Q2 2021 Cimarex Energy Co Earnings Call

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Good day and welcome to the Cimarex second quarter 2021 earnings Conference call, all participants will be in listen only mode.

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Conference specialist by pressing the star key followed by zero. After today's presentation there'll be an opportunity to ask a question to ask question and you May Press Star then 1 on your Touchtone phone.

2.1 pellet question. Please press Star then 2 please note. This event is being recorded.

I'd now like to turn the conference over to Megan Hays, Vice President of Investor Relations. Please go ahead.

Thank you Jordan Hello, everyone and welcome to Cimarex and second quarter 2021 conference call for those who want to reference today's press release or presentation, you will find it on our website joining.

Joining us on today's call will be Cimarex, chairman, President and CEO, Tom Jorden, Our Chief Financial Officer, Mark Burford.

Executive Vice President of exploration John Lambert.

And vice President of operations like Serco.

Participants on today's call May discuss non-GAAP financial measures you will find the most directly comparable GAAP financial metrics and appropriate reconciliations to the GAAP metrics and our press release, which is available on our website and also as a reminder, during today's conference call we will provide for.

Looking statements based on current expectations I call your attention to the forward looking statement cautionary statements and other disclaimers that are provided in the earnings release and presentation for.

Following our prepared remarks, we will take your questions. Please limit yourself to 1 question and 1 follow up with that I'll turn the call over to Tom.

Thank you Megan and thank you for those of you who are joining us this morning.

As we reported this morning, Cimarex has a strong second quarter, driven by strong operational performance and favorable commodity pricing.

And our oil volumes came in at $72.7000 barrels of oil per day. This is a 6% increase over Q1 and in line with the high end of our guidance, we understand that and industry, leading capital efficiency is a competitive advantage and our program is delivering on the promised increase and capital.

ANSI driven by 3 focus areas, optimizing well spacing improving drilling performance and refining our completion techniques for.

First let's discuss our recent projects that incorporate relax spacing.

We highlight the productivity uplift, we observed and the Dixieland and big Sky developments that are highlighted on slide 6 of the Investor Day. We are also flowing back a number of new developments that are delivering encouraging results.

Moving to our drilling performance, we recently drilled our lieutenant Gibson, 1 stage, 7 H, well and Culberson County, and 7.4 days from spud to TD, averaging 2597 feet per day hats off to our operational team for this outstanding for.

Performance.

We also finished drilling and completing the Carol elder 5 well project and the mid continent, where we significantly bested our prior averages for drilling and completion productivity. We expect this project, which will come online in Q3 to be and important proof of concept.

Our third focus area refining our completion techniques is continuous as we incorporate the latest productivity and performance data into our operational decisions and.

Fortunately the culmination of our focus on these 3 areas means our cost and productivity continue to trend and the right direction.

Our Delaware basin, and well costs are tracking within our annual guidance range of 800 to $850 per lateral foot.

As always our cost numbers to account for all costs associated with bringing in new well on to production, including drilling completion facilities gathering and saltwater disposal infrastructure and flow back.

As Mark will describe we had solid financial performance during the quarter, we maintain a sharp eye on controlling costs and our production expenses are trending within our guidance range, Despite an uptick and workover expenses during the quarter as we further cut up with deferred workovers and maintenance.

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Strong volumes, good cost control and strong pricing drove $195 million of free cash flow or $167 million of free cash flow after the payment of our base dividend.

We ended the quarter with $799 million cash on hand, and no borrowings on our revolver.

With strong operational momentum favorable commodity prices and outstanding organizational performance Cimarex is in terrific shape as we look to build for the future.

On that note I would now like to make a few comments about our recently announced combination with Cabot.

And bringing together cabot's position and the Marcellus shale and Cimarex is acreage and the Permian and Anadarko basins. The combined business will have a strong and differentiated foundation, creating a premier energy company that is focused on delivering leading returns of capital to shareholders through the cycle.

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The benefits of this combined business are clear and I'd like to reiterate a few of these on today's call.

First and foremost the combined business is expected to be able to return substantially more capital to shareholders as compared to <unk> standalone.

Combined at mid cycle pricing, we expect to deliver for $7 billion of cumulative free cash flow between 2022 and 2020 for Jenny.

<unk> generated strong free cash flow against macro complexities enables us to target returning more than 50% of quarterly free cash flow with the capacity and confidence to distribute more than 30% of cash flow from operations and higher commodity price levels.

We believe this approach to shareholder distributions is industry, leading and understand several of our peers have begun adopting similar strategies.

And this best in class capital return profile is driven in part by a high quality portfolio with Premier multi basin exposure.

As I've said before Cimarex has benefited from exposure to oil gas and natural gas liquids.

This remains a core competitive advantage that moderates the impact of price swings of any single commodity.

And our combination with Cabot and they are strong PDP base enhances our resilience to commodity price swings.

Importantly, the combined company will benefit from our strength and financial profile together, we expect a lower cost of capital due to increased scale increase liquidity and a strong balance sheet with less than 1 times net debt to EBIT docs for.

From a cultural perspective, we're also aligned and our strong commitment to environmental stewardship sustainability and strong corporate governance and look forward to bringing our talented teams together.

To that and dedicated teams from Cimarex and Cabot had been working diligently and with our preliminary S for file the exploration of the HSR waiting period and integration planning underway, we are making important progress towards completing the merger and the fourth quarter of 2021 well.

Look forward to completing the transaction and delivering on the value creating potential of the combination.

I am incredibly proud of the entire Cimarex team and I am confident and our path forward as we continue to deliver strong financial and operational performance, while focusing on bringing our business together with Cabot.

And while I am speaking about my pride and the Cimarex team I hope that you have not missed that we have posted this morning, our updated and environmental and safety and health data on our website, including a very detailed fact filled report of our emissions and safety data we have made tremendous.

Progress over the past few years as our emissions footprint has become a top engineering priority at Cimarex. This has driven substantial and meaningful reductions and it will continue to do so on the future as our organization from the field to my office is highly focused on this.

We will bring this focus together with cabot's shared commitment on these principles to our new company and continue to make solid environmental progress.

With that I'll handle the call over to Mark.

Thank you Tom good morning, everyone.

I'll address the P items, and our second quarter 2021 financial results and outlook.

Our production volumes this quarter came in above the midpoint of our guidance due to strong well performance and <unk> second quarter production increased 8% compared to first quarter 2021 volumes.

As Tom highlighted operation, we are executing extremely well and on track to achieve our fourth quarter 2021 oil production guidance, which is to grow oil volumes by more than 30% as compared to the fourth quarter of 2020.

As we previously discussed for fourth quarter production increase as a result of resumption of and efficient drilling and completion cadence at 5 rigs and 2 frac crews after dropping to 1 rig and no crews and mid 2020.

Combination of strong price realizations production volumes resulted in oil gas and NGL revenues for this quarter approximately $700 million.

Which has nearly tripled revenue as compared to the second quarter of 2020.

Per unit cash costs comprised of LOE, Workover expense transportation and production taxes, and G&A totaled $9.36 per Boe.

A decrease of 10% as compared to the first quarter.

And with projected higher second half volumes, we expect per unit costs trend down further towards the midpoint of our annual 2021 expense guidance.

Total capital investment for the second quarter was $199 million, including $168 million of drilling and completion capital.

Cash flow from operations, and first quarter totaled $394 million generating $195 million and free cash flow for $106.7 million of free cash flow after the dividend.

Our results and our strong free cash flow and the quarter and noncash property sales, we exited second quarter with net debt of $1.2 billion a decrease of 526 million from year end 2020.

Overall, we're executing very well on issues program for committed to maintaining capital discipline and with the higher commodity prices that translates directly into incremental free cash flow.

With that I'll turn the call over to Blake.

Thanks, Mark our.

And our operations teams continued to deliver strong performance.

And we're on track with our capital program, while delivering the efficiency improvements telegraphed at the end of 2020.

We find significant efficiency gains and steady concentrated activity.

And painting, a cadence of 5 rigs and 2 frac crews and the Permian allows us to focus our operations and key development areas, resulting in more wells per pad longer laterals and faster cycle time, while optimizing our facilities.

All of these efficiencies come together to help improve our cost structure and keep inflation and check.

We see continued inflation across the supply chain, including horsepower labor steel and fuel.

Left on check these cost pressures could increase our capital costs.

However, due to the performance of our ops teams, we have been able to offset nearly all cost pressures with efficiency gains.

Nowhere is this more evident and in our drilling performance, where our team set another record this quarter with the Lieutenant Gibson and 1 state at number 7 H, and Culberson County, Texas, which drilled to TD and 7.4 days.

During the second quarter and across our Permian program, our drilled feet per day came in at 1513 feet per day, which is up 7% from the first quarter and 35% from a year ago. Thanks.

Thanks to these continued efficiency gains we are reaffirming our full year cost guidance for total well cost of 800 to $850 per foot.

Our organization continues to make advances towards our goal to reduce our emissions footprint.

We have 5 of our new tankless facilities and operation with 11 more planned through 2022.

Facilities replace traditional tanks with surge vessels, thereby eliminating the patches and end of line devices, which are common sources the fugitive emissions.

We're constantly learning as we collect performance data from these new facilities.

And it informs the critical feedback loop that allows us to iterate and improve on future designs to help further drive down emissions.

These efforts coupled with the great work by our field staff and help ensure that each new barrel produced at Cimarex has a lower emissions footprint and the last.

And with that we are now happy to take any questions.

We will now begin the question and answer session.

For us.

Alright, and 1 and you touched on the phone. Thank you.

Speaker phone please pick up your headset of oil.

Cool.

And today's final question.

And I would like to withdraw your question. Please.

Alright and coal.

For participants equally.

And 1 question and 1 follow up.

Apple.

And with MLR up there.

Our first question comes from <unk> and <unk> with Jpmorgan. Please go ahead.

Good morning, Tom I wanted to maybe start with some of the key learnings.

For a big Sky, and Dixieland and and how this is informing your future development planning and the Delaware Basin.

Well.

And by John to chime in here with me, but certainly some of the key learnings are from our up spacing.

Just purely and simply allowing a little more space between wells and we think it absolutely has confirmed our thesis that we can have it significantly increase capital efficiency that the tradeoff and loss reserves as minor gain and lowering capital as major.

And we've seen our initial flow back and we have.

Almost 6 months on on a couple of these projects and I would say, it's absolutely confirming our core thesis that we can.

Extract comparable reserves by drilling fewer wells and.

And we've also looked.

Additionally, on a big Sky are very different <unk>.

<unk> is a triple stack project Big Sky has 2 landing zones and they're on different parts of the basin. So.

Differences are not always explained by spacing and completions.

But we've learned a tremendous amount about up space completions, and the differing performance and the sand and shale environments, we've learned a tremendous amount about well to well they are parents.

And we are further looking to optimize so we are just really excited about increasing our capital efficiency as we've highlighted going into 'twenty, 1 and 'twenty 2 John anything you'd like to add.

No Tom I think extremely well there and we are we've learned a lot over the last 3 years.

And we really feel like for.

For every section that we're about to develop a pretty dialed in on the spacing and aspect of it.

Based on the rock properties based on reservoir properties and based on existing parent wells.

And really have we think a pretty.

Good process to come up with the optimal spacing for every section as we go forward.

Great My follow up Tom I've gotten this ex a question for quite a few buy side and so I wanted to ask you about this is to ask about the people side.

Of the Cabot merger and we all know that your technical team has been 1 of the core advantages and the company.

And I know you touched about integration planning, but could you talk a little bit about the cimarex employee reaction to the merger and perhaps your confidence and retaining your core technical talent.

It appears youre going to combine the corporate headquarters from Denver to.

And to Houston.

And thank you for that question because I think those of you that know me would know that.

Retaining our core operational capability the <unk>.

<unk> mines, and soles that or the absolute engine that drove cimarex is forefront and their mine, which is 1 of the reasons why our combination with Cabot appeal to both Dan and me.

We're very different companies, but we're very similar in many respects.

I think youre going to see the.

Overwhelming majority of Cimarex is talent at the New company. Our staff is excited about it I think our people are ready and willing to take on a new challenge and.

And we're ready to get after it but I wanted to just finish by saying I did have an opportunity to go to Pittsburgh, 2 or 3 weeks ago and.

And there was my first opportunity to talk to the people there and we also do a field visit and I was just wholly impressed with the people the quality of the operation and I came back more fired up and I had ever been and about the absolute caliber of these 2 companies. This was going to be and we are committed to make.

This.

Top performing company and our sector.

With.

The absolute best operational talent and our space.

Great Tom No state income tax and the Great Day, Texas. That's also a good thing to think about.

Yes.

Thanks Thomas.

Thanks Sharon.

Our next question comes from Doug Leggate with Bank of America. Please go ahead.

Yes. This is John Abbott on for Doug Leggate.

Doug will baby on be on here for the follow up call a question.

Just for our first question here, Tom you laid out some pretty good commentary on your on the merger.

Could you just sort of discuss what the hedging strategy will be for the company.

On a combined basis going forward.

Well John that's a.

Very topical issue with us we have been discussing that and.

I'll say first we'll we'll need to.

Sit down as a new company and talk through that but yes, I will just tell you how we think about it.

We think about hedging as insurance and it's kind of a question on what it is you want to ensure I think classically at Cimarex, we wanted to ensure our capital program, which historically prior to the shale 3 <unk> era was a very high percentage of our cash flow.

And as we look ahead I think that we will look at the hedge program.

As built to ensure our capital program, but also our certainly our ordinary dividend and which which is increasing.

So although.

Obviously, we need to get the new co team together and have this debate I don't think youre going to find any serious disagreement and I would expect and this is.

We haven't had that debate, yet, but I would expect that there'll be a pretty strong voice that we might and hedge a little less going forward than we have currently and our current hedging program is a programmatic 50% of our volumes.

But.

We'll debate that long and hard and and I never want to get caught up in short term optimism when we discuss long term capital planning and it's real easy.

To do.

Appreciate it and for.

For our follow up question.

It's related to the asks for and had been put out.

Just looking at it and it looks like Todd Granny co process, regardless and merger.

For shareholders could.

Could you discuss the process that you ran for shareholders.

Yes.

I didn't get that from my reading of the S for John but I'll just describe what we did is.

I think fairly clearly laid out and yes for we had multiple conversations with multiple counterparties over the year or 2 leading up to our merger announcement.

And I don't want to.

Represent that those were casual conversations.

We have a very sophisticated set of tools here with our financial planning and our asset valuation teams. So we can look at a counterparty and great detail with public information we know their assets. The publicly released financials are usually pretty solid and we can do a fairly <unk>.

Detailed projection of drilling upsides and asset potential based on our understanding of the lay of the land and our understanding is.

I would say second to none.

With our technical team.

Although on the S..4 we represented that we the only entered into 1 other confidentiality agreement. We did very detailed pro forma analysis on many potential counterparties and when we looked at Cabot plus cimarex.

It was just a while that we firmly believe that the combination of these 2 companies allowed our shareholders and go forward opportunity and a cyclic commodity environment that no. Other combination offered so we're we were excited then we remain as excited today in fact with the <unk>.

Increase in gas prices.

I just feel more strongly and never that this is a fantastic transaction for our owners.

Thank you Tom and thank you for taking our questions.

Our next question comes from Neal Dingmann with Q&A.

Please go ahead.

Good morning, and my first question, Tom for you and John just on regional focus I'm, just wondering and the Dell will you continue to stick largely to that <unk> had lot of success and northern Res and if you would could you talk about I see you've talked a lot about space and in that area, yet you talked well space and that area of the success you've had can you talk about.

And at the spacing there versus your thoughts and need to like Northern Colbert centers Southern Eddy.

While on regards to spacing as we've learned again over these years.

Are you are very right our acreage is vast across the basin and the properties and <unk>.

The wolfcamp geologically as well as the reservoir properties to whether were gas and reservoir oil change.

And so we've learned to take all that into account too then lead to optimal spacing.

Currently right now it looks around the 9 wells per section and <unk>, but that will vary a little bit again, depending on pompe parent well locations as well as the geology.

By the time, we get the call percent, we're a little bit less pressure, where gas year. We're finding we don't need as many wells to achieve the same kind of recoverable reserves. So right now we're a little bit lower kind of the heart of Culberson is around 7 wells per section.

Although you will see that vary too across our acreage position.

The main thing to come across as there is not any 1 template that you would stamp across our entire position we've learned to kind of space for fit based on every section we look at.

And that's true even up in Lea County, where we have a wonderful acreage position.

And there we studied our peers and we're now honing in on right around 9 wells per section is being very optimal for the upper wolfcamp.

And again, we'll adjust with results, but we're feeling very good about our spacing decisions going forward, yes, Neil I just wanted to add when John quotes. These numbers, we're talking about the upper Wolfcamp, yes, we.

Have other landing zones above and below us.

Yes, great and Tom and then if I could just on a second by our math I think that obviously the combination and you guys are going to have some really nice free cash flow going forward Tom.

You alluded to this a little bit earlier, I'd, just like to hear and little more your thoughts on is sort of free cash flow piles up you've got a great balance sheet. What is your thought about like on near term shareholder returns. If you think your shares are trading at a discount to NAV I am just wondering just in broad terms, how you think about that versus potentials and desk.

Well, we're going to look at all the options in front of us and yes.

Telegraph that.

And.

And anything but the most draconian and commodity prices. We think we can hit 30% of cash flow from operations returned to our owners.

We've talked about calling those notes are due 2024 and retiring that debt.

But we will also be modeling share buybacks.

We look look at that from time to time and all of those options will be on the table.

Depending on what the wake up every morning, and look at it fresh I mean, there's lots of moving parts that contribute to that of all of those the 1 that were rock solid committed to returning net cash to our owners.

Barry I would like to answer thanks, Tom.

This concludes the question and answer session I would like to turn the conference back over and it's ongoing for closing remarks.

Well, thank you I want to thank everybody for joining us.

And we're delighted to report a solid quarter, we'll continue to execute we will continue to update you on our integration efforts moving towards a fourth quarter close with our combination with Cabot.

And I also want to say I very much look forward to the new organization coming together performing delivering everything we promised and becoming 1 of if not the leading independent E&P operator, so thank you very much.

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