Magnolia Oil & Gas Corp

NYSE:MGY

Earnings Call Transcript 2019-Q2

[Operator]

Good day, and welcome to the Magnolia Oil & Gas conference call and webcast. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Brian Corales. Please go ahead.

[Brian Corales, Vice President of Investor Relations]

Thank you, Shantelle, and good morning, everyone. Welcome to Magnolia Oil & Gas' second quarter 2019 earnings conference call. Participating on the call today are Steve Chazen, Magnolia's Chairman, President and Chief Executive Officer; and Chris Stavros, Executive Vice President and Chief Financial Officer.

As a reminder, today's conference call contains certain projections and other forward-looking statements within the meaning of the federal securities laws. These statements are subject to risks and uncertainties that may cause actual results to differ materially from those expressed or implied in these statements. Additional information on the 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 two of the conference call slide presentation with the supplemental data on our website. You can download Magnolia's second quarter 2019 earnings press release, as well as the conference call slides from the investors section of the company's website at www.magnoliaoilgas.com.

I will now turn the call over to Mr. Steve Chazen.

[Steve Chazen, Chairman, President & Chief Executive Officer]

Thank you. Good morning and thank you for joining us. I'll provide a brief update on the overall business, and Chris will go into some of the details on financials, provide some additional guidance before we take your questions. We've recently crossed the one-year mark as a public company, and I wanted to reflect on some of the things we've achieved as an organization and reiterate the aspects of our business model, as these are the same principles that will continue to guide us going forward.

We're fortunate to start Magnolia through the acquisition of some of the highest quality oil-producing Eagle Ford assets in the core area of Karnes County. These assets generate some of the highest economic returns in Lower 48 and the capability providing moderate and consistent growth, while generating significant free cash flow.

The acquisition of our extensive acreage position in Giddings Field has provided the sizable low-cost resource optionality as we continue to further appraise and ultimately develop some of this resource. We continue to manage these assets in disciplined manner, with the overriding principle of spending within 60% of our gross cash flow on drilling and completing wells, which provides us with meaningful and consistent free cash flow through the year. Maintaining low financial leverage is also part of our ongoing philosophy, and we do not expect any of these founding principles to change.

Free cash flow we generate provides us options to further enhance the business and generate stock market value over time. Over the past year, we've completed several small to mid-size bolt-on asset acquisition. These accretive acquisitions have not only strengthened our underlying asset base by providing additional production and cash flow, but have also given us additional running room by expanding our footprint and acreage position in the Karnes area.

Our second quarter was marked by strong performance as we achieved both our operating and financial objectives. Our second quarter production grew by 4% sequentially to 65,000 boe a day, in line with our earlier guidance with our oil production approximately 54% of total volumes.

While we completed a small acquisition late in the second quarter, most of the sequential improvement in our production was driven by a combination of operated to non-operated wells coming online in the Karnes area. Appraisal and exploration program around our large position to Giddings Field is proceeding well, and we expect to provide further update later in the year.

Our drilling completion capital declined to 64% of our adjusted EBITDAX in the second quarter, and we expect this percentage to fall further during the back half of the year. Our cash balance increased by about $20 million during the second quarter, inclusive of cash outlays for our capital program and acquisitions.

Since the company's inception a year ago, Magnolia's overall production has grown by about 30%, and we've increased our Karnes acreage position by more than 50%. Our growth was entirely internally funded and achieved without adding any new debt.

We also recently completed an exchange offer for all of our outstanding warrants. Resulting benefits from this exchange are more simplified capital structure, reduction in the ultimate potential dilution associated with the warrants, elimination of the frequent hedging activity deemed to warrants and our common stock.

As a result, the recent annual reconstitutional of Russell indices, Magnolia was added to the Russell 2000 index based on its market capitalization. While we have accomplished much over the last year, we also recognize we have more to do in order to generate value for our shareholders. Our ability to continually generate free cash flow provides us with the options.

With respect to M&A, we remain mindful of the objective, and acquisitions always make the company better not worse. We've had good success over past year to allocate most of the free cash flow towards acquiring small oil and gas producing properties that are financially accretive to provide us with additional attractive drilling opportunities.

We will continue to pursue small to midsized bolt-on asset acquisitions which makes sense and add value to the business.

In addition to potential acquisition opportunities, there are other options for us to allocate some of our free cash. As we noted in our press release, Magnolia's Board of Directors authorizes initial share repurchase program of 10 million shares based on market conditions and would be funded with cash on hand. While the notion of allocating some capital towards repurchasing our shares may run contrary to our relative low public share float, we do not believe our share should trade well below their intrinsic value. The goal of this program is to repurchase shares at an attractive price for the remaining shareholders and not to reward the exiting shareholders.

To summarize, our high-quality asset base, low level of debt and ongoing discipline strategy to spend within 60% of our gross cash flow in drilling completing wells underpins our ability to continue to generate free cash flow to add value to the business. We remain encouraged by our progress and results and very optimistic about Magnolia's future potential.

I'll now turn the call over to Chris.

[Chris Stavros]

Thank you, Steve, and good morning, everyone. I'll go through some of the details around the second quarter results and then provide some additional guidance before turning it over for questions. For reference, any variances in my remarks related to the second quarter will be compared to the first quarter of 2019.

Looking at slide 5 of the presentation that's posted on our website, we reported GAAP net income attributable to Class A common stock of $18.5 million or $0.12 per diluted share for the second quarter 2019. Total net income for the period, which includes the non-controlling interest, was $31.3 million or $0.12 per diluted share, which includes both Class A and B common stock.

Investors and analysts should use total net income in calculating EPS when comparing us to other similar companies. This compares to total income of $22.7 million or $0.08 per diluted share for the first quarter of 2019. Sequential increase in net income was primarily due to higher oil production for the quarter. Total well production for the company averaged 65,100 equivalent per day during the second quarter, representing a 4.3% sequential quarterly increase and in line with our previous guidance.

Second quarter oil production of 35,000 per day represented nearly 54% of our total volumes at the high-end of our guidance and an increase from approximately 52% during the first quarter. The higher oil percentage is direct result of additional new wells coming online during the quarter.

Turning to slide 6. Revenues totaled $243 million in the second quarter, up 11% compared to the first quarter, mainly due to a combination of higher oil production and higher oil price realizations and minimally offset by weaker natural gas and NGL prices. Our oil price realizations increased by roughly $5 per barrel compared to the first quarter. We continue to receive a premium to WTI with our realizations averaging 107% of the benchmark in the second quarter.

Our NGL price realizations averaged about 25% of WTI compared to 33% in the first quarter and closer to natural gas equivalent prices. As oil is the primary driver for Magnolia, both lower natural gas and NGL prices had a much smaller impact on our revenue and cash flows.

Turning to costs, and looking at slide 7. Our LOE during the second quarter was $4.20 per BOE compared to $3.83 per BOE in the prior quarter with the increase due to higher workover expenses in both Karnes and Giddings. Total cash operating cost fell to $7.66 per BOE from $8.05 per BOE in the first quarter, and we expect our total cash operating cost to run about $7.75 per BOE for the third quarter.

DD&A was $21.28 per BOE compared to $20.64 per BOE in the first quarter. The slight increase is mainly the result of our increase production from the Karnes area. Since we're only using one year of PUDs in our reserve base, our DD&A rate remains relatively high as we are over-depreciating our asset base during the year. Our total DD&A amount this year has expected to outpace our capital spending by almost 20%, so we expect our DD&A rate to ultimately decline in the coming years.

Exploration expense was $3.6 million in the second quarter compared to $2.5 million in the prior quarter. The increase is mainly due to the continued application of microseismic related to an ongoing appraisal and exploration program in Giddings. Second quarter G&A was $19.1 million or $3.22 per BOE, which increased compared to $16.2 million or $2.88 per BOE last quarter and partly due to fees on professional services related to corporate activities.

Second quarter G&A cost also included $3.1 million of noncash employee stock compensation expense. On a unit basis, we expect these costs will fluctuate from period-to-period as we continue to incur some additional cost and expenses related to the build-out of our corporate structure and IT systems. We expect our G&A per BOE in the third quarter to be about the same as the most recent periods. The effective tax rate was approximately 14% in the second quarter and in line with the prior period. We expect the full year 2019 rate to be about 15% to the accounting achievement of non-controlling interest and based on the current split in ownership.

Our adjusted EBITDAX shown on slide 8 was $182 million for the second quarter with a sequential increase primarily due to higher oil production. Our capital spending associated with drilling and completing wells was $116 million during the second quarter, which includes capital accruals.

Second quarter D&C spending was approximately 17% below first quarter levels and represented 64% of adjusted EBITDAX. As Steve mentioned, we expect our capital spending levels to continue to climb during the second half of the year and average 60% of our adjusted EBITDAX for full year 2019 and keeping with our ongoing strategy.

Looking at our cash flows for the second quarter on slide 9. We had cash flow from operations before changes in working capital of $178 million and our change in working capital was a positive $15 million.

Our cash outlays for capital spending including drilling completions and facilities was $133 million, and we spent $39 million of cash acquiring oil and gas properties. We ended the second quarter with $97 million of cash on the balance sheet, an increase of about $20 million sequentially and undrawn $515 million credit facility, which provides us with ample liquidity to continue to execute on our plan.

Our long-term debt at the end of the second quarter was approximately $389 million and our net debt as a percent of total enterprise value is approximately 10%. We do not expect to increase our bonded indebtedness, which is keeping with our strategy of maintaining low leverage.

Our summary balance sheet as of June 30 is shown on slide 10. Turning to guidance. We expect our total production to be approximately 70,000 equivalent barrels per day for the third quarter and in line with our prior guidance. Our oil production mix is now expected to be about 54% and at the high end of our guidance range. The continued strong percentage of oil production is the result of both new operated and non-operated wells coming online during the quarter.

Our capital spending for drilling and completing wells is expected to be approximately 50% of adjusted EBITDAX during the second half of the year assuming current product prices. This decline in capital allows us to meet our strategic objective in spending within 60% of our gross cash flow for the full year.

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 $4 million on an annualized basis for a $0.10 per Mcf change in natural gas prices.

As we noted in the press release, we completed the exchange of all of our outstanding warrants in July, not only simplifies our capital structure but also reduces the ultimate potential dilution associated with the warrants.

For the third quarter, we expect to have approximately 260 million shares outstanding as a result of the warrant exchange. The warrant exchange also increased the public shareholder flow.

As shown on slide 11, post the exchange, Magnolia management owns 4% of the total outstanding shares, EnerVest owns approximately 49% and the public shareholders own the remaining 47% of the company.

To sum-up, I would point you to slide 12, which shows what we've done with all the cash generated by Magnolia's operations during 11 months since our formation last August. Approximately 60% of our cash flow from operations was allocated to capital spent on our organic drilling program. Nearly all of the free cash flow approximately $230 million spent on small bolt-on acquisitions of oil and gas properties. Our production is expected to be about 30% higher since the company's inception, and all of which has been internally funded without incurring any additional debt.

We're now ready to take your questions.

[Operator]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Thank you. Your first question comes from Neal Dingmann, SunTrust. Go ahead please.

[Neal Dingmann, SunTrust]

Good morning. Steve, my question. I've noticed, obviously, you've on the release added potential share buybacks to your basket of things you could potentially do. I'm just wondering given the -- your rationality to market, you and Chris are stacking things up today, how do you view that, I guess more specifically versus the exploitation or opportunities in Giddings some kind of question between those -- or is -- so maybe now one or the other, I'm just wondering how you would layer those?

[Steve Chazen, Chairman, President & Chief Executive Officer]

Given what everyone call, irrationality, I guess, you used the phrase. At these levels or even somewhere higher levels and probably the best use we have right now is buying in the shares. I'm not excited about buying in the share because it reduces already lack of liquidity in the stock, but nobody else wants to buy and we probably should. So that's how I feel about it right now. Our capital program is more driven by the 60% rule than anything else. And so if oil prices declined $3 a barrel a day or whatever, we'll probably reduce our -- lay down a rig or something.

The issue in Giddings is simply, we really haven't been able to hook up as many wells as we've drilled. And then we think the problem goes away here in the third and fourth quarter. So I think we'll have more to talk about. We're not trying to hide anything, it's just that we haven't been able to hook up the wells in shoulder production yet. It's not -- the wells have been completed, but not hooked up and there are some right-of-way issues, which I think will get solved. So I'm not really -- I think we'll have more to talk about Giddings in the third and fourth quarter. And just we're not -- there's really nothing that we can say now that makes any sense.

[Neal Dingmann, SunTrust]

No. That's helpful. And then lastly, just wondering in this type of environment where there's pricing pressure, are you in the team seeing more opportunities in Karnes? I mean, you've always talked about seeing small pieces there when others sort of…

[Steve Chazen, Chairman, President & Chief Executive Officer]

We see opportunities, but when you have this kind of oil price correction in a short period of time, seller says, Gee, I was stupid. I should've sold last month. And so it's too short a time frame and basically it's usually gums up the work. Generally, we don't compete against -- we're competing against whole bids rather than real bidders. So somebody says, I can't sell below x dollars, because he told his investors it was worth that or something. So until he gets some change of that attitude, we'll be cautious on acquisitions. We need to do things that are accretive given where our stock is, not where we hope our stock to be.

[Neal Dingmann, SunTrust]

Very good. Thank you.

[Operator]

Thank you. Your next question comes from Irene Haas, Imperial Capital. Go ahead please.

[Irene Haas, Imperial Capital]

Yes, hi. My question really has to do with -- you got some really good hedges going on in 2019. You got some in the year on 2020. Any opportunity to add more? Is it difficult and also in terms of protecting the basis as well for both oil and gas? Just a little color on that please?

[Steve Chazen, Chairman, President & Chief Executive Officer]

Generally, we don't hedge. So there's no particular reason to hedge. Our hedge is basically our financial structure, which is sort of debt-free and generates cash and our hedge basically is cutting the capital to keep the spending down. So I think that's pretty much what we think about hedging.

[Irene Haas, Imperial Capital]

So to the extent that we see upsize, we would earn it, if not, we just kind of have to deal with it. But again, you said you have absolutely -- a really clean balance sheet so it's less of an issue.

[Steve Chazen, Chairman, President & Chief Executive Officer]

I know. The problem with hedging is -- the goal of the hedge is to buy insurance. You can't hedge the value of the business, but you can buy insurance for this year's capital or next year's capital or some other year. Our insurance, we're self-insured. I think we probably are -- our self-insurance is probably cheaper than going to Goldman Sachs and buying insurance from them. I assume they're not running a philanthropic organization, at least not deliberately.

[Irene Haas, Imperial Capital]

Okay. May I have one follow-up question? How is the Eagle Ford, also the scene looking any deflation that you can capture?

[Steve Chazen, Chairman, President & Chief Executive Officer]

We haven't -- the change has been in the last month really. And so you don't really see much. All we saw was a few percent. There's no shortage of people to do the work. You can drop a rig or add a rig without much problem. But you haven't really seen any massive deflation yet, because it's just too shorter period. And you still have a fair level of activity among the -- some of our partners, at least they haven't slowed their activity down. So the demand -- because a decent Karnes, decent Eagle Ford well, you could make say 20% return down in $40 oil price environment. And that's not true everywhere. So I think and I'm not saying it will be the last place people cut back. But it's certainly not the first place.

[Irene Haas, Imperial Capital]

Great. Thank you.

[Steve Chazen, Chairman, President & Chief Executive Officer]

Thank you, Irene.

[Operator]

Thank you. Your next question comes from Jeff Grampp, Northland Capital Management. Go ahead please.

[Jeff Grampp, Northland Capital Management]

Good morning guys. Steve, just to build on your last comment there on Karnes, probably that'll be in the first place with capital. Is it fair to think as we look at 2020 and you guys maybe toggle the capital program up or down depending on kind of product prices. Is Giddings kind of the incremental flex capital on the upside or downside, is that the right way to think about it?

[Steve Chazen, Chairman, President & Chief Executive Officer]

I think Giddings is the upside flex capital. We almost surely -- Giddings is okay and it will run reasonably well at $40 oil. But if we have extra money, it will probably go into putting another rigs in Giddings. If we don't, we may go to one rig in Giddings or -- and in some extreme circumstances, no rigs and just rely on non-op activity to run the business. Because we have enough non-op activity, we could keep our production pretty flat without any activity in our part at all. Basically, take our capital at the current oil prices down to 30%, 40%.

[Jeff Grampp, Northland Capital Management]

Got it. Understood. I appreciate that. And for my follow-up, I was curious on the buyback. How you guys kind of centered in on the $10 million is kind of the initial size and understanding that the liquidity of the stock is important to you. But to the extent there's still some opportunities there, how do you guys kind of think about opportunities to expand that and balancing trailing liquidity?

[Steve Chazen, Chairman, President & Chief Executive Officer]

We're not going to borrow any money to do it. And that's roughly what the cash we had on the balance sheet at the end of the quarter. So we – I took out my ancient calculator and divided the current stock price 100 million divided by the current stock price, and I got 10 million shares. So that was the thoughtful process that went into it – and as we build cash, I could probably take out the old calculator and – you're lucky I don't still have a slide rule.

[Jeff Grampp, Northland Capital Management]

All right. So effectively, we'll take the four-function calculator every quarter and…

[Steve Chazen, Chairman, President & Chief Executive Officer]

That's right. Yeah. This calculator actually is – I buy them on eBay as used calculators. And it has Lotus 1-2-3 on it, which is probably before you were born.

[Jeff Grampp, Northland Capital Management]

I'll dig into the inner web. I appreciate that.

[Operator]

[Operator Instructions] Your next question comes from Tim Rezvan, Oppenheimer. Go ahead please.

[Tim Rezvan, Oppenheimer]

Good morning, all. I was hoping to get a little clarity on this. I think you mentioned CapEx, of course, you reiterated your guidance less than 60% of EBITDA. Is your confidence stemmed from these delay turning lines in Giddings that may have kind of skewed…

[Steve Chazen, Chairman, President & Chief Executive Officer]

No, no.

[Tim Rezvan, Oppenheimer]

Okay.

[Steve Chazen, Chairman, President & Chief Executive Officer]

No. It's basically – we have a forward calendar from our third parties. So we know what the non-op people are probably going to do between now, in the end of the year, give or take a few wells. We know what we're going to spend. And if we ran into the trouble that is oil prices fell too much, we'll just take our one rig that's in the Karnes down. So it's within our ability to manage. But it's not very complicated. So we'll be running close to 50%, this current quarter, which we – but we're not good forecasters. We're nearly halfway through the quarter so we could probably guess this. And similar 50% level probably in the fourth quarter, too. So we got pretty good visibility on this number at this point.

[Tim Rezvan, Oppenheimer]

Okay, okay. Thank you. I appreciate that color. And then follow-up is somewhat related, a little bit philosophical. If you look at slide 12 of your deck, you kind of show kind of the cash flow reconciliations for the company. And I know that the mantra, what you see is differentiated, is the growth and income in the free cash flow. But you can help notice that acquisitions have essentially consumed all of that free cash flow. And then, if you look at EBITDA versus CapEx plus acquisitions this year, it's in same trend being flat. Is there a thought that maybe – or can you give a little more – going forward a little more sort of quantitative guidance on acquisitions just to give people comfort on some sort of sustainable free cash flow net of all these acquisitions because…

[Steve Chazen, Chairman, President & Chief Executive Officer]

Remember, we're talking about four quarters. And so the acquisitions, for example, the last acquisition was right at the end of the quarter. But you don't get the EBITDA for something you do in last August. So I think – we don't really know. We run about $50 million a quarter. Our cash flow from operations is actually up. And basically, while we're consuming, you can say we're consuming it, just building cash isn't really particularly relevant either. So as we built, we've got about $100 million in cash and we used that probably to reduce the share count. There's no debt really to cut. We can't really use it to reduce debt. And the business is not mature enough to start paying regular dividend. We're still in our first year of existence.

And so in order to promise a dividend flow at this point, it is probably not responsible. So in light of acquisition activity, we just don't know. We've run around $50 million quarter, but I don't think the past is necessarily reflective of the future. If we found something that was -- all these acquisitions generate cash, and especially free cash, that is accretive to the company's value. It's better than the base company. So I mean, I'm not sure if that's really what the point of it was. So I -- we don't -- the production is up 30% in the year.

So it's clearly adding value. Our product price is really about the same and oil as it was when we started our net price is very similar to what we started a year ago. And we've had some better prices and worse. But I think this is sort of a rough business plan but we don't -- we could easily -- if we want to build cash, we could easily do that. We'll just stop acquiring and production for the third and fourth quarter doesn't really have any new acquisitions in it.

[Tim Rezvan, Oppenheimer]

Okay

[Steve Chazen, Chairman, President & Chief Executive Officer]

If that answers your questions?

[Tim Rezvan, Oppenheimer]

Okay. Yes. I appreciate that comments. Thank you.

[Operator]

Thank you. Your next question comes from Kashy Harrison, Simpson's Energy. Go ahead, please.

[Kashy Harrison, Simpson's Energy]

Good morning. And thank you for taking my questions. So understanding that it may be too early for a fixed dividend, I was just wondering if you could discuss the appetite to use some of that free cash flow to pay out special dividends to your shareholders just given your concern around the float.

[Chris Stavros]

For us, it simply -- it's really a stock price question. If the stock were trading at normal multiples, whatever that might be, then you say, okay, we're not smart enough to buy in shares and so you pay the dividend. If the stock is trading well below, say, simple measure like book-value, not just a little below. So it's not really a close call on the stock versus the dividend, but the repurchasing the shares is generally better for the shareholders over time.

A lot of people go in the share repurchase broker and they just say they're going to buy the shares, and they tell the broker to buy 10,000 shares everyday. That's not what's going on here. We're pretty price sensitive on the stock. So we're looking to add value that way for now. A dividend at some point is likely. But right now, where the stock is, we're not convinced that the share repurchase isn't the better choice given the current stock prices.

[Kashy Harrison, Simpson's Energy]

Got you. And then maybe switching gears a little bit to A&D. To the extent that you can, I was wondering if it was possible to quantify in net acres, the total population of small bolt-on opportunities that exist in Karnes? So for example, when you look over, do you think there is 100,000 net acres of opportunity in Karnes? Do you think you could grab 200? Just any color would be helpful to the extent that you can share with us.

[Steve Chazen, Chairman, President & Chief Executive Officer]

I mean, if you just say what's sort of for sale, may be that's a better way, okay? I can't tell you how -- something is not for sale, right? But if you look at what people say is for sale, it's close to 50,000 acres. I don't think that will be transaction, by the way, but I mean, that's sort of what's out there in the Karnes general area for sale currently. There's no way to say what somebody might -- always you look at and say this is what people have talked about wanting to sell and they assume they can get some price for it and that's -- and sort of we're also pretty picky on what we pay and that sort of thing. But I think that's sort of what's there, which is more than twice or roughly twice what we currently own.

[Kashy Harrison, Simpson's Energy]

Got you. And historically, in past cycles, how -- from your perspective anyway, how willing do you think sellers become if we run into a $40 oil or a $35 oil. Do you think that -- do you think the willing was to sell increases or people just kind of hold on...

[Steve Chazen, Chairman, President & Chief Executive Officer]

No. You never know. It just depends on how it's held, I guess. If you're a manager or whatever you want to call it of some assets and you're making a nice salary and price of oil is $40, it's going to be harder to dislodge you. And so there's a fair amount of stickiness on that. I think that the volatility and the negative aura in the market will eventually create opportunities.

But, I don't think, we're there yet. I think, they're still -- they still remember the six months, they sold six months ago. They'd gotten more, or a year ago, or 5 years ago. And there is a belief that, it's going to get better.

And you have to go through -- wear through that because, these corrections last month or two. And then seems to get better for a while. And so, you need a longer period of negativity, plenty of negativity in the equity markets but on oil price.

And again, there's a certain amount of stickiness in the management's desire to continue to get paid salaries. It's sort of like the mutual, private equity or mutual fund business, where the -- they're focused on getting the management fee. And they don't worry about the profits.

So, they're getting 1.5% and 20% of the profits. They're not going to get the 20%. But we're happy to take the 1.5%. So, I think, there's a lot of stickiness and a lot of -- I suspect in the private equity people where the assets have not been, mark-to-market appropriately. And so the investors don't know, how much, they lost.

[Kashy Harrison, Simpson's Energy]

That makes sense. That's helpful. And then finally, what's the appetite to look outside of Karnes and the Giddings area within the Eagle Ford or just anywhere? Like what's the appetite to extend outside of Karnes and Giddings?

[Steve Chazen, Chairman, President & Chief Executive Officer]

I think the appetite is not overwhelming. But, if we could find the same sort of results where we could buy and not invest more than 60% of the cash flow. And grow the business. And there are opportunities for consolidation, we would do that.

But the acquisition cost is -- and where we can have a decent return on investment, also, the acquisition cost is the key. And while acquisition cost has probably declined in areas, they're still fairly expensive. And so I think, there's nothing immediate, that's sitting out there then we say, Oh! We're going to do this.

So if you look at the Delaware Basin, the reservoirs will generate these sorts of returns and these stores of -- you can invest 50%, 60% and do just fine. But the acquisition cost is quite high per acre or however, you want to measure them.

And so while there's been some correction, surely, you can't be paying $40,000, $50,000 an acre. And expect to make any money.

[Kashy Harrison, Simpson's Energy]

Got you, do you think -- do you see any other reservoirs in Lower 48, that can do what you're looking for and may be the PR point of view…

[Steve Chazen, Chairman, President & Chief Executive Officer]

I think it's really that the Permian or Eagle Ford or something where, you basically don't pay much for it. And while you're finding cost might be higher. You really haven't paid anything for the asset.

But I do know, where that is. And there are some places, where you know you don't want to go. So, I think, -- that I'm not one for crossing the river.

[Kashy Harrison, Simpson's Energy]

All right, well. Thank you. I appreciate it.

[Operator]

Thank you. You're next question comes from Jeffrey Campbell, Tuohy Brothers Investment. Go ahead please.

[Jeffrey Campbell, Tuohy Brothers Investment]

Hi, Steve, since you guys are going to be with us tomorrow in New York, I don't want to use up all my questions. But I want to ask one. Today, there's been some discussion about possible restraint in acquisitions.

I was wondering if you're evolving Giddings results remain attractive, where you just continue to execute your previously stated desire to acquire sweet spot acreage there cheaply?

[Steve Chazen, Chairman, President & Chief Executive Officer]

Our appetite is the same. Just the price is less.

[Jeffrey Campbell, Tuohy Brothers Investment]

Okay.

[Steve Chazen, Chairman, President & Chief Executive Officer]

I guess that's the way -- if I'm answering your question.

[Jeffrey Campbell, Tuohy Brothers Investment]

Right, well, yeah absolutely.

[Steve Chazen, Chairman, President & Chief Executive Officer]

We use around $55 oil, as our benchmark for acquisitions. And I think, that's a reasonable number. But the stock market and future market, at least today, is below that.

And it's hard to ignore. And so, I think, -- I'm trying -- my interest in acquisitions is the same just -- but I simply can't afford to pay -- can't afford to pay a premium price for premium acreage.

[Jeffrey Campbell, Tuohy Brothers Investment]

So the kind of another way to put it is if the price of the acreage goes down, as a response to the commodity market, then the appetite is the same.

[Steve Chazen, Chairman, President & Chief Executive Officer]

The appetite is the same, but it hasn't yet.

[Jeffrey Campbell, Tuohy Brothers Investment]

Right, okay, thanks, I appreciate that color. Thank you.

[Steve Chazen, Chairman, President & Chief Executive Officer]

Great.

[Operator]

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