Q3 2021 Denbury Inc Earnings Call
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Okay.
Greetings and welcome to John varies third quarter 2021 results conference call.
My name is Daryl and I will be your operator for today's call.
This time all participants are in a listen only mode. Later, we will conduct a question and answer session to ask a question at that time. Please press star one on your telephone keypad I would now like to turn the conference call over to your host for today's call Brad Whitmarsh head of Investor Relations. Please go ahead Sir.
Good morning, everyone and thank you for joining us today I hope you've had a chance to review our earnings release and supporting materials that we released this morning, they're.
They are available on our website and then Barry Dot Com and we may reference certain slides as we make our prepared comments.
I want to remind everyone that today's call will include forward looking statements that are based on our best and most reasonable information.
There are numerous factors that could cause actual results to differ materially from what is discussed on today's call.
You can read our full disclosures on forward looking statements and the risk factors associated with our business in the slides accompanying today's presentation. Our most recent SEC filings and today's news release.
Also please note that during the course of today's call. We may reference certain non-GAAP measures reconciliation and disclosure relative to these measures is provided in today's earnings release as well.
This morning, our prepared comments will come from Chris Kendall President and CEO.
Mark Allen CFO.
David Sheppard SVP of operations and Nic would S V P of carbon solutions.
And with that I'll turn the call over to Chris.
Thanks, Brad Good morning, everyone and thank you for joining us on today's call.
In last quarters call I noted three key areas to watch in the second half of the year were Denver would be unlocking substantial value for our shareholders and propelling our company toward an exciting future.
This morning, I will provide a brief update on each and then Mark David and Nick will provide more detail.
The first of those key catalysts with strong execution on our base EUR focused business.
I'm incredibly pleased with our results across the board.
Safety performance is better than it has ever been we've continued to deliver on the plan with quarterly operating and financial results meeting or exceeding expectations in all areas.
Further we exited the quarter with no borrowings on our credit facility and we anticipate having zero debt on the balance sheet early next year.
The second catalyst was executing on our flagship CCA development project.
David will share more detail, but the project is ahead of schedule is at or below budget and is on track for initial C. O. Two injection in the first quarter of next year.
Importantly, we have incurred zero recordable safety incidents over the entire project to date.
A remarkable achievement by the team, which underscores our core emphasis on safety.
All production from this project will be carbon negative blue oil and we continue to believe that our enhanced oil recovery business utilizing industrial sourced cotwo missions produces the most environmentally friendly barrel of crude oil on the planet.
We are progressing the blue oil third party verification and Ci score process that I mentioned on last quarter's call with completion of that project planned around year end.
The third key catalyst I noted last quarter was progressing agreements with companies seeking to capture their C. O two emissions as well as agreements with the owners of potential storage sites in each case to begin unlocking the massive value potential that we have for CCA U S with our carbon solutions business.
Okay.
During the third quarter, our carbon solutions team executed initial term sheets for our C O two transport and storage services, including the previously announced ammonia project with Mitsubishi and the joint evaluation agreement for low carbon solutions with Mitsui.
These are just the first of what I am confident will be many agreements I'm excited and encouraged by the number of agreements, we're negotiating as well as the cumulative volume potential.
I anticipate we will have executed even more agreements for C O two transport and storage by the end of the year.
At the same time, we have continued work to secure underground C. O two storage access along our infrastructure to provide long term safe sequestration of C O two for our customers.
The agreement with Gulf Coast Midstream partners that we announced this morning represents the first of these sites, providing a substantial storage opportunity in the Houston area.
Total storage potential dislocation could be up to 400 million metric tons, and we're thrilled to be working with Gulf Coast Midstream partners on this project.
We're also working to add sites across our infrastructure network and I expect that the proximity of these locations to our pipeline system will provide a very economic reliable and flexible storage solution for our customers.
I often get asked about the competitive landscape in CCA U S.
Considering the magnitude of the CCA U S opportunity I expect there may be many potential competitors, who will work to enter this market.
That being said I do not see another company capable of providing the complete package that Denver It provides today.
Ranging from our industry, leading C O two infrastructure footprint.
Our deep technical expertise and the complete spectrum of transporting and storing C O two.
And the certainty that are currently operating system can provide.
Before handing over to Mark I wanted to comment briefly on the latest draft of the House reconciliation package, which includes enhancements to the 45 Q tax credit.
Well there are many details to work through and the language and the entire package is of course subject to congressional approval.
These enhancements are consistent with our expectations for increased C. O two emissions capture incentives with greater support for both dedicated storage and EUR storage.
The proposed increase tax credit levels should begin to incentivize higher cost of capture industries like cement and steel manufacturer.
As well as certain other post combustion emissions.
The draft package also includes other enhancements to 45 Q such as an extension of the capture of construction period a.
A reduction in the minimum facility size that qualifies for the credit.
And the shift from a tax credit structure to direct pay.
If passed.
I believe these changes will expand and accelerate the growth of the U S. C. C U S industry, leading to significant reductions in industrial C O two emissions.
Before I wrap up if you haven't had a chance to read our corporate responsibility report that we issued in September.
It is available on our website, highlighting our progress in mitigating direct and indirect emissions as well and enhancements and safety and governance.
Then Barry has a unique and impactful ESG strategy and we are dedicated to being a leader in sustainability as we all work to create a new energy future.
Mark I'll now turn it over to you.
Thanks, Chris and good morning, everyone.
Today I'll provide a brief review of them various financial results for the third quarter before handing the call over to David for a more detailed operations review.
As Chris mentioned, our third quarter results were bolstered by higher sales volumes and realized oil prices, which led to quarterly highs. This year for revenues net income and operating cash flow.
Adjusted net income for the third quarter was $40 million.
74 cents per diluted share as compared to GAAP net income of $83 million with the primary difference being the mark to market change of our oil hedges.
Operating cash flow for the quarter was $104 million or $78 million adjusted as positive working capital changes contributed $26 million to our cash flow from operations during the quarter.
On a pre hedge basis, our cash operating margin increased to over $32 50 per Boe in the third quarter.
Financial liquidity at the end of the third quarter increased to $565 million.
And we exited the third quarter with no borrowings on our credit facility.
Our only outstanding debt at the end of the quarter with the final 17 million payment obligation on our any J D pipeline financing, which was made last month.
During the quarter, we closed on the sale of some additional Houston area Nonproductive surface acreage that was outside of the company's planned development area for total proceeds of $12 million.
Looking forward I anticipate we will exit the year with $25 million to $50 million of bank borrowings as we wrap up the capital spend for the Greencore C O two pipeline expansion to CCA in the fourth quarter.
Based on current oil pricing, we project being debt free in the first half of next year.
Our strong balance sheet provides us great flexibility and is extremely valuable as we assess the massive growth potential ahead of us with CCA U S.
Including pipeline expansion.
<unk> and nine EUR storage development and various new opportunities to create even more value in CCA U S.
Sales volumes averaged approximately 49700 barrels of oil equivalent per day in the third quarter as expected a slight increase from the second quarter.
Differentials in the third quarter were consistent with our guidance widening primarily with respect to the Gulf Coast crudes, which are weaker relative to W. T I prices.
For Q3, the differentials for our Gulf Coast and Rockies regions were essentially the same whereas historically, our Gulf coast crude received higher prices.
This is reflective of the supply and demand balances in the various regions with a tight supply of Cushing driving strength into our Rockies pricing.
It's always difficult to guide on differentials, but for now we continue to expect differentials in the near term to be similar to our third quarter results.
Our cash outflow on hedges during Q3 was $78 million compared to 63 million last quarter as W. T. I oil prices continued to strengthen during the third quarter.
You'll recall that most of our hedge positions were put in place in the fourth quarter of last year as required under our bank credit facility.
We have no additional hedging requirements under our bank credit facility and as we move into 2022, we have less of our expected production hedged we are hedged at more favorable prices and with a greater mix of colors, which provides for more upside.
Needless to say, we are looking forward to the roll off of the 2020 one hedges.
Lease operating expenses for the quarter totaled $25 50 per Boe.
In line with our expectations, considering the amount of seasonal workover activity that we typically have in the third quarter as well as the impact on our operating costs from rising commodity prices, including the natural gas price impact on power and utility costs.
All other items are right down the fairway of expectations for the fourth quarter, we expect our DD&A will increase by $5 million to $7 million as we consider the impact of the potential booking of initial proved tertiary reserves at CCA.
It's too early to provide specifics on 2022 capital or cash flow plans as we are still working through our planning process. However to provide a framework I think it's reasonable for you to expect our focus to be on holding our base business relatively flat from a volume perspective, and maximizing our cash flow generation as we.
CCA towards first tertiary production with ongoing evaluation of our capital needs in 2022, as we continue to grow our CCA U S business.
Before I turn it over to David.
To reemphasize, what a great place where in financially with essentially no debt on the balance sheet, a strong base oil business that can generate significant free cash and hedges that are rolling off in our favor as we move into 2022.
It gives us a lot of confidence in executing our long term strategy and great Optionality for funding our growing <unk> business.
David.
Thanks, Mark Good morning, everyone. It's certainly an exciting time at Danbury is activity levels have been increasing throughout the year as we have built great momentum with our near and long term development projects.
I will focus most of my discussion this morning on the CCA project and our recent Oyster Bayou development before wrapping up with some comments on volumes and expenses as we progress towards closing out 2021.
I always want to start with safety, which is core to our operational performance effective and efficient operations have to be safe operations and our teams are doing a great job on that front year to date, we are continuing to track at a record low total recordable incident rate in the third quarter was our best quarter.
One accomplishment I want to share with you that was just outstanding.
On the CCA project, we have accumulated 550000 man hours of activity between them very company employees and contractors this year with no recordable safety incidents.
Acknowledge the tremendous effort and focus by the project development and operations teams for a job well done.
Moving on to an update on project execution during the third quarter, we finalized the Avon development project at our worst for Bayou field in Southeast, Texas. The initial eight one expansion included the drilling of one new producer, while converting two wells to producers and two additional wells to injectors and our pattern designed to optimize resource recovery.
And our previously under swept area of the Avon reservoir.
Late in September we began seeing the first we'll respond and is currently producing above plan.
We expect the two additional producers to respond before the end of the year.
This positive early result is very encouraging as we consider two additional development patterns for future expansion and the Gabe one reservoir.
Continuing with Oyster Bayou, you will recall the deeper 82 development that was executed in 2020, where we also expanded our facility compression and injection capacity.
From the a to have continued to show strong response, therefore, where you're evaluating a potential eight to expansion.
At the end of the third quarter worst or value was producing approximately 4200 barrels per day net to Jim Barry the highest level seen in the field since the fourth quarter of 2019.
Approximately 60% of our third quarter capital spend went towards our CCA tertiary project, which is progressing ahead of plan.
As of today, we have installed all 105 miles of 16 inch Greencore C. O two pipeline extension with final testing underway and mechanical completion expected within the next two weeks.
This is the only significant C O two pipeline project installation in the United States. This year and with this extension I believe Danbury will become the largest mileage operator, a C O two pipelines in the U S.
The first phase of tertiary development at CCA is targeting the east Lookout Butte, and Cedar Hills, South units, where our teams have multiple workover rigs operating in the field converting 74 water injector wells to C O two injectors.
Oh to landfill the Greencore pipeline extension should begin by the end of this month and is expected to be completed by the end of the year.
First subsurface C. O. Two injection has now accelerated into the first quarter of 2022 and phase. One production response is expected in the second half of 2023.
With a pipeline installed we have put the key infrastructure in place that will benefit all future phases of CCA tertiary development.
Three things that really stand out to me about the CCA development are number one the total recoverable resource potential of 400 to 500 million barrels equivalent make CCA the largest your resource development we've ever undertaken.
Phase one is targeting less than 10% of the total potential which means we have a multi decade long development opportunity.
Two.
CCA will drive down our operating cost per Boe.
We estimate L O E per incremental Bowie at 10 to $15, thereby increasing our margins with every barrel produced.
And three there.
This is a fully carbon negative development as we will inject more industrial sourced cotwo to the ground and the production in combustion of the oil will ever admit.
CCA will significantly increase the scale of our blue all operations.
Now to give some near term thoughts for four quarter guidance on volumes capital and operating costs.
We anticipate fourth quarter sales volumes being nearly 50000 barrels equivalent per day.
Oyster Bayou is anticipated to increase from the third quarter as we will see additional contribution from the a one development.
This should offset anticipated lower volumes from our CCA field, where were you are temporarily shutting in wells to convert from water to Cotwo injection.
In addition at certain fields in CCA or third party holds a net profits interest, which negatively impacts our sales volumes as oil prices rise in the fields are more profitable.
On the capital front, we remain on plan at to slightly below the $260 million midpoint of our full year guidance range and accordingly, the fourth quarter will come down some from the third quarter peak spend level.
The vast majority of <unk> spend will again be related to the Greencore C O two pipeline completion and CCA field activities.
Fourth quarter L. O E per Boe E should be relatively consistent with the third quarter as fewer workovers and preventative maintenance projects are offsetting some of the impact from the increased commodity prices, both oil and natural gas on our variable costs, such as C O two power and utilities.
As we are seeing some incremental cost inflation pressures on certain goods and services.
Our operations teams, along with planning and supply chain are proactively working with our suppliers to get the things, we need when and where we need them at fair prices.
Wrapping up I, just want to comment how pleased I am with the performance of our assets, but even more so the execution by our teams.
With our near and long term developments, we are strengthening the foundation on which didn't various stands and positioning ourselves for a tremendous future.
I'll now hand, it off to Nick for an update on the CCA U S business.
Thanks, David it's great to be on the call today to share some of the teams exciting progress.
Over the past quarter, the deemed very carbon solution teams momentum continued to increase and we are laser focused on moving deals to final agreement stages.
In last quarters call, we discussed our ongoing negotiations with industrial partners to transport and store more than 50 million metric tons of Sidoti per year.
As well as negotiations with multiple pore space owners, representing more than 1 billion metric tons of Sidoti <unk> sequestration potential.
We are thrilled with the two agreements that we disclosed since that call.
The long term off take agreement for Mitsubishi's Newbuild Gulf Coast ammonia project as well as the Mou with Mitsui to work together to jointly evaluate your opportunities to produce carbon negative blue oil.
This morning, we're excited to announce two new agreements.
The first is a significant storage site development in Texas and the second is a new CEO to transportation and storage agreement.
I'll spend most of my time on the call today talking about these new agreements.
We reached a significant milestone with our first dedicated store site that we plan to jointly develop with Gulf Coast Midstream partners.
The project site is located on the western edge of our infrastructure and South East, Texas with the potential to inject up to 9 million metric tons, a few two per year and ultimately store up to 400 million metric tonnes.
Development planning is already underway with preparations for the permitting of classics injection wells in progress with the expected readiness for first injection by early 2025.
We believe this site will be a very competitive storage option for our customers.
<unk> intends to participate in the equity of the storage project with up to 50% ownership.
Proximity of this site to our infrastructure is ideal located just 25 miles from our green pipeline.
Also by extending our pipeline infrastructure to the site, we will improve uptake access for significant additional industrial emissions in the southwest Houston area.
This will be the first of several store sites as we expect to continue to build a portfolio of dedicated storage options across our infrastructure footprint.
Provide significant storage capacity in the right locations, ensuring that our industrial partners achieved the most benefit from their captured Cotwo emissions.
Separately, we've also signed a 25 year agreement for the exclusive rights to transport stores, you too from a planned renewable biofuel plant on the Gulf Coast.
At the request of the plant owner, we are limited on what we can share about this deal for now, but we are looking forward to sharing more at the appropriate time.
We continue to be encouraged by the scale of plans for Newbuild activity in the area, which I think further validates the Gulf coast unmatched combination of ideal geology for storage strong regulatory and policy support access to deepwater ports and extensive existing C O two infrastructure.
I'll wrap up with a few key thoughts.
First we believe <unk> is vital to accelerating the success of CCA U S, especially in the early innings.
The certainty you or provides under the existing permits and regulations allows industrial partners to make capture investment decisions today, knowing that there's an offtake solution that is not subject to the uncertain timing of new permit approvals.
Ultimately, we believe that dedicated storage will provide the bulk of Sidoti storage, primarily because the capacity, we see is orders of magnitude greater than in <unk>.
The Gulf Coast region. In particular has an abundance of safe long term C. O two storage opportunities that can serve the industry's needs for decades.
Put this abundance of perspective didn't Barry's extensive pipeline footprint provides access to over 30 million acres of potential for space within 25 miles of our infrastructure.
I'm proud of the great progress the team has made advancing juneberry carbon solutions strategic priorities.
The current 45 few tax credit has opened up a large market and we have great momentum from our initial engagements.
I'm optimistic that the potential enhancements to the 45 queue that we see in the reconciliation package will substantially increase the scale of the addressable U S market.
Our extensive currently operating pipeline network provides flexibility and reliability to our customers today.
When combined with our strategy to build a portfolio of diverse storage options. We have a superior solution will provide a secure near term economic storage solution to the front gate of any capture projects.
Operator, we'd now like to open the call for questions.
Thank you we will now be conducting a question and answer session.
I'd like to ask a question. Please press star one on your telephone keypad are.
A confirmation tone will indicate your line is in the question queue. He.
You May press Star two if you would like to remove your question from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, one moment. Please while we poll for your questions.
Okay.
Our first questions come from the line of Charles Meade with Johnson Rice. Please proceed with your questions.
Good morning, Chris to you and your whole team there.
Hey, good morning Charles.
Chris I'd like to ask a first question about the.
I'd like to actually give us some perspective on the CCA U S business from from.
The the arc.
The arc of the last six months if we.
If you were to go back and look you know.
If you were to go back six months ago, and think about what you guys have accomplished with these three year, maybe even four deals you've signed now.
How would you characterize you know your progress versus your expectations or are you kind of on track with our U R.
Or are the big fish still out there to land.
So kind of give us give us that that sense and then also if you could shares or anything.
That surprised you or maybe is there any way that that opportunities are evolving in a way that you would not have anticipated six months ago.
Yeah, that's a great question Charles and so.
Actually the two parts are kind of linked in and certainly when I think about where we are today and.
And I think about the.
The great progress that next team has made both the parts of that that we've disclosed but other parts that are yet to come I I actually think that we're ahead of where I imagine we'd be at the beginning of this it's a there's just so much activity so much enthusiasm and tailwind of wear.
Society is going where companies are going and the recognition that the carbon capture plays a huge role in and what needs to happen here. So I feel great about that.
What I think is interesting is as your second question of anything that's surprised me and what I would say is the.
Great surprise is not just the take up that we've seen not just the regulatory support or the policy support that we saw in the last administration and that's only accelerating in the current administration.
But it is what energy transition will really mean in terms of newbuild.
We know about or meters on the ground and we have great relationships, there and we were off taking C. O two already from from several of them.
What's been surprising is the the ideas around for example, blue.
Blue ammonia and the new developments that will be associated with that or biofuels and the way that any of these new developments can use the breath of the system that we have to connect and have access to all of those benefits and really optimize their costs.
And optimize the whole system. So it continues to to me to what positive to the upside.
We talked a little bit about some of the work to enhance 45 Q.
We were excited about this in the first place when we had 35 and $50 at 45, Q I think that the potential expansion. There just makes it that much better so we feel great about it.
Think that it's it's it's really coming into its own as a.
Hey, Ted.
Neat that is recognized and there's going to be a big business.
That's really interesting Chris I think I I I was likewise I wasn't looking for Newbuild Blue ammonia plant that says your first actually first got exactly.
Exactly you you you caught being are you kind of athlete described me there.
Second if I could ask a question about the that's the CCA pipeline and it's it's it's remarkable we've been talking about this project for for so many years and here we are.
Literally a couple of weeks from from the from all the pipe being in the ground can you talk about what are the.
What are the are the steps and if theres any really meaningful obstacles between you know getting the pipe in the ground and actually getting the first C. O two injected in in the first couple months of next year.
I mean, I guess are all aligned pale in field distribution, but or is that it.
Good morning, Charles This is David Sheppard I'll I'll take that question I will just tell you it's been really tremendous progress bar.
By our teams in the field just the execution that has gone on and not just the execution is how we've executed safely.
Safely.
And I really think that that's a core tenet to our success right now.
Just for clarity the pipe is completely in the ground and though we have one final segment, where hydro testing.
At this point that work will be complete this week and a final mechanical completion of the pipeline yeah. It will be finished within the next two weeks there we have work ongoing on the pump station.
You as well that we'll wrap up here soon probably in the first or second week.
Of January a landfill will start.
Prior to that to a pump station being being completed here by the end of the month, yeah. When do we expect to.
Get that pipe field and progressing ahead. So no to answer your question very short and direct I do not see any impediments to C O two distribution.
Occurring in the first quarter of 2022.
Thank you for that detail.
Okay.
Thank you. Our next question is coming from the line of Leo Mariani with Keybanc capital markets. Please proceed with your question.
Okay.
Hey, guys just wanted to ask a handful of questions here on the deal that you guys announced this morning with the Gulf Coast.
I just wanted to get a sense.
Is this deal kind of completely locked down at this point by the Gulf Coast, guys and it's a project that you've already.
Fully secured and you guys are in the process of quote unquote kind of farming into this off for some type of equity interest here.
And I guess, just additionally would this be sort of you know kind of heads up economics with those guys would be any kind of upfront payments you got to make or is it more just sharing and the capital to kind of build this out you know over the next couple of years.
You bet Leo I'll take the first part of that and then I'll ask Nick to to go into it a little bit more and certainly at this point, we are there going to be some details on the agreement that I'm sure you can understand we can't go into but.
I think we can talk generally about it might just asked Nick to share your thoughts on the nature of where what are the G. M. P team was a when we met up with them and where we are.
Great. Thank.
Thank you Leo Thank you for the question so I'll I'll jump into the first part of the question around the lockdown of the storage site aspect and what I'd like to I guess state here is that as we entered into negotiations would you see it already progressed a lot of the steps necessary to get a storage site in Texas.
Yes.
The hurdles that are in Texas around Horse-faced ownership and so I'm.
Getting that acreage prepared for development was something that they had already put in place and so being able to get a site, where it's at honor infrastructure close to a mid or is there in Texas was a great win for both parties and so we look forward to getting past that and starting to the definitive agreement and working through that over the <unk>.
Course, coke coming months, and we know just what I'd add to that is is that you know we think we bring a lot to the story with the the Gulf Coast Midstream team and we think that that team brings a lot to the story, particularly for the storage area in south West of Houston, and so we'll continue working through that and share more details there.
The right time.
Okay, and I guess, maybe just from.
From a high level perspective can talk more about kind of what you all's role would be in this project versus just lumpy role I don't know those particular that particular group, but obviously you guys. Both have midstream capability, but clearly you have the giant chunk line to move lots of volumes around so maybe you can get into that a little bit more that would be helpful.
Great and this is this is Nick again, we owe and so just to address kind of the nature of the partnership it'll be a JV and the exact interest percentage that either party will own in that JV will be figured out over time, but generally we look forward to jointly developing this together do you see them people take on a lot of the steps that are ongoing on.
The acreage they already secured.
Then Barry will be working a lot on the pipeline connection with bringing the C. O two to that site and are working a lot with the emitters that we'll actually be bringing the revenues of that site.
Okay.
Helpful for sure and I guess you know.
Potentially would this be a side that you would just hold in.
The other deals that you guys signed so as you guys are signing deals I mean, theres just had been part of the kind of offering a package with these folks always G. C. M. P. Also kind of pursuing emitter deals on their side as well just trying to get a sense of that dynamic.
Yes, the way we think about it is that this is the first piece and a puzzle that we've talked about for some time. Our vision is that this great pipeline network that we have the existing EUR.
Our fields that are great targets for C O two right now.
It needs to be supplemented with a.
A number of dedicated storage sites from one end to the other and so this is on one hand.
I picture is that the storage sites will and we're working on many of them as Nick mentioned earlier that they will steadily be folded into the entire package to really give us. This breadth of an offering that we can provide to the industrial partners, where they know that if their store.
Storage needs can be met for whatever reason, whether it's storms or technical or operational that we have other options along the way. So we see it as part of a it's a bigger story that are that were building in real time right now.
Okay. Thanks, guys.
Thanks Leo.
Thank you. Our next question is coming from the line of Doug Leggate with Bank of America. Please proceed with your questions.
Oh, Thanks, excuse me good morning, everybody. Thanks for taking my questions Doug.
Oh Gosh, I don't know who's best to answer this one but class six permitting where does that stand on the JV you announced this morning, because my understanding is there's only a couple of those active currently and in the country.
Alright, Alright, Doug this is Nick again, so what I'd like to say there is that G. C. M. P has been progressing interactions with the EPA to get the classic permitting underway.
But the actual class six permit application hasn't exactly been.
Submitted yet.
Yes.
And then it didn't offer any economics around the project as it relates to specific to your potential pits present interest.
Yeah, So Doug we haven't shared any of that yet the purpose really what I would say is as a kind of echoing Nick's comments a few minutes earlier is that we think that the storage will be competitive with with anything that.
That will be out there.
When we just look at what what it'll take to develop it where it will be in and what emissions that can access.
Thank you I have one last one and I know, Chris you and Ive talked about this before but I. Just wanted you know I wanted to ask this publicly so everyone can hear.
Well, it's mostly on our mind on this particular topic and it relates to the utilization of your infrastructure there.
The replacement cost of that infrastructure and how you think about getting the market to recognize the value of that infrastructure is there anything structural that you might think in the context of <unk>.
The ownership of your types might evolve over time, if not how do you think about how you can get some recognition for the value of also by the in the ground.
Yeah. That's that's a great question, Doug and we think about that quite a bit.
Obviously, we think that the value of our infrastructure network is incredible and what it can provide and not just a replacement value, but the fact that it is in the ground and operating today and it's touching all of these key.
Industrial emissions areas. So it's in the right place that has the right capacity. It has the right expand ability and and so we we.
We think it's incredible.
Obviously, we want to continue to grow that value and we think about the system.
Effect.
You hear us repeatedly talk about that we think that the most efficient and reliable and flexible type of system that can exist is what we have that presents the industrial customers the flexibility to move their C. O two to a variety of different destinations. So we think that's.
That's a winner in the long run and we're going to keep working to build that out.
To your underlying.
Lying question of how do we really ultimately get that value realized I think along the way you know right now what we want to do is is just build this business as well and as large as we can and as you see we're in the process of doing that ultimately I think there could be some different.
Sure as ways to think about providing opportunities for investors to invest in different parts of what <unk> does and.
We'd like to get a bit further down the road on that and have that look like a business that truly does stand on its own so yet to come but it's certainly something that we're thinking about.
Intriguing comments, Chris Thanks, so much.
Thank you Doug.
Thank you our next questions come from the line of Michael <unk> with Stifel. Please proceed with your questions.
Yeah, Hi, good morning.
I understand that youre, not ready or able to discuss the economics of the storage side, but I'm. Just wondering if you could give an idea of maybe initial capital cost or at least what are the.
Early steps you mentioned are getting classics permit obviously, but I'm just wondering if.
Can you give any sense on what the next steps would be there is there any remediation work. That's required are there vertical wells in the area that needs to be a word that I guess I'm thinking along those lines.
Yeah, you bet, Mike and good morning.
So we're not not yet at a point, where we're ready to jump into the capital costs I mean, obviously.
You'd see that.
About 25 miles off of the western extent of the Green pipeline. So we'll have a pipeline interconnect that we work on that that you could apply some of the typical pipeline capex too.
Otherwise, we've got some some work to do.
Before we're ready to disclose any of that publicly what I'd. Just say is when I think about it and I think about storage costs that we've talked about publicly.
How they've been laid out and the National Petroleum Council report to them on the U S. It all fits very well with that and so we feel good about it just a little bit premature to talk any more details.
In terms of the.
Any vertical wells in the area that you need to do remediation work on or their seismic that needs to be a acquired over the year.
And so to that I'm not aware of any remediation that's needed on this site.
And so nothing that's extensive or costly that we're aware of from that point seismic I think and all of these sites as you work towards the class six permit and the MRV.
There will be expenses like that that are baked into our planning not just for this site, but for any others that we're working on.
We're wanting to make sure that we can provide just the the most.
The highest level of confidence most of the regulators and to the public that were putting C. O two into very secure places.
Got it okay.
With the proposed legislation you know if we do go to 80 560 per ton.
Hey, Chris you mentioned that that opens the door for more industrial companies to contemplate carbon capture are you seeing any new companies come to the table and have your discussions changed at all in terms of the potential tolling see me.
The charge those customers and I guess same goes for now that you've secured a a permanent storage site is that open the door for more potential customers and changed any of your.
Negotiations.
You bet, Mike and so what's interesting is when.
When we look at where these credits could go.
Compared to where they are today.
First of all the excitement that we've had about this business was based on where the the credits were and then the number of different partners, we're talking to that we're incentivised at those levels.
And so what I'd say first is that we would that the that's the primary set of conversations that we've been having and I know that there are others that have been that have known that they were outside of the money on 45 Q. You know great. Examples are these hard to abate industries like cement.
Or a steel or honestly, even start to get up into.
Electricity generating plants are better natural gas fired for example.
So I think that as we get to these higher levels it opens that door.
It also starts to move you toward a part of the cost of capture a curve that flattens out some more and so I think that just every dollar that you gain.
It gives you an outside outsized improvement in the total amount of emissions that can be captured. So we're excited about that I think that it just really.
It really underscores the bipartisan support that we see here on an CCA us whether it comes through this reconciliation package or whether it comes from the catch Act.
Plenty of pathways that this can be achieved at least at least right now that they are.
The highest likelihood we season the reconciliation package, but it's.
It's exciting.
So to your question on the negotiations and economics, I mean to me.
The the biggest win for us and for the six U S industry in General I think is building scale and this allows significant building of scale I do think that there will be some improvements in Danbury is able to realize but but primarily what you wanted to do.
Do you want to attract those higher cost of capture industries to build that huge scale that we think is the long term win here.
Great. Thanks for the color Chris Yeah. Thanks, Mike.
Thank you as a reminder, if you would like to ask a question. Please press star one on your telephone keypad.
Our next questions come from the line of Richard Tullis with capital One Securities. Please proceed with your questions.
Hey, Thanks, good morning, everyone.
Good morning, Richard.
I was wondering if maybe you can give us just an overview of.
Any negotiations you may have had or just just how aggressively you may have approach the air products is hydrogen.
Project that was announced recently.
In South Louisiana, It looks like you know a big project and.
A lot of C O two likely to be moved there eventually I'm just maybe let us know.
Did you have a shot at that project or would they just trying to keep almost all of it for themselves and just any any potential to participate in any way going forward.
Sir Richard.
Thinking about our products.
They're a great partner of ours.
We are together with us with their hydrogen plant and port Arthur we're taking about 700000 tons a year of industrial sourced cotwo off of that plant.
Into our system and have been doing so for many years. So we have a great relationship.
And I would say along the course of the last year.
We have known that their products was working on this project and that it was something that at least at this point they wanted to keep to themselves as you mentioned.
Any any numbers that we've provided in terms of volumes that we've been.
Considering to be in play we actually carve those out because of what we knew from air products.
Having said all that I firmly believe that in the long run the network effect is a.
More reliable more effective.
Just to just a lower risk choice for any a minute or two to move their C. O two into a when you compare it to shipment.
Shipment of of C O two to a single destination and we think ultimately that carries the day and and we'll keep working on that and there could be possibilities along the way as we are as we see the their product project move forward and as we continue to develop out our network.
That's helpful. Chris Thank you and.
Looking at the Green pipeline in place I know it was brought up a little bit earlier.
Caller's question.
Looking at the backlog of projects, you're you're you're in discussions with.
Any potential tics look at expanding the capacity of the system I know you're.
You know US you know you have the ability.
Tito to look both ways, but just even in one direction to expand it maybe to 50 million tons per year. If they if the 45, particularly if the 45 Q a tax credit has increased to $85 a ton.
Yeah, no absolutely Richard didn't and I think have multiple waves that we can expand or extend this this pipeline infrastructure in.
In the past, we've talked about expanding the in place portion up to 50 million tons, a year of overall capacity either by adding pump stations or line loops at high traffic areas and we see a good pathway of doing that.
Along the way we see other ways of growing this system. Some of them are even associated with reaching the pipeline to the Gulf Coast Midstream site. There are other emissions in that area that we're that much closer to and so so that's an area. We think about we think about moving.
<unk> into lake Charles or down towards Baton Rouge, and New Orleans again areas of high emissions that would just make a lot of sense and really tie this integrated system into that much more of an emissions base. So we're continuing to work that and and what I love about it is that we are starting from a base.
This system, that's already moving 10 million tonnes a year through it we have a right away that we're working with and we have a great base to start from that we can incrementally build as that demand comes in and provide essentially real time solutions as we go.
And then I guess, just lastly for me.
If you could recap the comments Matt.
During the opening remarks related to the 25 year contract that Nick was mentioning I didn't catch all of that.
Yeah. So we have a a a new a new agreement with a.
Newbuild biofuel plant there in the Gulf Coast.
That we have that agreement is a long term agreement for 25 years.
And beyond that Richard we have been asked FERC for several reasons by the the partner there too.
Not disclose anything further.
We're excited about it but it's a it's gonna be a bit of time before we can go into more detail.
To me, it's just one more element.
That's out here of the types of new investments and new opportunities that 45, Q combined with our system and the great to situation that you have really across our infrastructure opens up and as I mentioned to Charles earlier. These are these.
Our ideas that weren't even evident to us a year ago, but we see them coming together now.
Yeah, No that's that's helpful and.
Just lastly related to that is it both transportation and storage or you're not able to stay at this time.
Yes, it would be transportation in storage.
Okay.
Alright, very good that's all for me. Thank you. Thank.
Thanks Richard.
Thank you. Our next question is coming from the line of Michael.
Stifel. Please proceed with your question.
Yeah.
Yeah, just had a couple of follow ups. Mark you mentioned, you expect to be debt free in the first half of next year.
Given a formal 'twenty two guidance, yet, but I'm, assuming that you're thinking you.
Well I guess I don't know I'm, asking I guess are you anticipating generating free cash flow or just spending to be kind of equals free cash flow what was that comment based on.
Sure not at this point the.
The guidance or the kind of the overarching comment that we made was as you think about next year. You know maybe think about us holding production kind of flattish from a volume standpoint, which we've kind of guided to before in terms of from a capital standpoint with that.
Require you know close to 200 million or so well just on a on an average basis.
But knowing that we're continuing to build up our CCA here for for production in the next couple of years, but.
Beyond that I would say that if you look at our hedge position alone.
Targeting probably paying.
Paying out somewhere in the neighborhood of 280 million this year plus.
Plus based on recent prices.
As we look at our hedge book next year.
No.
It's definitely less than half of that.
Just on current prices our recent prices. So so that alone obviously puts us in a significant free cash flow position.
And and not.
I'll have more of our production that's able to benefit from higher prices. So so we do anticipate generating a.
Significant amount of free cash and what we said is we want to remain opportunistic with that cash today as we think about building out the <unk> business and what that might entail here over the next couple of years, making sure that we have good line of sight to fund that.
Before we start considering.
Some kind of distribution program.
At this point so so that's how we see it right now and we'll continue to work through the planning process and hopefully our share of this a little bit more early next year once as we normally do.
That's kind of some broad brush.
Comments that I would say for now.
Yeah, and if I'm reading you right Mark it sounds like Youre anticipating funding all the Ccs requirements or at least the next couple of years with internal cash.
Cash flow.
Thinking about external funding at this point.
Yeah I think.
That's definitely an option we want to have in front of us I say to the extent that things.
Things move faster and it requires more capital that's a great thing because it means six U S is moving faster and we don't believe there would be any issues or obstacles to also raising some money toward this if if that.
Became necessary, but having the flexibility to deploy.
To deploy our free cash into that growth vehicle. We think is this gives us the best opportunities today, and we will consider other options.
As we need to.
Yep Okay.
And.
Just one last one you mentioned in the press release, our horizontal development well at the Coral Creek unit I'm. Just wondering was that just all kind of one off exploitation well or could that have any bearing on how that unit gets developed with C. O two.
Yeah. Michael This is David I'll take that question, Yeah that was just a.
Pension of our mission Canyon program that we've executed throughout the previous two to three years, we'll drill an occasional well there had a nice well to add to the inventory.
With a rig of opportunity and we like to do that are good solid producing outcome.
Got it.
<unk>.
Thank you.
Thank you there are no further questions at this time I would like to turn the call back over to Brad Whitmarsh for any closing remarks.
Yeah, Thanks, Darryl for helping us today I want to thank all the analysts and investors for joining us.
Susan and I are around all afternoon should you have some follow up questions, we'd love to have the <unk>.
With you I hope everyone has a great day. Thank you.
Thank you for your participation. This does conclude today's teleconference. You may disconnect your lines at this time.
Great day.