Q3 2021 Callon Petroleum Co Earnings Call
Expenses remained in check and contributed to the strongest operating margins we've seen in some time at more than $45 per barrel of oil equivalent of.
A 20% increase from the previous quarter and at the leading edge of third quarter earnings releases.
Our operations team made strides on numerous project fronts lowering our overall low run rate, while also reducing our environmental footprint.
Our near term focus is simple.
Employ a scaled codevelopment model across a diversified portfolio of core investment opportunities to drive rapid deleveraging from leading cash margins.
This focus is best exemplified by an expected reduction in our net debt to EBITDA under two five times by year end.
This progress reflects our leverage improvement of two turns since the first quarter, which is amongst the best rates of change in the industry.
Importantly through thoughtful co development of our resource base, we maintain our life of field development view that preserves longer term inventory quality and depth.
Supporting capital efficiency and free cash flow sustainability over time.
We recently completed a strategic consolidation transaction in the Delaware basin, increasing our footprint to a 110000 net acres in the basin.
The acquisition of the <unk> assets, which we announced along with our second quarter earnings close at the beginning of October and we are well on our way with the integration process.
We have been very pleased with recent results from the properties as activity resumed at the beginning of the year targeting two primary zones, new generation completion designs and refined landing zones.
Early time productivity has been evident with average peak oil rates of over 200 barrels of oil per day across 19 wells in the Wolfcamp, a and B and longer term performance has also been attractive with 180 day average cumulative oil production of approximately 120000 barrels of oil which represents over 72% of the <unk>.
Carbon mix on a two stream basis.
While we won't have the chance to incorporate counts completion designs into new wells until later this year, we've been able to use our more conservative flowback strategy on our recent three well project in the area.
The combined well packages responding favorably to the modification with all three wells performing ahead of the project type curve through the first 20 days online.
In addition, we are currently transitioning development on the acquired assets to the Cowen philosophy of scale co development. This.
This transition is currently focused on building an inventory of drilled wells to support larger average project sizes with our initial three projects in 2022 slated to average six wells a piece.
As we look a little deeper into 2022, the large majority of our development program will focus on both the Delaware and Midland basins with the Eagle Ford returning to more of a supporting role.
<unk> talked at length about the Optionality that our diversified portfolio offers in terms of cash conversion cycles and returns on capital.
But we were unable to fully optimize investment in the Delaware basin over the last two years as we focused on shorter cash conversion cycle projects.
Scale and scope of our Permian position and associated core inventory of over 100 locations in the Delaware alone.
Enable us to establish a durable program to build on substantial project level returns on capital to support our robust robust free cash flow profile through mid cycle commodity pricing.
Despite the significant uplift we've seen in the forward curve for oil.
We intend to maintain our capital reinvestment framework based on more conservative planning prices that reflect our longer term outlook and focus on continued simplification of the capital structure and deleveraging on both our net debt to EBITDA in absolute debt basis.
Since the second quarter of 2020, we have laid out plans and consistently executed on strategic financial initiatives that have dramatically changed our outlook and allowed us to get back on our front foot.
As part of that execution multiple non core monetization and produce cash proceeds of roughly $210 million in 2021.
We expect that these last few transactions announced since early October, including a smaller monetization of select water disposal assets to close by year end, which will put us near the top end of our guidance range of $125 million to $225 million of proceeds for the year.
These proceeds combined with our 2021 free cash flow generation expectations have established a tangible path to bring leverage under two times by mid 2022, and subsequently drive to our next round of targets of debt to EBITDA below one five times and absolute leverage of under $2 billion.
Given this trajectory in addition to our focus on sustainability and the importance of controlling critical operations in our core areas, we believe that retaining our larger portfolio of water gathering recycling and disposal assets provides the greatest value proposition for our shareholders as such we are not pursuing additional monetization related to water asset.
At this time.
Building upon that theme advancing environmental sustainability has become a critical piece of the conversation.
Yes.
With a greater portion of executive compensation directly tied to achieving our sustainability goals, we're advancing interest not only shareholders, but all stakeholders.
Ill turn things over to Jeff to discuss operations.
Great. Thank you very much and good morning, I'd like to start by recognizing our operations team and it really cowen as a whole.
Not only do they knocked it out of the park across the board, but they did this while working to integrate the <unk> assets and simultaneously move forward to our 2020 planning process. So hats off to all of you.
You put <unk> in a great position.
As Joe mentioned, our performance during the third quarter was very positive with well performance above expectations capital costs better than expected and our lifting costs improving slightly on a unit basis.
This bodes well for what we should be able to accomplish as we finish integrating the recently acquired southern Delaware assets.
Our electrification program, which started in the Permian has been a real success story in the Eagle Ford, We recently wrapped up work, they're removing another 25 generators from service.
And this not only helps our carbon footprint, but with the changes we've made year to date actually equates to nearly one $5 million in annualized savings.
Across the Delaware, we've been converting old gasless system to ESP or electric submersible pumps.
And with newer wells moving directly to ESP after natural flow begins to drop off.
Across the board. This has been extremely beneficial and is helping to improve overall, well performance and reduce the upfront cost of artificial lift.
Our ESP management program has resulted in an 80% improvement in run time since 2018, saving us valuable Workover dollars.
Additionally, we've seen some of these recent conversions to the ESP such as our Limber Pines project in the Delaware.
Upwards of 1900 barrels of oil per day, an initial uplift this equates to more than 250 barrels of oil per day per well.
It also carries forward and uplifted production curve for multiple months thereafter.
We're already identifying opportunities and beginning to implement our talent and best practices across the acquired acreage.
Fantastic to start with <unk>.
As we've discussed previously our in house technical expertise in chemicals management allowed for significant operating cost reductions and improved well performance for our previous asset additions and also continued application of our peer leading ESP management practices should provide another avenue for synergy realization.
As we begin modifying the current program in place on the acquired assets, we would expect to defer initial artificial lift installations by optimizing early time performance from our moderated pullback strategy.
And the early flow back performance. So this new Nimitz three well pad supports this concept and should be a good example of what's to come.
Our continued field efficiency has been an important factor in beating expectations, our year to date drilling and completion costs have remained generally flat with 2020.
And this is primarily due to solid performance by our team and realizing cost savings through operational efficiencies as.
As we continue the budgeting process for 2022, we'll build in a reasonable estimate for potential inflation likely something in the high single to low double digit range for capital development activity, but of course, our team will be working hard to deliver efficiencies that allow us to keep that cost pressure at bay as well as anyone in the business.
We continue to see development activity shift away from one to two well pads and move to much larger projects that provide better opportunities to retain that much needed peak capital efficiencies.
These larger projects ensure that we are developing the resource in place appropriately to optimize recoveries by eliminating future child wells and developing that inventory prior to the effects of depletion affecting the future locations.
Our combined Delaware footprint of approximately 110000 net acres has become the cornerstone of our development program.
As Joe mentioned, we expect capital to flow to both the Delaware and Midland basins, we're probably with the Eagle Ford playing a supporting role going forward and make no mistake, it's a great asset with fantastic cash flow, but our growth focus will be on the Permian and the tremendous resource we've assembled.
We're off to a very good start in the fourth quarter with six rigs currently in the field drilling across all the asset areas and helping to replace some of the DUC backlog that we drew down through the middle of the year in 2021 as we rebuild this inventory as an operational bumper to account for timing issues related to our larger scale development, we will have a.
Very balanced opportunity set to draw upon as we scheduled completion activity for the first half of the year.
At this time I'm going to turn it over to Kevin to handle the financials. Thanks, Jeff on the second quarter was a record one in many ways for us I want to quickly mentioned some of the more impressive elements of our execution this quarter.
We set new quarterly performance records for talent, we had our highest ever quarterly revenues with more than $500 million of revenue and had record cash flow from operations of $295 million in the quarter.
Our adjusted EBITDA for the quarter was $292 million and almost 50% increase from the second quarter of this year, helping us and this improvement was our peer leading operating margin. This margin increased 15% from our Q2 performance as we reached approximately $45 per BOE. In addition, LOE was $4 60.
<unk> per Boe in the quarter for more impressive total LOE was down over 8% from the second quarter. Despite placing the combined 70 gross wells on production during the second and third quarter.
Let's talk about what impact these strong margins of that on our balance sheet.
Most of $120 million of adjusted free cash flow in the quarter, which went directly to paying down debt, we were able to achieve a 5% reduction in our total debt in a single quarter I want to thank our very active business development team, who managed the significant amount of activity this year and help us deliver at the high end of our 2021 targets.
Cash from asset sales or dispositions, which were also applied to debt reduction.
Also we're pleased to announce today that the amortization of nearly $200 million of second lien notes from Cambridge helpful. Delever, the balance sheet and equally as important eliminates almost $20 million of future interest payments.
And we are starting to accelerate the pace at which we can pay down this debt since Q2 2020 and through the end of Q3, we have generated cumulative adjusted free cash flow of nearly 275 million have been able to reduce debt by almost $700 million during that period inclusive of the Cambridge second lien acquisition.
<unk> estimates per Bloomberg show expectations for another $120 million of free cash flow in the fourth quarter, helping us achieve our leverage targets for 2021.
But estimates calling for nearly $650 million in 2022, we will be well on our way to achieving our stated target of less than two times net debt to EBITDA.
I'll make a couple of final points on the balance sheet, even though we drew on our credit facility to fund the cash portion of the <unk> purchase price you will see a total debt picture at year end that should look equal to or better than Q2, and an RVO. It gets close to 50% utilization.
As a reminder, the <unk> draw the majority of asset sale settlements and robust cash flow all happened intra quarter in Q4.
On the hedging side, we were proactive in adding incremental hedges prior to the announcement of the <unk> transaction and as a result, we find ourselves well positioned for 2022 at this point with the price levels in percentages hedged we are comfortable with.
I know there've been questions out there about our timeline to pay cash taxes, given the higher commodity prices and whether this means models need to be adjusted we look at this on a regular basis with our tax team as part of the work we do on scenario planning to give you. Some guide posts and realizing there are a lot of inputs to this plan and that can move around.
At current strip prices, we would expect to pay minimal cash taxes over the next several years and not be a significant payer until four to five years from now if we had $85 flat oil for the next several years that would certainly accelerate our cash tax payments to around the 2024 time horizon.
What does all this solid financial performance get US we believe as we continue to execute against these near term deleveraging targets. We are quickly moving into a range more representative of companies with a solid b to B plus rating, which we hope to see the agencies recognized formerly this should result in a lower cost of capital and will help us as we think about proactively.
Addressing upcoming bond maturities.
I'm going to turn things back over to Joe before we move to Q&A.
Thanks, Kevin.
So over the past year challenge experienced an extraordinary turnaround from where we stood in the fall 2020.
We were adamant that the quality of our assets talent of our staff and the determination of the team as the whole lead us back to the position we're in today.
We know what firmly forward you can see our financial goals not only within reach but much closer than most thought possible in such a short time.
And with every dollar that we continue to retire we're paying back our shareholders for their faith in our ability to do so.
Operator, you May now open the lines for Q&A.
We will now begin the question and answer session.
You ask a question you May press Star then one on your telephone keypad.
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At this time, we will pause momentarily to assemble our roster.
Our first question comes from Derrick Whitfield with Stifel.
Please go ahead.
Thanks, and good morning, all and congrats on your quarter and progress in general.
Thanks, Eric.
Perhaps.
For two or Kevin Youre, Levered stats have dramatically improved to date as a result of asset sales the cymric.
<unk> and <unk> transaction.
Commodity strength in general.
With the potential to achieve.
Two times net debt to EBITDA leverage in 2022.
How should we think about your longer term preference for capital allocation of the free cash flow once you achieve.
Sub one times, one five times net debt to EBITDA.
Sure. Thanks for the question.
Could it be here thinking about these types of questions and the near term, it's pretty simple we laid out we're going to.
Give equity holders value through debt repayments, so thats pretty clear for the coming quarters, but with the pace of deleveraging as you mentioned.
At least the credit metrics will improve dramatically I guess the other part of the equation. There is absolute debt as well. So there is probably two targets that we need to be thinking about as we start progressing towards returns of capital.
But.
We've made some longer term goals around leverage metrics of one five times and below two times absolute debt reduction so that was our firm and we got to make sure. We don't lose sight of that but we think that over time, we can.
Look at returns of capital to shareholders and complement that.
Continued debt reduction to those long term goals.
That makes sense.
My follow up regarding the potential divestiture of infrastructure assets that you noted in your prepared remarks could you speak to potential valuation parameters and operating cost impacts of material.
Valuation parameters are thinking that we put out some at least with the assets in the Midland.
Headline production numbers so.
Whether you can do that on a headline flowing barrel equivalents or attribute some value to PDP and look at the acreage value I think they're both very compelling.
In terms of low impact I guess probably related to the water.
Small water transaction.
Low impact there is roughly about $4 million per annum.
That's great and Joe just to clarify for the infrastructure assets that you noted that you would potentially put on the market. That's what I was really referring to and maybe I misheard you in the prepared remarks.
Oh, yes.
With some of the technical difficulties, but yes.
At this time.
Very pleased with.
The outcome with a smaller monetization of the water package, but and water assets are very critical to our operations. We've been very clear about that over time and maintaining control and we have.
<unk> been working on.
JV types of structures to allow us to maintain operational control and then get some economic benefits, whether it be upfront cash proceeds or monistat monetizing some latent capacity in the system I think the short answer as we sit here today, we don't see that value proposition being compelling to offset.
The operational <unk>.
And dates that we have so at this time we are not.
Actively pursuing broader monetization of the <unk>.
Water assets, especially given the profile, we have a free cash flow outlook feel comfortable that's going to get us where we need to be on the deleveraging side. So hopefully that answers your question in terms of.
We go next but you are right to point out I mean, there is a substantial value proposition. There. We just think it's best for us to retain that for shareholders.
That makes complete sense, great update and thanks for your time.
Thank you.
The next question is from Brooklyn, Donna's risks Trust. Please go ahead.
Hey, Good morning, guys just wanted to ask on the activity levels on the Prime Max acreage.
Are you going to focus after the first half 'twenty two wells I see on that map you kind of have that clusters spaced out, but I wasn't sure of after that you were planning on going back south near some of this first half 'twenty, one wells or if it was you kind of want to look at the results from the wells and then decide afterwards.
It's actually a little bit of both so.
Some service analysis, that's been done over the last 30 days is really confirmed what an outstanding asset.
Private exposition encompassed.
Taking a look at some of the opportunities we have for the robust.
Top to bottom development opportunities is really the next stage in the back half of 2022, we have a few obligations very manageable obligations that were focused on in the front half so youll see.
Opportunities, where we have a larger static potentially kind of in the northeast in the Wolfcamp a.
That will get some attention as well as some opportunities down south in all likelihood.
But obviously just as you had mentioned.
We'll learn a little bit as we go along and then adjust as needed.
That makes perfect sense, and then really just my follow up is.
The rates that you announced from from the Prime ex the wells that came on.
Is there are they doing something differently than you would or is it it looks like its exceeding the type curves that you were looking for so is there something you think you'd keep applying to improve it further or is it maybe something that they did that you can bring in house on your other properties.
Yes, and again.
You nailed some some very complementary things relative to the assets.
Anytime that they can get an opportunity to combine the assets. It's also the best practices from both squads.
Those those rates are both related to physically how that.
The wells are being handled at the service.
As well as outstanding geology and so.
Generally speaking what we've tried to buy it is a little bit.
Managed flowback.
From the perspective of not ripping the wells wide open and having and drawing a bunch of sand into the wells and potentially have various scheme declines if not immediate workover candidates.
And so I think what we've seen with the <unk> assets is that while potentially a little bit more aggressive that would also have hung in there are fantastic and so we'll take a very thoughtful approach to what those wells do in year, one back end of year, one and two and really apply.
Combined best practices of both companies to see what fits this particular well set the best So I would anticipate a little bit of a hybrid between what <unk> has done historically, what <unk> already done.
That's perfect. Thanks, guys.
Thank you Nick.
Next question comes from Gabe Daoud with Cowen. Please go ahead.
Hey, good morning, guys.
Just curious Joe I think.
Press release had mentioned capital moving forward likely be predominantly focused on the Permian and within that the Delaware. So just curious if you could give us some updated thoughts on the Eagle Ford and how that fits into the portfolio longer term.
Sure the Eagle Ford is certainly a big part of.
What we do in our broader portfolio and offering that diversification not only the location but.
Around cash conversion cycles over the last.
A couple of years, it's been really important.
And has really proved to be a.
A critical asset and generating free cash flow.
We move forward, we look at.
Longer term sustainability of free cash flow we have.
Enormous machine in the Delaware.
With very high impact wells that we can get into large scale developments realize those efficiencies, we see that as being the backbone.
Of our not only our leverage reduction, but potential backbone for returns of capital down the road and really using out of the foundation. So the Eagle Ford similar to.
After the <unk> transaction, we talked about the free cash flow machine that it was.
That will certainly be the case going forward, but we still have a good inventory there we're very efficient team.
And operations that will continue to bear fruit.
Well also.
Look at ways to expand our inventory in that part of the world whether it be some smaller bolt ons around our area or some exploration.
We haven't obviously, you said a lot of detail around 22, yet that'll be coming but we always put a few exploration or delineation wells into the mix.
Austin chalk is going to be one that is in the mix. Once we finalize plans, we can talk a little bit about that more but again this is.
While we are emphasizing the Delaware and broader Permian from a capital standpoint Eagle Ford is still a very important part of our machine.
Thanks, That's helpful. And then my follow up was going to be around 2022, and anything you could say, but I guess just to kind of stay tuned for the.
The <unk> update.
Well, yes.
Okay. Okay got it thanks, Chuck recorded okay. Thanks Kate.
Again, if you have a question. Please press Star then one.
At this time.
And there are no further questions. This concludes our question and answer session I would like to turn the conference back over to Joe Gatto for any closing remarks.
Thanks Denny.
And thanks to everyone for joining today and before we sign off actually I have one more special thank you.
For our director of IR Mark Brewer.
March can be leaving us at the end of the year after leading the charge with with investors and research analysts since 2017.
I know most of you spent a lot of quality time with with Mark over the years and I have no doubt.
You enjoy working with him as much as we all have here of talent. So Mark wish you all the best.
For everyone on the phone, we look forward to a strong finish to the year end.
Look forward to our next call in early 2022. Thank you.
This concludes our conference. Thank you for attending today's presentation you may now disconnect.