Q3 2021 Centennial Resource Development Inc Earnings Call
Good morning, and welcome to him.
[noise] development conference call to discuss its third quarter 2021 or anything.
<unk> call is being recorded a replay of the call will be accessible until November 11th 2021, My DIONE 8558592056, and entering the conference I D number 6880769 or by visiting Centennial's website at W.
W. W. Dot C D E V I N C dot com.
This time I will turn the call over to <unk> Centennial Senior director of Investor Relations for some opening remarks. Please go ahead.
Thanks rent.
And thank you all for joining us on the company's third quarter earnings call.
Presenting on the call today are shorn Smith, or Chief Executive Officer, George Calippus, Our Chief Financial Officer.
And Matt garrison, our Chief operating officer.
Yesterday November 3rd we call it a form 8-K.
With an earnings released reporting third quarter earnings results as well as operational results for the company.
We also posted in earnings presentation to our website that we all reference during today's call.
You can find the presentation on our website homepage or under presentations at Www Dot <unk>, Inc. Dot com.
I would like to note that many of the comments. During this earnings call are forward looking statements that involve risks and uncertainties that could affect our actual results and plans.
Many of these risk are beyond our control.
And are discussed in more detail and the risk factors in the forward looking statements sections of our filings with the SEC.
Including our quarterly report on Form 10-Q for the quarter ended September 30th 2021.
Which will be filed with the SEC later this afternoon.
Although we believe the expectations expressed are based on reasonable assumptions. They are not guarantees of future performance and actual results.
Or developments may differ materially.
We may also refer to non-GAAP financial measures that help facilitate comparisons across periods and with our peers.
For any non-GAAP measure we use a reconciliation to the nearest corresponding gap measure can be found in our earnings release or presentation, which are both available on our web site and with that I'll turn the call over to Shawn Smith R. C E O.
Thank you Hayes.
Good morning, and welcome to Centennial's third quarter earnings call.
Following my introduction George will discuss our quarterly financial results and that will then provide an operational update including recent efficiency improvements and well results and then I'll follow with our updated financial targets and provide a high level outlet for the remainder of 2021.
Overall, I am very pleased with our Q T results as I believe they demonstrate our continued execution of our key 2021 objectives.
During the course of the third quarter, we once again generated record free cash flow, which helped drive significant deleveraging an absolute debt reduction.
We also continued to successfully prosecute our development plant in Texas, and new Mexico, delivering strong well results with competitive costs, while improving drilling and completion efficiencies.
Additionally, we recently signed an agreement to monetize a non core asset in southern <unk> County that upon closing will allow us to further accelerate our debt reduction efforts improve our overall leverage position and optimize our future development with that said I'll turn it over to George to review our.
Financial results.
Thank you, Sean we delivered another solid quarter with significantly higher free cash flow substantial debt repayment and as mentioned the announced sale of a non core acreage position bigger.
Beginning with the acreage sale, which is detailed on slide six of the earnings presentation.
We recently signed a purchase and sale agreement for the divestiture of approximately 6200, net leasehold acres and related assets for $101 million in cash.
The assets are located in an area of southern <unk> County that we did not intend to develop in the near term and is non-core relative to the company's overall acreage production and cash flow profile.
Third quarter production associated with the assets was approximately 1600 Boe per day, which represents less than 3% of our total production the.
The transaction is expected to close in early December and net proceeds will be used to repay borrowings under a revolving credit facility.
Assuming a successful closing and continued debt repayment from projected free cash flow generation, we expect to end the first quarter of 2022 with a completely undrawn revolving credit facility.
Overall, we're very pleased with the outcome of this divestiture as we were able to bring value forward from longer dated inventory and accelerate our debt reduction and deleveraging initiatives.
Turning to our financials, which can be referenced on slides five and 16 of the earnings presentation net.
Net oil production for the third quarter increased 5% for Q2 to approximately 33500 barrels per day <unk>.
<unk> net equivalent production increased 6% and totaled approximately 65100 barrels per day.
Total revenues increased by 24% quarter over quarter to $288.5 million as.
As a result of higher production levels as well as significantly higher commodity prices.
Realized oil prices of approximately $65 per barrel drove a 14% increase in oil revenues.
Notably higher natural gas and NGL prices made a significant impact with combined gas and NGL revenue up 57% over the prior quarter.
Natural gas realisations of approximately $4 per Mcf were up 56% compared to Q2 and realized NGL prices were up nearly $10 to $40 per barrel.
Turning to costs most unit cost metrics were in line with our expectations.
Both <unk> and cash G&A per BOE increased off a very low Q2 metrics, but we're very much in line with the midpoint of guidance with.
With <unk> of 479, and cash G&A of $2.08 per barrel.
Total G&A increased primarily as a result of stock based compensation expense that is tied to certain stock grants that are that have been impacted by the significant increase in our share price over the past 18 months.
As you will note from our implied queue for guidance, we expect stock based compensation expense to drop significantly in Q4 and going forward.
<unk> was $4.03 per barrel, which was up 16% from the prior quarter, mainly because of higher natural gas and NGL prices prices, which increase the expense associated with our percent of proceed contracts.
Importantly, this increase in <unk> expense was more than offset by the material increase in gas and NGL revenue, which.
Which was a net benefit to our EBITDAX and free cash flow for the quarter.
DD&A declined to $12.69 per barrel from $13.09 in queue to.
Due to upward PDP revisions and lower F&D costs, a reflection of the significant strides we have made an overall capital efficiency over the course of 2021.
Due to a quarter of solid production growth continued cost control and strong commodity price realizations adjusted EBITDAX totaled approximately $171 million up 35% from Q2 and free cash flow more than doubled to $77 million compared to approximately $34 million in the prior quarter.
Additionally, re recorded GAAP net income of approximately $37 million.
Turning to Capex centennial incurred approximately $79 million a total capital expenditures during the third quarter.
Which was a 5% decline relative to Q too.
We continued to run two rigs and one completion crew, which spud 13 wells and completed 10 during the quarter.
Finally of the 70 $79 million in total Capex infrastructure and land capital represented $4 million for the quarter.
On slides nine and 10, we summarize our capital structure leverage and liquidity, which showed market improvements quarter over quarter.
During Q3, we utilise free cash flow to repay 50 million of borrowings on the revolving credit facility net.
Net debt to LTM EBITDAX declined by nearly a full term moving from three times at June 30th to 2.1 times, It's September 30th the.
The pace of our deleveraging has continued to exceed our initial expectations and as a result, we've revised our leverage target for year end 2021 down to 1.5 times from our prior target of less than two times.
Notably net debt to last quarter annualized R. L. QA EBITDAX has already declined to one five times at September 30th.
Additionally, while we haven't yet provided of 2022 leverage target. We believe based on strip pricing, we will be below one times leverage by year end 2022.
At September 30th total liquidity was nearly $500 million based upon $205 million, a credit facility borrowings $5 million of cash and six $5 million outstanding letters of credit.
The $700 million borrowing base was reaffirmed in the fall, but I will note that asset loan value is significantly higher than the borrowing base amount given.
Given our strong liquidity position, we haven't had a need to push the borrowing base higher even though our fundamental asset quality and value would support doing so.
Turning to hedging or hedge position as illustrated on slide 11 of the presentation.
Our hedging strategy is designed to protect cash flow and the balance sheet against unexpected declines in oil prices, while also minimizing disruptive disruptions to operational activity.
This is particularly important as we delever the balance sheet.
We also tried to balance the downside protection that hedges provide with upside exposure to commodity prices for calendar year 2022, we have hedged approximately 11000 barrels per day on average using mostly fixed price swaps at around 60 to $4 50 to $65 per barrel.
This compares to approximately 17000 barrels per day hedged on average for calendar year 2021.
Given our deleveraging profile or 2022 hedges are more heavily weighted towards the first and second quarters, where we have approximately 14500 barrels per day hedged in the second half of the year. We have an average of approximately 7500 barrels per day hedged providing incremental exposure to commodity prices.
Lastly, based on year to date performance. We are also refining our annual guidance, which includes the anticipated impact of our recently announced divestiture assuming an estimated December 1st closing date.
Annual oil production guidance as being increased by 2% at the mid point to roughly 31800, B O per day, and total equivalent production guidance as being increased by 3% at the midpoint to approximately 61200 Boe per day.
As highlighted over the past several quarters. Our operations team has continued to drive efficiencies in the field. Therefore, we are increasing the midpoint of our spud guidance by five wells to 48 gross operated spuds as.
As a result of the incremental activity in addition to higher than expected working interest in wells completed during the year, we've adjusted our full year capital expenditure guidance to essentially the high end of our previous range. We've also updated our estimates for completions and unit cost metrics, where it which are all outlined on page 12 of the earnings presentation.
And with that I'll turn the call over to map to review operations.
Thank you George Q.
Q3 was another solid quarter for the operations group.
We continue to realize the significant improvements in cycle times that we highlighted in last quarter's earnings update.
Year to date cost per foot remain near the midpoint of 2021 guidance at around $800 per lateral foot.
Which includes facilities and flowback as we believe that is the proper way to think about D&C capex.
In Q3, all of our competed wells consisted of two section laterals.
And we continued to see the utilization of larger pad and facilities as key drivers of capital efficiency.
As we continue to look for ways to improve our capital efficiency, both longer laterals and larger pad developments will be two main areas that we will focus on.
Additionally, our operations team has been working on Wellbore design modifications in both the drilling and completions departments.
Some of these tests in Q3 resulted in very positive outcomes that we intend to build upon in 2022.
Notably, we trialled two different completion designs that yielded a roughly 30% improvement in stages per day.
On the drilling front, we have continued to see the benefits of the significant improvements in drill times realized over the course of 2021 and anticipate trailing a new motor and bit design that we've been working on in the back half of this year.
We believe this new design has the potential to further reduce our drilling cycle times by an incremental 10%.
As you can see our operations department is constantly pushing the envelope on the technology.
To drive further.
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The teams continued focus on innovation and efficiency will be particularly critical as we look to help offset some of the inflationary pressures we anticipate in 2022.
Now turning to recent wells on slide eight in new Mexico.
Lots of Ella and Goethe wells were drilled as a four well development targeting the third bone spring sand. These.
These approximately 10000 foot laterals delivered an average IP 30 of over 2100 Boe per day or approximately 1600 barrels per day blue.
Further east in the central portion of our Lee County position, the Crunch Berry wells were drilled into three well development targeting the third bone Springs, Anne with an average of 9500 foot laterals like.
Like the mozzarella and Goethe package production numbers were robust posting of IP 30 numbers of approximately 2000 Boe per day or 1600 barrels a day of oil.
Year to date or development packages in new Mexico have all met or exceeded our internal expectations and we will continue to serve.
As a growth engine for centennial into 22.
Turning to Texas, the Highlander West Deep C. O nine age is another example of a strong lower Wolfcamp result.
Drilled as a single well to finish out the drilling unit, the well result exceeded internal expectations.
Drill to a lateral length.
Doximity 8100 feet.
This well produced an IP 30 of approximately 1800 Boe per day or 1400 barrels of oil per day.
The Highlander well represents our eighth Wolfcamp see results in Reeves County this year.
We've been pleased with the results of that program that had been yielded thus far and expect this target to continue to play a role in our development program in 2022.
Overall, our team did a tremendous job during the third quarter and brought online some terrific wells.
Underpinned by our structural cost reductions coupled with higher commodity prices, we estimate that all of our wells brought online during the quarter will achieve payout in under 12 months, assuming current strip pricing and further highlighting the quality of our asset base.
To wrap up in Q3, we continued to build upon the momentum we have witnessed in the first half of the year we.
We have been very proud of our ability to largely offset year to date inflationary pressures with improved drilling efficiencies.
We do anticipate inflationary cost pressure in 2022 and that is why we will continue to pursue new technologies.
And larger scale development to capture additional cost improvements.
As we put the final touches on the 2022 drilling schedule in the next month and a half. It is important to note that we anticipate a similar development mix between our two assets as what we saw in 2021 with the vast majority of the development in 2022 being focused up north and the new Mexico asset.
The bottom line is that I believe our team is up for the challenge.
Our operations an asset development teams have provided a solid foundation for centennial's, well costs and unit metrics.
We are all incredibly proud of the work that has been done and I look forward to updating you on our progress early next year and with that I'll turn it over to Sean for closing remarks.
Thanks, Matt.
As evidenced by today's remarks Centennial had an outstanding third quarter and I'm pleased to have increased our free cash flow and reduced our year end leverage targets for the second consecutive quarter. In addition to increasing full year production guidance.
Focusing on slide 13, we've transitioned to generating sustainable free cash flow and expect to generate over $200 million in free cash flow this year.
Additionally, we've increased our liquidity by nearly 50% during the first three quarters of the year.
While higher commodity prices have certainly helped accelerate our free cash flow and leverage targets. This would not be possible without are materially lower cost structure.
In the field our operations team continues to do an outstanding job driving efficiencies and reducing cycle times, which have materially lowered our go forward well costs compared to just a couple of years ago.
Before I touch on high level strategy, Let me first comment on our recent non-core acreage sale as George mentioned yesterday, we announced the divestiture and the southernmost portion of our Reeves county position for $101 million.
This was a legacy position with quality rock, but given our current portfolio within both new Mexico, and Texas, We did not expect to develop disposition in the near term. Thus we view this transaction as prudent portfolio management, considering that our near term capital will be focused on other areas of our portfolio.
So.
Importantly, these sale proceeds will be utilized to repay borrowings under a revolver as.
As a result of that pending debt repayment as well as further anticipated repayments funded by future free cash flow, we expect that our queue that during Q1 of 2022, we will have repaid a revolving credit facility in full.
With line of sight on an unutilized revolving credit facility and continued balance sheet deleveraging, we expect to have significant flexibility with respect to how we deploy our anticipated future cash flow during the course of 2022 and beyond.
Between now and our February earnings call. When we will release or 2022 guidance, we will be evaluating the best use of excess free cash flow, including various shareholder return options.
While we are not in a position to provide further details on these topics today, we have already begun in depth discussions with our board to develop those future plans.
Overall, I am very excited to see and recognize how our team has performed this year.
Our execution in 2021 sets us up nicely as we head into next year.
Furthermore, are increasing free cash flow profile, and our continued deleveraging provide us with significant financial and operational flexibility to drive value for the company and our stakeholders. Thanks for listening and now I will turn it over to Q&A.
Thank you the question and answer session will be conducted electronically. If you would like to ask a question. Please do tell me pressing by then the number one on your telephone keypad, if you would.
Nice to meet you a question about.
Once again, that's five and the number one on your telephone keypad.
Okay. First question comes from the lineup Neil Demon I'm curious to Kennedy.
Then.
Good morning, Sean.
Going forward suddenly going to have more financial options operational options, given a leverages club that you've talked about that at risk.
Like you don't have the full details yet I'm sure, we'll return, but but I guess my question still alone shoulder attorneys a bit more general and that's more around some of your peers have gone to an suggested more of the basic maybe a no grilled plan is best while others still think especially your side.
Still best too.
To continue to scale up a little bit.
On a go forward and so again I'm not certainly asking specifics on how you would pay out give free cash flow. So I'm just wondering if he would.
Sort of lean to one one of those to the.
No growth or the scale of direction.
Sure Good morning nail thanks for the question.
Certainly, we're not giving out of 2022 guidance that being said I think we're being very transparent with the amount of free cash flow that we're going to generate this year and if you just look forward on a strip basis.
That number is going to increase next year, so feel very good about our financial flexibility as you mentioned and we described in our prepared remarks and that we have begun some material of shareholder return discussions at both the senior management and the board level I mentioned in previous calls and comfort.
Is that as we approach one five times that the EBITDA that.
That we would start to have those discussions that has happened as we plan to end the year at one five times and then have line of sight on being less than one times levered by year end 2022. So you kind of take all that into consideration and we've got a lot of options both from the balance sheet perspective, as well as from a free cash flow perspective, So I do.
Think that we will continue to have serious shareholder return discussions.
The internally and at the board level in regards to growth.
As we think about that into next year. We are currently running two rigs we have been running two rigs all year. This year, we plan to start next year with two rigs.
And if we were to keep a to rig program flat for next year.
Because of the operational efficiencies that are that are team, Matt and his team have.
Have.
And carried over the year and expect to incur next year, we think that does provide some growth and so while it's a maintenance program from a rig perspective, we do think that there is some production growth that goes with that to.
To the tune of low double digit growth on a year over year basis. So it's a bit of a combination of all the above if you O'neill. We think we're going to have substantial free cash flow in a two week program, we're going to look at a shareholder return program and all of that is coincident with the.
Low double digit growth if we were to have a two week program next year.
No I would love the Optionality and then just to follow up.
MAA out there, we've we've seen larger deals and I'm just wondering how often are you guys.
Either seen somebody knock on your door.
Showing you some things that they have or I'm. Just wanted to you know get on Wall Street here, we don't we don't see it too too much under the Hood I am just wanted to have things increased as they normally do towards the end of the year so on or just.
I'm not asking what you're gonna do but just more how at the market is out there may be versus.
Earlier this year.
I think it ebbs and flows as all markets do I think they have been deals that have come across that had been public and.
You know.
It's hard for me to gauge that but anytime there's an opportunity in the Delaware Basin I assure you that our team considers it.
But what we're not going to do and I've said this in the past is stretch I think you've seen the numbers. They are they're very good as a standalone business with.
We've got quality longterm inventory, we've got financial flexibility and material free cash flow and a balance sheet that is just an outstanding shape. So we're great as a standalone company.
Said in the past Ah continue to say it if there's an opportunity out there that is that adds accretive value to our business, particularly on a cash flow basis and can compete for that <unk>.
Capital versus our current inventory will absolutely take a look and the prices appropriate that will move forward, but we're going to be very careful and selective about that because we've got such a.
Positive.
The momentum as to driving value for our stakeholders as is.
No love the openness I think investors do stop showing that thanks guys. Thanks.
Makes me I appreciate it.
Your next question comes from the line that's great. Thank you emails from RBC capital market Youre lettuce.
Hey, guys I appreciate it just kind of following up on your on your prior comment that it sounded like you said you're going to start the year next year at two rigs. So I guess that to me and kind of implies that you might be internally considering third rig.
So I guess just kind of honing in on that a little bit what factors are you all kind of considering and weighing in in that discussion and kind of what would tip the scales, one way or the other.
In terms of activity acceleration I guess.
Sure. Good morning, Chris I appreciate the question I'm, certainly not implying that there is a third rig.
<unk> My point was that we have two rigs now without providing 2022 guidance, which will come out in late February we plan to start the year with with two rigs and then we will look at our capital needs and we will have discussions with the board on what the appropriate level of capital Ie.
Rig cadence will be for 2022, I think that.
A safe way to think about is it even in a model where we have two rigs running throughout the year. It provides growth along with free cash flow and.
Is to continue to deliver the company so.
I'll leave it at that and I certainly wasn't implying that we are near term considering a third rig as I've said in the past the world right now with OPEC plus still holding barrel is off the market with with Covid still out there.
Impairing the demand side of the equation, we want to be very careful and I think the industry should be very careful before it starts talking about material growth and we are certainly in that same camp.
Okay understood I guess is my follow up you mentioned you guys are are still on track to hit your well cost targets for the year and you highlighted a number of initiatives that could bias well costs lower in the future I guess can you talk about current pad development size and lateral.
Langston then.
Obviously you haven't.
Provided any any guidance on 2022, yet but.
<unk>, maybe just thinking about the opportunity to to increase pad sizes, what does that kind of look like and what options are available to all maybe next year and going forward.
Sure.
Chris This is Matt I'll go ahead and take that question there with regard to current pad sizes and lateral length. So I think we've been very pleased year over year. If you kind of look at historically back where where.
2019, 2020 kind of timeframe we were typically.
Like a one to two well.
Per pad kind of company.
Especially predating 2019, and our lateral lengths in general where we're at around 7000 feet or less in prior years.
What I've been very proud of our land team an asset team for doing is taking a lot of opportunities in 2020, and this year and 21 to block up through trades and swaps.
To get these longer laterals I think at the beginning of the year, we guided that on average lateral length. This year would be kind of in the 8700 feet.
Range in terms of an overall average for the program.
And we've been very happy with the last couple of quarters.
That both Q2 and Q3 have been in excess of 9400 feet on average so we've been able to block up and get those lateral length of the pad size is also.
As part of I think some of the things we highlighted in the second quarter, we've gone to more of a modular facility that allows us to bolt on and continue to build.
Units through a common facility and and what that is really allowed us to do is push those average pad sizes up from ones and two well pads to more like threes and fours on average for for kind of where we're at this year and that's certainly what we hope to kind of be at.
In 2022 is more of a more of a three well to four well kind of average for the year.
Beyond that I think given where we're at with our activity levels and things.
We're going to be a little bit more.
Measuring with our approach to going much more beyond four well kind of grouping at one time and that's just a function of assessing the current market conditions and where we're at with regard to our activity level. At this point. So I think what you should see probably for us as a continued emphasis on these long laterals.
In excess of 85 to 8700 feet on average for a program wherever we can we were going to be pushing these laterals to.
Around two miles and then you should expect us to place a high degree of emphasis on pads in excess of three wells per pad and I think that's kind of our internal goals.
Got it and I appreciate it thanks guys.
Thanks, Chris.
And there are no further questions at this time I would now like to turn the conference back to I P. M. Shawn Smith.
Great. Thank you ma'am.
While obviously hopefully what everybody saw from the presentation and from the remarks that the third quarter was a very positive outcome first centennial highlighted by as we mentioned in the call record free cash flow continued deleveraging of the business non-core asset divestiture, which again went right to the will go right to the revolver.
As I mentioned, we plan to have our our BL fully repaid in the first quarter, which is just an outstanding outcome and that's really driven by lowering of our of our cost as well as generating free cash flow and of course higher commodity prices are helpful as well.
Updating our guidance pretty much across the board is another positive aspect of how we are running the business and continue to focus on our costs, but all of those things set us up very well for 2022 and beyond honestly to allow us to continue to drive value for our stakeholders. So I appreciate everybody's time and attention and.
And for their interest in Centennial. Thank you very much.
Ladies and gentlemen, Nathan today's conference. Thank you for your participation and have a wonderful thing you may ask.
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