns. I mean there it's very oily oilier, obviously than any core Giddings or general Giddings.
But again, an important point is that these are up shallower wells. There are 3 to 4,000 feet shallower than our typical Giddings wells. So the D&C costs are our lower. So the economics, frankly, are very similar to what we see in the organic.

Noah Mist

Great. Thank you, and I'll hand it back there.

Christopher Stavros

Thanks.

Operator

Arnie Burke, Goldman Sachs.

Arnie Burke

Hi, good morning, team. Just a quick question on the cost reduction. Sounds like you're beginning with your cost reduction plan at this point. And obviously, there are a lot of your peers that have been doing several things over time to reduce costs and maybe help us understand where you will be after this initial phase on that journey versus others. And so that just so that we can gauge how much room there is to go after this.

Christopher Stavros

Well, I think the 5% to 10% is a very good starting point. We'll sort of see how it goes. We said we haven't really done a lot of this up. So I think there's low hanging fruit. We've been at this six years, and I was joking with the guys. I mean, it's almost like them. We've taken a taken a spin in the dryer where you're in the longer in the dry or the more linked to pickup and occasionally you got to shake off the land.
And so, um, you know, there's a lot of things that we can go after and we've accumulated more understanding of the assets. We've obviously drilled a lot of wells in Giddings. We have a better understanding of it off. There's some I think synergies with the focus that we have within our core and the application of some field management systems that will really help us out here in managing some of the processes in the field. So we'll see how things go.
But I am optimistic that we'll start to see some early gains here up before the back half of the year. And we'll just continue to see how it goes. The objective here is really to improve our operating margins. At the end of the day. I mean the cash cost will come down the operating margins would pick up all else equal and provide us with better earnings and more free cash flow. That's really the objective.

Arnie Burke

Awesome. And then I guess taking taking that SKU like how does this black plan tie into the long-term sort of efficiency objectives, capital efficiency objectives?

Christopher Stavros

And as you free up more capital, how should we think about that allocation strategy while this is less and less of a capital exercise as it is really more of a field exercise at the end of the day, both from both of the actions or activities amount to money. So you know that the capital side just gets folded into your F & D costs and your DD&A.
And so that at the end of the day is your biggest cost. And so the more you can do on your well costs, I'll provide greater drilling efficiencies overtime and and a lot more free cash flow as well, requiring a lower reinvestment rate, the same outcome. So they're they're clearly tied together but come on, we'll look at we'll look at some things. There's probably some overlap in terms of things that we were able to do well on the capital side that could come but may apply in terms of what we've learned that we could apply in the field.

Arnie Burke

Brian, appreciate that. I'll turn it over.

Operator

Juan Lin, Wells Fargo.

Juan Lin

Thanks for taking my questions. I want to follow up on the investment rationale behind a new Giddings acquisition. Could you perhaps provide some colors on some of the key valuation metrics of the acquisition?

Christopher Stavros

Thank you. Yes, well, you didn't it didn't get a whole lot of volumes. So I'd imagine if you back out just the the value of the current PDP., you're looking at 3 to 3,500 an acre or something like that on night. I'm not not sure what else, but our second SAINT, I think that's pretty attractive, frankly.

Juan Lin

Got you. And do you have any preferences regarding oil ratio for future acquisitions? Thank you.

Christopher Stavros

No, I not I don't I know I don't look at it like that. I look at it just in terms of how it's going to improve our business and financial outcome and how it sort of continues to seek to extend the capability of managing our model. Our business model, which is, you know, completely designed around being the most efficient operator and drilling the best wells at the lowest cost, too, we provide as much free cash flow that we can return to shareholders. And Al, we've reduced the share count as we have over time. And we don't we're not looking to do increase our debt levels or if we don't, we're not sellers of stock. And so we've done everything we've done pretty organically here just through cash generated by the business side.

Juan Lin

That's that's the plan. Thank you.

Operator

Sean Mitchell, Daniel Energy Partners.

Sean Mitchell

Thanks for fitting me in guys. Sorry, I was on mute on. Congrats on the deal. Deals are not easy to come by these days. So congrats to you guys. For getting something done at several of your peers are doing refrac work. And I think there's more buzz today than there has been in the Bakken, the Eagle Ford, how are you guys thinking about this opportunity if at all?

Christopher Stavros

Yes, it's more in the if at all category hub, all less there. I mean, there's lots of guys. I appreciate the question John, I I hear you, you know, it's it's way way too early for us to really think about this for us. And in a broad way from, you know, these are these are early science projects. Frankly, there's lots that we are focusing on far and away from things like that is too much too many things for us to do end up and drill before we ever get to that tie in. I just can't see that in our in our mix in any substantial way for a long time.

Sean Mitchell

Yes, fair enough. And maybe follow up on on the bolt on or I think I probably know the answer, but with these guys running a rig or no.

Christopher Stavros

They were not to my knowledge and control and then have the two rigs and one frac crew you guys have today, Tom, remind me, are those on spot or do you guys have those contracts and contracts?

Sean Mitchell

Okay. Very helpful. Thanks, guys.

Christopher Stavros

Okay, thanks.

Operator

Paul Diamond, Citi.

Paul Diamond

Thank you, Dmitry. I'll just stick to my call. Just a quick one on kind of the opportunity set you see or are you still seeing Giddings? How should we think about that geographically? Is it more north?

Christopher Stavros

We more Fiat is Washington, China, just generalized scale of that, similar to the bolt-ons are a lot more of the smaller type opportunities still available. While we are, we have a lot to work on in the areas that you mentioned, for sure, there's a lot of acreage in addition to that elsewhere in other counties within the Giddings Field and getting proper. So we still will continue with some appraisal work to have a better understanding and better define some other areas that frankly, has worked very well and led us to seek out new opportunities on whether for bolt ons or just areas that we could drill with strong economics. So I think it's still relatively early days. You can't get to everything all at once. It's some of it is just kind of fall into a question of how much money there is available to us in any given time period in any given year and the plan that we have to execute. So you can't do everything, we'll get to it over time. But there's a lot that we can lot that we can look at over time.

Paul Diamond

Understood. And how do you on how to scale this opportunity? Is it a more like small ground game type stuff? Are they similar sized bolt-ons and one done this quarter?

Christopher Stavros

Fair. There are on I look at this and say, I mean, it would be on would be unfair for me to say that you're going to see something like this that we just did. Again, I'm not this specific type of transaction. But there are potentially other small fill-ins, small working interests or just fill-in properties to help round out areas that we like and are working well for us.

Paul Diamond

Understood. Understood clarity. However, there, thanks to.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.