Good morning, and welcome to the Magnolia Oil & Gas Corporation's fourth quarter 2018 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Brian Corales, Vice President, Investor Relations. Please go ahead.
Thank you, Anita, and good morning, everyone. Welcome to Magnolia Oil & Gas's fourth quarter 2018 earnings conference call. Participating on the call today are Stephen Chazen, Magnolia's Chairman, President, and Chief Executive Officer, and Christopher Stavros, Executive Vice President and Chief Financial Officer. As a reminder, today's conference call contains certain projections and other forward-looking statements within the meaning of the federal securities laws. These statements are subject to risks and uncertainties that may cause actual results to differ materially from those expressed or implied in these statements. Additional information on risk factors that could cause results to differ is available in the company's proxy statement filed with the SEC. A full safe harbor can be found on slide two of the conference call slide presentation with the supplemental data on our website.
You can now download Magnolia's fourth quarter 2018 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. Stephen Chazen.
Good morning, and thank you for joining us today. I'll provide a brief overview of our business, and Chris will go into some of the details of financials and also provide some additional guidance before we take your questions. As we stated from when we started this almost a year ago, Magnolia's business model designed to be differentiated, and the primary objective being to generate stock market value over the long term. Our company's continuing strategies exhibit characteristics that appeal to and attract the generalist investors. These attributes include generating actual earnings and significant free cash flow with moderate growth and low levels of debt. While Magnolia has only been in business for a little more than six months since closing the transaction with EnerVest last July, we have exceeded most of our original business plan objectives during 2018.
Our fourth quarter 2018 production averaged nearly 62,000 BOE a day at a rate that was more than 30% higher than our original full-year guidance. Our higher than forecast production growth was due to stronger than expected well performance, drilling efficiency gains, and higher non-operated activity. We emphasize that much of this was accomplished by averaging roughly two and a half rigs and utilizing one completion crew throughout the assets over the balance of 2018. I'd like to also point out that our production in Giddings has doubled since we assumed ownership of the assets. Our double-digit organic production growth since the closing of transaction was achieved by spending approximately 57% of our EBITDAX on drilling and completing wells and was well within our business plan.
Significant portion of free cash flow generated by the business during our 2018 ownership was used to make bolt-on acquisitions, which further strengthens our core operations in both Karnes and Giddings. Most notably, during the third quarter of 2018, we acquired substantially all the South Texas assets of Harvest Oil & Gas Corporation, which added both production and drilling inventory to our Karnes County and Giddings assets. Additionally, in the fourth quarter, we added to our Karnes position, acquiring approximately 1,850 net acres. Generating high pre-tax margins is another characteristic of our business model. Our EBIT margins were 26% during the period we owned the assets in 2018, including 29% in the fourth quarter or 35% on an adjusted basis for the five-month period.
We accomplished these objectives while maintaining low financial leverage and strong liquidity, including a $550 million undrawn credit facility and a cash balance that grew by approximately $100 million during the fourth quarter. As we move forward through 2019, we believe that our strategy and business model is well suited and flexible for the current environment. Current product prices are about or even a little higher than the levels when we first announced the transaction nearly a year ago. We view this environment as one in which we can thrive. While we have been running two rigs in Karnes for most of the first quarter, we plan to release one rig by the end of the quarter in order to adjust our capital levels to lower product prices.
As a result of our higher operated and anticipated non-op activity, our capital at % of EBITDAX is expected to run a little hotter than normal during the first quarter. This rate is expected to normalize towards mid-year as our activity levels adjust to product prices. We will continue to evaluate our drilling activity as the year progresses. Despite the reduction in our operated rig activities, we still anticipate growing our production at a double-digit rate during 2019 while spending within 60% of our EBITDAX. Importantly, our goal does not solve for growth rate. Rather, the growth rate is simply the outcome of our capital program. The rate of the capital required to achieve this growth rate speaks to the quality of the assets. In Karnes, we continue to see high-quality well results, which remain fairly constant and steady, and with a predictable outcome.
We see ample opportunities here for small to mid-size bolt-on acquisitions to further strengthen our position over time. In Giddings, while the increase in our production is related to the quality of the wells drilled, the results continue to be quite variable. Our current plan is to run one rig at Giddings and continue to drill some appraisal wells to help improve our understanding and further delineate our sizable position, where we have approximately 650,000 gross acres. Our Giddings acreage is almost entirely held by production. Finally, we continue to build out the Magnolia staff, adding several key technical administrative positions, which should gradually enhance our asset performance. We are still in the very early stages as a company, and we're pleased with the performance of our assets and what we've accomplished so far.
We remain very optimistic regarding our prospect of opportunities in 2019, which will allow us to continue to deliver on our business model objectives and create value for Magnolia shareholders. I'll now turn the call over to Christopher Stavros.
Thank you, Steve, good morning, everyone. Before I walk through some of the numbers, I'd like to point out a few items that may help in understanding our financial statement disclosures. First, the fourth quarter ending 2018 was the first full quarterly period under which we own the assets since we closed the transaction with EnerVest at the end of last July. Second, we'll refer to the five-month period from the end of July 2018 through the year-end as the successor period of ownership. Keep in mind that our financial statements for the successor period lack comparability with predecessor period financial statements prior to that date. Finally, we adopted the new revenue recognition accounting standard, ASC 606, at the end of 2018 for the successor period, using a modified retrospective approach.
While adoption of the new standard is not anticipated to have a material impact on the company's net earnings or EBITDAX, there was a small positive impact to our natural gas and NGL production volumes, this also contributed to the slightly lower percentage of oil in our production mix. Our reported production volumes for the five-month successor period of ownership reflect this adjustment for the adoption of the new standard. My expectation is that our financial statement disclosures should be easy to understand and more consistent as we move through the year. Moving on to some of the numbers. Referencing slide five on the conference call presentation that's posted on our website, we reported GAAP net income attributable to Class A common stock of $33 million, or $0.21 per diluted share for the fourth quarter of 2018.
Total reported net income for the period, which includes the non-controlling interest, was approximately $58 million, or $0.23 per diluted share when including the total of both Class A and Class B common stock outstanding. Investors and analysts should use this latter measure of EPS when comparing us to other similar companies. Turning to slide seven, our total production averaged 61,900 Mboe per day during the fourth quarter, an increase of more than 5% sequentially and ahead of our previous guidance. Fourth quarter production in the Giddings field was 20,600 Mboe per day, or a sequential increase of nearly 22%. The higher-than-expected production at Giddings for the fourth quarter is driven mainly by new well completions, in addition to a full quarter benefit of the production from the Harvest acquisition.
Our Giddings volumes have approximately doubled since we announced the original transaction nearly a year ago, as Steve mentioned, and we remain very optimistic about our prospect of opportunities in the field. Our revenues totaled $255 million in the fourth quarter, benefiting from both higher production volumes and strong oil price realizations, which averaged $65.12 per barrel during the period and as shown on slide eight. Although oil prices declined sequentially throughout the fourth quarter, our realized prices remained relatively strong as we were indexed to export market prices on the Gulf Coast. As such, our oil realizations were 110% of WTI and more than a $6 per barrel premium during the fourth quarter. Turning to costs, our LOE during the fourth quarter was $3.46 per Boe and higher than the third quarter 2018 two-month successor period.
We expect these costs to trend slightly lower through the year and as our production volumes continue to grow. Our fourth quarter DD&A was $19.65 per Boe and reflects Magnolia's plan to focus on near-term development of PUD reserves. Fourth quarter G&A expenses were up $18.5 million, or $3.25 per Boe. These costs increased sequentially as we continued to build out our corporate structure, IT systems, as well as incurring some organizational startup and other related expenses. We estimate that our per-unit G&A costs in 2019 should be similar to fourth quarter levels. Our total reported net income for the fourth quarter included $2.2 million of transactions costs related to the original acquisition. We show these fees as an adjustment to our net income on slide nine of the presentation. These consulting and other service-related costs are expected to dissipate through this year.
The effective tax rate was approximately 12% in the fourth quarter, and we expect the 2019 rate to be in the range of approximately 12%-15% due to the accounting treatment of the non-controlling interest. As shown on slide six, our pre-tax operating margins were 29% and 26% for the fourth quarter and five months 2018 successor period respectively, or 30% and 35% on an adjusted basis. Adjusted EBITDAX, as we show on slide 10, was $193 million for the fourth quarter and approximately $328 million for the period we own the assets in 2018. Looking at our cash flows for the five-month 2018 successor period and as shown on the waterfall chart on slide 11, we started with approximately $116 million of cash immediately after closing the transaction with EnerVest last July.
Our cash flow from operations after transaction costs paid at the close of the business combination and excluding changes in working capital, were $331 million during the period. Our cash capital outlays were $142 million, excluding capital pools, and we spent $147 million of cash on asset and property acquisitions. During the period, we generated free cash flow in excess of our capital and acquisition spending and ended 2018 with $136 million of cash on the balance sheet, an increase of approximately $100 million compared to the end of the third quarter. We have an undrawn $550 million credit facility and have ample liquidity allowing us to continue to execute on our strategy. Our long-term debt at year-end 2018 was approximately $389 million and in line with our policy of maintaining conservative leverage.
Our net debt stands at less than half a turn of our annualized EBITDAX. A summary balance sheet for year-end 2018 is shown on Slide 12. Our total proved reserves at year-end 2018 were approximately 100 million BOE, composed of roughly half oil and 71% liquids, compared to approximately 76 million BOE at the end of 2017. The year-end 2017 reserve amount relates to one year development plan of the assets acquired in the transaction with EnerVest. Proved undeveloped reserves at year-end 2018 represent 24% of total proved reserves, the vast majority of which will be developed within one year. As Steve mentioned, we ended the year on a strong note, exceeding our earlier production guidance while spending 57% of our adjusted EBITDAX on drilling and completing wells.
Turning to guidance for 2019, we expect our first quarter total production to be equal to or better than fourth quarter levels. We estimate that our first quarter volumes to be impacted by the timing of new wells turned in line in Karnes, lower non-op activity, and some downtime in Giddings due to pipeline maintenance. Production is expected to accelerate in subsequent quarters due to new well completions in both Karnes and Giddings and higher planned non-op activity. When we first announced the transaction nearly a year ago, our expectations were that we would grow moderately, adding about 6,000 Mboe per day each year, or roughly 3,000 a day in each of the Karnes and Giddings assets. That outlook has not changed, and we expect our production to exit 2019 approximately 6,000 barrels a day higher than what we achieved in the fourth quarter of 2018.
As Steve noted, our capital spending as a percentage of EBITDAX is expected to run a little hotter in the first quarter than during recent periods. This is partly due to the decline in oil prices. As we adjust our pace of activity to lower product prices, our capital levels are expected to trend lower as our current plan is to run two operated rigs into the second quarter. We also anticipate capital savings of approximately 5% specifically related to well completion materials and services. We continue to expect that our total capital for drilling and completions to be within 60% of our full year 2019 EBITDAX. Regarding our costs, the fourth quarter was our first full period owning the asset base. We believe these per unit costs are a reasonable proxy for 2019. We estimate that our 2019 DD&A rate should be approximately $20 per BOE.
Our per unit cost for the fourth quarter and five-month successor period are shown on Slide six of the presentation. Product price changes at current prices affect our earnings before income taxes by roughly $12 million on an annualized basis for every $1 per barrel change in oil prices and $3 million on an annualized basis for a $0.10 per Mcf change in natural gas prices. We're now ready to take your questions.
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 are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question today comes from Neal Dingmann with SunTrust. Please go ahead.
Steve and Chris, my first question is just, I know you've given overall production guidance out there. How do you all think about just the Karnes production, particularly maybe the trajectory later this year after dropping to one rig, and then how quickly that might change if you bring a rig back? It's not going to make much effect because the indications from our partners in there, is for a hotter drilling program than they had last year, really. If you were to look at their portfolios, I don't know about these companies or who they are, but if you look at their portfolios, the Karnes assets have quick paybacks and high returns, and they're shifting there.
We would expect more third party, we've cut back our operated, to stay, to keep things in balance. Otherwise, we produce more than that. I think what you'll see is that that production will go up
Okay. Just lastly, the potential for, I think you've alluded to this in the past, Steve, just the potential for M&A around Karnes, given how pristine that acreage is.
There's lots of small properties around. People have to get used to they go home, and they tell their spouse or whatever that their property's worth $500 million when oil was going to $90, and now it's worth $200 million. It's hard to sell. People just have to get used to a somewhat lower price. We're pretty disciplined. We don't feel pressured to do anything. There's really no reason to worry about it. As we see opportunities, we'll continue to look for stuff, and we have several of them under review currently, and we'll just see how it goes. We don't need to do anything. We're not worried about I'm more worried about overpaying because we're too anxious than I am missing something.
No, you certainly all have done a good job. Thanks again, Steve.
Sure. Thank you.
The next question comes from Nelly Raymond with Johnson Rice. Please go ahead.
Good morning, guys.
Morning.
You all built an impressive $100 million cash in 4Q and now have $136 million on your balance sheet. What are the options you all have with the cash? Also, you've mentioned in the release that you all are evaluating small asset deals fit the business model. Are these all in Karnes?
Well, there's only three choices for a company for what to do with the cash. I suppose you could just leave it there, but I guess that's the fourth one. Putting that aside, small bolt-on acquisitions, we don't have any plans to do a large-scale public deal or anything like that. Sometimes people hear about that, but that's just some broker trying to hype the process. Small bolt-on acquisitions, debt reduction, not real likely in our case. Finally, some sort of dividend program. I think we're a little early to begin a dividend program, and so we probably won't be thinking about that until maybe next year. I think at this point, I think right now we're focused on seeing if we can find something to build out the business. It's likely to be in the Karnes area rather than the Giddings area.
We have a big footprint in Giddings. There may be some small leases and that sort of thing in Giddings to fill in. As we do this exploration or whatever you want to call it, or program in Giddings, we're going to find areas which look better than we think, and we'll sort of try to go in and lease some acreage in those areas when we find it. We'll be a little slow in telling you about the good areas until we lease up all we need. I think you should view it as primarily a Karnes thing. We also look for a similar business model.
If we were to find something that was a similar business model, that is a 60%, grow more than 10% with 60% of your cash flow and have reported earnings or good size margins, pre-tax margin, including acquisition costs. We would do that. I don't see much of that's sort of the plan. Right now we're thinking fairly conservatively.
That's very helpful. That's all I have for today.
Thank you.
The next question comes from Tim Rezvan with Oppenheimer. Please go ahead.
Good morning, folks. Thanks for taking my question. My first question, I noticed that the Giddings footprint looks like it's down about 21,000 acres from your prior presentation in January. Can you talk about what drove that and how we could maybe expect that to trend going forward?
Actually, it was about down about 20,000. That I think was just an acreage adjustment when they went through and looked at the purchase accounting. There wasn't any sale or anything. It was just when they actually looked at what the seller sold us, they found some scattered acreage that didn't look like he owned it.
Okay. Just wanted to make sure it wasn't major exploration.
No, there's no plan. You shouldn't read anything into that. There's no particular reason to sell it. We're not smart enough about it yet to have a program where we're selling down. We may never be smart enough. It's all held by production, so there's no reason to do that. You might lose some leases for lack of drilling activity or something, but not much.
Okay. That's helpful. Then I guess my follow-up question on CapEx, I understand that the business model is not designed to allow you to give the kind of CapEx guidance that maybe Wall Street wants, but you have to have a pretty good line of sight on 1Q, obviously you're signaling pretty hard that we can expect it to be above 60%. Can you put any parameters or any more granularity on how 2019 CapEx could look based on what you've spoken about now with the rig count you have?
Yeah. You have to understand that in Karnes, at least a third of the program is in the hands of other people, which is what gives us more lack of forecasting ability than even the standard oil company, which has no ability. We're less than none. I think if you use an EBITDA model using sort of $55 oil area and $2.80 for gas and $17, $18 for NGLs, and multiply by 0.6, it's close to that. We're not trying to be evasive. It's just that we don't know exactly. First quarter will be fairly hot. Probably north of 80% burn, and the second quarter will be down around 60%, we would guess, and then it would fall back into the mid-50s%, and we'll be okay by the end. That's sort of a guess, because we don't know what the third parties are going to do.
I think you could take whatever model you have, if you use those parameters and multiply by 0.6, and you probably wouldn't be off more than 5% or 10%.
Okay. That's helpful. Thank you for the color.
The next question comes from Jeff Grampp with Northland Capital Markets. Please go ahead.
Morning, guys.
Morning.
Sticking on the non-op side, I know you guys don't have a ton of longer-term insight there, just, I guess as best as you guys can comment today, you mentioned 2018 was kind of the equivalent of half of a rig net to you guys. Is 2019, we understand it's up, does it get up to one full rig to you guys? Three quarters of a rig? I guess just trying to get-
It's probably closer-
a reality.
Based on what we know today, it's probably closer to one.
Okay. Got it. Perfect. On the 6,000 kind of growth rate that you guys are looking at exit to exit, understanding it's still kind of weighted pretty evenly between Giddings and Karnes. Can you remind us, I think you maybe mentioned it in the prepared remarks, but what's kind of baked in there regarding if and when the operated rig in Karnes comes back after leaving here shortly?
It doesn't. We didn't bake that in.
Okay. There's the one two operated and the non-op.
Yeah. The non-op basically picking up the slack, if you will. That's all organic. Those are organic numbers, not everything.
Got it. Perfect. If I can sneak one more in, just on the acquisition side, you mentioned some small ones you're looking at. Is the expectation that you guys can primarily do that out of free cash flow generation? Or can you just talk about your comfort level with tapping the line of credit to do any acquisitions that you might see here?
I think it's very likely it'll be done within either cash on the balance sheet or free cash. We might borrow for a month or two or something against the line until the cash comes in. I don't like debt.
Got it. Understood. I appreciate that, guys.
The next question comes from Irene Haas with Imperial Capital. Please go ahead.
I have a question on Giddings. That area has previous drilling, and so ought to be quite a bit of historical data. My question for you is, what kind of exploration or engineering parameters you're trying to nail down before you can get comfortable with the play? Can you give us a little color on why is the trend variable from what you have drilled thus far?
Yeah, sure. If you do it like you would in Karnes, say, you basically use the oil in place heat maps to sort of guide you. That helps in Giddings. There's also not just large fractures, but micro fractures that we can't see, or we hadn't seen. What happens to the well is you drill a well, and while the data shows a lot of oil in place, and you frack it, you don't really know what's going to happen with the micro fractures. Sometimes it helps you, sometimes it doesn't. We need to do more work to figure out what the fracture pattern is. We're doing more either micro seismic or seismic. To look, see if we can figure that out to improve the predictability.
The wells are good, but we're probably just unable to predict exactly what's, or not forget exactly, more or less what's going to happen. Even sometimes we think they're going to be oil wells, they're gas wells, and vice versa. It's something we don't understand. We think it's a fracture pattern. I think that's. If you remember back years ago, people drilled on the fractures and got the fracture production without fracking. The fractures are a way to drain a bigger area. The wells tend to come on with making something odd and improve over the first six months. Unlike a well in Karnes where you can pretty much tell how good a well it is in the first couple of months, probably take you six months because the fractures clean up, the water comes out, and the well builds.
We're just trying to figure that out. We're also looking possibly to acquire some acreage, and there's not a lot of reason to provide a lot of detail as to what areas are good and what areas are not.
Gotcha.
Does that answer your?
Yeah. In your opinion, you have sort of views of your competitors. Are they pretty much in the same boat, nearby, in the same neighborhood?
There's not really much in the neighborhood. There's the old WildHorse assets, and that's to the north of us, and the wells are really quite different. GeoSouthern in the south, looks like some kind of variability down there and some of the smaller producers, a fair amount of variability. What we can tell you is that you need to apply science to drill the wells. If you just drill the wells randomly, you're probably not going to do real well.
Great. Thank you.
Sometimes what you see is the guys drilling randomly, and they have bad results. It's because they didn't do anything. They just drilled the well.
Great. Okay. Thanks.
Thanks.
The next question comes from Brian Downey with Citi. Please go ahead.
Good morning. Thanks for taking the question. We appreciate the color on the production cadence over the next few quarters as you accelerate volumes into mid-year. Do you have any sense on how that translates on oil cut trajectory over those periods? I know you'd mentioned roughly three MBOE a day each from Karnes and Giddings exit to exit, but wasn't sure how that translated or if there are any timing expectations in between.
We're looking at 52%-54% black oil.
Okay.
Yeah. The problem really is that, let's say in Karnes, when somebody fracks a well near you shut your well down so you don't get hit by a frack, and then you bring your well back up again when they stop. You have this start and stop in it. They tend to come out a little gassier initially in that sort of process. Remember, the numbers are fairly small. There's no real averaging out of this thing. You wind up with what looks like more variability than actually exists.
Got it. Okay. Appreciate that. Then on the Karnes bolt-on net acreage, I was wondering if you could comment how much of that was increased working interest on existing acreage versus adding adjacent. I noticed the map really didn't change all that much, but maybe I'm reading too much into that.
You're reading too much into it.
Okay.
We run a low G&A outfit. We don't have professional map makers.
Got it. Appreciate that. Thanks, guys.
The next question comes from Biju Perincheril with Susquehanna. Please go ahead.
Hi. Good morning. Just wondering, the one rig that you will be operating in Giddings, can you give us a sense of how much of that will be all delineation versus are there going to be any portion of the drilling this year that will be, call it development around some of the areas you've already delineated?
Some development. I'm guessing a third to half to development, depending on how things are going. We have the flexibility to, if we get good results, maybe there'd be more exploration, for want of a better word. If the results are a little weaker, we'll go to the surer things.
Got it. When you look at the Austin Chalk in the Karnes area versus the Giddings, can you talk about the key differences there, and if you've been I know it's a smaller footprint, and you have had consistent results in the Karnes area. What are some of the key differences there which we're looking at?
One of the key differences is these fractures and the fact that the Chalk was drilled heavily during the '70s and '80s. There are wells in it that drain some of the oil. If you want to think of it, some of it was already produced when I was a kid. You shouldn't overstate the Austin Chalk in Karnes or understate it. It's good, but it is variable through the area. There are some good areas and less good areas. I think it's not a blanket that covers the entire county.
Got it. That's helpful. Thanks.
Thanks.
The next question comes from Jeffrey Campbell with Tuohy Brothers. Please go ahead.
Good morning.
Hi.
I wanted to just ask again, go back to the acquisitions. I've found it pretty impressive you guys have been able to keep pulling off these bolt-ons in such a mature area. I was wondering if the fact that you're paying cash for acquisitions is proving to be a competitive advantage. Also, are there any other advantages that Magnolia is bringing to these deals?
I think there's three. Some people want the stock because they overspent to acquire the whatever, when we may offer less than they paid for it. This gives them some upside, and we have this I apologize for the confusion it caused, but these, the up-C structure, the non-controlled shares or whatever we're calling them, the Class B shares. They're identical in all ways with the other shares, except the tax is deferred for the person who takes them rather than having to pay tax right away. If somebody has a low tax basis or maybe they have a promote or something like that they would have to pay ordinary income under the new tax law it can be put in the structure. That's an advantage.
The main advantage is, we've drilled so many wells, we've been in so many wells, we really understand it a lot better than the average. The risk you always run in an area like this is a new entrant comes in, he doesn't understand what he's doing, and he decides to pay a new entrant premium. Usually, that's a road to hell. I think, we've got a lot of understanding. Again, our G&A will be spread, G&A and even field costs will be spread over what we acquire, because as long as you're within a short truck driving distance, we can spread our field hands out. I think there's some real field synergies in the operating costs. There's knowledge and flexibility to pay either cash or stock, depending on the tax needs of the party.
Okay, great. Yeah, thanks for that color. That B share angle is really quite interesting. My other question was that before the fourth quarter 18 price drop, I believe you were forecasting that Karnes was going to spend well below its EBITDA and generate free cash, while Giddings might spend up close to its self-generated EBITDAX. I was just wondering, is that still the plan or is Giddings-
That's still the plan
dialing back a little bit?
That's still the plan.
Okay. Okay, great. Thank you.
After we've cut back Giddings, I think I've told this. This is like portfolio manager. You tell him you got 10 billion, he's got 1 billion ideas. You tell him he's got 10 million, he gives you his best ideas. Keeping the guys on a diet is a good management technique.
Okay, great. Thank you.
If you have a question, please press star, then one. The next question comes from Michael McAlister with MUFG. Please go ahead.
Thank you for taking my question. It seems that the Giddings program actually is doing a little bit better because you have a comfortability to take a rig out of the program for 2019 at this juncture. You're keeping the same kind of production forecast that you gave earlier.
Yeah. It's certainly better than we told you it was going to do. We wanted to be conservative in the beginning. There'll be some drilling on Giddings. We'll move the rig around a little. The lumpiness is caused by the completion crews, because we've got to get enough completions to send a completion crew in there. It might be a little lumpy from quarter to quarter, but that's just basically caused by when you decide to complete the wells.
What would be the signal to add a second rig to that program?
When we can accomplish it with the cash flow numbers.
Well, if you build.
The acreage isn't going.
That's true.
Yeah. The acreage isn't going away. If we manage our, call for want of a better word, exploration program well, we'll have lots of locations with the cash flow and the business improves. I'm not really worried about that. You really have to keep. If you wander off your discipline, you could sort of ruin a good thing with your own enthusiasm. You try to get people to focus on what's real good now, and let next year take care of itself. If you don't have any gun to your head, like continuous drilling obligations and stuff.
Okay. Is there, I guess, a cash level on either end, the low end or the high end, where you have your own boundaries as a
Well, I don't like debt. I think that's bad for commodity businesses.
We would borrow for an acquisition from a short-term basis. Short meaning under a year. That's about all. I think I don't have any problem, if we can do a good job in finding acquisitions, spending the 40%, as long as it's building value. If it's not building value or we're just wasting money, I'd just as soon give it back. My wife can spend it, so
You would be willing to build up to $250, $300 million if there was nothing out there that made sense to the-
I doubt that. It's simply, if we don't have a forward look that says the money will be consumed in a reasonable period of time, like a year, we'll figure out something else to do with it. Again, there's only two other choices. You either pay dividends or buying stock. That's the choice. There's really not enough liquidity to buy in stock right now.
True. What would you tolerate on the low end for a length of time?
If we had no cash and we're in and out of the line, that'd be all right, too.
Okay. That's all I had. Thank you.
Thanks.
This concludes our question and answer session and also concludes our conference. Thank you for attending today's presentation. You may now disconnect.