Q3 2021 Coterra Energy Inc Earnings Call
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on a touchtone.
To withdraw your question. Please press Star then two.
Please note. This event is being recorded I would now like turn the conference over to Catarina pop a deep trouble.
Mr Relations analyst.
Thank you Matt Good morning, everyone and thank you for joining coherent Energy's third quarter 2021 earnings conference call. During today's call. We will reference an updated investor presentation, which can be found on the company's website today for todays prepared remarks well be at.
Sometimes our N CEO and President and Scott Schroeder Executive Vice President and CFO.
As a reminder, on today's call we will make forward looking statements based on our current expectation. Additionally, some of our comments will reference non-GAAP financial measures forward looking statements and other disclaimers as well as reconciliations to the most directly comparable GAAP financial measures were provided in this morning's earnings release, which can be found on our website.
I never paired remarks, we will take your questions. Please limit yourself to one question and one follow up with that I'll turn the call over to Tom. Thank you Kat Arena and thank all of you for joining us on this morning's call I'll make a few introductory remarks, followed by Scott, who will walk us through third quarter financials, and our fourth quarter guidance.
We have quite a crew in the room today and I just wanted to make sure you know who is in the room, because we may be directing questions to them given the complexity of our release like Serco assure for operations. Dan Guffey is here for financial planning and analysis, we have Todd Roemer, our Chief Accounting Officer, we have Matt Kerin.
For finance another overarching.
Business issues, including marketing and of course, Scott, who will be making some prepared remarks.
The closing of the cabin and Cimarex merger occurred on October one as a result legacy Summer X will not report third quarter financials.
I'm pleased to report that culture energy is well underway with the integration of our two legacy companies as you can imagine a merger of equals between summer acts in Cabot is not an easy task.
We've been full court press since May we have functional teams working around the clock to integrate accounting information systems production reporting safety protocol land systems operations marketing legal and human resources.
Each of these teams are tasked with identifying and implementing best in class systems and processes. Our approach is all co terror all go forward.
That's not the way we've done it here is not an acceptable answer we've made great strides and we'll hit the ground running as we head into 2022.
I want to salute, our exceptional people from both legacy organizations, who are coming together to form a new bedroom co chair up from two outstanding legacy companies.
We all share an enthusiasm and commitment to create the very best E&P company in our industry I have great confidence that we will exceed our lofty expectations.
Speaking of confidence this morning's announcement that we are accelerating our first variable dividend underscores and demonstrates this confidence co.
<unk> is built to deliver superior financial returns through the cycles. This morning's announced base and accelerated variable dividend totals are combined <unk> <unk> per share.
Coupled with the 50 special dividend, we paid on October 22nd the company will return 80 cents per share during the fourth quarter.
As these moves demonstrate we are committed to our owners co terra owners benefit from assets that are second to none.
Pristine balance sheet and asset diversity that will sustain and preserve our cash flow through commodity cycles are owners also benefited from our ongoing discipline to allocate capital to its most productive use and continually challenge the status quo.
Although co Terra is barely one month ago, we have some excellent operational results to discuss this morning on a pro forma basis <unk> produced 645000 barrels of oil equivalent per day, including 81 5000 barrels of oil per day during the third quarter.
As promised we are on track to exit 2021 with oil rates that are 30% greater year over year compared to fourth quarter 2020.
We brought 61 wells online during the quarter and are currently running seven rigs and we will average four completion crews during the fourth quarter.
Five of our rigs are in the Delaware Basin, two rigs are in Susquehanna County of northeast, Pennsylvania.
We benefited nicely from higher commodity prices during the quarter. This was true across the board oil gas and natural gas liquid prices were significantly higher during Q3 and have continued to strengthen.
More on that later.
We continue to see excellent productivity and deliverability from our northeast, Pennsylvania assets slide eight in the Investor deck. We posted this morning highlights our ongoing activity level and sustainable production volumes in North East, Pennsylvania, Our Pennsylvania operation is impressive on all fronts, we continue to.
Make remarkable drilling progress and are bringing projects online faster than predicted.
Faster drilling has meant that we can drill more wells with the same number of rigs, resulting in four additional wells drilled during 2021.
When acceleration occurs owing to operational excellence, it's a nice problem to have and we're also moving seven additional completions in the late fourth quarter 'twenty. One from early 'twenty two pushing our planned Marcellus capital slightly above the upper end of our previously issued annual guidance range as a.
<unk>, we will have additional volumes coming online around year end to take advantage of strong Appalachian and winter pricing.
We continue to see a significant increase in capital efficiency in our Delaware Basin assets slide nine in our Investor presentation highlights recent development projects in Culberson County, as we've previously discussed we are observing that relaxed spacing and modestly upsize completions can significantly improve low level return.
And in many instances we cover the same amount of oil per drilling spacing unit than more dense well spacing.
We are achieving increased productivity per well similar section recoveries and increased PV 10, with substantially lower capital per drilling spacing unit.
We're also seeing excellent results from our loan 2021, Anadarko development, the five wells, Carol elder, which targets the Woodford shale.
Slide 11 in our deck illustrates the uplift we've seen with relaxed spacing and improved completions are Anadarko team has assembled a deep inventory of projects that are highly competitive for capital.
I'd also like to make a few comments regarding our ESG performance co Terra like both legacy companies before it is deeply committed to making ESG performance a top priority.
Our industry has grand engineering challenges and we embrace these challenges wholeheartedly.
<unk> is dedicated to be a top performer in ESG metrics to be transparent in our communication.
And the aim higher than state and federal requirements, we will be an industry leader in ESG performance.
As we look ahead into 'twenty to 'twenty, two and beyond <unk> is well positioned to generate consistent returns we have the flexibility to pivot in response to market constraints and opportunities commodity price swings and operational advances our capital allocation philosophy is supported by three pillars.
Rafik diversity commodity diversity, and economic windage geographic diversity and commodity diversity are self explanatory economic windage is provided by having assets that provide some of the highest margins in our business high margins and the low cost structure, meaning that returns.
Our preserved through Downdrafts in commodity prices. These pillars of our fundamental attribute in a competitive advantage of co chair, our capital discipline diversity and flexibility underwrite our ability to generate outsized returns and accelerate return of capital to our owners with that.
I will turn the call over to Scott.
Thanks, Tom as you mentioned given the merger closed in the beginning of the fourth quarter. The reported third quarter financials for Kotara energy only reflect the results of legacy cabinet for this reporting period.
My comments will include key items for legacy Cimarex also.
Specifically like to draw attention to the following financial and operational highlights for the third quarter legacy Cabot generated discretionary cash flow of $309 million in the quarter, including merger related expenses, which was driven by a 69% increase in realized natural gas prices compared to the same quarter a year ago.
Looking ahead realized natural gas prices are anticipated to increase substantially in the fourth quarter of 'twenty, one driven by the expectation for the highest average quarterly Nymex price, we have experienced since the fourth quarter of 2008.
The combined Cabot consumer free cash flow for the quarter totaled $387 million, which also included merger related cost of $100 million.
Legacy Cabot's production for the third quarter was $2 three 6 billion cubic feet per day, which was 2% above the high end of our guidance range for the quarter legacy Cimarex production for the quarter was 251000 barrels of oil equivalent per day, including 81, and a half thousand barrels per day.
Of oil production.
Legacy Cabot incurred a total of $171 million of capital expenditures in the third quarter, while legacy Cimarex incurred $165 million of capital expenditures in the third quarter, excluding capitalized expenses.
I would also note that moving forward co tarell will be reporting under the successful efforts accounting method that legacy Cabot utilized which does not capitalized G&A and interest expenses.
During the third quarter legacy Cabot repaid $100 million of senior notes that matured in September reducing our principal long term debt to $949 million.
On a combined basis kotara exited the third quarter with a cash balance of $1 1 billion.
And principal long term debt of $2 9 billion.
Before adjustments for purchase accounting, our strong balance sheet provides significant financial flexibility and allows for industry, leading capital returns through the cycles as evidenced by the special dividend. We made paid excuse me in October and the acceleration of our variable dividend that was announced in this morning's release now a few comments on guide.
<unk>.
Our fourth quarter 'twenty, one combined production and expense guidance assumes that we achieve results that meet our previously issued Standalone annual guidance of note. We are reaffirming our fourth quarter oil guidance, which assumes 30% year over year growth as Tom highlighted earlier, our full year 'twenty one.
<unk> capital is expected to be at the high end of the ranges due to increased efficiencies and accelerate and acceleration of completions in late.
Fourth quarter, obviously due to the timing of these actions the increase in capital is expected to have no effect on 'twenty, one production volumes, but will benefit 22 volumes, taking advantage of the strong commodity price environment, we find ourselves in.
In the Permian, we are maintaining a second crew during fourth quarter 21 to complete our Lea County project versus our original annual guidance midpoint, which assumed we would drop to one crew in the fourth quarter.
In Appalachia, we plan to drill an additional four wells and complete an additional seven wells during 2021.
These completions are set to come online near year end during the first quarter of 'twenty. Two we plan to maintain two completion crews in the Permian and averaged just over one completion crew in the Marcellus we plan to issue formal 'twenty two guidance early next year.
Combined financial strength and free cash flow generation potential opco tariff that was originally envisioned when contemplating. This combination is illustrated in these results and has been further supported by the tailwind from the improving commodity price backdrop with that Matt.
Turn it over to you for Q&A.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
If you are using a speakerphone please pick up your handset before pressing the keys.
Anytime a question Thats been addressed and you would like to withdraw your question. Please press Star then two.
In the interest of time, please limit yourself to one question and one follow up.
At this time, we will pause momentarily to assemble IRR.
Our first question will come from Neil Mehta with Goldman Sachs. Please go ahead.
Congrats team on closing the transaction here.
Reported your first quarter together as a company maybe.
Maybe just a high level question to kick off Tom It just talk about how the integration is going and bringing together the two cultures.
And what Youre seeing.
Early on that gives you confidence.
In the combination and what you think is the biggest.
Obstacle that you need to overcome in order to achieve your goals here.
Well good morning, and thank you for that question I. The integration is going very well the single obstacle or moving trucks.
Yeah, we're still kind of dispersed and flying around to me with one another but here as we get into November December we will all be down the hall from one another and that will certainly.
Give us a head start.
What I am wholly optimistic and I'm optimistic for several reasons first and foremost and you know my background.
I fundamentally believe that the only competitive advantage. Your company has a long run is its culture and the quality of its people and I have been wholly impressed with the co chair of our organization from top to bottom. We have people that are energized really talented willing to look at problems are new and they bring.
And absolute commitment that's humbling for me in leading this organization.
I've made two trips to the field in Pennsylvania, and I have been nothing short of blown away by the quality of that operation and the dedication of our organization to work with the local community and providing this absolutely.
Necessary resources in a way that is I think community friendly.
Across our platform, we have people working together to develop new tools to develop ways to make the best most disciplined capital allocation and Theres just great energy, it's really fun to be in the middle of this and.
I'd just fasten your seat belt and watch us perform.
Alright, and then the follow up is just on gas fundamentals.
How are you guys see in the market here as we go through winter, but more structurally.
As we think about 'twenty, two and 'twenty three and in that context, what's your approach to hedging I believe you guys are about 20% hedged here over the next couple of quarters, So you're still relatively open.
How do you plan on attacking the curve from here.
Hey, Neil this is Matt Karen here.
The fundamentals and then hand, it over to Tom or Scott to discuss hedging philosophy. So currently we obviously feel very bullish on the fundamentals that we've seen for gas.
Obviously, we've seen a pretty big uptick in the forward curve over the last couple of months, which we think will certainly be beneficiary for <unk> going forward given the lack of hedging in place right now for 2022.
Look at the U S storage levels currently we're about 10% below last year's levels and about 4% to 5% below the five year averages and more specifically to where legacy Cabot operates in the Marcellus we see similar trends in both the eastern and Midwest stores levels. So both for the broader Nymex benchmark, but as well a global basis.
We feel really strong about where we sit entering the winter months and certainly going into 2022.
Yes, Neil in terms of hedging.
Again like Tom talked about the integration were coming together, we have a formalized hedging policy, we have yet to kind of sit down at the table and.
Collect our thoughts, but Tom myself and.
Jeff Hutton.
Our legacy marketing person will be part of the hedge committee going forward as you saw in the release this morning or in the Investor deck, We did add some cabot hedges.
Around the time of the transaction as we saw the and followed the path.
Kind of wide collars.
That's still a great approach that will be positive in the market that's out in front of us that Matt talked about is when we have the ability to be very offensive in terms of our front flip around the hedge.
Decision versus being in a defensive posture trying to protect things the other dynamic I would add and Tom and I had a conversation probably a month ago is the fact that co. Tara also changes that hedge decision from the perspective of its balance sheet and its overall financial wherewithal that there isn't as much when we.
We're separate organizations the need to hedge as much but we will still use it ops.
<unk> Opportunistically.
Thanks, Steve.
Yeah.
Okay.
Our next question will come from Matt Portillo with PTH. Please go ahead.
Good morning, all.
Hi, Matt.
And just a quick question looking out into 2022.
Alex sheets in pristine shape, and obviously, you've already initiated a fairly robust return of capital program for shareholders. Just a higher level question philosophically, how do you think about buybacks.
This environment as the debt load is in good shape, you've got the base and diversification and the equity is trading at a pretty steep discounts, it's probably long term intrinsic fair value.
Well.
That's a great question.
Certainly in our tool kit as our buybacks there we're going to have tremendous flexibility financially as we look into 2022.
Yes.
Stunned at how constructive one can be in terms of the amount of our capital that we need to invest.
Just to stay flat or.
Generally flat so we're going to have great flexibility with cash even after our stated commitment of returning cash to our owners.
We're going to model. It I'll, just say theres going to be one word that will guide us into 2022, and that's a discipline.
And we're going to be disciplined in our capital we're going to be disciplined with our capital allocation and we're going to be disciplined in our use of funds and we're going to we're going to look seriously at buybacks you have to.
But we're not going to do it because it's a fad will do it because we think it's a prudent use of our capital Scott do you want to comment on that I think you've covered it it's been an arrow in our quiver of the organization for a long period of time and I think as Tom said it will be fully vetted, we're in the process of pulling that together.
You mentioned the intrinsic value, we need to do that deep dive on intrinsic value. We also have to think can strategically about it because historically when prices are good.
Your values are up even if you are at a discount from your peers when the prices moved down.
Then all of a sudden you bought shares at a higher price you got to do is look at the average cost of the legacy balance sheet of Cabot as to what what that intrinsic value is of the shares on the balance sheet. So it's it's also part of the economic decision to the.
Question. The rhetorical question no answer required is do you kind of leave that cash on the balance sheet and take advantage of that buyback in more lean times than where we find ourselves today that will be all part of the discussion map.
Perfect and then maybe an asset level question.
So Tom the team just curious your learning so far at lone rock with the.
New well results you provided how that may fit into kind of your development program in 2022 that just relates to the returns youre seeing on that asset relative to the Delaware and then just a medium term question in terms of running room from an inventory perspective, particularly around Moonrock. How you think about your inventory profiling.
<unk> to develop that going forward.
Well, we're very pleased by the Carol Alder project.
We look at our returns fully burdened putting all overhead all associated costs, including legacy land and when we look at that we model the Carol elders being highly competitive within our portfolio now you mentioned loan rock, but we've got a portfolio of opportunities within our Anadarko asset others.
Three major areas Lone rock being one.
Up dip kind of near the merger classically as another and then we've got a really nice opportunity on our western friends. All of those are highly competitive for capital you asked about inventory.
Our team has done a nice job of presenting a really healthy inventory of two mile off with two and three mile horizontal well opportunities.
Yes.
There'll be a slice of that in 2022 I don't at this point cant Telegraph, how biggest slides, but I'll say it offers tremendous flexibility from a capital allocation standpoint to have that third basin that has competitive returns because as you know from time to time Durbin Mark.
What constraints, both in Appalachia and in the Permian and having that third highly profitable area is a tremendous safety valve that we offer our owners. So we're very high on Anadarko. It's obviously doesn't have the running room of our Pennsylvania or Delaware go boy.
Deserves a place in our portfolio.
Thank you.
Okay.
Our next question will come from Josh Silverstein with Wolfe Research. Please go ahead.
Hey, Thanks. Good morning, guys. I know you you want to wait till January or February next year to provide a more formal guidance.
Our winter shapes up but can you just talk about how much flexibility there is in the portfolio to shift capital around for 2022 relative to just the Standalone baselines.
Well Josh. Thank you for that question, we've talked about this in the past when you're drilling these pad projects have long lead time.
By the time you're into November a lot of certainly the first half of 'twenty. Two is mostly baked in so flexibility to reallocate capital will probably be a late second quarter second half phenomenon I would say the first half is probably mostly.
Already underway in terms of what will be turned in line in 2022 now that said, we're not shrinking from that challenge, we're going to be making we don't have a lot of marketing commitments and we don't have a lot of vendor commitments, we have great flexibility.
Capital flow to its most productive years, but that will probably not actually.
Involve equipment move underground until second half 'twenty two.
Got it and then just within that framework does it even make sense to grow the Marcellus next year, even if were at current strip pricing.
No no.
Makes sense, that's something that I wouldn't want to put a stake in the ground on.
Three months ago, what made sense.
One of the things makes sense that doesn't make sense three months ago.
We're in a very strange time in that all of a sudden we realized Oh my goodness energy really is important and we see prices moving up you'll see a lot of concern about where energy markets will trend and we have tremendous flexibility to adapt to that so in terms of what will make sense in 2022.
Stay tuned.
Okay got it and then just one more on the returning.
Our return on capital profile.
One thing that you had wanted to do.
At Cimarex was build up enough cash for the 2024 maturities.
Now that.
You're a combined company that maturity has now grown to one $3 billion. How do you guys want to build up cash for that or how much of that would you want to take out with cash relative to refinancing when the time comes.
Yes, I'll, let Scott handle that one.
Yes.
Josh I.
Hard to kind of pre closing Tom's desire to pay off of 750 and I fully understand that as you've known me a long time I am I I'm, a debt averse kind of guy, but I know that we have to have some debt in the capital structure I would put that on a lower.
Checklist be lower than stock buybacks, but I think <unk>.
<unk> two <unk>.
Repay debt as highlighted in the script Cabot paid it's Kevin actually paid $188 million back a share of <unk> 88 earlier in the year in the $100 million in September So I think.
Let us kind of get together and figure out and look out. These next couple of years, but I would suspect a portion of that one three will be paid back in a portion will be refinanced I don't think nobody is looking to go to zero debt in the organization, but maybe it my gut and Tom and I and fairness have not talked about this but a target level of <unk>.
Absolute debt around $2 billion versus $3 billion kind of feels like it's in the sweet spot.
So I.
I would add to that lots of things have changed.
And our business, obviously, we're under regulatory pressures, we're under pressures coming from the SEC, we're waiting to see where under investor pressures.
When I look at those challenges I think you would find a company like co Tara probably moving forward at a lower debt level than we would have answered two years ago now what that is we will see but but we used to say one five times debt to EBITDA I think today we'd be.
Significantly below that.
Okay. Thanks, guys.
Yes.
Our next question will come from Michael <unk> with Stifel. Please go ahead.
Yeah.
Hey, good morning, everybody, Alaska, I guess, a couple of operational questions.
Tom You mentioned slide nine.
It seems a little perverse to me I guess that the industry has turned into a wider spacing with oil prices above.
$80, but.
Obviously makes sense. If you can get the same reserves with five wells per section that you can with seven.
Prior but have you looked at that.
Greater completion intensity with seven wells per section and I guess as you optimize that NPV per section what oil price was that based on.
Well.
That analysis will withstand any oil price. If you can recover the same reserves with less capital that's not going to be a price to kind of analysis now that said you drill more wells there there will be an acceleration component with our analysis tells us that that is not going to catch up to the destruction of investing more capital than you need.
Two.
So we think slide nine has a remarkable result, we're thrilled by it and it frees up additional capital for more productive uses.
Okay.
And then slide 10.
You mentioned and Youre trending towards the low end of the range on cost in the Permian.
How are you thinking about those costs as you look out into 'twenty two.
I guess, how much are you dependent upon.
How much have you used simulcast <unk> at this point and is that enough to offset the inflation that you see so far.
Yes. This is Blake I'll take that one.
We're real excited to be trending at the low end of the guidance and that's really driven by operational efficiencies we've had throughout the whole value chain throughout the year drilling completions facilities flowback if at all.
The game ages, that's coming together.
We do have inflation, we've seen in place.
Everybody else and see it in steel we see in <unk>.
Will we see it in labor.
We're working right now to try to model that for 'twenty, two that will come out with our 'twenty two plan, but we expect continued operational efficiencies to help offset.
Future inflation.
We have tried xyrem frac, we've done we've done some of those projects were still trying to quantify the real savings to that.
But.
Right now, where we really like our zipper operations, we like our pad operations, we see tremendous efficiencies there.
Yeah.
Great. Thank you.
Our next question will come from Holly Stewart with Scotia, Howard Weil. Please go ahead.
Okay.
Good morning, gentlemen.
Hi, Alex.
A follow on to Neil's question, so for Tom or Scott.
Any items to highlight.
Just kind of sat down and enrolled up your sleeves and maybe you didn't think about as you put these two companies together.
Yeah.
Uh huh.
Now.
I think Holly it at the end of the day I think it was very well vetted going together.
The interesting thing in the dynamic of putting the two together.
Not just the integration after the fact, but the <unk>.
Mindedness of how the two companies had been.
Managed.
In terms of just the conservative nature of the balance sheet, where were at the capital plans the technical ability as Tom complemented the Marcellus we can do that same complement of the Permian and the Anadarko staffs of lead met on our side.
So I don't think there was there wasn't an aha moment, obviously, it's a marriage and for everybody on the phone. It gets married not everyday is.
He is a.
Challenges each can be each week, each day or whatever just from the different push pull on various things.
Blake and I have had the opportunity to serve on <unk> and <unk>.
Had a lot of great discussions and a lot of things come together to get us where we're at and like Tom said the biggest driver right. Now is we just need to all get together in one location. So that we can move this forward, but there was no bright spot Ah ha moment that we said Oh crap. We missed this holiday is one of the things I've been most pleased about first and foremost.
We are on track to achieve our announced G&A synergies and I'm pleased about that but once we got our operational teams together and really brainstormed on operational synergies best practices procurement and how we might be able to leverage that there are there's a set of ideas longer than my arm.
And our tendency is going to be to under promise and over deliver and.
I am very optimistic I also want to follow up I'm curious my wife's on the line I don't know what Scott talked about.
Marriage.
Yes.
Well played.
Maybe my follow up just on an M&A there appears to be a lot of assets are hitting the tape both on the oil and gas side of things and certainly on the gas side, there's some things that might fit into the legacy Cabot footprint without speaking I guess the specific assets could you just comment.
On your appetite for M&A, maybe in gas M&A along with that.
Well as we've said all along we're going to have the opportunity and flexibility to take advantage of really good opt.
Opportunities.
We've got our plate full right now with a deep inventory of fantastic projects and plenty of challenges and it doesn't surprise me that lots of assets are hitting the market.
Yes.
I think any anybody who really believes what they say when I talk about discipline has to be really cautious buying assets at this uptick in prices.
Got great organic opportunities, we're developing additional organic opportunities and so.
Look as something really makes sense, we have the ability to strike.
We ask that you used the word appetite.
We're not hungry, we've got plenty to do.
Yeah.
Thank you Dan.
Our next question will come from David Heikkinen with Pickering Energy Partners. Please go ahead.
Good morning, and thanks for taking my question.
Really first things first Scott and Tom.
Your comment on countercyclical building of cash and buying back stock at Lowe's as opposed to high if I could.
Wash rinse repeat that for every conference call it would be that'd be perfection. So thanks for that statement first.
Second thing is as you think about the gas markets, what's your maximum capacity or flow.
In the Marcellus going through the winter do you have it do you have an assessment of of where and how high that could actually go on a gross or net basis.
Well this is Mac guarantee so we're set up to be able to move volumes even above the levels that we're at today, if we think that the pricing warranted warrants it but as you know we have the leidy South project coming online.
Full in service in December one, but we've been starting to take certain portions of that capacity, leading up to that full in service. So thats going to provide some incremental opportunities there, but from a gathering system perspective, we've recently, a new deal with Williams Thats going to continue to expand on what we already have so throughput.
Throughput is not really an issue. The question is going to be as the pricing and the returns on capital for incremental volumes makes sense for us up there or will we just be long term cannibalizing existing volumes that we already have in the market.
Okay.
Price dependent, but <unk> got ample upside to meet demand.
And then on the Delaware Basin, Tom Unlike your slide about the five wells per section as you looked around at other operators in your operation.
How much capital was over deployed in the base and if you just think about seven wells versus five wells.
Is there is that the next round of operating efficiency.
As you head forward you kind of look at the basin and kind of ongoing developments across your portfolio of.
How do you evaluate the cabinets on the operator.
We didnt stumble onto this conclusion, it's the outcome of years of deep science understanding our incremental well level deliverability.
A lot of work went into this I'll just give you. An example, and I don't want to get specific on geography, but we have a project going on right now the slowing back where we have drilled nine wells in the upper Wolfcamp and next door is an operator, we really respect that's drilled 12.
As we analyze those two projects are volumes are right on top of theirs because of geology is the same the pressures the same the face and the reservoir is the same and we are recovering an equivalent amount of oil on our project compared to our neighbors.
When we analyze our neighbors project, we think it's a 100% rate of return.
If that's all you had for the wells you drill and the volumes. We flowed back you would have a victory party.
Celebrate 100% rate of return.
Our returns are significantly higher than that 100%.
And if we didn't have the low level detail, we would've missed that and I think a lot of operators that don't do the science will look at the sum total of projects output and stop their with their analysis and therein lies the missed opportunity.
Satisfaction without pressing further that's.
Good summary of that operational.
Thanks, guys.
We drive ourselves crazy everyday and we will continue to do so.
Thanks, Joe.
Our next question will come from Neal Dingmann with Truest. Please go ahead.
Good morning, Tom at all Tom.
Tom just one after what's been said this one I'm just trying to get a sense of how you all think about now on a broader scale growth versus shareholder return in general and maybe even more so in times like today in order to take advantage of these higher prices.
Well, it's all about shareholder returns. So we think first and foremost beginning in about shareholder return.
Now we will see I think we're at a bit of a pivot point.
With what's happening with energy markets.
I think theres been a societal realization.
Oh My goodness, maybe fossil fuels are important after all.
All markets have moved up gas markets have moved up if we have any kind of a winner.
To be a serious call on natural gas in the United States.
And we don't live in a vacuum although today I think we are absolutely committed to everything we've said that we think growth is probably not called for but.
But we wake up every day and we're flexible.
No.
What we don't want to do is get back to this cycle, where capital is destroyed by the industry, putting the pedal to the floor. When times are high and then suffering when times are low were going to be disciplined we're going to move prudently.
But we don't live in a vacuum we will adapt to the world we live in and there'll be shareholder pressure that will also adapt to the changing world. So we have <unk> has great opportunity to be flexible through this changing energy landscape.
Yes.
Great well said and then just a follow up now that everything is closed where do you all sit just on sort of block and tackling on M&A are there. Some pieces that you could let go or theres. Some other things that you'd like to bolt on to sort of tie in just wanted to and any thoughts you can share with that.
Well, we always would like to let go straight properties.
We still have some things that probably are better off in other people's hands, not big chunks of our portfolio, but.
Every now and then somebody pitches.
Got this set of wells, it's just not very efficient for us to operate and we will continue to look for those opportunities.
And then we remain interested in bolt ons, but I'll just say what I said to an earlier question, we're going to be highly disciplined.
Yes.
We're not we're not Empire building here were value, creating and that will be our goal.
Well said thank you all.
Our next question will come from David <unk> with Cowen. Please go ahead.
Good morning, Tom Scott, Matt Thanks for taking my question today.
Hi, David.
I really just had one question I'm curious, especially Tom you brought up the Anadarko and I know, we're going to be getting in the capital allocations and early early 'twenty two for next year.
Would there be any interest on <unk> part now and considering third party capital or other developmental structures using someone else's wallet to develop some of the resources that you might have a difficult time allocating capital to.
Or does it really just makes sense just given the leverage profile now and the returns to sort of look at doing everything organically.
No David.
We're very open to those types of opportunities we have.
Explored a couple of them and.
Kind of depends you mentioned that Darko, but I think we'd be open to.
Opportunities like that in some of the areas of the Permian as well.
We haven't pulled the trigger on anything like that but.
I will say, we have a very active team that's putting some options in front of us. So I don't know, whether we will do it or not but your question is would we be open to it and the answer is absolutely.
And at the end of the day I guess, what if you were to pursue something like that would you be looking you know what would you be looking to accomplish above all else is there other areas like the Anadarko Anadarko that are just not optimized from a capital perspective, or we'll just have to be an opportunity that really just sort of augmenting near term free cash per.
Sure.
Well I would put this in the embarrassment of riches category, where when we look at our inventory we have some things that are years down the road in our inventory, but there are others for whom they would jump at the opportunity to confidently invest that those returns and so when we looked at that we said.
So if something isn't going to get drilled for the next eight or 10 years and yet it has a return profile that would be highly enticing to an outside party.
We look at the opportunity to accelerate that value.
And that's kind of how we think of it.
Fair enough. Thanks for the replies guys best of luck with the integration.
Okay.
Our next question will come from Doug Leggate with Bank of America. Please go ahead.
Thanks, Good morning, everybody.
I Wonder if I could.
I hit.
During the question, but.
<unk> three bite to you a little bit the rationale for the deal.
Less volatility stronger balance sheet.
Recognition of a variable dividend is a bit of a subjective call I guess, what about the base dividend if you've got more volatility on our balance sheet.
Why not step up the base dividend.
Doug This is Scott Schroeder, how are you.
Can you hear me.
And in terms of the base dividend, let's kind of reset the platform here legacy Cabot had a base dividend increase in the spring.
2021, and then an announcement in May there was a second.
Dividend increase going from 11 to $12 five that was memorialized right now in this first co Tara dividend that was announced.
We're firm believers in a not in our plan to rationally grow the base dividend over time.
Having just done two and knowing that we're in a very robust commodity price environment, let's see how this shakes out because we do as you pointed out have the ability to continue to return with a variable dividend structure that we put in place and let me add on that remember the legacy Cabot one was once a year.
The co Terra because of the financial Wherewithal is going to do that assessment every single quarter, which gets.
Dividends back in the hands of shareholders quicker and so again, we're all in favor of growing the base dividend, but in a methodical way Youll remember I said in my history I'm all for it but I never want to get too far over our skis, where we would ever have to ratchet it back and in this legal enterprise in 31 years of paying a dividend.
<unk> has never had to call that audible or even reduce it and we want to continue to build from that point.
Yeah.
It's a favorite debate I think the issue is about right.
Hey, Bob.
It appears.
Hey, Doug your cotton out a bunch I mean, we're hearing about every other word.
I'm sorry.
Yes.
Okay.
Okay.
Okay.
Alright.
Yes.
Okay.
Oh.
Hey.
Hey, Doug Doug Youre going to have to just follow up with us because we can't hear you.
Okay.
Our next question will come from Leo Mariani with Keybanc. Please go ahead.
Hey, guys just wanted to follow up a little bit on a few of your comments here.
Certainly I guess you guys have had pledged to return.
50%.
Uh huh.
Cash flow.
Shareholders here and just wanted to get a sense. If we continue to see if there had been a robust commodity tape as we roll into 'twenty two it sounds like that number could be a fair bit.
Higher than that you guys did talk about discipline, so it sounds like.
Not planning on all that much growth for 'twenty two so commodities your high just given the fact that balance sheet is really strong it sounds like we could be expecting.
Certainly some increases in the returns here is that generally how I'm hearing here.
Yes that would be correct just based on the simple math on what the scenario you laid out I would say our actions. This morning to advance our variable dividend a quarter is telegraphing that thats, our bias as we scale our bias is to lean forward now.
We wanted to be careful what we commit to and but I think as we get quarter by quarter Youre going to see how we behave in that bias will be clearer.
Okay. That's helpful. And then just wanted to touch base on a couple of number questions here. So.
Certainly noticed that the Cabot Standalone LOE was up a little bit in third quarter. So I just wanted to get any kind of color around that if that was more maybe onetime in nature.
And then just from a high level perspective, I know you guys did provide some guidance.
Guidance on deferred taxes here in the fourth quarter, which is helpful. But would you guys continue to expect a decent size cash tax shield and <unk> kind of like Youre seeing in <unk>, just trying to get a sense of the tax shields in the combined entity.
Hey, Leo this is Matt Karen on the yellow for legacy Cabot those numbers can move around a little bit quarter to quarter, depending on some of the workover projects. We have so we did have an increase in work over in Q3 that kind of policy can come a little bit above the high end of the range, but somewhere in that eight to 10 range on a legacy Cabot basis is where.
We would expect that number to be I don't want to go forward basis as it relates to deferred taxes I'm going to hand, it over to Dan Guffey.
The ways when it comes to that.
Sure. Thanks, Matt So we gave guidance for $30 to 40% on a deferred tax basis and we've communicated.
A 382 indications and built in gains we would expect a $1 $3 billion of Nols that were on Cimarex is balance sheet at 930 to be.
Shield that is ratably spread over the next four to five quarters.
We've discussed in prior calls we would expect that Nols could be fully utilized during 2022 based on current strip prices.
As we walk into 2022, you can expect that the deferred portion to be in that 30% to 40% range again, depending heavily all commodity prices investment levels, but we do expect full utilization of the Nols by year end 2022.
Okay. That's very helpful. Thanks, guys.
Again, if you have a question. Please press Star then one our next question will come from Noel Parks with Tuohy Brothers. Please go ahead.
Okay.
Yeah.
Yeah.
Good morning.
I just had a couple of things I want to check in on.
Okay.
You had some discussion of cost inflation and.
Sounds like you anticipate being able to use operational efficiencies to offset some of that going forward.
Just wonder.
Does that play into your thinking at all around.
Whether strategically.
Terra or the industry broader is going to need to inch back towards thinking more about scale.
You know the focus has been so much on fish.
Patiency maintenance.
<unk> drilling.
If there is steady cost inflation at some point it seems that the.
Thinking does start to head more over towards.
Perhaps opt.
Operations over a narrower set of basins or just other things.
That leads you to sort of.
Maximize the potential for Freescale.
Well, we've talked about scale a lot over the years.
Yeah, I'm going to repeat what I've said on past calls the first big ticker on scale or long laterals. If you can get two or three mile laterals, there's tremendous cost savings there. So aggregating your land to be able to do that is critically important.
And then an aggregation. So you can most efficiently deploy your infrastructure dollars, both gas gathering and compression saltwater disposal. All gathering there is also important.
I think beyond that certainly procurement is an important scale topic.
But.
Quite frankly, I think scale can be overblown and I think once you check those boxes.
You have a really great operational team.
You're down to very small differences between.
Certainly huge companies and scrappy little companies.
Scale alone, where the answer I think the majors would have the lowest cost structure of our business and clearly that's not the case and so I think scale is important but it is important to a point.
And each of our three basins, we have the opportunity to have the lowest cost structure and Thats. Our challenge we don't use scale as an excuse we think we've got what we need to deliver lowest cost now I want to say one other thing.
Our vendors are our partners and they need to make.
Significant living as well because they need to show up with well maintained equipment, our commitment to safety and well trained crews and so we understand some of this inflation is an inevitable outcome of good partnerships and so of course, we're going to complain like crazy, but we're also going to be supportive of.
Vendors.
Fair enough.
And.
I guess, one other thing I wanted to check in on is you have stressed.
The many fronts on which the combined companies enjoyed tremendous flexibility, especially in this commodity price environment and as you look ahead and think about.
Product mix that you might pursue across the various basins.
Can you talk a little bit about how ESG or policy risk.
My way into your thoughts about.
Oil versus gas, including you know what's going to happen with.
Federal lease permits and so on.
Well, we certainly are wide widely aware of the challenges.
As such as federal and state its investor pressure. It's everywhere. We look we're committed to be a top tier operator in ESG as I said in my opening remarks that doesn't necessarily fall into a commodity preference. We think we can deliver the clintons barrel of oil and a clear SNCF of gas and we think the U S producer.
Is desperately needed to do both co chair will be at the front of the line on that.
I don't think it will have any kind of.
Some on the scale on.
Our capital allocation decisions, nor necessarily will commodity index. The beauty of co. Tara This capital is going to flow to its highest most productive return and that's what that's what we're going to do and we're going to be disciplined in doing that.
Great. Thanks, a lot.
This concludes our question and answer session.
I'd like to turn the conference back over to Tom Jorden, CEO and president for any closing remarks.
Well. Thank you for joining us on this first quarter conference call. We look forward to reporting results over many more quarters, delivering what we promise and reporting on our progress, but I want to thank you for a series of great questions.
We're going to get back at it so thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.