Q4 2021 Callon Petroleum Co Earnings Call
The new settings, both of which are located within the investors section of our website at www dot gallon dot com.
Before we begin I would like to remind everyone to review our cautionary statements disclaimers and important disclosures included on slide two of the presentation. We will make some forward looking statements during today's call that refer to estimates and plans actual results could differ materially due to the factors noted on these slides and in our periodic SEC filings.
We will also refer to some non-GAAP financial measures today, which we believe help to facilitate comparisons across periods and with our peers for any non-GAAP measures. We reference we provide a reconciliation to the nearest corresponding GAAP measure you may find these reconciliations in the appendix to the earnings presentation slides and in our earnings press release both.
Which are available on our website.
Following our prepared remarks, we will open up the call for Q&A and with that I'd like to turn the call over to Joe Gatto Joe. Thanks.
Thank you, Kevin and good morning to everyone joining us for the call, especially on a day with concerning developments in other parts of the world.
As we run through our introductory comments I encourage everyone to take a look at the earnings presentation on our website for additional background on our commentary.
But before we get started I'd like to formally introduce Kevin Smith, our new director of Investor Relations. Kevin has over 15 years of industry experience in the energy sector working most recently in Investor Relations and previously as a research analyst covering the E&P industry.
We are excited to have him here with us and I'm sure you will all enjoy working with him.
I'd like to start by discussing the fourth quarter during which we once again achieved stellar results and beat expectations for the quarter total production came in at over 112000.
Barrels of oil equivalent per day.
This was at the high end of guidance driven by strong well results from the Permian basin and efficient integration of the Delaware South acquisition.
Additionally, operating cost categories came in at either at the midpoint or below guidance as our strong cost controls were effective in mitigating inflationary pressures.
Overall talents outreach performance combined with our disciplined capital spending program that was below budget for the year drove free cash flow generation to a new record of approximately $125 million for the quarter.
As I look back at 2021, we began the year with ambitious goals for leverage improvement, while maintaining a disciplined reinvestment model and advancing our sustainability initiatives.
I am very pleased to say that we delivered across the board on those commitments.
Early in 2021.
Outlined our capital allocation framework reinvestment rates of 65% to 75% of our operating cash flow planning prices.
In 2021 accounts actual capex ultimately represented less than 60% of our operating cash flow as commodity prices through to be higher than our planning prices, while our capital plan remains unchanged setting the stage for excess free cash flow to flow directly to debt reduction.
This cash flow profile was a clear products, our operating profit margin grew by roughly 141% year over year.
It remains top tier in the industry.
As I mentioned earlier aggressive debt reduction on both an absolute and leveraged metric basis was a key focus for the team in 2021.
Our free cash flow generation.
Combined with our asset monetization and liability management initiatives contributed to $760 million of absolute debt reduction and resulted in a net debt to adjusted EBITDA ratio of two times on a fourth quarter annualized basis.
These are impressive achievements that have put us in an advantaged position for further balance sheet improvement and disciplined reinvestment in our robust portfolio of drilling locations.
Alongside our operational financial performance, we are all proud of the work the collective organization has done to reduce greenhouse gas emissions and improved calendar overall carbon footprint.
As you May recall last spring, we announced meaningful goals to reduce flaring and ghd emissions by 2025.
Given our progress in reducing flaring in 2021 paired with increased methane emissions initiatives that are in process.
<unk> accelerated our goal timeline by one year to 2024 and increased our ghd reduction target to at least 50%.
As part of raising that bar relative to our original GHT goals. We also expect to reduce our methane intensity to less than 2% by 2024.
Total flaring to below 1% by 2024.
Emanate all routine flaring this year.
In our presentation materials, we've outlined an inventory that represents 15 years of locations that are economic at $50 per barrel and below based on third party estimates, but I also want to highlight our substantial proved reserve base 485 million barrels of oil equivalent at year end comprised of 60% oil and 85% Permian volumes.
Importantly, we increased PDP volumes by almost 30% in 2021 and PDP now represents 57% total proved reserves and.
In addition to adding group volumes and attractive valuation through acquisition.
Place over 100% for 2021 production through the drill bit at a PDP F&D cost of approximately $8 per Boe.
In total our SEC PV 10 valuation increased by nearly $5 billion.
As we exited the year with an SEC PV 10 value of $7 1 billion.
For 2022, we have set a capital budget of $725 million.
This represents an operating cash flow reinvestment rate approximately 60%.
$75 per barrel WTS. It is expected to generate free cash flow of well over $500 million using that oil price assumption.
At recent strip pricing levels implied reinvestment rate with declines of approximately 52% and.
Free cash flow, an increase of nearly $700 million.
Our capital allocation to the Permian will increase to 85% this year as we advance our scaled development model across our recently expanded opportunity set of over 135000 net acres in the basin.
Importantly, <unk>.
Talent steady development program and proactive contracting strategy for key services, which we began last year will help mitigate inflationary pressures being seen in the spot markets as.
As a result, we are forecasting cost inflation for our drilling completion and equipment costs in the range of 10% driven primarily by labor steel and fuel costs.
We are also budgeting approximately $20 million for environmental projects and initiatives, which are being accelerated this year to achieve the new goals emissions that I discussed earlier.
Looking at our 2022 production profile.
We expect to production reset in the first quarter of 2022 as our production levels are impacted by fourth quarter divestitures of approximately 3000 Boe per day, and a shift to a larger scale development model on the newly acquired properties, which will impact the timing of wells placed on production.
More specifically the number of wells placed online in the fourth quarter of 2021, and the first quarter of 2022 combined will be similar to the number in the third quarter of 2000 22021 alone.
Our <unk> will rebound over 30 net wells in the second quarter of this year in conjunction with an expansion in our DUC inventory to over 45 wells in the first half.
This increased inventory will accommodate larger project sizes in the Permian and create operational flexibility for future quarters.
This shift in production timing will not compromise the sustained level strong free cash flow generation for the forecast of over $125 million in the first quarter.
With its positioning for more efficient scaled development across a larger portion of our asset base, we expect to deliver 10% growth in our oil volumes. During the course of the year and an average annual total production rate for the year in line with 2021 came in at approximately 105000 Boe per day after adjusting for acquisition and divestiture activity.
During the year.
Based on the forward curve, we also forecast sequential increases in operating cash flow through 2022, despite market aggregation.
To sum up our outlook for the upcoming year.
I will leave you with a few key points.
Talents extraordinary pace of deleveraging in 2021 will continue into 2022 on the strength of bleeding cash margins and a maintenance capital program that is benefited by a scale development model.
With free cash flow potential in excess of 10% of enterprise value at recent strip pricing, we see a clear path to adding shareholder value as enterprise values transferred from that balances the equity value.
Sounds value proposition has a strong foundation and the inventory of 15 years at locations at $50 per barrel of UTI.
And below with additional upside ongoing delineation from a multi zone resource base.
In other words this is.
A sustainable business model, a story of near term liquidation high graded inventory.
I will now turn it over to Jeff to discuss operations.
Thank you and good morning, everyone.
As Joe pointed out the operating environment over the last 12 months have presented many challenges and I'm proud to say that our team was up for them.
Thanks to our focus on execution and cost control, we had an outstanding year.
Our production results came in at the high end of guidance as well performance trended above expectations.
Additionally, we exhibited exceptional cost control as we came in at or below the midpoint of capital costs and lifting cost guidance. Even in this inflationary environment now dig into the cost environment and what we're doing to offset inflation later in my prepared remarks.
Now I'd like to discuss some of the operational highlights we had during the year.
Starting with the Eagle Ford.
Well, we did not have any completion activity in the Eagle Ford during the fourth quarter I cannot overstate how important the 'twenty nine well urban West project that came online during the second quarter displayed in our production.
Actual results for the year.
The urban West project was the largest horizontal well development in the company's history, and so tremendous planning and coordination across essentially every part of talent and it's been a terrific success.
Another highlight from the Eagle Ford.
The efforts to vastly reduced emissions by having our fields on the electric grid.
During the year, we connected 500 full field to the power grid and this allowed us to take 43 generators from service, which not only reduces our carbon footprint, but also results in over $2 million of annual savings.
This year our plan is to continue expanding the field of electrification across the Eagle Ford assets.
To release, an additional 30 more diesel generators.
Also we'll be replacing over 60% of the nomadic devices with instrument air to help us move closer to our overall methane reduction targets.
So shifting to the Midland Basin.
We continue to have success with multi bench targeting in our life of field development philosophy.
During the fourth quarter, we completed an eight well three zone development in the Wolfcamp, a wolfcamp b and lower sprayberry formations.
Bringing on two of those wells at the end of 'twenty, one and the other six in early January .
Results to date for that project are excellent with all wells meeting or exceeding our expectations.
The drilling days for the eight wells, which had an average lateral length of roughly 11000 feet averaged.
Averaged about 10 days from spud to rig release, which represents a reduction of 10% versus our average drilling time.
Continued efficiency.
Moving to the Delaware, we were very active during the fourth quarter, bringing online 16 wells.
Three of the wells, which I'll discuss later, we're from our newly acquired Delaware South properties. So prime mix has become Delaware sale too.
To Ward County Wells that we brought online that I would like to highlight are the cohort wells that we completed in the third bone Springs formation, so modestly nontraditional formation.
These 5000 foot lateral wells had an average 30 day IP rate of.
Over 845 Boe per day of which 85% was oil so again short 5000 foot laterals.
A significant amount of production.
And the remaining wells in that development Wolfcamp completions, all of which were performing in line with our expectations.
Throughout the year, we've been very active in the Delaware Basin.
Hurting old gas lift systems to <unk> or electric submersible pumps.
And this decision has significantly helped improve well performance and reduce upfront costs of artificial lift systems are.
Our ESP management program is top tier and has resulted in an 80% improvement in run time since 2008.
Last year, we secured additional secondary gas gathering options for the Permian regions to help reduce our total gas flared.
We also tested a dual fuel and electric Frac fleet in the Permian region.
The success of these two projects led us to sign full year contracts for 2022 for both an electric Frac fleet as well as the high substitution rate dual fuel fleet.
This year, we plan to upgrade natural gas treatment facilities, and we will be replacing a majority of our natural gas operated pneumatics with <unk> devices are instrument air to support our methane emission reduction initiatives.
So next I'd like to provide you with an update on the recently acquired Delaware South assets and it really this has been as close to a seamless transition from an operation standpoint as possible.
We completed the acquisition in October on the first and within hours of closing we had a crew onsite drilling out frac plugs and the three wells that were drilled and completed by prime mix.
Our team successfully brought three wells online within seven days of closing these wells have been producing for roughly 90 days plus.
Oil cuts similar to our Delaware assets and are performing in line with expectations.
Currently we're operating two rigs in our Delaware South assets.
We recently brought online six additional wells and plan to place another five wells on during the remainder portion of the first quarter.
We're very excited about implementing our drilling and completion methods on this acreage.
The size and stable nature of our overall development plan allows us to lock in supply and service contracts at more favorable pricing than operators that are having to deal with a tight spot market.
As Joe mentioned, our capital budget is going to be primarily focused on the Permian basin as we increase our attention to our Delaware assets.
We plan on continuing to prioritize multi bench development opportunities as we've really shifted away from the one and two well pads.
The focus at a larger scale.
Over half of our 2022, Delaware program will target, our new Delaware South assets.
And then in the Midland Basin, our focus will be on multi zone infill development, primarily focused on the Midland lower sprayberry and of course, the Wolfcamp, a and b zones.
In total we've allocated approximately 85% of our D&C budget to target the Permian.
In the Eagle Ford will continue to drill infill wells under core acreage and remain focused upon optimizing completion methods and costs.
So lastly, I'd like to discuss the steps, we're taking to offset inflation.
Just like our peers, we are experiencing cost inflation with average well costs of between eight and maybe 12%.
Primarily experiencing inflation items like raw materials and fuel and then of course, we're also seeing our service providers pushing for price increases to reflect the tight labor market.
To offset this we have locked in long term service contracts and rigs and Frac crews.
Our size and scale allow us to use accurate vendor management.
And really partnerships and provides the opportunity also to buy in bulk pushing efficiencies that.
That is primarily due to a very stable well outline development program.
And then specifically one area that we think we can bring down our lifting cost than the Delaware South assets.
We'll use our in house expertise in chemicals management to source more effective and cheaper chemicals and.
And we've made significant progress in reducing our natural gas treatment costs.
Additionally, again in the Delaware, South we've already seen our proficiency in ESP run time increase the overall run time for the field and the overall productivity of the.
New Delaware Basin assets.
So to wrap up we exceeded expectations across the board in 2021, we've got the right plan the.
The right assets and the write operations team in place to once again deliver in 2022.
And with that I'll turn it over to Kevin to handle the financing.
Thanks, Jeff during the fourth quarter and full year 2021, we delivered on our promises set new records and achieve key financial goals like our deleveraging target.
Quickly look at some of these highlights.
We set a new record for EBITDA.
Approximately $1 billion in adjusted EBITDA for the year, we delivered on our divestiture targets and realized $210 million or adjustments, perhaps most importantly, we reduced our leverage ratio by over two turns during the year remarkable achievement ended the year with a pro forma leverage ratio of two three times.
With regard to this two three times. This is a pro forma calculation on leverage which following the closing of the <unk> acquisition on October one this pro forma metric is based on the same calculation, we use with our lending banks and bonds.
During the fourth quarter, we once again were able to expand our peer leading cash margins. Despite the higher lifting costs associated with our new Delaware South properties are targeted for significant reductions in 2022 as Jeff mentioned, we realized an increase in operating margins as the high oil weighting of our asset base plus lower gathering.
<unk> and processing on a per unit of production basis led to an 8% sequential increase in our quarterly operating margin to approximately $49 per Boe.
This top tier margin helped us realize adjusted EBITDA of $339 million in the fourth quarter, 16% increase over our third quarter results.
The new company record level of adjusted EBITDA and reduced interest burden combined with our disciplined capital spending has led to record levels of free cash flow during the fourth quarter, calling generated adjusted free cash flow of approximately $124 million for the full year, we generated roughly $274 million.
Free cash flow.
Our capital discipline has provided the opportunity to reduce debt levels and strengthened the balance sheet. During 2021, we reduced our debt balance by $290 million and lowered our RBS borrowing level to below 50%.
You consider the $470 million in cash we borrowed for the <unk> acquisition is really $760 million of pro forma debt reduction over the course of the year.
This also has positive implications for our equity value talent has now reduced debt levels for two consecutive years since year end 2019, we have paid down roughly $500 million of debt. We view this as a form of returning minus shareholders as it just moved value from debt to equity.
We're not done here either.
Just on our initial 2022 guidance and consensus estimates, we expect to generate approximately $500 million of free cash flow in 2022 at a flat $75 oil price just quantum of cash flow.
To achieve absolute devil debt levels approaching $2 billion and a leverage ratio of around one five times by year end.
Continued achievement of our stated financial goals should also allow us to remove the second lien notes from our capital structure and reduce our overall cost of debt. So our financial metrics more closely mirror those of a double b credit rating.
Turning to hedging our hedge program for 2022 is fairly complete minimizing the downside risk, while still leaving upside potential as we look to 2023, we remain proactive in adding additional hedges you can see from the latest slides we've begun to add 2023 oil hedges that protect the floor of $70 market.
Helpful. In this regard with both the oil and natural gas curve strengthening recently in the out years.
The strides we have made in deleveraging over the past two years plus the positive outlook for cash flow puts us in a good position to start having meaningful discussions about returning money to shareholders.
While we are increasing equity value through debt reduction we are rapidly approaching the point, where many of our debt reduction and leverage goals will be achieved.
We need to discuss other ways to increase shareholder value in the near term we can do this organically.
So we're continuing to invest in our business and creating value organically in the future you can look to return capital shareholders through means like dividends and share buybacks. This is something we will be evaluating throughout the year as we investigate the best options to generate value for our shareholders, while protecting the balance sheet and affording us corporate flexibility.
And with that I'm going to turn things back over to Joe before we move to Q&A.
Thanks, Kevin I think it's.
Clearly appropriate to finish up here by thanking our employees for their tireless efforts and dedication.
Which drove an exceptional year for Cowen and it certainly sets us up for great things to come.
So with that I'm going to turn it back to operator to open up for Q&A.
At this time I would like to remind everyone in order to ask a question Crestar one to allow time for everyone to ask a question. Please limit yourself to one question and one follow up.
So just a moment to compile the Q&A roster.
Our first question comes from Derrick Whitfield with Stifel. Your line is open.
Thanks, Good morning, all and congrats on your portfolio and deleveraging progress.
Thank you.
Perhaps for <unk>.
Jill or Kevin kind of ending with where you guys have it in your prepared comments you're leveraged stats.
Dramatically improved to date as a result of your actions since 2020.
And the improving commodity price backdrop.
With the potential to achieve sub one five times net debt to EBITDA leverage in 2022.
Should we think about your longer term preference for capital allocation for free cash flow.
Once you achieve that metric.
Yes Derrick.
Ill start out there and see if Kevin wants to jump in but clearly we're on a great path here and we got to follow through but things look good.
Dramatic reduction on the power of our cash margins here.
Think deleveraging will continue to be.
At the top of the list, even if we get to one five target, we're still going to look to bring.
Bring that down as you might seen in materials of sort of a medium term goal is to bring that closer to two one times, but alongside that.
Kevin mentioned, there's clearly options continue to invest in it and a very strong inventory and as we get to our leverage metrics.
And look out on a longer term planning horizon.
Returning to capital and SaaS that we've started assessing that just to get ahead of it.
We think later this year, we'll be in a position to make some more tangible decisions around it but right now it's certainly around keeping options open.
Ryan on our commitments out there and also taking feedback from investors. There is certainly a lot of return on capital models being deployed right now and to talk to our investors and understand and where their priorities are as wells as a piece of that.
Yeah.
Great.
My follow up referencing slide 12 could.
Could you elaborate on the importance of delineation objectives for 2022.
More specifically are you seeing these opportunities as it means to high grade development activity or is this simply an evaluation to add inventory depth.
No.
We have some some compelling opportunities here these are.
Not in our core locations are always delineating I think Derek as youre dealing with especially in the Delaware around a multi zone resource base when you're there developing some of the core zone as we like to take the opportunity to.
Target.
Noncore zones to see.
One is they're going to compete for capital we've seen results in these zones and other spots. Some are very good and compelling it could compete for capital.
But as you know in places like the Delaware Basin Co development is certainly important potentially when youre developing zones. So if this is going to be an economic zone.
Over time, probably you want to know that sooner than later so it makes sense to develop now with the other zones you might put that into the plan.
On a per capita we're happy to continue to put money into that effort.
Very helpful. Great update guys and thanks for your time.
Thanks, Eric.
Our next question comes from Neil <unk> with.
Your line is open.
Good morning, all maybe.
Maybe a little on that same line just wondering.
We would love to hear from you or Jeff just on the larger scale development I've always said.
Others were out there I guess, just maybe one or two zones you guys now that you've been doing it a larger development that you've had great success. So I'm just wondering.
Maybe talk a bit about.
What are you just kind of mentioned a little bit I'm, just wondering how much of the plan how much more efficiencies or are you seeing with that maybe just Jeff if you could maybe share a little bit more on the upside you're seeing from those larger scale development.
Yes, absolutely that.
Cowen has remained committed to that and I'm very proud of that back even to 2019, 2020 one.
The development philosophy really remain the same from a very robust top to bottom analysis and implementation of the program and Youll see that very well represented here in 2022 also.
The nice part about the integration of these several companies over the last couple of years with with.
With the <unk> and now the Prime mix is yes, you have three independent datasets that are all now <unk> with each other specializing in slightly different areas.
And the ability of the group.
To analyze all of those different independent datasets and put those two together in a development program allows the optimization of each particular pad and development system using larger more regional aspects of it so youll see.
Even in some of the mature assets like the Midland Basin, we put in an eight well pad that was at one side bounded on an infill basis and reasonably tight spacing not tight tight but certainly.
<unk> hundred 60 ish and we.
Fantastic results with several of the Wolfcamp B wells, averaging over 1000 barrels of oil a day.
So youll see that continue to be reflected in the overall 2022 program.
Delaware Basin, South assets newer assets, we're starting with a little bit broader spacing just to get an idea of.
Overall productivity and depletion aspects. So we'll do some additional.
Subsurface logging and take some different analysis to see how the fracture systems and influence items, how the wells interact with each other both vertically and laterally, but the overall top to bottom left to right development program is very healthy within this company.
Great detail, Jeff and then maybe just Joe.
Can you just Kevin just to follow up on.
And jumped besides about this morning presented president on what was going on with oil prices and then you mentioned a little bit taken advantage of the.
Sort of baseline or a floor.
One is from either a Joe maybe a question for you is maybe optimal operational.
Hedging perspective are there things that you would think about doing in the near term incremental things to do in the near term or is this.
Is it sort of business as usual I guess.
First our operational and capital deployment standpoint, I think it's certainly business as usual as we talked about we have.
A steady plan as well outline that we're executing well on obviously.
Yeah.
Maybe others are thinking about dialing up activity, maybe more private companies are very small portion of public companies.
Yes.
We're not going to be doing that obviously as we've talked about we're focused on taking that excess free cash flow above our planning prices been put into that for the foreseeable future. I think you also have to take into account some of the spot market pricing out there. If you wanted to make that decision.
As a very different price point, it's sort of a step change from certainly from where we are so maintaining that rate cost structure, maintaining steady development, maintaining a clear focus on debt reduction as where we are and with better prices will take that extra cash flow.
Benefit from that the pricing that we have.
Sort of locked in here.
And take the benefit there, but on the hedging side why don't I turn it back to Kevin maybe you can talk a little bit about how we've approached the market over the last few weeks and how we look at it going forward.
I think over the past couple of weeks, we've taken advantage to low layer on probably a base layer hedges as insurance kind of protecting that $70 floor.
2023, and really that was or light ads and that's kind of an early look certainly the movement in the price curve today.
Had.
Had discussions around the floors here early on and seeing if there is a chance to take advantage of some movements in the price there as well.
I would remind you that as the financial position and balance sheet continue to improve youll, probably see overall, a lesser percentage of production hedged as our balance sheet is able to carry through some of these cycles.
<unk>.
Great details. Thank you all.
Thanks Neil.
Again, if you would like to ask a question press star one on your telephone keypad. Our next question comes from Bill.
Johnston with capital one your line is open.
Hey, guys. Thanks.
Question for Kevin on cash taxes.
Obviously, you guys aren't expecting to be a cash taxpayer this year, but if prices remained strong when do you think you might be call it cash tax there.
Yes, I think thats.
It's a good question I think it even price levels like this it's still out below.
It's still out beyond our medium term forecast.
Okay sounds good and then.
I appreciate all the details on our year end reserves I'm wondering what kind of next 12 months PDP decline rate for both oil and gas is embedded in the numbers.
And maybe how those decline rates of change kind of versus what was assumed in your year end 'twenty Reserve report.
Yes.
Yes.
Yes, Jeff do you want to yes.
Yes, absolutely.
We're kind of in the mid thirties relative to the PDP decline rate and it stayed relatively flat.
Which is.
Little hook and correct because when we brought in some additional assets such as the Eagle Ford, which which tends to have a little bit of a mature more mature profile.
Versus say some of the higher initial decline rates from some of the Delaware Basin, New wells and those kinds of things it's modestly coincidentally date in the same arena.
So from a PDP basis, we see <unk>.
Relatively consistent overall decline rates.
2021 through 2022 and of course there'll be some fluctuations with that.
But the reserve picture remains extremely robust and when you glue.
Glue that next door to the overall inventories at Cowen has it's an outstanding value proposition.
Okay great. Thank.
Thank you.
Thank you Michelle.
There are no further questions at this time I'll turn the call back over to Joe <unk> for closing remarks.
Thanks again, everyone for joining the call and your continued interest in Cowen and everything that we've done this year and certainly what we expect to do going forward.
Look forward to speaking with you again next quarter. Thank.
Thank you.
This concludes today's conference call you may now disconnect.
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