Q3 2021 Continental Resources Inc Earnings Call
Good day, ladies and gentlemen, and welcome to the Continental Resources, Inc. Third quarter 2021.
Earnings Conference call.
At this time all participants are in a listen only mode.
Later, we will conduct a question and answer session and instructions will follow at that time.
So if you need assistance. Please signal conference specialist by pressing the star followed by zero.
As a reminder, this conference call is being recorded.
I would now like to turn the conference over to Rory Sabino, Vice President of Investor Relations. Please go ahead Sir.
Good morning, everybody and thank you for joining us and welcome to today's earnings call. We.
We will start today's call with remarks from Bill Berry Continental's, Chief Executive Officer, John Hart, Chief Financial Officer, and Chief Strategy Officer, and Jack Stark, President and Chief operating Officer additional members of our senior executive team, including Mr. Harold Hamm Chairman of the board.
He will be available for Q&A today's call will contain forward looking statements that address projections assumptions and guidance actual results may differ materially from those contained in forward looking statements. Please refer to the company's SEC filings for additional information concerning these statements and <unk>.
Yes.
In addition, continental does not undertake any obligation to update forward looking statements made on this call. Finally on the call we will refer to certain non-GAAP financial measures for a reconciliation of these measures to generally accepted accounting principles. Please refer to the updated investor.
Presentation that has been posted on the company's website at www Dot CLR dot com with that I will turn the call over to Mr. Barry Bill.
Thank you Roy and good morning, everyone.
Moving the earnings date was not an inconvenience for any of you did this to be able to share several exciting things with you today.
First is our record free cash flow for the quarter of $669 million clearly 2021 is going to be a record year for us in terms of free cash flow generation.
Second we have expanded both our shareholder capital and corporate returns. This includes increasing our dividend by 33% from 15 to 20 per share with a return on capital employed and increasing to approximately 21%.
Third is the exciting news.
That we now have strategic positions in four leading license across the lower 48, with a $3 billion to $5 billion acquisition of Delaware assets from pioneer, providing our company and shareholders with material geologic and geographic diversity.
Like our first quarter Powder River Basin acquisition. This transaction is accretive on key financial metrics and the acquired assets will complement our existing portfolio and the Bakken, Oklahoma and powder River.
And for <unk>.
We are now post this transaction, we have been fully returned to fully investment grade.
And as we've indicated on previous calls we believe continental has more alignment with shareholders than any other public E&P company, we focus everyday on maximizing both shareholder and corporate returns.
The Permian Basin acquisition will be an integral contributor to the shareholder return plans.
This is an outstanding asset with 92000 acres over 1000 locations 50000 net royalty acres. The acquisition also comes with about 55000 Boe per day from PDP and anticipated volumes from wells in progress and finally and possibly most importantly, this Permian transactions.
As projected to add up to 2% to a return on capital employed annually over the next five years.
The acquisition of these assets strongly supports the tenants of continental's shareholder return on investment and return of investment dividends and share repurchases.
These are all driven by our continued commitment to stream to strong free cash flow.
Our plans for low single digit production growth are the foundation for being able to deliver strong free cash flow during the third quarter. We took additional steps to increase returns to shareholders with our third dividend increase and as many quarters.
And executing on $65 million in share repurchases.
While we will be taking on some additional debt to pay for the transaction our net debt to EBITDAX target remains the same less than one.
We expect to exit this year at a quarter annualized net debt to EBITDA of about 1.3 and expect to be below one O. One point by year end 2022.
Assuming $60 and strip gas pricing.
We are unwavering in our commitment to reduce debt.
Our 2021 cash flow generation remains very competitive versus our peers in the broader market as shown on slide seven.
This is even after our stock has nearly tripled year to date.
We see the potential to generate $2 $6 billion of free cash flow this year, which equates to about 14% free cash flow yield at current prices. This is significantly above the majority of our industry peers and the broader market, indicating further upside in the value of our stock.
As we look to 2022, we expect to provide updates on capital budgeting operations, including the pending integration of our newly acquired Permian assets early next year.
We are confident this acquisition will further enhance our free cash flow generation.
Our ESG performance is top of mind for me and I want to update you with regards to our ESG performance year to date.
In the third quarter, we achieved a 98, 9% gas capture rate up from 98, 3% in 2020.
In support of our industry, leading ESG gas capture stewardship, we have deferred approximately $45 million in revenue in 2021.
Additionally, we have achieved zero recordable injuries, among our employees through the third quarter 2021.
Congratulations to the team all outstanding performance were proud of our teams and their exceptional commitment to continuously operate with integrity and a safe and environmentally responsible manner.
We will spend the remainder of the call discussing some of the specifics on our recently announced in highly accretive expansion into the Permian Basin.
John will highlight the compelling financial aspects of our expansion and Jack will provide details regarding the outstanding.
Geologic attributes and fully integrated nature of the deal.
Our new position in the Permian as shown on slide four was driven by our geologic geology led corporate strategy and is built on a strong foundation of geoscience and technical operation skills, coupled with our management team fully aligned with shareholders.
This transaction increases continental's operational footprint in the area with our current acreage position across the Permian now approximately 140000 net acres.
Later on the call Jack will provide details regarding this expanded Permian footprint, along with the tremendous success. Our teams have had growing our top tier corporate.
Folio of lower 48 assets.
Approximately 75% of the price of this asset is covered by PDP value and wells in progress at current strip prices, leaving significant upside value in undeveloped acreage.
On a pro forma basis and at current strip prices, we expect to generate at least $3 billion.
Of cash flow in 2022.
Our pro forma free cash flow in 'twenty to 'twenty two is projected to be about 17%. This compares very favorably to our 2021 projected free cash flow yield of about 14%.
Like our other assets the fully integrated nature of this asset offers a multifaceted value proposition, including minerals and water infrastructure that we control and provides tremendous optionality and upside in the future as shown on slide four.
The transaction has been unanimously mostly approved by the company's board of directors and as effective as of October 1st with an expected closing date in the fourth quarter.
Now I'll turn the call over to John and Jack for more texture on the acquisition.
Thank you Bill as Bill mentioned today's acquisition is immediately financially accretive on cash flow and free cash flow per share earnings per share return on capital employed and cash margin. This transaction has a number of benefits to continental shareholders, let's discuss a few of those items.
This transaction is credit enhancing due to projected cash flow and rapid debt paydown benefiting our credit metrics, while enhancing our commodity optionality and geographic diversity.
It is beneficial to the ongoing trajectory of our credit rating I will discuss agency views momentarily.
This transaction includes a healthy amount of PDP benefiting our EBITDAX by approximately $900 million per year at current strip prices enhancing our credit metrics. Additionally, we are projecting an incremental $500 million of free cash flow from the acquired asset in 2022.
At current strip prices.
Based on estimated 22 production and capital spending combined with our legacy assets, we expect 2022 free cash flow.
But at least $3 billion at strip prices for continental.
We have significant flexibility in how we plan to finance the transaction.
As of September 30, we had approximately $700 million of cash on hand with expectations for strong free cash flow moving forward our.
Our revolver remains fully undrawn.
On October 29th we extended our revolver maturity to October 2026, and increased available commitments to $1 7 billion.
We intend to utilize available cash and our revolver to fund a significant amount of this transaction.
Our remaining acquisition financing will be derived from debt capital markets and bank term facilities.
We will not issue additional equity as a means to fund this deal.
This financing approach amplifies the accretive nature of this transaction on a per share basis.
Our credit metrics also remained strong.
With net debt to EBITDAX projected to increase only slightly from <unk> 90, <unk> in the third quarter to one three times initially with the transaction, but is expected to drop below one times during 2022 at current strip prices are.
Our target is to reduce net debt back to current levels or approximately $4 billion by year end 'twenty. Two we plan to utilize 2022 cash flow to pay off the revolver funding rebuild our cash position and pay off our 23% and 24 bond maturities at the earliest possible opportunity.
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As you May have noted the rating agencies have been supportive of this transaction and our plans.
<unk> upgraded us to Triple B <unk>.
Moody's has upgraded us to be a three and S&P has maintained a positive outlook to upgrade.
This positions us.
With two agencies are investment grade, making us fully investment grade eligible.
One agency with a positive outlook to investment grade.
We are pleased with this progress as our objective is three investment grade ratings.
Before I turn the call over to Jack I would like to note some of the key financial highlights from the quarter.
As we have discussed in previous quarters.
And as you will note in the Form 10-Q with the rise in natural gas prices. The company has elected to lock in a portion of associated cash flows through natural gas hedges at attractive prices. Subsequent to September 30, we have continued to layer in natural gas hedges for the second quarter of 2022 through <unk>.
Year end 2023, we've utilized a combination of swaps and collars with an average swap or $3 71.
And in average put a $3 25, and an average call of 496. These positions are summarized in our 10-Q, along with our prior positions. We are largely unhedged parole as we believe market fundamentals are supportive of price participation due to supply and demand rebalancing.
We have remained capital disciplined with a projected reinvestment ratio of approximately 40%.
Reflecting back on our original guidance in February we were projecting at that time $1 billion of free cash flow with the reinvestment rate of 58%.
With our free cash flow now up approximately 160% from our original guidance, we have decided to reinvest a modest amount of additional capital this year or just under 10% of that incremental cash flow figure.
This is due to the associated capex from the pending Permian acquisition at.
Additional leasehold acquisitions and incremental gas focused activity in order to meet domestic and global natural gas consumer demand given under supplied market outlook. This winter.
I would now like to turn the call back over to Jack to discuss some of the key operational highlights of the deal.
Thank you John and good morning, everyone.
I will start out by saying that the Permian assets. We've acquired are excellent addition to our existing portfolio. They contain the key strategic components common to all of continental's assets, including the right rocks excellent economics.
Significant contiguous acreage position with high working interest and net revenue interest mineral ownership surface ownership operated water infrastructure and significant upside potential through continued operating efficiencies technology and exploration I'll touch on each of these briefly here.
First and foremost it's all about the rocks, referring to slide four these assets contained proven stacked oil rich reservoirs.
As well as other high potential reservoirs, we intend to explore and develop in the future.
We estimate that these assets contained an inventory of over 650 gross wells targeting three primary reservoirs, including the third bone spring the <unk>.
Wolfcamp a wolfcamp b.
And we think there are over 1000 locations when you consider other known producing reservoirs that underlie this acreage.
On an economic basis these assets complement our existing inventories very well delivering rates of return from 50% to well over 100% at $60 <unk> and $3 Nymex.
The 92000 net leasehold acres being acquired are largely contiguous as you can see on slide four and highly concentrated.
The continental will operate 98% of this acreage with an average working interest of approximately 93% per well and over 90% of this acreage is held by production.
The acquisition also includes 50000 net royalty acres approximately 70% of these royalty acres directly underlie our leasehold, which raises the average net revenue interest for wells drilled on this acreage to around 80%.
The acquisition also includes significant water infrastructure and surface ownership, including 31000 surface acres, approximately 180 miles of pipeline water facilities and disposal wells that can be expanded to accommodate growth.
We will provide immediate operating efficiencies and cost benefits to our operations.
The acquisition also includes approximately 55000 Boe per day of production, which is inclusive of 10 wells in progress on a pro forma basis and approximately 70% of this production is oil.
The last point I'll make on these assets is that they are in the early stage of development, which is exactly what we like the initial phase of testing and reservoir delineation is complete and the properties are teed up for full field development.
And as in all of our plays we see significant opportunity to improve well performance and financial returns through optimized density and Wellbore placement operational efficiency gains and asset growth through exploration.
I'll stop there, but before I turn the call back to Bill I want to close by pointing out how impactful our strategic moves over the past 18 months had been for continental and its shareholders.
Most importantly, we've expanded our operations into two additional world class oil weighted basins, the powder River basin and Permian Basin.
<unk> leasing trades and strategic acquisitions, we now own or have under contract approximately 140000 net acres in the Texas portion of the Permian Basin and <unk>.
So a 215000 acres.
Net acres in the powder River basin. During this time, we also expanded.
We also added approximately 47000 net acres in the heart of our springboard assets in Oklahoma.
Combined these assets have tremendous resource potential, adding well over 1 billion barrels of net resource potential to our industry, leading assets in the Bakken and Oklahoma, providing continental and its shareholders are deep and geologically diverse oil weighted inventory.
That will drive strong returns and profitability and for decades to come.
With that I'll turn it back over to Bill.
Thank you Jack.
This company has a long well established track record of having the exceptional capability of transferring our unique geologic and operational expertise to new and existing basins.
We have created significant inflection points for the company in the past with our entry into the Bakken and Oklahoma positions.
We now see our position in the Permian and powder River as an additional inflection point, representing significant complementary step changes to the company's portfolio.
With that we're ready to begin the Q&A section of the call I'll turn the call over the operator.
Thank you to ask a question you May Press Star then one on your Touchtone phone.
If you are using a speaker phone.
Please pick up your handset before pressing the keys.
The majority of your question. Please press Star then two.
Today's first question comes from Neal Dingmann interest. Please go ahead.
Good morning, guys.
Nice job guys.
Question Bill for you just curious to know how maybe that you don't seem to be and maybe this is too early to ask what are you guys, but just early thoughts on all of the infrastructure associated with the deal.
Yeah. Thanks, Neal I appreciate the question.
Yes, I know this might have caused some of our investors and some of them you guys by surprise, but actually if you look at our involvement in the in the Permian, we actually looked at putting something together about the turn of the century out in the Permian.
Actively been pursuing things out there we've looked we look we've been pretty deliberate in our process very discipline never felt the time was right or the economics were right to enter the basin and obviously, it's a great basin and we're happy to be there, but this is something that we have a really strong active new venture geologically new ventures team.
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We actually like the diversity of geography and in the markets and this brings out to it to US and this is I know you run the numbers on this it's very accretive accretive with our operating capabilities and we will compete with anything in the country. So so that's a little bit of the history.
Started probably 20 plus years ago started 50 years ago, when <unk> started the company, but but the Permian specific was about 20 years ago and we're just delighted to have this really really good asset as part of our portfolio.
Okay.
Question for John maybe on the potential.
On share buybacks, obviously, the new property to me adds nicely to the free cash flow as you all pointed out for next year. So just thinking.
One is it too early to say just how you guys are thinking about sort of the timing of buybacks or any anything you'd say about maybe the timing and shareholder returns next year. Thank you.
Absolutely our commitment to shareholder returns remains solid and strong we are more in line than any company in the industry with shareholders with our ownership.
<unk> are an important part of that they remain in place. We bought about 2 million shares. This quarter that will continue ongoing debt reduction has been a part of it that that is achievable as well and obviously, we increased the dividend we're generating a significant amount of cash flow. So that gives us the ability to add resource here in <unk>.
Abundant while continuing with share buybacks and.
Strong competitive dividends.
Thank you guys.
Thank you and our next question comes from Scott Hanold of RBC capital markets. Please go ahead.
Yes, I think so just.
Just going back to the Permian transaction.
And I think you did give some color you've been looking at it quite some time, obviously the seller had had indicated was unsolicited interest, but can you give us a sense of.
What did you do from a geological standpoint to kind of get comfortable with that position did you.
There are some actual drilling you've been able to get out there and do yourself on some adjacent acreage or was it just based on geological data that was available.
What I'll, let Jack and Tony Puleo weigh in on this as well, but if you look at the capabilities of the company and.
And Theres a lot of similarities geologically from the Oklahoma area in this area out in the Delaware and so the transference of that geologic understanding is a pretty easy thing for us to do.
In the basins.
Early well understood understood, but theres also a lot of capabilities that we think we can bring operationally to it we are the largest remodel drill or a lateral driller in the country and so that plus some other skill sets that we think we've got the unique ability to bring to the value proposition I think it is going to transfer a lot of value to this to this property with continental operating.
And Jack and Tony Once you can maybe highlight a little bit more on the geologic side Tony may have some things to add here is a follow up to me, but when we look at this obviously, we started with geology and we know the rock really well.
And so one of the big components of this obviously is well performance and how the wells have been completed.
Look at this.
We see that there is a big opportunity here to essentially improve performance.
And enhance the asset here through more optimized density and well placement.
And of course, our operating efficiencies wherever where we're at with the lowest cost operator, and we bring will be bringing that to the table here and just really continuing to see the opportunity being something that is just right up our alley. I mean this is this asset when you look at it we've got it's got all the components that we look for in assets when you.
Consider the concentrated acreage position large I mean, 93% average working interest 98% operated nine.
<unk>, 90% <unk>.
All contiguous acreage I mean, we have the ability to go in here and just develop this at our pace at our.
And with really.
With an infrastructure in place already with this gathering system that's in place for water in the facilities there.
Said in my comments here, its just teed up for development.
A lot of people will look in the rearview mirror. It results in you've got to look ahead, you got to take a look at technology and where it's taking you not where it's been and so when we look at these assets, we see where they're going and we see that there is a lot of opportunity here to really generate a lot of.
Future value for continental shareholders in these assets.
Yes, the one other thing I might add on this that maybe it is not apparent.
To everyone is that we've got.
A really talented team here a lot of which have really deep operational skill sets from this space and so it's not like it's something that we've never operated and Theres. Several sitting around this table that I've actually had a lot of experience out out of the Midland area. The other one that no. One escaped your attention is that this is an asset.
Deal versus a corporate deal so a lot of times, the integration and inefficiencies that come with with a big dollar type of asset acquisition through a corporate we're not going to have that difficult to hear you just an asset and so it's a real quick and seamless integration into the company.
Okay great.
My follow up in the 10-Q it did highlight that there was.
I think about another $375 million of A&D activity you all are looking to close in the fourth quarter can you give a little color on that and maybe help me square the circle on your acreage position in the Texas Permian I think this deal was 90000 acres and I think you said 140 that you have is the <unk>.
<unk> you are looking to close in the fourth quarter adjacent to some of this and that's that's the variance.
Yes.
Great question and I'm not surprised you would like to get more details on that but.
For competitive reasons, we're not going to share a whole bunch about that right now we've got some some things in the works here from that were following up on with our based on our geologic understanding but yes, a lot of this will be right in adjacent to and contiguous two but others not.
Thank you.
And our next question today comes from Derrick Whitfield at Stifel. Please go ahead.
Good morning, and thanks for taking my questions.
Certainly.
With my first question I wanted to ask a more direct question on your longer term corporate objectives specifically.
Thinking about the transaction how does it change your $3 billion debt target if at all and then your ability to more aggressively pursue return of capital objectives, one set that objective.
Objective is achieved.
Great question, we expect to be back to roughly $4 billion by the end of 'twenty, two that's where we're at here.
Here at not at 930.
And with that we're projecting for multiple years in the future.
Multibillion dollar cash flows coming back free cash flow. So we have a lot of ability to continue that trajectory. It's important to us and we will continue that we've been able over the last couple of years to balance a number of things we bought roughly I don't have the exact number in front of me but.
Corporate Lee, we bought roughly 15 million shares through our share buyback through 2020 and into 'twenty. One. Additionally, we've obviously reduced that by in excess of $1 5 billion during that time, and we reinstated our dividend and have sequentially.
Increased quarter upon quarter in a material way our models our views looking forward show is not only being able to achieve the $3 billion.
Which of those two to go substantially below that we have the ability over the next five years to go to zero debt. So we've got a lot of cash flow a lot of ability and adding resource that is accretive and adding to that cash flow was initially is very beneficial to that trajectory.
Yeah.
Terrific and then as my follow up I really wanted to ask a question to build on some of your earlier comments and that specifically with the transaction where are you seeing the greatest opportunity for well performance improvement and value uplift.
Well, it's a combination of things I mean, it comes down to as I said.
Wellbore placement route density.
And just our operational efficiencies stimulations you name. It we've got a lot of ideas and then on top of that there's a lot of we highlighted the three main targets here in the third bone Wolfcamp, a and b, but theres a lot of other reservoirs out there that we.
We know our known producers in there in the in the basin and we.
We have them underneath our leasehold and we will surely be able to harvest those down the road.
Add to it long laterals I mean should.
We'd be looking at with this acreage position that's contiguous nature of it we could be looking at three mile laterals in here.
To more efficiently develop this and so just a lot of a lot of benefits here just from our experience that we're bringing to the to the basin. We obviously know there's things we can learn from others down there and they have been paying attention to that but I think that everywhere. We go we seem to be able to raise the bar on performance and all of our ASP.
Let's.
That's very helpful. Thanks, guys.
Thank you Harry.
And our next question today comes from Phillips Johnston of capital one. Please go ahead.
Okay.
Hey, guys. Thanks.
Pioneer has started the year with zero rigs on these properties.
At one point.
September so at about three rigs running.
And is now back down to one rig.
<unk> as you look to next year, how many rigs would you expect to run on these properties and what sort of Capex would you anticipate spending.
Yes, that's a good that's a great question and you're right. They did have about four rigs running actually.
There is a discussion with them on this they were running about four rigs in there they are dropping that down but our expectation is that based.
Based on our development plan right now in 2022 and were not given that obviously guidance on 2022, but probably be running a couple of rigs in this area in 2022.
Okay, and what sort of Capex would that imply.
Yes, that's one that we're we're just putting the numbers together on total 2022 on that but so we're not really given the numbers at this point in time.
Okay Fair enough and then John if I heard you correctly. The addition of $150 million of Capex for 'twenty one.
Since your prior guidance includes some capex on these properties as well as some additional leasehold.
At $375 million of other property acquisitions that you disclosed in the Q.
In addition to that.
Are there.
I don't know the timing on those closing, they're factored into our cash flow projections.
If they do but.
Yes, they would be incremental for the most part.
Okay. So thanks again.
It's a mixture but.
So a bit of both.
Okay. It sounds good thanks, guys.
Thank you.
And our next question today comes from Doug Leggate with Bank of America. Please go ahead.
Thanks, guys for getting me on I appreciate the opportunity.
So I was wondering if I could start with a bit of a.
Random question on the water infrastructure that you've acquired.
It's not that long ago that you decided against.
Doing a transaction on your legacy infrastructure, but it seems to me this.
Am I thinking too deeply about this but maybe there is a.
Another layer of value in this acquisition that we might be overreaching, just on the production coming out of basin.
Yes, Doug Youre absolutely correct.
Sure.
Water assets about 180 miles of our system. That's there they will add significant value to this sale just because of the interval nature of it.
And so that is a value proposition that we've looked at and actually one of the things that we considered when we were.
Interested in this property because of the facilities they had in <unk>.
Place.
Makes us able to hit the ground running.
But just to be clear on my question would there be a monetization opportunity at some point.
Well, that's always an option just as you saw as we talked about with our.
<unk> position in the Bakken, we looked at that last year and earlier this year.
And at some point in time that could be a monetization opportunity right now we have no plans to do that.
Okay, Alright, I appreciate the answer my follow up is John.
I'm afraid it's a mechanical question on cash taxes.
Obviously, the NOL situation. There if you could just give us a quick refresh or not but what I'm really interested in is that when you are in a kind of a low or no growth mode.
Level of sustaining capital there is a large amount of itc's, but.
You essentially get to write off instantaneously against your <unk>.
Your tax burden.
Should we expect at any point in the future you can have any meaningful cash tax.
Exposure.
So we've done a lot of analysis on that I think we've got a good hold on it with and without this acquisition. We've looked at it don't expect any the NOL as you focused on as an important part in driver. You are also correct when you're not when you're investing at the levels that companies are investing at that you do transition to cash.
Taxes.
Mechanical I think as you said, so we see that but the NOL.
Defers that an.
Into the future 2021, I don't see us paying cash taxes will use a portion of the NOL.
The NOL will largely cover us in 'twenty, two we could have less than $100 million of our cash taxes in 'twenty two looking longer term than that we're it varies by.
Year and timing of different things coming on et cetera, but I would say it's.
100 $300 million on the upside through that too.
23 through 26, so NOL, obviously is a big significant component, that's federal tax level and states.
It's different than would be lower than that obviously and then some state toward.
Come and deploy.
Thanks, guys I appreciate the clarity.
Sure.
And our next question today comes from Arun Xylem JP Morgan. Please go ahead.
Yes, good morning, I wanted to.
See if you guys could elaborate a little bit on the expansion in the Permian Basin and just wanted to.
To see if we could get.
A little bit more thoughts you've now added a third leg to the store and the <unk> and now you're in the Permian, but what is the longer term.
How is the longer term strategy evolving.
And do you look to be a consolidator.
In the in the Permian just given the number of <unk>.
<unk> operators in the basin.
Yeah, there's a couple of parts to that question you know obviously, the Permian is a great Big basin with a lot of some significant players there.
I think what you probably look to us to do in the Permian is what we've done elsewhere and as was mentioned earlier that <unk>.
Everywhere. We go we have a demonstrated track record of being the low cost most efficient operator, and we anticipate being able to deliver that in the Permian as well so that would probably be the primary focus I think you'd be looking at us pursuing in that area. There is.
It was described by Jack and geologic opportunities.
We're considering out there and for competitive reasons that we're not talking about right now.
Great and one for John Hart, John You've got upgraded by Moody's. This morning, So congratulations there and I just wanted to see if you could talk about some of the benefits cost of capital et cetera from getting back to AG.
The move to <unk> can be 25.
<unk> points to three eight so I think thats positive possibly.
More we have a long term track history.
And the debt and equity markets are delivering on what we say we're going to do we've obviously paid down debt. We've obviously been a.
This will be the sixth year in a row of positive cash flow obviously, it's.
The largest in this the projections looking forward, our significant free cash flow as well all of that factors into our cost of capital and gives us a very attractive and improving our cost of capital.
That's important and Fitch upgraded us as well too.
Triple B, so that's important as well and S&P as a.
Right there on the cost with a positive outlook so.
It makes it very attractive.
Thanks, a lot John.
Thank you everyone.
And our next question today comes from Neil Mehta.
Goldman Sachs. Please go ahead.
Hey, Thank you very much and apologize if this has been asked and answered but the first question is about how you evaluated this transaction relative to repurchasing your own shares where you have been aggressive and as you think about the share repurchase program.
Be able to execute the transaction.
With cash and still be aggressive around.
Sure share count reduction.
No I think the easy answer on that is both here that when we go into these type of acquisitions, we look at what the impact is going to be the balance sheets impact going to be to the shareholder return.
The end of the day, we are balancing two things Jones value creation.
Cash distributions and so those are things that are equally important to us and that if you look at the second.
Cash returns to shareholders Thats driven by the former value creation and this is what I think Tom was alluding to earlier. This is actually going to create value creates the ability for us to make larger distributions in the future.
And as a follow up is just where do you think we are in terms of Bakken maturity and your runway in the Bakken.
Is this a opportunistic transaction to diversify the portfolio or does this in some ways reflect your view that.
Just the Bakken part of the portfolio is maturing.
I think there's two parts of that.
Youre talking about the geologic side of things and what's the running room, there and there is still significant running room. The other is <unk>.
The consolidation that's been going on in the area of value creation question I think youre asking.
Yes.
All things in the in the Bakken, we think that has.
<unk> significant running room, theres actually been transactions up there.
Could have been considered that would fit well with us.
However on a value proposition there is just more of the right things to do.
This is one that all value.
Value creation for the company as it was really strong for us, but the Bakken we've got eight rigs running there now.
So quite a quite a bit of inventory that we're still pursuing.
Developing up in that area.
I think we're a long long way from seeing anybody, saying the Bakken is going to be falling off so Jack you've probably got some comments.
Just point to some color on that too you know here, we are way down.
Bakken was actually kicked off out in Montana back in to early.
Early two thousands.
Here, we are in 2021, and if you take a look at say the on page eight and you look at <unk>.
Performance here what over since 2018.
You can see all of that.
Basically the performance on average of the wells during the drilling program years and take a look at the long Creek wells.
We've got 11 wells in there the first 11, we've completed.
And they are substantially outperforming the statistical average we've had over the prior years and it just shows that there's still a lot of a lot of horsepower out here in the Bakken.
That remains to be tapped and we've got 656 wells in this long Creek unit to drill.
We've got five more that will get completed here probably by year end and then the rest 50% of those will be completed next year and the other 20%. The following year. So I mean this is a bellwether for the type of performance you can expect a unit and to me.
That doesn't look like.
Hey.
As <unk> reached full maturity yes.
Yes, no the build on that if you look at almost every year and that's what Jack's highlighting.
Drilling our best wells in the Bakken.
This year is better than last year better than in previous years and next year is going to be better than this year and so I think youll see that trend continue and I think you got to keep in mind. The leasehold position is key for some for some operators definitely.
Reached maturity or they have no inventory to drill that are because of our large and basically industry leading footprint out here, we've just been able to continue to.
Develop the Bakken here.
Deliver these type of results. So it's proportionate to your position in the play and we're early in the play and built a dominant position in the play and it's continuing to deliver.
Thanks, guys.
Thank you. Thank you. Thank you and our next question today comes from Paul Cheng Scotiabank. Please go ahead.
Alright. Thank you good morning, guys.
Good morning.
Just curious that if we looking at.
That was based on.
On the inventory backlog standpoint, that's something that you can share.
Non bulk location.
Economic for you at $40, <unk> and $2 50, Henry hub by region or total.
Okay.
Oh.
When I look at it I mean youre asking.
Almost like a breakeven question is that what you're asking.
Yes.
And also that I mean, we're just trying to I'm just kind of band that I mean, you saturate the improved inventory backed up by law.
So we're trying to understand that I mean, how many years.
Julien inventory, we're testing now we are talking about yes, just wanted to sustaining your operation.
Yeah, well I mean, if you look at 650 wells and assume what guys. We're going to get about 18 wells a year per rig so I mean.
What's that gave you 30 plus years rig years of inventory. There. So that's that gives you an idea you can put how many rigs and one in there and get an idea of the sustainability of that inventory and your other part of the question was how this competes.
Is that what Youre asking me well, we basically looking at some of your competitors.
Inventory backing off base on I think a lot of people that we've been looking at for the <unk> and $2 50 is pretty conservative and so based on desktops conservative pricing what is the inventory backlog that we are looking at.
Well this inventory that we're looking at here.
As Scott breakeven below 40, Bucks and so and what you got to keep in mind here is that these this acreage area remember, we've got 70% of our minerals underlying our leasehold position. So our net revenues here are very strong there are 80% on average across this acreage and so.
So you benefited from that you benefited from the water infrastructure. The surface ownership you name. It that's why I say this thing is got all of the all the component parts that are basically continental assets. This is like going to springboard we own base.
Basically the infrastructure, we have 360 square miles of basically acreage we control in there I mean, that's the size of the project or 75% average working interest I mean, it is carbon copy of the type of projects that continental is put together and that's why this we saw as a unique opportunity to grab a hold of and.
Then we can take our geologic and operational expertise and apply it and take this.
This asset basically the next level.
Mhm.
My.
Second question is that I guess, a two part one I know, it's early but for next year.
On a pro forma basis that do you expect production oil production will grow.
Comparing to the fourth quarter LIFO or anything yet.
Going to remain relatively flat and also when we're looking at that that what base and once you get the offset.
Can you tell us that yes, most of the oil and gas currently selling is on the existing customer contact you also have it yet.
And do you plan to.
Mostly so damn good debates on or that you were trying to ship it to the Gulf Coast.
And what does that do you have existing Kyle relationship obesity with that thank you.
Yes, thanks, Paul So two questions.
Production versus this year and then the other is the ability to be able to market the product out of it.
I think you've heard us say on previous calls we're still in the exact same position.
The oil market still pretty fragile and we're thinking maybe Q1 Q2, it's going to be close to getting balanced, but still pretty fragile and so I don't think it's appropriate for anyone in the industry to be over producing into the potentially fragile oversupplied market and so for next year, we're going to be low single digit growth.
I think what youll see from us as far as market offtake.
The opportunity is there to be able to produce at levels that we are producing and to grow that in the in the Permian.
Obviously, there's been some tight gas in the past with worldwide differentials blowing out, but that's one of the things that we factored into the analysis is.
The ability to shift occurred and ship to go to the gas as well.
And Thats, what youre seeing with our approach to come in with a couple of rigs and Thats whats driving that.
Thank you ladies and gentlemen, this concludes today's question and answer session.
I'd like to turn the conference back over to Rory Sabino for any closing remarks.
Great. Thank you very much for your time today and please feel free to address any additional questions to investor relations team have a great day. Thank you. Thanks, everyone.
And thank you Sir This concludes today's conference you may now disconnect your lines and have a wonderful day.