Q1 2021 Callon Petroleum Co Earnings Call

For our continued growth in free cash flow as we move into the first half of 2022.

I'll reiterate that we have shifted the majority of our positions into callers with our early 2022 positions providing upside into the $60 a barrel price both at Nymex Debbie at Ti in MH to reflect the balance on our physical sales points the value of this price point diversity was reflected.

Earlier, and our cash margin analysis and is part of what allows us to weather changes in regional pricing for our various commodities.

On slide 13.

Pleased with the progress we've made in addressing leverage over the past several quarters.

Entire organization has worked to maximize free cash flow, allowing us to pay down our credit facility and be successful in executing monetization opportunities with the cumulative proceeds in excess of $200 million.

On our current trajectory, we still see Cowen generating between five and $800 million in cumulative free cash flow by the end of 2023 at plus at prices between 50 and $60 per barrel of oil.

As Joe mentioned earlier, we recently signed agreements for two separate packages in the Delaware.

One of which was a gas weighted property and a second that was undeveloped acreage between the two transactions. We are expecting gross cash proceeds of roughly $40 million. Despite.

Despite current production of approximately 3400 Boe per day, and an oil cut of around 25% the impact to our free cash flow generation is minimal and we expect to benefit from incremental reductions in operating expenses.

Cowen has demonstrated the ability to effectively harvest value from noncore assets consistently over the past several years and I expect that these credit accretive transactions will continue.

The other pieces that remain critical to advancing our leverage reduction goals as our cost control and commodity realizations Joe.

Joe mentioned the significant jump in our operating margin this quarter and we expect to see continued strength as we see more of our production shifting to Brent linked pricing over the coming quarters.

Slide 14 provides a brief overview of our financial position and priorities, our senior secured credit facility and associated borrowing base were unanimously reaffirmed by our banks at one 6 billion earlier this week with current borrowings.

Currently standing at $950 million and an approximate $25 million of cash on hand, our free cash flow in the second half of the year should meaningfully advance our reduction efforts.

Our bonds have seen significant appreciation since the lows of last year and we are now beyond any window, where debt for debt exchanges make economic sense. We will continue to be opportunistic with regards to refinancings and managing our near term maturities.

Importantly, we continue to track towards our goal of less than two five times net debt to adjusted EBITDA by the end of 2022.

We see a clear path to pursuing a significantly lower leverage ratio long term.

Overall I am truly pleased with what we have been able to accomplish in a rather short period of time and I look forward to seeing the team continue progressing these initiatives over the coming quarters at this point I would like to turn the call back to Joe.

Thank you.

Good morning.

No.

Okay.

Okay.

Reserves.

Again.

Yeah.

Okay.

Sure.

Good day.

Our game.

Okay.

Okay.

Thank you.

Only a better company because you and your contributions to Cowen. Thank you.

Later that that concludes prepared remarks like to open the line for Q&A.

Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing the keys if at any time of your question has been addressed and you would like to withdraw your question. Please press Star then two.

The first question today will come from Neal Dingmann with <unk> Securities. Please go ahead.

Good morning, Alan Nice details on Joe My question for you or Jeff you guys continue to run a really nice what I'd call diverse regionally diversified program can you talk and I think assets are.

On the same question, but I just noticed you continued to sell well with that could you talk one is you know maybe when you talk about you know a lot of people ask about cadence on.

I ask it a little bit more about sort of regionally. If you guys are going to continue with this kind of plan.

And you know when you look at Delaware versus Midland what kind of expectations are you on are.

Are they really similar these days thank you.

Oh.

Thank you for yet generally speaking.

The cadence is going to it's going to stay pretty much what it is so that this wonderful luxury of having the opportunity to work in multiple basins really paid off in 2020, when we were able to shift from.

Some of the longer cycle time projects.

More expensive on a per well basis in the Delaware and shift over to the Eagle Ford and the Midland Basin, and you see a pretty equivalent spread of capital in 2021 with that so we would anticipate that that being the strength going forward.

One of the nice things with the Delaware of course is that it's less mature asset and so since we have the ability to put in different types of programs or learnings or G. Mechanical algorithms, where we try to look at not just what the rock contains but how it Craig.

Nope it contributes.

While we're learning that with a couple of well pads. We can then rotate over and have some expenditures and some progress in the more mature areas like Midland and then.

And then the Eagle Ford.

And then we can come back into the Delaware and make improvements over what we did in a relatively short time without having to have that consistent capital program, where potentially your over capitalizing being a little less efficient than you would be so that that's kind of a general statement about why we've been able to continue to make progress at an all day.

The operational areas.

No well said I like the details and then just one last one Joe again Capex night continues to come in the trend a little bit lower.

I guess my thought would be around flexibility of the plan is the.

As you continue to beat on debt is that going to sort of you know.

I guess my question is that's what are the sticking point and if prices go higher youll still kind of keep the capex as is.

I'm just wondering again I guess my question is really production more of an output of how do you. How do you think about for that overall strategy. These days.

Yeah, I think he got it there in terms of you know sticking to the plan.

As you recall on our last.

Earnings release and presentation, we laid out a three year plan sort of gave you a sense of how things will roll out over the next three years given the visibility we see in the program and intend to stay with those types of reinvestment rates in that 65 to 75 per cent range. As you said there is production.

Small production growth is an output of that but it really is about a P.

Disciplined around the Capex reinvestment for 'twenty, one for locked in on this program, what we laid out.

Over the next couple of years with some slight increases in capital.

But for you know.

For large part this is sticking to our guns on those reinvestment rates on really driving some some outsized free cash flow over the next couple of years.

Right, that's what I was hoping to hear thanks guys.

Yep.

As a reminder, if you'd like to ask a question. Please press Star then one.

Next question staying on will come from Brian Downey with Citigroup. Please go ahead.

Good morning, Thanks for taking the questions and Jim Echoing Joe's comments, we wish you and your family the best as you retire from Cowen. We certainly appreciate all the help maybe for for you or Joe on the A&D side are you clearly nice progress following recent asset sales over the past couple of quarters does the water assets I believe are one of the key.

The items on the menu of potential disposition options that you havent transacted on yet is that still something you're potentially contemplating or what else is still embedded in this year's remaining divestiture target.

Yeah.

Take that and yes. The on the water is still something that is progressing.

Hey.

You know on opportunity that we're really looking to find the right partner and find the right fit and that's at a.

A discussion that's really benefited as we've provided more clarity on the not only the short term, but the medium and long term prospects for the business strength of our.

Asset portfolio over time, it really helps those discussions with potential partners as they see the durability of this business and underwriting.

Anticipated water streams are off the business that's ongoing as we've talked about.

Our monetization targets that we put out there is a lot of ways to be right put it that way right that the water is a component there, but there are other similar opportunities in.

In line with this non core Delaware divesture across our footprint that we have in various stage of progress. So like I said, we're going to be methodical about this.

We've gotten a lot of questions over the last couple of quarters on where we're letting the market come to us and I think it is developing quite nicely getting to a point, where not only can you sell assets, but you can sell them and make a credit accretive on a metric basis. So more to come yes waters in the mix, but there are others that are in the queue.

I think we're encouraged to see the activity more broadly in the market.

Great and then Jeff that the E. Frac test you you laid out on slide nine clearly some environmental on efficiency benefits. There how should we think about quantifying how that all translates into D&C costs per perhaps coupled with the fluid loading changes you noted on the prior slide how how does that all compare.

Versus what you've achieved in <unk> or what's embedded in our full year guidance.

Sure.

The E Frac tests was fantastic really.

You know that.

The group.

Really enjoys a technical.

Technical challenges and problem solving.

And so from a <unk>.

Beyond just test it was a system of obstacles and opportunities that provided a lot of them.

Enjoyment if that if that makes any sense and so from a from a cost perspective, it's pretty neutral.

Generally speaking I think.

On the groups that are moving to dual fuel fleets, which of course Cowen has already done that and E. Frac fleets. There will probably be there is a potentially a premium on those relative to the.

The historic diesel fleets.

And Thats just more in my opinion than anything.

So all that's baked into our capital program right now I think that you see tremendous benefits both from <unk>.

Reducing the emissions the sound noise the opportunity debt to use field gas is it in addition to <unk> and potentially even maybe plug into the grid at some point.

For that debt power supply so from an overall D&C costs. When you couple that into what we shown on reductions relative to the fluid loading in that slide of course was in particular to the Midland Basin.

That's allowed us to continue to to.

Grind away and keep costs relatively flat, even though obviously the market is looking a little bit on the north side from a labor and sand and and you know that.

We're not in $40 oil anymore.

But overall, we've been I've been very very happy with the cost from a to Z on our operations.

And on that power grid point is that something where there's already existing infrastructure in place or as you evaluate that would that require any upfront capital that UA against per per well savings.

Yes, that's a great question any kind of depends on where you are so some of our areas have better.

Cowen has already committed to multiple substations in the past, which of course gives us a lot more flexibility than than having to ring somebody's doorbell on coming over.

So it really just depends obviously, if you're in an area, where you're going to be there for a while and you have infrastructure in place. That's the most optimal opportunity that you would have but anywhere that you have.

You know a reasonable on a substantial amount of activity.

We will be looking into that.

Great I appreciate it.

Again, if you'd like to ask a question. Please press Star then one.

Again that is star then one to ask a question.

At this time there are no further questions and this will conclude our question and answer session I would now like to turn the conference back over to Joe Gatto for any closing remarks.

Thank you and I'm going to wrap up earlier, a little bit of user error on my part so I.

I'm going to reiterate something I said to Jim because it's worth saying twice.

Even if you heard it before but this is Jim's last earnings call with us before.

Before he takes some time with his family and hopefully find a different gear and enjoys.

His time will certainly miss him and I.

Just wanted to thank him on behalf of our entire team here at Cowen for for being such an important part of our leadership team.

And for me personally I always upped our game both on a professional and personal basis every day he's been with us over the last three plus years and at the end of the day, we're truly a better company.

Because of you and what you've done for us Jim So really appreciate.

<unk> that we're going to Miss you, but I know we'll see.

Very frequently.

We'll keep tabs on them so wanted to wrap up with that and we'll look forward to updating everyone. Later this summer with our continued progress with the business.

Thank you.

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

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