Q1 2022 Hess Corp Earnings Call
Good day, ladies and gentlemen, and welcome to the first quarter 2022, Hess Corporation Conference call.
My name is Liz and I will be your operator for today.
At this time, all participants are in listen only mode.
Later, we will conduct a question and answer session.
If at any time you require operator assistance. Please press star followed by zero and we'd be happy to assist you.
As a reminder, this conference is being recorded for replay purposes.
I would now like to turn the conference over to Jay Wilson, Vice President of Investor Relations. Please proceed.
Thank you Liz good morning, everyone and thank you for participating in our first quarter earnings Conference call. Our earnings release was issued this morning and appears on our website www Dot dot com.
Today's conference call contains projections and other forward looking statements within the meaning of the federal Securities laws. These statements are subject to known and unknown risks and uncertainties that may cause actual results to differ from those expressed or implied in such statements.
These risks include those set forth in the risk factor section of Hess is annual and quarterly reports filed with the SEC.
Also on today's conference call, we may discuss certain non-GAAP financial measures a reconciliation of the differences between these non-GAAP financial measures and the most directly comparable GAAP financial measures can be found in the supplemental information provided on our website.
On the line with me today are John Hess, Chief Executive Officer, Greg Hill, Chief Operating Officer, and John Reilly, Chief Financial Officer.
Case their audio issues, we will be posting transcripts of each speaker's prepared remarks on www Dot Hess dot com following the presentations.
I'll now turn the call over to John Hess.
Thank you Jay welcome everyone to our first quarter conference call today, I will review, our continuing progress to execute our strategy. Greg Hill will then discuss our operations and John Riley will cover our financial results.
With Russia's invasion of Ukraine. The spotlight has been put on energy security and the critical importance of oil and gas to the global economy.
Energy security is essential for an orderly energy transition oil markets were tight even both.
The Russia, Ukraine conflict.
We have now had seven consecutive quarters of global oil inventory draws and at the end of March global oil inventories were estimated to be more than 400 million barrels less than pre COVID-19 levels.
The world is facing a structural oil supply deficit and the only way to address it is through more industry investment and that will take time to have an impact.
According to the International Energy agency, a reasonable estimate for global oil and gas investment is at least $450 billion each year over the next 10 years to meet demand in 'twenty 'twenty that number was $300 billion and last year's investment was $340 billion.
So to ensure an affordable just and secure energy transition, we need to invest significantly more in oil and gas.
And we also must have government policies that encourage investment rather than discourage it.
In a world that will need reliable low cost oil and gas just now and for decades to come Hess is in a very strong position offering a differentiated value proposition.
Our strategy is to deliver a high return resource growth deliver a low cost to supply and deliver industry, leading cash flow growth.
While at the same time maintained our industry leadership in environmental social and governance performance and disclosure.
Our successful execution of this strategy has uniquely positioned our company to deliver long term value to our shareholders by both growing intrinsic value and growing cash returns.
In terms of resource growth, we have built a balanced portfolio focused on the Bakken deepwater Gulf of Mexico, South East Asia and Guyana.
With multiple phases of low cost oil developments coming online in Guyana, and a robust inventory of high return drilling locations in the Bakken, we can deliver highly profitable production growth of more than 10% annually over the next five years.
Our expanding high quality resource base positions us to steadily move down the cost curve.
Our four sanction to oil developments in Guyana have a breakeven Brent oil price of between $25 and $35 per barrel and by 2026, our company portfolio breakeven is forecast to decrease to a Brent oil price of approximately $45 per barrel.
In terms of cash flow growth, we have an industry leading rate of change and durability story.
Based upon a flat Brent oil price of $65 per barrel, our cash flow is forecast to increase by approximately 25% annually between 2020 , one and 2026.
More than twice as fast as our top line growth.
Our balance sheet will also continue to strengthen in the coming years with debt to EBITDAX expected to decline from less than two times in 2022 to under one time in 2024.
Our financial priorities are first to have a disciplined capital allocation process. So that we invest only in high return low cost opportunities second to maintain our investment grade credit rating and have a strong cash position and balance sheet to ensure that we can fund our world class investment.
Opportunities in Guyana.
And third to return up to 75% of our annual free cash flow to shareholders.
With the successful startup in February of the Liza Phase two oil development offshore, Guyana, which add capacity will add $1 billion of net operating cash flow annually at a $65 Brent oil price in late February we repaid the remaining $500 million of our billion dollar term.
Loan scheduled to mature in March 2023, and on March 1st we increased our regular quarterly dividend by 50%.
And April has received total net proceeds of $346 million from the secondary offering of Hess on class a shares of Hess midstream and the sale of Hess, one class B units to Hess midstream.
Most of these transactions has owns approximately 41% of Hess midstream.
To manage oil price volatility, we have hedged a 150000 barrels.
Per day of oil production for 2022 90.
90000 barrels of oil per day with $60 per barrel W. D. I put options and 60000 barrels of oil per day with $65 per barrel Brent put options.
Given the significant increase in volatility and liquidity risks in the oil markets. Following Russia's invasion of Ukraine in March we remove the 100 dollar W. G I and $105 Brent call options that we previously had in place.
Hess is now positioned to fully benefit on the upside while remaining protected on the downside.
As our portfolio becomes increasingly free cash flow positive in the coming years, we commit to return up to 75% of our annual free cash flow to shareholders with the remainder going to strengthen the balance sheet by increasing our cash position or further reducing our debt.
We plan to continue increasing our regular dividend to a level that is attractive to income oriented investors, but sustainable in a low oil price environment.
As our free cash flow generation steadily increases share repurchases will represent a growing proportion of our return of capital.
Key to our strategy as Guyana, the injuries <unk> largest oil province discovered in the last days.
According to a study by wood Mackenzie Guyana is one of the highest margin lowest carbon intensity oil developments globally.
As discussed earlier the world will need these low cost oil resources for decades to come to meet future energy demand.
On the Stabroek block in Guyana, where Hess has a 30% interest and Exxonmobil is the operator, a number of important milestones were recently achieved.
Current production at the Liza Phase one development is 130000 barrels of oil per day.
Ahead of its original gross nameplate capacity.
And following production optimization work on the Liza Destiny F. P. S. O is expected to increase to more than 140000 barrels of oil per day over the course of this quarter.
The Liza phase two development, which achieved first oil in February is ramping up ahead of schedule and.
And expected to reach its gross production capacity of approximately 220000 barrels of oil per day by the third quarter.
Our third development on the Stabroek block at the pie or a field with a gross capacity of approximately 220000 barrels of oil per day is also ahead of schedule and is now expected to start up in late 2023.
In early April we announced the sanction of the yellow tailed development after receiving government and regulatory approvals. The yellow tailed development has world class economics and will be the largest to date on the stabroek block. The project will develop an estimated resource base of approximately 925 million barrels of oil.
And have a gross production capacity of approximately 250000 barrels of oil per day with first oil expected in 2025.
Front end engineering and design work for our fifth development at War room, Mako is underway and we anticipate that exxonmobil will be in a position to submit a plan of development to the government by the year end.
We want to thank and congratulate exxonmobil for their outstanding work as operator, and delivering exceptional project management and execution.
According to wood Mackenzie study the production growth ramp for the Stabroek block is the best in the industry compared with other major deepwater developments, which will benefit the people of Guyana and our shareholders.
We continue to see the potential for at least six floating production storage and offloading vessels or F. P. S. OS on the block in 2027 with a production capacity of more than 1 million gross barrels of oil per day and up to 10 F. P. S owes to develop discovered resources on the block.
In terms of exploration and appraisal in Guyana, we continue to invest in an active exploration program with approximately 12 wells planned for the Stabroek block in 2022.
In January we announced two more significant discoveries on the block at the Fangtooth and Lala wells, which further underpin our Q a future low cost development opportunities.
Yesterday, we announced three additional discoveries at Barreleye, Luca Nani and patois, which further strengthens the development potential of the block.
With these discoveries the gross discovered recoverable resource estimate for the block has been increased to approximately 11 billion barrels of oil equivalent up from the previous estimate of more than 10 billion barrels of oil equivalent and we continue to see multibillion barrels of future exploration potential remaining.
Now turning to the Bakken, where we have an industry leading position with approximately 460000 net acres in the core of the play we are currently operating a three rig program.
Given the strength of the oil market and the world's need for more oil supply, we will give serious consideration to adding a fourth rig later this year, which would accelerate our production ramp up to approximately 200000 net barrels of oil equivalent per day, a level, which will maximize free cash flow generation lower.
Our unit cash cost and optimize our infrastructure.
As we continue to execute our strategy our commitment to sustainability will remain a top priority. We are honored to have been recognized as an industry leader in diversity equity and inclusion in January with a top score of 100% on the human rights campaign's corporate equality index for <unk>.
2022 as well as earning a place on the Bloomberg gender equality index for the third consecutive year.
In summary, our differentiated portfolio is uniquely positioned to deliver industry, leading cash flow growth and financial returns in the coming years as our portfolio becomes increasingly free cash flow positive we commit to prioritizing the return of capital to our shareholders through further dividend increases and share repurchases.
I will now turn the call over to Greg for an operational update.
Thanks, John let's begin with several positive developments on the Stabroek block that have created significant long term value for the people of Guyana in our shareholders.
Current production on the Liza Destiny <unk> peso is 130000 barrels of oil per day.
Head of its original base named quite nameplate capacity.
As expected to increase to more than 140000 gross barrels of oil per day over the course of this quarter.
Production on the Liza Unity <unk> P. S. O is ramping up ahead of schedule and is expected to reach its gross capacity of 220000 barrels of oil per day by the third quarter.
The pie. Our development is also ahead of schedule and is now forecast to start up in late 2023 versus 'twenty 'twenty four previously.
Pulling forward production startup reflects strong execution by the operator in significantly enhances the net present value of the project.
The prior development will utilize the prosperity F. P. S O with a gross capacity of 220000 barrels of oil per day.
In April we.
We sanctioned the yellow tailed development.
Project is designed to develop 925 million barrels of oil and will utilize the one Guyana F. P. S O with a gross capacity of 250000 barrels of oil per day and first oil is planned in 2025.
We have also made five additional discoveries this year.
Which have increased the estimate of gross discoverable, Rick discovered recoverable resources to approximately 11 billion barrels of oil equivalent.
We've also faced some challenges this year in the form of transitory weather issues in the Bakken and cost inflation across the across our portfolio.
In March we revised our Bakken and company wide first quarter and full year 'twenty two 2022 production guidance lower to reflect impacts from severe weather in north Dakota, as well as higher NGL prices in the first quarter, which enhanced profitability, but reduced production entitlements under.
Our percentage of proceeds contracts.
These weather conditions continued in April but are transitory and we expect to recover and resume normal operations over the balance of the second quarter.
Like our competitors. We are also seeing upward cost pressure across both our onshore and offshore businesses.
We are mitigating many it effects through lean manufacturing strategic partners partnerships with key service providers and technology driven cost efficiency gains.
Nevertheless, we now expect additional cost inflation.
Proximately, 3% to 4% on our 2022 capital program.
Including higher drilling and completion costs in the Bakken.
That we now expect to average approximately $6 2 million per well or 7% above last year.
Of course higher oil prices are also driving much higher earnings and cash flow.
Now, let's review, our operating results and forecast.
In the first quarter company wide net production averaged 276000 barrels of oil equivalent per day, excluding Libya.
Which was above the high end of our revised guidance range of 270000 to 275000 barrels of oil equivalent per day that we provided in March.
For the second quarter.
We forecast that company wide net production will average approximately 310000 barrels of oil equivalent per day, which is 12% above last quarter.
For the full year 2022 we now forecast our company wide net production to be at the low end of our three 325000 to 330000 barrels of oil equivalent per day guidance range due to the previously mentioned weather impacts in the Bakken in April .
In the Bakken net production in the first quarter averaged 152000 barrels of oil equivalent per day compared to our revised guidance of about 150000 barrels of oil equivalent per day.
In the first quarter, we drilled 19 wells and brought 13, new wells online in.
In the second quarter, we expect to drill approximately 22 wells and to bring approximately 80, new wells online and for the full year 2022 we.
We expect to drill approximately 90 gross operated wells and to bring approximately 85, new wells online.
For the second quarter, we forecast the Bakken net production will average between 140000 and 145000 barrels of oil equivalent per day and that our full year 2022, net Bakken production will be near the bottom of our previous guidance range of 160000 to 100.
65000 barrels of oil equivalent per day again, reflecting the severe weather impacts.
Net production in the Bakken. However, it is expected to build in the second half of the year, reaching 175000 to 180000 barrels of oil equivalent per day in the fourth quarter with more wells online and improving weather conditions, we plan to bring approximately 54, new wells online in the second half of this year.
Compared with 31 wells in the first half.
It's also important to note the well results have been strong with IP, one eighties and EUR is comparable to last year's results.
As John mentioned, we're giving strong consideration to adding a fourth operated drilling rig later this year.
Moving to the Gulf of Mexico first quarter net production averaged 30000 barrels of oil equivalent per day, which was within our guidance range of 30000 to 35000 barrels of oil equivalent per day.
In the second quarter, we expect to maintain net production of approximately 30000 barrels of oil equivalent per day and for the full year 2022, we forecast net production to average between 30030 5000 barrels of oil equivalent per day, reflecting the addition of the shell operated llanos.
<unk>, well in which Hess has a 50% working interest late third quarter.
The well will spud in may by shell and will be tied back to shell's auger platform with gross production from the well expected to build to a plateau rate between 10015 thousand barrels of oil equivalent per day by the end of the year.
The Gulf of Mexico is an important cash engine and a platform for growth for the company.
We have multiple options for tie backs to over two or three Gulf of Mexico hubs, including both infill and near field exploration prospects right.
Our recent acquisition and processing proprietary ocean bottom node three D seismic across all three areas has identified opportunities for drilling in 2023 and beyond.
In terms of for Mexico exploration.
We spud the Huron one well in February on Green Canyon Block 69, where we are targeting a hub class Miocene opportunity.
Results are expected during the second quarter Hess is the operator with a 40% working interest and shell and chevron each have a 30% interest.
Moving to southeast Asia.
First quarter net production was 64000 barrels of oil equivalent per day in line with guidance second.
Second quarter and full year 2022, net production are forecast to average approximately 65000 barrels of oil equivalent per day.
Now turning to Guyana.
Our discoveries and developments on the stay broke block, where Hess has a 30% interest and Exxonmobil is the operator are world class in every respect with some of the lowest project breakeven oil prices in the industry.
First quarter net production averaged 30000 barrels of oil oil per day, which was at the high end of our guidance range of 25000 to 30000 barrels of oil per day.
As a result of the Liza one phase one optimization work and the continued ramp up of Liza phase two we forecast second quarter net production from Guyana to average between 70070 5000 barrels of oil per day and to increase to 85.
<unk> to 90000 barrels of oil per day in the fourth quarter.
Our full year 2022, net production guidance for Guyana remains unchanged at between 65070 thousand barrels of oil per day.
Turning to exploration in January we announced significant discoveries on the Stabroek block it fangtooth and low.
Positive results at Fang tooth, our first Standalone deep exploration prospect.
Will help confirm the deeper potential of the block.
<unk> further underpins, our COO future low cost development opportunities in the southeastern portion of the Stabroek block.
Yesterday, we announced discoveries at barrel I look and I look at Ani and patois, all of which will require appraisal, but will further underpin future developments on the block.
Upcoming wells in the second quarter will include C. Bobb targeting campaigning reservoirs and located 10 miles south of yellow tail in Kiuru kiuru targeting campaigning in San Antonia and reservoirs and located three miles southeast of Qadbak, Hey, Fangtooth appraisal well is also <unk>.
<unk> for the fourth quarter of this year.
Moving to Suriname planning is underway on block 42 for drilling Ms. Zander I, one prospect around mid year.
The well will target both campaigning in San Antonia and aged reservoirs we.
We see the acreage as a potential play extension from the stay Brook block with similar play types and trap styles.
Yes, Chevron and shell the operator, each have a one third interest in the block.
In closing, while we are managing some short term issues with weather and cost inflation, our long term outlook has never been brighter.
Distinctive strategy and world class portfolio have positioned us to deliver differentiated value to our shareholders for many years to come.
I will now turn the call over to John Reilly.
Thanks, Greg in my remarks today, I will compare results from the first quarter of 2022 to the fourth quarter of 2021.
We had net income of $417 million in the first quarter of 2022, compared with $265 million in the fourth quarter of 2021.
On an adjusted basis first quarter net income was $404 million, which excludes items affecting comparability of earnings of $13 million included in corporate interest and other.
Turning to E&P.
E&P had net income of $460 million in the first quarter of 2022, compared with $309 million in the fourth quarter of 2021.
The changes in the after tax components of E&P earnings between the first quarter of 2022 and fourth quarter of 2021 whereas follows.
Higher realized selling prices increased earnings by $227 million lower sales volumes decreased earnings by $154 million lower DD&A expense increased earnings by $62 million all other items increased earnings by $16 million for an overall.
All increase in first quarter earnings of $151 million.
For the first quarter, our E&P sales volumes were under lifted compared with production by 945000 barrels which decreased our after tax income by approximately $40 million.
Turning to midstream.
The midstream segment had net income of $72 million in the first quarter of 2022, compared with $74 million in the fourth quarter of 2021.
Midstream EBITDA before non controlling interests amounted to $241 million in the first quarter of 2022.
Paired with $246 million in the previous quarter.
Turning to our financial position at quarter end, excluding midstream cash and cash equivalents were $1.37 billion and total liquidity was $4.94 billion, including available committed credit facilities.
Debt and finance lease obligations totaled $5.61 billion.
In April we received total net proceeds of $346 million from the public offering of approximately 5.1 million has shown class a shares of Hess midstream and the sale of approximately $6 8 million has shown class b units to Hess midstream.
Pro forma for these two transactions our cash balance at quarter end, excluding midstream was approximately $1.7 billion.
In the first quarter of 2022.
Provided by operating activities before changes in working capital was $952 million compared with $886 million in the fourth quarter of 2021.
Changes in operating assets and liabilities during the first quarter of 2022.
Decreased cash flow from operating activities by $1 $1 billion, reflecting payments made for previously accrued Libyan income tax and royalties of approximately $470 million for the period December 2020 through November 2021 .
Premiums paid of $325 million to remove the ceiling price on outstanding WT, I and Brent crude oil collars effective April one 2022.
And an increase in accounts receivable due to higher crude oil prices.
In the first quarter capital expenditures for E&P, and midstream totaled $580 million and in February we repaid the remaining $500 million outstanding of our $1 billion term loan.
With the pay off of the remaining balance on the term loan our leverage stands at 1.6 times E&P debt to EBITDAX. Our goal is to reduce our leverage to under one times E&P debt to EBITDAX based on our projected cash flow growth at $65. Brent we expect to achieve this target in 'twenty 'twenty four while continuing to.
Kris returns to shareholders through dividend increases and share repurchases.
Turning to 2022 in the first quarter, we sold 2.3 million barrels of oil from Guyana and expect to have seven 1 million barrel lifting in the second quarter and eight 1 million barrel lifting in both the third and fourth quarters. This ramp in listings from Guyana is expected to result in significant cash flow growth over the next.
Three quarters.
Now turning to guidance first for E&P.
Our E&P cash costs were $13 79 per barrel of oil equivalent, including Libya and $14.54 per barrel of oil equivalent excluding Libya in the first quarter of 2022.
We project E&P cash costs, excluding Libya to be in the range of 15 to $15 50 per barrel of oil equivalent for the second quarter, reflecting planned maintenance and workover spend in the Gulf of Mexico, and North Dakota, and higher price driven production taxes for.
For the full year cash costs, excluding Libya are expected to be in the range of $13 50 to $14 per barrel of oil equivalent compared with prior guidance of $12 50 to $13 per barrel of oil equivalent primarily due to the impact of price driven production taxes and the expectation.
<unk> production comes in at the low end of our full year production guidance.
DD&A expense was $10 96 per barrel of oil equivalent, including Libya and $11.54 per barrel of oil equivalent excluding Libya in the first quarter.
DD&A expense, excluding Libya is forecast to be in the range of $12 to $12 50 per barrel of oil equivalent for the second quarter and full year guidance of $11 50 to $12 50 per barrel of oil equivalent is unchanged.
This results in projected total E&P unit operating costs, excluding Libya to be in the range of 27 to $28 per barrel of oil equivalent for the second quarter and $25 to $26 50 per barrel of oil equivalent for the full year 2022.
Exploration expenses, excluding dry hole costs are expected to be in the range of $35 million to $40 million in the second quarter and full year guidance of $170 million to $180 million is unchanged.
The midstream tariff is projected to be in the range of $290 million to $300 million for the second quarter and full year guidance of $1.190 billion to $1 billion and $215 million is unchanged.
E&P income tax expense, excluding Libya is expected to be in the range of $135 million to $140 million for the second quarter and $460 million to $470 million for the full year, which is up from previous guidance of $300 million to $310 million due to higher commodity prices.
We expect non cash option premium amortization, which will be reflected in our realized selling prices will be approximately $165 million for the second quarter and approximately $550 million for the full year inclusive of the additional premiums paid to remove the previous ceiling price on <unk>.
Standing crude oil hedging contracts for the remainder of this year.
Our E&P capital and exploratory expenditures are expected to be approximately $750 million in the second quarter.
As Greg mentioned earlier, we are considering adding a fourth rig in the Bakken, which could add up to $100 million to our 22022 capital budget of $2.6 billion in the second half of the year and we also expect industry cost inflation to potentially add another $80 million to $100 million for this year.
We will provide an update on our capital spend during our second quarter conference call.
Turning to midstream.
We anticipate net income attributable to Hess from the midstream segment to be in the range of $60 million to $65 million for the second quarter and the full year is expected to be in the range of $265 million to $275 million, which is down from previous guidance of $275 million to $285 million, reflecting the impact of.
The midstream capital transactions completed in April .
Turning to corporate.
Corporate expenses are estimated to be approximately $30 million for the second quarter and full year guidance of $120 million to $130 million remains unchanged.
Interest expense is estimated to be in the range of $85 million to $90 million for the second quarter and $345 million to $355 million for the full year, which is down from previous guidance of $350 million to $360 million due to the repayment of the remaining $500 million outstanding on our $1 billion.
Term loan.
This concludes my remarks, we'll be happy to answer any questions I will now turn the call over to the operator.
Ladies and gentlemen, if you have a question. Please press star followed by one on your phone.
If your question has been answered or you would like to withdraw your question press pound questions will be taken in the order received please press star one to begin.
Your first question comes from the line of Doug Leggate with Bank of America.
Thank you good morning, excuse me good morning, good morning.
Good morning, Joe.
Good morning, John and team I guess I've got two questions if I may so.
I mean, Guyana continues to get better and better obviously with the seller.
Salaries, the timing on <unk>, perhaps but my question is really about the line of sight you guys have through 2027 at least you still talk about six <unk> six development phases, but your production guidance or outlook is still a little bit different from what the operator Exxonmobil is saying so I'm curious if you can just help us close the gap.
<unk> is at plateau rates is it is it more conservative assumptions, what's the difference because clearly it seems to us that your guidance is more realistic than what the operators are seeing at this point.
Yeah a.
Great question.
I you know I I think exxonmobil will be addressing that on their call I understand but we're sticking to the guidance that we gave which by 2026 will be 27 will be over a million barrels a day capacity and I'd say, that's a conservative number.
I would concur completely thanks, John for the clarification my follow up is related to the hedging buyout and this is kind of a <unk> question I guess.
The fact that you no longer have the upside comp on the hedges on the forward curve for both oil and gas is inflected in a way that is that a is.
What does that do to the timing of your inflection to paying cash taxes in the U S has it changed any.
I know Doug it really has not changed.
Our 10-K, so we do have.
Our U S net operating loss in excess of $16 billion here for the U S. So from a cash tax payment to horizon really hasnt changed so we do not anticipate paying cash taxes in the next five years or.
Or more.
I was going to say, if I said 10, but I've been wrong.
I don't want to go out that far Doug.
Yes, nothing in the near term.
Alright, thanks, very much indeed.
Thank you.
Your next question comes from Paul Cheng with Scotiabank.
Yeah.
Hey, guys. Good morning, good morning.
Morning.
Couple questions.
Okay.
Sure.
I think.
With the power.
The schedule is being pushed forward John .
John you talk about the potential inflation.
For 2022 as.
Wireless.
The fourth with that you may have about the forward, they're probably never did.
The good thing is that you are salaried development.
How about in terms of the impact.
So Paul as you know.
Contracts or EPC contracts right. So a lot of those costs are locked in there has been inflationary pressures on the tubular.
And the drilling side, but again I want to compliment exxonmobil, they're doing a fantastic job of driving efficiencies too.
To offset.
A large part of those cost gains so we should be in good shape.
Yeah, and just to add to that Paul we don't have anything really right now from an add to our 2022 capital budget related to pie are the Guyana developments are actually it. This is really just great execution by Exxon and N. S. P. M. So theres been no add to our budget for this acceleration of the of the pie or a startup.
Yeah, John I think.
Obviously that is already talking about 2023.
Capex and activity level, but.
But can you give us maybe some guidance in terms of direction and give and take out that.
Capex I've actually no data and how that is going to move.
Yes, sure so again.
This year right, let's just do a reasonable approximation is as Greg mentioned, the 3% to 4% inflation. So that's $80 million to $100 million on on this year, plus if adding a fourth rig which were given serious consideration to up to 100 million. So let's let's talk this year with an approximation around 2.8.
And then I just have to remind everybody going back like to the Guyana list with two lifts in the first quarter seven in the second eight in both the third and fourth that we're even with any increase in our capital budget, we're going to have significant cash flow growth and significant free cash flow growth throughout this year.
Talking about next year now with pirate coming forward. It obviously accelerates our cash flow growth from our previous profile. So again. This durability story on our cash flow growth really can goes out as John was mentioning earlier to 2027. So when you look at the capital increase for next year. So what that really means if we accelerate.
This fourth rig in and if I can just round it to $100 million typically adding a rig is 200 million rule of thumb. So for a full year, you're going to add another hundred than two four.
Bakken standpoint.
Then guy.
<unk> to your point I just wanted to say you you did say it's early so this is early but you know clearly there will be some increase in Guyana capital nowhere near matching this increase in cash flow growth that will be happening because at that point now youre going to have a.
Finishing up work on phase two but then you're going to have pay are in full swing you got yellow tail, and then really that fifth F. P. S. O that we talked about so we're going to have those three F. B cells in capital. So there will be an increase can I say several hundred million dollars in that capital in Guyana as you move into next year should.
Be some offsets than southeast Asia down a little bit from this year, but that's kind of a rule of thumb I would say Paul but the biggest thing for US is we've got this just increase and cash flow starting really next quarter with Guyana and now with Pi Ara coming next year first we have phase II and phase one operating at full capacity.
And then <unk> coming in and so significant cash flow growth tied into some additional capital.
John should we assume mix yet the inflation at.
Maybe I'm not the cause of the 10% to the call. So if this year is to me should we assume that you can face I'm glad that you said about the 200 million.
So the way I would look at it is we picked up this inflation for the second half of the year. It's really that's what's happening a lot of it we did have some tubular steel kind of locked up in the first half and we're seeing some increases now going into the second half of the year. So we're picking it up for for half the year I don't necessarily.
Thank you you know you then need to double this is as you move forward.
We'll see what happens with with oil prices and basically industry investment two for next year. So.
At this point.
I wouldn't want to guide to that kind of level, Paul and again, we do everything we can with.
Leanne and with different technology as well as again a lot of these contracts for Guyana as Greg mentioned, we've kind of fix these prices that we have so far so at this point I think it's early for us to talk about what the inflation will be next year.
Can I just sneak in a real strong accounting question.
Sure.
Win that you guys are going to start booking a income tax in your U S operation.
Given the substantially higher commodity prices.
Let's see.
Okay. So as mentioned previously from a cash tax standpoint, we will not be incurring cash taxes, let me just say for five years or anything in the near term.
To your point, what happens now with higher prices and more income here in the U S. We have a full what we call sorry, just gonna be accounting technical valuation allowance against that net operating loss. So there will come a point in time, where we will release that valuation allowance effectively book.
Big gain increase equity and then what would happen is as you use the NOL, we would be recording deferred tax expense. The exact timing of that Paul I don't know at this point, but again it would all be noncash.
From that standpoint, alright.
Alright, thank you.
Yeah.
Your next question comes from Arun Jairam with J P. Morgan.
Yes. My first question goes back to the yellow tail F I D.
Greg.
F I did that with Exxon at a gross cost of $10 billion.
Which is call it $1 billion more than IRI yet.
Youre doing a lot more wells 51 versus <unk> 41, a lot more resource.
And we are in a more inflationary environment. So I was wondering if you could kind of walk through.
The cost numbers that youll until which you know it was a little bit lower than we were thinking just given some of the inflationary pressures.
Yes.
So again as as when we announced yellowtail remember, it's got a $29 breakeven. So this project is.
Arun It is it's exactly what you said costs are a little higher because of course, it's a bigger ship.
Got 30000 more capacity on the oil side.
And also on the injection.
A water side, so it's a much bigger it's a much bigger boat.
Start with as you mentioned Theres more wells there's more.
Subsea manifolds associated with those wells. So it's really all just that extra kit that has been the primary driver wasn't a whole lot of inflation that we saw come.
Coming through the yellow tail line.
It's more just scope.
And scale.
Exciting it's on track for 2025 startup the Hull is actually done it sitting in Indonesian waters waiting to come into Singapore as soon as Pi R is complete and it floats away.
But again.
World Class project $29.
Barrel breakeven and of course remember, it's developing 925 million barrels of reserves versus Pi or that was 600 right. So for all those reasons little bit higher cost, but extraordinary world class economics.
Great and just my follow up Greg I was wondering if you could just maybe give us a little bit more detail.
Some of the transitory weather issues in the Bakken, we're seeing call. It gas flows are running call. It 400 million a day and the basin versus.
Two one Bcf a day or so which is more typical so can you give us more details on the weather events and how this is impacting you and the rest of the industry.
And in April and May be any implications for the rest of the year.
Well of course, that's why we lowered our guidance.
For the second quarter and also.
Lowered our year end to be more at the bottom end of our guidance of $1 60 to $1 65.
In the Bakken Hey, it's been it's been a tough winter with rare.
A record storms in March and April and of course that has impacted our production but.
No Irina it's not her first whether rodeo in the Bakken.
You know its transit it's transitory I'm more fully recover over the course of the quarter and then really be back on track to deliver our Q4 production and in the range of $1 75 to $1 80.
And that's a you know a 15% increase from Q1. So again, it's transitory we've been through this before just take a little time, but we're on our way back.
Alright, great. Thanks, a lot Greg.
Your next question comes from Jeanine Wai with Barclays.
Hi, Good morning, everyone. Thanks for taking my question good.
Good morning, good morning.
King.
Question is on cash returns in a second.
Diana.
On the cash that you've committed to returning up to 75% free cash flow.
Dividends and buybacks, you're already above the $1 billion reserve cash level.
Can you talk about how you see the allocation between dividend increases.
What are you really the gating factors for starting that.
And I guess, maybe on that like how do you avoid the common investor concern that buybacks are cyclical.
We've been hearing a lot more of that pushback recently.
Sure no.
Great question, Janine I think a couple of perspectives on this obviously, we have a unique value proposition that we offer which is industry, leading cash flow growth of compounding, 25% a year each year.
<unk> out for the next five years based upon $65 Brent So we certainly are.
I can see the visibility of our cash flow growth compounding in our free cash flow along with it.
In terms of the timing of the share repurchases and commencing that look based upon market conditions and our significant cash flow growth that John Reilly was discussing earlier you know we will give serious consideration to commencing our share repurchases this year and as we look forward.
We plan to continue increasing our regular dividend to a level that is attractive to income oriented investors as we said, but also sustainable in a low price environment and as our free cash flow generation are steadily increases share repurchases will represent a growing proportion of our return of capital we.
We will try as best we can to be opportunistic.
In buying our stock buying more on dips, but at the same time, we do have a commitment to on an annual basis to return 75% of our free cash flow annually, but as you look forward, we'll continue to grow our dividend and then the greater proportion of our return of capital will be share repurchases and based upon.
The market and cash flow growth for this year.
Will give serious consideration to moving forward with our share repurchases this year.
Thank you for all that color.
And then maybe going back to Guyana on the discoveries that you announced last night can you just maybe discuss how the results compare to your expectations, especially.
They were pretty meaningful step out then.
I'm very interested in your commentary.
High quality.
Versus just the hydro.
Alright. Thank.
Thank you.
Oh you know thank you for the question, we're very pleased with the results.
You mentioned Barreleye 230 feet of hydrocarbon bearing reservoir in 52 feet of that was high quality oil bearing.
Luke and Ini 115 feet of sandstone 76 of which was high quality oil bearing so very very pleased and as you mentioned. It does you know these are further step outs and I think what it does show is just how massive this accumulation is down in Guyana and it just keeps getting bigger.
And better.
As we continue to as we continue to grow.
And then we talked about patois, you know 108 feet.
[noise] of hydrocarbon bearing sandstone reservoirs now what do all three of these mean well you know they basically have allowed us to increase the expected gross recoverable hydrocarbons to approximately 11 billion barrels, including fan Fangtooth and loud al that we announced earlier in the year, how and when you know these resources.
Get developed will be a function of appraisal drilling results and development studies, but we are very pleased with the results of all of the wells that we've seen this year met or.
Ceded all of our expectations.
Great. Thank you very much.
Thank you.
Your next question comes from Neil Mehta with Goldman Sachs.
Thanks team a lot a lot of the questions have been asked already.
Two quick ones here. The first is as you think about taking up that fourth rig in the Bakken any gating factors in terms of executing it certainly the commodity price environment would suggest it could make sense, but just any questions around that.
Our comments around that and the second is John any perspective on.
The relationship you have from a regulatory and a physical perspective in Guyana. It seems like that has been stable, but given it represents a disproportionate amount.
The asset value, we always want to stay on top of any inflections that might be happening there. Thank you.
Yes. Thanks for the question Neil about the fourth rig so we don't anticipate any any bottlenecks or issues in getting that rig going we're in active discussions with <unk>.
Contractors and suppliers up there. So we're in we're in really good shape.
So why would we why would we want to add that fourth rig well given the high prices in world demand for oil the world needs the oil.
Pluses as you and I have talked before.
You know it that fourth rig would allow us to optimize our in basin infrastructure increased production to about 200000 barrels a day and as you recall with our extensive inventory of high return wells, we could hold that plateau for almost a decade and generate significant free cash flow from the Bakken.
As a result, so that's the logic for the fourth rig we do not see any any issues getting that fourth rig started up with cruise or availability of equipment or anything so we're in good shape.
And Neil in terms of the Guyana government, our company and our joint extra have an excellent working relationship very constructive one with the government a testament is the.
Early April approval of yellow tail.
The governments have been very clear with us that they would like us as a joint venture to accelerate the development of their oil resources.
To basically improve the prosperity and I have shared prosperity for all guy and he citizens. So it's a very constructive working relationship. It continues we also want to help the government and social responsibility as well.
Trying to make a better future for all Guyanese. So it's an excellent relationship and we continue to work with them and as I said before.
Exxonmobil has done an outstanding job on project management and execution, bringing a lot of value forward for our joint venture for the people of Guyana and for our shareholders and the excellent.
Achievements they've had in terms of being really ahead of schedule on now on Liza Phase. One ahead of schedule on Liza Phase. Two are ahead of schedule on <unk> and that track record is to the benefit of the Guyanese people as well as our shareholders.
Thanks, Steve.
Yeah.
Your next question comes from Roger read with Wells Fargo.
Yeah. Thanks, good morning.
It seems like the Bakken fourth rig thing has been hit quite a bit but I do have just one question on that.
What.
What at this point would be the reason for not pulling the trigger on that at some point this year.
Meaning would it be hard to get a rig in the Bakken with crew and all the other associated items you need or is it just an internal decision on your part.
No really the that it's it's related to operations because really the best time to build locations is after the after the ice outs over so we'll go in and build those locations get some new pads ready for that for that rig to operate on.
So we don't sit around with idle idle pads laying around we like to do it just in time. So we will we will build those pads in and get go into drilling as soon as we can.
Okay. Thanks, and then the comments earlier about inflation at the Capex side, which all makes sense I was just curious and not trying to go.
So against the guidance on the low side, but what should we think about in terms of inflationary pressures if any at the cash opex level.
Roger It was baked in there we're not seen as much there on the on the cash cost cash operating cost and the capital. There is no question. There is some it was in the number but the biggest driver on that increase in the cash cost per Boe is the.
Production taxes, which is driven by higher prices. So again that that helps our margins that way so that when youre seeing that real increase there, it's really that increase in production taxes, that's driving that higher cash cost.
Great. Thank you.
Your next question comes from Bob Brackett with Bernstein.
Good morning, I had a question on that cash costs will follow up with the long term guide was marching down towards the nine box.
Cash calls.
Much of that is mix shift.
Got it grows is there any part of that also assuming deflation or operational improvements.
No not really Bob now look we did set that out in a $65 world. That's for sure that was that was how we set that up all our forecasts going out is in a in a $65 world. So obviously there can be impact again like I, just mentioned with with production taxes being higher from that standpoint, but you are.
Correct is that really what drives that down is Guyana and in fact, if you look just at our numbers and the guide I gave and you just did the math on the second half of the year second half of the year has to average about $12.60 on that cash cost to get to those numbers basically in the mid point and whats.
Gonna happen as third quarter will be a little bit higher than in the fourth quarter, it's going to be lower than that $12 60, why again, because Guyana continue continues to build up its auction. So the more and more you know now that <unk> is moving up early and.
Now that it's to your point, it's that mix and and have in Guyana, just drive down our cash cost as well as Greg mentioned getting that fourth rig on we'll optimize our infrastructure and lower our unit costs in the Bakken as well.
Okay.
And then the second question on the yellow tail draining 925 million barrels is that just from the yellow tail field or some of those nearby.
Into that.
No Theres also a red tail discovery, that's being tied into that as well.
Got you.
And then Bob but I think also as we've mentioned before.
The plateau on all of these vessels really they're all going to be you know they'll all be bespoke, but I think you could assume extended plateaus on all the vessels as we go out in time, just because of resource density.
In and around these hubs, so there'll be longer than what a typical deepwater development would be but again they'll all be different so.
Thanks Scott.
Alright.
<unk>.
Thank you very much. This concludes today's conference call. Thank you for your participation you may now disconnect have a great day.
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Yes.
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