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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day, and welcome to the Magnolia Oil and Gas Second Quarter 2021 Earnings Release and Conference Call. All participants will be in a 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, Investor Relations. Please go ahead.
Thank you, Ilene, and good morning, everyone. Welcome to Magnolia Oil and Gas' second quarter 2021 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 risk factors that could cause results to differ is available in the Company's Annual Report on Form 10-K filed with the SEC.
A full Safe Harbor can be found on Slide 2 of the conference call slide presentation with the supplemental data on our website. You can download Magnolia's second quarter 2021 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.
Thank you. Good morning, and thank you for joining us today. My comments this morning will focus on our first partial semiannual dividend that we cleared yesterday and some thoughts around our differentiated dividend framework. I will also discuss how we plan to allocate our capital and free cash flow for the remainder of the year. Chris will then review our second quarter results, provide some additional guidance before we take your questions.
Magnolia's business model and disciplined approach to our capital investment has not changed since our inception almost exactly three years ago. Despite the volatility around product prices, we continue to consistently execute on our plan as demonstrated with the strength of our second quarter operating and financial performance, which included record net income and earnings per share. Our plan has not changed, we believe that business is fundamentally improved, resulting in the strong productivity and efficiency in our Giddings asset.
Another of our key corporate goals was to generate EBIT or equal to 50% or more of our realized boe price. This is defined as accounting profits after all costs, including DD&A or before interest and taxes. Our average realized price in the quarter was $42.42 per boe and an EBIT of $21.85. Strong margins are a direct result of our team's focus on cost control, safety, well productivity, and this is especially pleasing to me because it's always been a corporate fold or half of the product price.
The quality of our assets in the business unburdened by large debt should allow for continued moderate production growth with high operating margins, will generate significant free cash flow at much lower prices. We now believe this could be achieved by spending within 55% of our EBITDAX on drilling completing wells compared to spending within 60% previously.
Our shift total shareholder return is allocated into two main buckets, the largest being to improve per share metrics of the company by reducing our share count. In the first half of the year, we repurchased 7% of the total shares. And assuming repurchase 1% of the shares each in the next two quarters, it would provide investments with a 9% return before paying the recently announced dividend.
Our differentiated dividend framework is aligned with the principles of our business models and designed to reinforce our plan. We would not characterize our dividend as special, nor is it a function of windfall product prices. Instead our approach is meant to appeal to long-term investors who seek dividend security and sustainability, moderate and regular dividend growth and dividend is paid out of actual earnings. We believe our framework provides for this rather than stretching for yield by trying to MLP or royalty Trust. Dividend announcement yesterday can base our continued confidence in the business plan and the quality of our assets.
The first interim semi-annual dividend of $0.08 of shares payable next month is secure and sustainable at oil prices below $40 a barrel and natural gas and NGL prices around half their current levels. We plan to declare the remaining annual dividend next February with the release of our full year 2021 results. The second payment will be based on our longer-term view of product prices, are approximately $55 a barrel for oil as well as the prior year's results.
We expect that each of these regular dividend payments should grow annually based on our ability to execute our business plan, which includes moderate production growth and the reduction of our outstanding shares. While the dividend will be paid out of real earnings, the total annual payment will not exceed 50% in the prior year's reported net income. While stock prices are often volatile and could behave unpredictability, we want the dividend to reflect the reality of the business. Our tendency to use this dividend framework to demonstrate the underlying results of our business and a stable product price environment.
Including the dividend, this framework provides ample free cash flow to repurchase our shares as well as to pursue small bolt-on oil and gas property acquisitions that are accretive to our stock, to improve our per share metrics. The goal is to provide superior total shareholder return by improving the per share value of the enterprise while providing a secure and growing dividend.
Our disciplined capital investment provided 4% sequential organic volume growth in the second quarter, with most of our free cash flow allocated towards repurchasing our shares. In the first half of 2021, we generated approximately $235 million of free cash, spent more than $200 million, reducing our share count by 17.6 million shares or about 7% of the total shares outstanding. This approach for allocating our capital and free cash flow provides a volume growth of 7% compared to fourth quarter 2020 level while enhancing our per share metrics and leaving our cash position nearly unchanged at around $190 million at midyear. We plan to continue to repurchase at least 1% of our outstanding shares each quarter.
We added a second operating rig at the end of the second quarter, which is currently drilling wells in Giddings Field. Our plans for this rig is to drill wells in both the Karnes and Giddings areas, including some appraisal wells in Giddings. The other are operated well, will continue to drill multi-well pads in the Giddings area. Our capital run rate is expected to increase in the back half of the year to the additional rig in activity, although our total capital will be far below our normal business model spending level as a percent of adjusted EBITDAX.
Portion of our capital and activity in the back half of the year will be directed toward drilling and completing some gassier wells in Karnes and Giddings and they benefit the recent strength in natural gas prices. Basically, this is a Karnes thing, we had some DUCs in Karnes, we were going to turn the wells on later in the year when gas prices were strong, we looked at the screen, and we saw gas prices were already strong. We remain unhedged on oil and natural gas side we put in place a year ago has expired, so we fully benefit from higher prices.
Finally, the EnerVest operating and other agreements will terminate at the end of the quarter, a result of the conclusion of the operating agreement, we expect realized G&A savings of approximately $0.60 a barrel going forward. To summarize our consistent significant free cash flow generation combined with improved efficiencies and greater productivity in Giddings, we can do more with less, all while maintaining our low-cost structure and strong balance sheet. Less production is needed to generate moderate growth, resulting in more free cash flow as to further enhance our business through share repurchases and small bolt-on acquisitions. A small, a regular, secure and growing dividend is an outcome of this plan.
The current environment for Magnolia presents a significant opportunity set. We have strong cost management, low capital intensity and unexpected high product prices, this generates significant amounts of free cash flow. Magnolia has very little debt and continues to build cash. At the same time, the stock market, in my view, it's not anywhere near intrinsic values for us and many others in our industry.
We believe we have the opportunity over the next 18 months to make large purchases of stock. This confluence of events may give us a chance to materially reduce our share account. This is usually difficult to achieve. A material reduction in share count without changing debt levels will inevitably lead to higher returns on capital employed and faster growth in earnings, cash flow and free cash flow per share than we could have achieved without the buybacks. We'll set a dividend rate at a secure level based on moderate long-term prices by dedicating the vast majority of our free cash flow, significant sensible share repurchase, future, predictable and important dividend growth is highly likely without increasing financial risk.
I'll turn the call over to Chris.
Thanks, Steve. And good morning, everyone. As Steve mentioned, I plan to review some items from our second quarter results and provide some guidance for the third quarter and the remainder of the year before turning it over for questions.
Starting with Slide 4 in the quarterly presentation, Magnolia delivered very strong second quarter 2021 financial and operating results. The company generated total reported net income of $116 million or $0.48 per diluted share. During the quarter, we had $19.2 million of pre-tax special charges, most of which was associated with the termination of our operating services and other agreements with EnerVest. After tax affecting these items, our total adjusted net income for the quarter was $135 million or $0.56 per diluted share. Both reported and adjusted net income were quarterly records for Magnolia and were well ahead of consensus estimates.
Net cash provided by operating activities was $188 million during the second quarter and our fully diluted shares averaged $242 million during the period. Our adjusted EBITDAX was $195 million in the second quarter, with total capital of $54 million for drilling and completing wells.
Total second quarter production grew 4% sequentially to 64.9 Mboe/d with both our Karnes and Giddings assets contributing to the increase, and total oil production grew 11% sequentially to nearly 32,000 barrels per day. The sequential improvement in our quarterly financial results benefited about equally from both the increase in product prices and our production growth. While oil prices have risen further into the current quarter, prices for natural gas and NGLs have been particularly strong.
Looking at the quarterly cash flow waterfall chart on Slide 5. We started the second quarter with $178 million of cash. Cash flow from operations before changes in working capital was $175 million during the quarter, with working capital changes and some other items benefiting cash by $21 million. Our D&C capital spending was $54 million in the second quarter, and we allocated $121 million towards repurchasing our shares and reducing our fully diluted share count by approximately 8.6 million shares. We generated $134 million of free cash flow in the second quarter and ended the period with $190 million of cash on the balance sheet.
Slide 6 illustrates the progress of our share reduction efforts since the original share repurchase authorization was put in place in the third quarter 2019. Since that time, we've reduced our total diluted share count by 29.1 million shares or about 11% in under two years. For 2021 year-to-date, we have spent $209 million toward reducing our fully diluted count by 17.6 million shares. Our plan is to continue to repurchase at least 1% of our outstanding shares each quarter. We currently have 10.5 million shares remaining under the current repurchase authorization.
Magnolia remains unburdened by large amounts of debt. Our $400 million of gross debt is reflected in our senior notes, which do not mature until 2026, so we do not expect to issue any new debt. We have an undrawn $450 million revolving credit facility, and our total liquidity of $640 million, including our $190 million of cash is more than adequate to execute our strategy and business plan.
Our strong balance sheet, consistent free cash flow provides a strong element of security amidst product price volatility is also an advantage in allowing us to opportunistically repurchase our shares, pursue small bolt-on accretive acquisitions and pay a sustainable and growing dividend. Our condensed balance sheet and liquidity as of June 30 are shown on Slide 7 and 8.
Turning to Slide 9 and looking at our unit costs and operating income margins. Our total adjusted cash operating costs, including G&A, were $11.18 per boe in the second quarter. Including our DD&A rate of $7.33 per boe, which is generally in line with our F&D costs. Our operating income margin for the second quarter was $21.85 per boe or 52% of our total revenue. As Steve referenced earlier, our business has fundamentally improved in large part due to the strong productivity and efficiencies of our Giddings asset.
Our second quarter production in Giddings grew 55% from last year's second quarter and with oil production growing 97% from the year ago period. Recent Giddings wells have averaged approximately $6 million with continued efficiencies offsetting some of the modest inflation experienced in the field. Results of recent wells drilled as part of our early-stage Giddings development continue to be representative of the strong outcome we previously disclosed as part of this program and with continued strong oil production scene.
Slide 10 helps to illustrate how our business has improved compared to 2019. While our current total production is similar to 2019 levels, Giddings now represents more than half of our overall volumes compared to 1/3 in 2019. More importantly, our level of D&C spending this year is expected to decline to less than 40% of our adjusted EBITDAX compared to 60% in 2019, leading to higher amounts of free cash flow and a more profitable business. And our expectations are that we will have reduced our diluted share count by 11% over this period. All of this has been accomplished at product prices that are similar to 2019 levels.
Turning to guidance for the remainder of 2021, we expect our full year capital to be well below spending rate of 55% of adjusted EBITDAX to generate moderate long-term production growth. The addition of a second drilling rig in late June, our total D&C capital for the second half of the year is expected to be between 150 and $175 million. Second rig is currently drilling wells in the Giddings Field, and we ultimately plan to use this rig to drill wells in both the Karnes and Giddings assets, including some appraisal wells in Giddings. We expect a smaller portion of the production impact from the second rig to be seen later this year with most of the benefit not reflected until 2022.Our other rig will continue to drill multi-well development pads in our Giddings area.
Looking at the third quarter of this year, 2021, we expect production to average approximately 67 Mboe/d representing a sequential increase of about 3% compared to the second quarter. A portion of our capital and activity will be directed towards drilling and completing some gassier wells in both Karnes and Giddings in order to benefit from the recent strength in natural gas prices, this includes the completion of several prolific natural gas wells in Karnes.
As Steve mentioned, the natural gas hedge we put in place a year ago has ended, and we're now completely unhedged for both oil and natural gas, allowing us to benefit from the recent strength in product prices. Oil price differentials are anticipated to be approximately $3 a barrel discount to MEH during the third quarter.
The third quarter fully diluted share count is expected to be approximately 237 million shares and is expected to continue to decline further by year-end due to our ongoing share reduction efforts. The EnerVest operating and other agreements were terminated at the end of the second quarter, resulting in several onetime cash and noncash charges that I mentioned earlier. As a result of the conclusion of the operating services agreement, the run rate for our cash G&A costs beginning in the third quarter is expected to decline to approximately $2 per boe compared to $2.60 per boe during full year 2020 or in excess of 20%.
Finally, I want to mention that Magnolia issued its first corporate sustainability report in the second quarter. The report demonstrates Magnolia's commitment to sustainability, outlines our core values and objectives and addresses factors that are important to our investors and other stakeholders.
A brief summary of this report is shown on Slide 11, and the full report is available on our website. To summarize, Magnolia's high-quality assets and capital efficiency should continue to generate strong operating margins and sizable free cash flow, allowing us to execute our strategy and contribute to our total shareholder return proposition.
We're now ready to take your questions.
We will now begin the question-and-answer session. [Operator Instruction] Our first question today comes from Umang Choudhary with Goldman Sachs.
My first question is on cash returns and how you plan to deploy your free cash flow. You talked about increasing your dividend next year based on a $55 long-term oil prices and capping it at 50% of earnings. I was wondering if you can help us frame, how we should think about the excess free cash flow after you pay the dividend? How are you kind of comparing the opportunity to buy back shares versus investing towards further growth given the returns which are generating on organic operations is also very attractive at current commodity prices?
The business model really doesn't change. To constrain us, we use the 55% of drilling to keep us from trying to buff it up or speed the drilling. It provides for a reasonable mid single-digit growth rate in the business, and that's really our target. As I said in my remarks, I hope, the focus now, because we believe there'll be large amounts of our stock available for sale over the next couple of years, is on share repurchases. The share -- when you model the share repurchases at a reasonable price into the model, it has a dramatic effect on our earnings, our cash flow per share and all those things.
Drilling more wells is really not in the cards, except based on 55%. So if you think about the dividend this way, we've given the information of how much we could afford to pay at $40 oil. That's what this interim dividend does. That's information for you, and we could say that we could very safely pay that 2x, so that's $0.16 a year. We're going to reprice the whole dividend package next, in February, that's going to be a larger dividend than $0.08, for sure. We're going to reprice it based on our results this year. We're going to take this year's results, reprice it to this lower price because we believe that's a long-term value, long term price.
And so the dividend per share is much less than we could in theory afford to pay. But the share reduction will-- we're trying to build value in the stock. To be all to be clear about it, we want the stock to go up and not from dividends, the dividend, after we get through this period where we have this opportunity to buy shares, then we'll re-evaluate the dividend plan. But right now, it's very rare to have an opportunity to buy so many shares and bring the capital structure to such that your return on capital employed to significantly enhance all your share metrics, and we haven't raised-- we haven't increased the risk in the company because the debt stays the same. It's a strategy to make the stock go up.
A dividend, 2%, 3% or whatever it is, the stock varies at every day, every hour. So the dividend is a placeholder for the future. And as we get through this period, we'll be able to pay a regular safe dividend, but a regular growing dividend. If you think about it, if we grow the production profitably at 5% or 6% a year, and we buy-in 4% of the stock each year, so you could have sort of 10% area dividend growth. And we think for many investors, that's an attractive outcome, especially for me. So that's the story.
Got you. That's really helpful. And I guess my next question is probably more on the operations side. Maybe you can talk a little bit more about your Giddings program. Any update around appraisal activity? Anything you're just seeing recently from a well performance? That will be helpful.
We have over 30 wells in the core area at this point. And they're highly predictable. The newer wells look like the older ones, except maybe a little oilier. There's nothing really new. And some of them have been on long enough to sort of -- to measure everything, but we're highly confident, we're getting great predictability, great outcomes, of course, in this environment, every other thing is good and the decline rate is low. The reason we can reduce it, the reason we-- when we started, we were a Karnes producer, the decline rate was real high. Here, the decline rate is much less. So we're much less capital intensive. That's what's driving this whole thing. And there's nothing going on at Giddings that wasn't the same as last quarter and the quarter before. We just had more and more wells. And we've got a lot more to drill. It's a very positive story at this point.
Well, we tried to draw the comparison, Umang, between now and 2029. It's sort of indicative of what's happened over the last couple of years. It's much better and it's clear.
And it's much better than I thought it would be when we bought the Giddings asset. I would not have imagined this outcome. I think if I looked at my plan that we put together when we started, we're sort of in-year six of the plan and this is three years in.
Those are helpful comments and we are seeing the same thing in the core area at our end when we do well results.
Our next question comes from Leo Mariani with KeyBanc.
I wanted to stick with the operations here. I think you guys have clearly identified in the past that you've got a 70,000 kind of core acreage position within a much larger footprint at Giddings. You talked about kind of 30 wells in the core. I guess, do you feel that those 30 wells have sufficiently appraised that entire 70,000 acre sweet spot. And I know you're going to do some further appraisal work this year with that second rig. So what's your thoughts on the potential of expanding that 70,000 acres late this year and into next year? And would that be a contiguous expansion? Or are you more looking at other sweet spots in the greater 430,000 acres?
The answer to your question is that we continue to step out and add. And that's simple as that. We have sort of a model, if you want to think of it that way. We step out and add, every time we get a well, we can add some more data. We try different kinds of spacing, that sort of thing. I hate sports analogies. But if we want to go to baseball, which I think has nine innings, right? Brian assured me that's right. We're sort of in the second inning year. And we have other areas we're looking at. We don't like to talk about them because they're still leasing in that sort of opportunities.
And we want to retain those rather than tip somebody off as to what we're doing. The core area continues to grow and continues to have significant opportunities for more and the spacing is still a work in progress. When we talk about extensions or whatever, this is testing other areas to figure out, to see if we can build the model in some other area. We don't really know the answer to that at this point. That's why we do grow the wells. You can always imagine an answer. But unfortunately, you have to drill a well to figure it out. And then what you find is the well may be good or better and different, but it gives you data, so you might have to drill two or three more wells to figure out if it's really true.
So we went to a gassier area a couple of quarters ago. We think those are -- the gassier well makes 600 barrels a day oil, black oil. So at some point, we might start developing that. But we try to keep our capital under control. This is -- we're trying to maintain a mid- single-digit growth rate, we're not trying to burn all the money drilling wells. And we have other things to do, we want to pay dividends, we want to buy-in shares, all these things are important. For a small company, a small company, the stock needs to go up. It's not an MLP, it's not a royalty trust. You don't want to dump all the money out. The money in a small company is made by the stock going up. And it's a different model than some large company, just a different way of thinking about things, it's because we're small. However, we might near $1 billion in sales.
Very helpful for sure in terms the way you guys are thinking about it. I wanted to get to a question on the two rig program. You theoretically talked about kind of a 5% to 6% production growth longer term, Steve. But just looking at the data, you guys have grown more than that, just running the one rig for the past several quarters, I know there was some benefit of DUCs in there, but are -- do you have any concern that kind of running two rigs continuously? Do you continue to see such strong well performance at Giddings kind of put the growth a little bit into overdrive? Or are you kind of happy to grow a little bit more if the well results are outstanding over the next year or two?
We'll take what we can get. But that's correct. I think we do want to spend, maybe not $50 million, but we want to spend some money. The problem with running one rig is the error bar because one rig, the rig is delayed for two weeks for something, and it makes extra noise. The other thing that's going on is that in the region some of the numbers are a little different than we had hoped. Is it the non-op activity, not in Giddings, but in Karnes, has been less than we thought. And so this gives us more control over the outcome of the second rig. I suppose if I wanted to manage the production better, I could set it in the well, but it doesn't seem all good like it an idea. But it's possible if things go well, the next year, we could exceed the number.
That makes lot of sense. And I guess just lastly, I just wanted to kind of clarify the mechanics of the growth and the base dividend versus the variable dividend. You certainly talked about kind of reassessing everything in February, but I just wanted to kind of make sure I understood. It sounds like there will be this semi-annual base dividend that's sustainable at a much lower oil price. But perhaps maybe just come full circle and talk about how the variable dividend payout would work?
Not going to be a variable dividend.
That's been kind of taken off the table.
Yes. I listen to all these other guys calls, and I was confused. And so I decided that we would run this like an industrial company. You have a very secure dividend, and we give you defined numbers of how we computed it. And we know that there's room to grow that dividend, but not in a variable way but in a way that's based on results. And I'm trying to convey information to you about our business. I can't rely on the stock market to do that. So we're trying to convey information about how strong the business is at fairly low oil prices that we can afford to do this, that's the point of the dividend. And I like dividends too, my wife especially, but that's really the point of this now.
Now this will evolve over time. But a variable dividend, dividend investors care about three things: they care about that it's safe and that it's a balance sheet issue, they care about that it's paid out of earnings, not out of smoke, and take care that it grows. That's what we're trying to deliver on this dividend. Those three factors, it's safe, it's out of earnings, and it grows. That's the plan over time, it's not complicated, it's what industrial companies do. This isn't some scam to throw a bunch of money to fool you that things are really good. We don't have any debt, that's the fundamental difference. We don't have to pay down debt.
And so all the cash that would be used to pay interest and buying that is basically funneled to the shareholders, either in share reduction or in dividend payments over time, more will be shifted towards dividend. But fundamentally, that's the plan. And it's just like lots of people in the non-oil and gas world do that. The trick, the opportunity for us is the opportunity in this period to make significant -- a large company buys $1 billion of stock out of it's $50 billion or $100 billion, it really doesn't change anything. For us, we're buying large quantities and will change our earnings in all of our metrics without harming our financial stability. Financial stability is really important to me. And it's deliberate -- I'm sorry, but it's deliberately different.
Our next question comes from Zach Parham with JP Morgan.
Maybe just a follow-up on Leo's question. Gallagher spends $80 million to $90 million a quarter on CapEx in the back half of the year, running a two rig program. I know it's early, but as you look out, do you see Magnolia continuing to run that two rig program through '22? And I guess, just in general, how are you thinking about activity levels with the current 2022 strip near $65 a barrel?
We expect to run the two rig program next year. If you do the 55%, there's plenty of money to do that. We probably won't hit 55% if you'd run the numbers through. I'm very cautious about operating activities. I wanted to be safe, I want to be efficient, and I want to be focused and economical. And I'm always reticent about expanding the activities too quickly. But it's likely it's a strip we're right. In the unlikely event it's right, I guess, is the way to say it, that we'll be well under 55%. And that will provide opportunity for other things, but you should plan on that.
I think the question about what the growth will be next year sort of depends. And then the timing and that sort of thing, maybe depends on not-op activity. But that's the -- we want a little more control than we have now, so we can forecast better. But I don't see any reason to expand the business next year. I sort of like where we're going now, I sort of like the growth that we're getting now.
So you don't want to -- I like the low finding cost, candid. This is run as an economical business. Not designed to do anything but generate decent returns. It's something a medium cap or whatever it's called investor would like to own and that's the idea, we're trying to appeal to that. And the reason that people want, in these larger companies, they want higher dividends, it's to keep the money away from the management as they drill other bunch of stupid wells. And so I'll take responsibility for not drilling the stupid wells.
Got it, that's helpful. And then maybe just one quick one on the quarter. Can you talk a little bit about what drove your gas price realization this quarter? You were at $3.28, which was well ahead of NYMEX?
No. It's just.
When we divided that pretty much.
But its looking obviously much better than now than it was in the third -- the second quarter.
No. The beginning, NGL prices are really the -- I mean, you've got to remember, if you go into this quarter, the third quarter, the NGL prices are very attractive for us. We don't actually know, nothing special. As somebody said it, check we cashed it.
Our next question comes from Charles Meade with Johnson Rice.
Going back to your earlier comments, shutting in wells so that you don't exceed your growth target, that would really be a novel way to run an EMP company, I have heard that one before. But Steve, you mentioned in your prepared comments that you see a lot of stock for sale and that you could ramp up your buyback program past that 1%. So it's kind of a 2-part question there.
Are there specific blocks and specific hands you're talking about there? Or do you more mean just the stock that's for sale every day with daily liquidity? And then the second question is, if you're successful with your share buyback program and as you still well pointed out, making the stock price go up, at some point, it seems like that would naturally come to an end. And so how do you imagine that might play out?
We'll start with the first question, we'll answer the first one. We have a private equity owner, owns about 35% of the company, he used to own 50%. So you see a lot in some of the larger companies, they have private equity people. They sold, bought stuff from, and they sort of dumped the stock into the market to look at liquidity. But here, assuming over some period of time, and I have no idea what they're going to do. Those blocks will be for sale. We bought last quarter, 5 million shares from them as a block and the prior quarter, the same thing.
So they have a life and instead of dumping it in the market when they sell shares, we'll buy some of those shares so that everybody gains by this sale. The if he sells 7 million shares into the market, we might buy another 5 million shares. So everybody, not just the people who buy the stock, but our existing shareholders gain because the share count goes down. And so unlike most people, when the stock is-- when the private equity guys sells the stock, he just dump it, and what we're doing is we're absorbing some of that.
And we don't have any idea when or if or whatever he's understand, have any insight information. But given the life of the fund and the recent past, you would expect that some stock is going to show up over time. And we could actually go to them if we wanted maybe and buy some stock, but we prefer to do it as part of an offering so that we don't pay too much. At some point, this comes to an end, that's right.
And we're still up, we wouldn't carry the almost $200 million cash.
Yeah. We don't need $200 million of cash. We do it in case the need arises. So we're out two or three years, I don't know. You'll shift more towards a dividend model. It's very difficult in buying shares in the market to assemble large quantities of shares. It may seem like it's a lot of volume. It's really, in fact, very difficult, even buying the 1% a quarter in open market is not that easy.
And this is like a unique opportunity over the next couple of years to really get the business so the return on capital employed is significantly improved and we're tighter. But we haven't raised the risk because normally, people don't -- the larger company don't want to involve with buying in the shares because it increases their apparent risk because they got a lot of debt, we don't have that issue. So I really think that it's just different because of the way we were set up, always better to be lucky than good, I think.
Right. You painted that picture well. And then one question about the Karnes DUCs, and specifically the gassy Karnes wells. I regard that as more of your kind of high-quality or high rate oil area. So what am I missing that you guys have these?
A little off the -- these aren't gas wells, this is in Haynesville wells. It's just a little gassier than the normal. All we're trying to tell you, maybe inelegantly, is that you should expect to see the gas percentage to be a little higher next quarter than it's been this quarter. We probably been in there. We tried to make an explanation for it, we just should have told you it was going to be and not explain it.
Message received, thanks steven.
It's all Brian's fault. We'll have to have a talk over lunch if it comes to it.
[Operator Instruction] Our next question will come from Neal Dingmann with Truist.
My first question, just you mentioned in prepared remarks about the plan to go to a little bit more gassier wells, obviously, given the gas prices. Was this shift always kind of in your plan? I know some folks had mentioned -- if there's some out there saying, well, these guys are gassier, I don't believe that to be the case. Could you just talk about that plan, Steve? And would you shift back to more oilly later in the year or next year?
There really isn't much shift. This is a tweak. We're drilling oil wells, principally. We have a gassier area in Giddings that we talked about a couple of quarters ago, I think. We're not planning anything there. But at $4, I certainly am tempted, because I've been a gas bearer for maybe 40 years. So I'm tempted, but not that much. So we're an oil producer, we produce gas and NGLs, that's what we'll be. You shouldn't or re-emphasize the shift. So all we're trying to say is it'll be a little gassier because of these DUCs and these wells, but we're not going to put a gas rig door at this time. I don't trust oil drillers and I trust gas drillers less, to control the markets.
So Chris, I mean, nothing different on the guidance there?
No, no. It's not-- I think as Steve said, it's not a shift.
Not a shift, this is a tweak, it's all one one or two quarter tweak.
More timing.
Yeah. More timing because we were going to put the wells on in the winter essentially, when I thought.
Well said. And then my second is just on Karnes. How many -- just ballpark there, how many locations you have left there? And are there opportunities to do some small bolt-ons that would continue to boost? I know, what, a year ago when Giddings wasn't coming on as strong, you were continually boosting some locations there, just your thoughts around how many you have now? And if you can kind of keep boosting that in the current.
I think we keep a three-to five-year inventory and we sort of keep it there. And we look for small bolt-ons. There's a lot of activity there from sort of private equity. And we're not pressed in Karnes, to be honest, we show you in the financial statements, it's small acquisition, a small amount of money. Those are basically buying interest in varying wells and stuff that we have mostly in Giddings. I'm very focused on capital efficiency and not spending -- if got a well over here and it doesn't decline as much, I have less of a bulky to keep the production growing. So I'm not interested in emphasizing the treadmill.
No. Understood. And then just, I guess, just a combination of the two, I guess, your oil progression in the next -- late this year and the next year is going to be the same as it's always been that, right?
Yes, it's to be similar. We-- and also in Karnes, you've got a lot of non-op potential opportunity. That's the only place where -- and we don't have any control really, over that. And we don't know what they're going to do. And some of our forecasting issue is we can't predict it, and it makes a little noise in the numbers. It doesn't make the locations go away, obviously, and we don't know what the thought process is of a lot of these people, if there is any.
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