Q1 2022 Coterra Energy Inc Earnings Call
Okay.
Thank you for standing by my name is Cheryl and I will be your conference operator today.
Time, I would like to welcome everyone to the Kuchera energy first quarter 2022 conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time said Please press star followed by the number one on your tell.
The phone keypad, if you would like to withdraw your question again press Star one. Thank you Catarina Papa daily troubled Investor Relations you May begin your conference.
Thank you Cheryl good morning, everyone and thank you for joining Portera Energy's first quarter 2022 earnings conference call. During today's call. We may reference that investor presentation, which can be found on the company's website. Today prepared remarks look real quick business overview from Tom Jorden, CEO , and President and Scott Schroeder Executive Vice President and CFO .
Also in the room, we have Steve when demanded Blake's Ergo primer and Daniel Guffey, either reminder, on today's call. We will make forward looking statements based on our current expectations. Additionally, some of our comments will reference non-GAAP financial measures forward looking statements and other disclaimers as well as working for the most directly comparable.
Financial measures were provided in yesterday afternoon's earnings release, which can be found on our website at all in your prepared remarks, we'll take your questions. Please limit yourself to one question and one follow up with that I'll turn the call over to Tom.
Thank you Kat Arena and thank you to all for joining us this morning.
By all measures co chair had an outstanding quarter first quarter results were driven by a nice production beat and strong commodity prices, our assets performed well as evidenced by our production coming in at the high end of our guidance, we generated $961 million of free cash flow during the quarter and process.
Our capital program with less than 30% of our cash flow from operations.
For the full year 2022, we currently project discretionary cash flow of $5.9 billion with our total 22020 excuse me totaled 2022 capital program coming in at less than 30% of cash flow, leaving almost $4 5 billion and free.
Cash flow.
We were pleased to declare an ordinary dividend of 15 cents per share in the variable dividend of 45 per share for a total cash dividend of <unk> 60 per share.
Furthermore, we launched our share buyback program in the first quarter buying and seven 6 million shares totaling $184 million.
Together. This resulted in a return of 16, 9% of our free cash flow to our shareholders.
My remarks will cover a few high level areas of interest the outlook for inflation the outlook for commodity prices and the role of the E&P sector and responding to the growing demand for oil and natural gas.
First a few thoughts on inflation.
As with all of our peers, we are seeing significant inflation in the oilfield pricing for drilling rigs completion crews fuel sand labor oilfield services in trucking are all moving upward.
Lead times for ordering tubular compressors, electrical equipment production equipment and line pipe or in many instances.
<unk> to 14 months from order to delivery pre.
Premier drilling rigs and Premier completion crews are in short supply.
Overall, we are seeing inflation moving towards 15% to 20% when comparing fiscal year 2022 through 2020 one.
Although we are pushing back with operational efficiencies inflation is putting pressure on our capital guidance range for now we're holding our capital guidance at the previously announced $1 4 billion to $1 5 billion range for the full year.
There are however, some bright lights wherever we can we're powering our Permian drilling rigs with grid electrical power all six of our Permian rigs are capable of running from grid power, 75% of our 2022 Permian drilling locations will be powered off the grid, which saves an estimated 50.
<unk> thousand dollars per well or $4.3 million grows we will also see significant savings from our first grid powered Frac crew, which arrives late Q2.
Now a few words on commodity prices.
For the first time in a decade, we're seeing support for oil and natural gas prices that is driven by long term fundamental supply and demand outlooks for many years any conversations on global oil supply ultimately pivoted to a conversation of what OPEC plus would do.
Suddenly the conversation is about the consequences of long term, underinvestment and replacing oil reserves and production.
This has led to a constructive thinking on long term oil pricing by thoughtful informed analysts and investors.
Natural gas and its vital role in World Power generation has returned as a welcomed hot topic. The world is ill prepared to meet ambitious climate goals and natural gas is a necessary part of the solution.
That coupled with affordability and accessibility make natural gas in U S. LNG exports, a vital component to world energy supply.
Energy Security has reserved returned as a top concern and use natural gas as a leading role to play in global energy security and U S. Geopolitical influence we've seen solid support in natural gas prices natural gas optimism and a serious discussion on the.
A long term role of U S natural gas in the World Arena co.
Coach Tara is well positioned to contribute to this critical need for U S natural gas in U S LNG exports.
Finally, a few words on the E&P sector's ability and willingness to respond to increasing demand.
The U S. E&P, operator has proven to be remarkably resilient through times of crisis.
It is through times of plenty that we have stumbled through lack of discipline in over investment.
As a consequence, our sector has created an environment of boom and bust cycles, each peak and trough setting the stage for the next cyclic response.
<unk> three point O and the investor sentiment around it has been a sea change in our business. Our investors have been clear they want us to be disciplined in both high and low commodity price environments and be proactive in returning cash to our shareholders.
And they're clear and then equivocal way our shareholders have telegraphed that they wanted to change behavior out of US we have listened and have responded with conviction around the revised approach to disciplined investing.
Now we find ourselves in a global energy crisis, starting last summer natural gas prices and much of the world spiked owing to demand that was brought on by underperformance of renewables and restricted supply into Europe now the terrible tragedy in Ukraine, and the loss of <unk>.
<unk> oil and gas supplies have led to an energy crisis. Unlike anything the world has seen an almost 50 years.
In order for the U S E&P sector to respond with increased U S supply, we need well thought out regulation and policies that encourage responsible resource development and infrastructure build out.
Need pipelines, which will take new legislation and cooperation from all stakeholders, including federal and state legislature and regulators as well as the American public.
Also we need our investors to respond and encourage responsible growth.
Lastly, we need the American public to realize that we as employees of U S. E&P companies are Americans first and we will do everything we can to meet our patriotic duty co.
Cooperation between all parties, including the E&P industry is essential for global energy security and the long term health of our industry.
<unk> stands ready to engage in these tough challenges we have the assets the organization the talent and the wherewithal to do what we do best solve difficult problems and we will do that in partnership in conversation with our owners.
With that I will turn the call over to Scott Schroeder, our Chief Financial Officer.
Thanks, Tom.
Today, I will briefly touch on first quarter results shareholder returns and then finish with a discussion on guidance during the first quarter <unk> generated discretionary cash flow of $1 billion to $3 billion. The largest quarterly cash flow generated in the combined company's history. The figure was largely driven by an 8% ish.
Increase in realized commodity price quarter over quarter and solid operational results.
Crude first quarter capital expenditures totaled $326 million with D&C, making up 96% of the total while cash capital expenditures totaled $271 million <unk> free cash flow totaled $961 million for the quarter, which included severance and merger related.
<unk> cost of $31 million.
Sully the free cash flow figure included cash hedge losses totaling $171 million.
First quarter total production volumes averaged 630 Boe per day with natural gas volumes, averaging 285 Bcf per day, both at the high end of guidance the company's oil production averaged $83 one mbo per day, one 3% above the high end of.
Guidance. The first quarter performance was driven by a combination of non operated production volume gains positive well productivity and to a lesser extent accelerated timing.
The company exited the quarter with approximately $1 5 billion of cash up from the $1 billion level at year end 2021 the.
The company's combined net debt to trailing 12 months EBITDAX leverage ratio stands at four one times at the end of the quarter liquidity stood at just under $3 billion when combining our cash position with our Undrawn Undrawn $1 5 billion revolver.
Turning to return of capital, we announced shareholder returns totaling 69% of the first quarter free cash flow or 50% of cash flow from operations.
The return was driven by three methods as Tom already indicated we maintained our base 15 per share quarterly dividend, which provides one of the largest common dividend yields in the industry second we announced the variable dividend of 45 per share combined our base plus variable dividend totaled <unk> 60.
<unk> per share up from our 56 per share dividend paid last quarter. Our total cash dividend is equal to 50% of free cash flow and 36% of cash flow from operations.
Third after announcing a buyback authorization of $1 $25 billion in February we repurchased $184 million of shares during the quarter.
We repurchased seven 6 million shares at an average price of $24 16 per share.
The buyback amounted to 23% excuse me 23 per share or 19% of free cash flow.
Entering the second quarter the company had a <unk> one plan in place and we will provide details of its second quarter share repurchase activity with our second quarter results in July .
We remain committed to returning 50% of free cash flow.
We have the base plus common dividend and supplemental returns will come in the form of enhanced variable dividends share buybacks or even debt reduction.
Lastly, I will discuss our guidance.
In the release last night, we reiterated our full year 2022 production capital and unit cost guidance. Our second quarter total production guidance is equal to 605 to 625 Boe per day with natural gas and oil volume guidance set at 275% to $2 77.
Five Bcf per day, and 82 to 84 Mbo excuse me Mbo per day, respectively.
As previously communicated our expectation is to generate second half volume growth. We are maintaining our full year 2022 capital investment guidance. However, we continue to see inflation headwinds, which could move us above the midpoint of our range. We intend to remain disciplined and have not added act.
<unk> for this year.
While we are also seeing inflationary pressure relating to operating costs, especially in <unk> and low <unk>, we expect to remain within our original unit cost guidance G&A expense for the quarter was $1 48 per <unk>.
Per BOE, which included 54 per Boe.
Or the $31 million previously mentioned.
Related to severance and merger related costs. Excluding these charges G&A would have been below $1 per Boe and below the low end of guidance in summary, we remain committed to capital discipline and shareholder returns while focused on execution maximizing return on capital and maintaining one of the best.
Balance sheets in the industry with that I will turn it back to the operator for Q&A.
To ask a question. Please press star one please limit yourself to one question and one follow up. The first question is from Neil Mehta of Goldman Sachs. Please go ahead. Your line is open.
Yeah, Thanks, and congrats on the continued capital return Tom Tom I wanted you to keep on weighing in on on your view of the gas macro here. Obviously the front month is close to $8, but the curve has strengthened quite a bit as well can you talk about do you see the fundamental supporting the price that we see right now and then tie it into your <unk>.
Use on why highest well do you think do you worry about a disconnect there and how are you positioning your business.
To mitigate this risk.
Well Neal I appreciate the question I'll Tee it up and then turn it over to Blake to comment on wall.
We are as you I hope not surprise very constructive on natural gas now a core shale. Both commodities are backward dated if you look at the strip, but we've seen support for natural gas well above what we've seen in recent years and we see that as were suppose to fundamentals.
I said in my opening remarks, I think there is a growing awareness of the critical need for natural gas and the market is responding accordingly. So we are very constructive on natural gas and really pleased to see the supported.
Yeah.
Now you asked me if I worried about Oaxaca Neil.
Neil I worry about everything.
So what I do but we're not.
Not panic, we think that the market will adjust and that a lot of the fears that are currently in the air or go into proved to be overblown, but to that I'm going to let Blake common a wall.
Thanks, Tom.
Neil when we look at our Permian gas, we already have about 45% on firm transport to the coast. The remainder is priced at Wahhab, but it's covered under firm sales agreements with our processors that give us flow assurance well into 2024.
But really when you look at co Tara that Wahhab price gas only makes up about 5% to 10% of our total co terra gas portfolio.
So we're evaluating all of those new projects coming out of the basin, including those three that have already been announced that in aggregate will add one eight bcf a day of takeaway to the basin by Q4 'twenty three.
So we're not against adding more FTE, if it makes sense, but we're going to view it for through a really long term lens and will.
We will be hesitant to take on long term commitments that could potentially destroy a lot of value for something we see as a short term impact but stay tuned.
Alright. Thank you for that color. The follow up is just around Capex. It sounds like you guys are tracking towards the top end of that one four to $1 $5 billion, but still within the bracket. A range is that is that a fair characterization of those comments again reinvestment rate is very <unk>.
Low, but just trying to make sure that.
Not flowing off the top ends thank you.
Clear I hope, what we said yes.
Thanks, Tom.
Your next question is from <unk> Kumar of Wells Fargo. Please go ahead. Your line is open.
Hi, Good morning, Tom and team Thanks for taking my questions.
I wanted to start with the gas side, you talked a little bit about why but.
We heard from a lot of your peers about the LNG opportunity in the long term phase.
Ways to participate in international pricing.
Could you talk about what you are seeing out there.
You have access to multiple markets are there any risks that you are seeing on the LNG market.
Again, I'm going to turn this over to Blake, but we have studied the LNG market is hard and one thing that I will say co terrorism I'm very proud of our marketing group they've been creative they've been adaptive and they've been pretty nimble and they've done a deep dive for us and I'll, let Blake summarize the marketplace.
So as we see it.
Thanks, Tom.
Net and first I'll say, <unk> 350 million cubic feet a day everyday through Cove point on a long term LNG deals. So we absolutely have the wherewithal to do these long term commitments and experience with LNG.
When we look at our assets, we've got three basins with multiple decades of high quality inventory inventory. So supply is not an issue for us. The challenge is just the economics it.
It is expensive to get to the coast Theres limited pipes to get there. So you pay a pretty good fee just to get there.
And once you get there, we're entering a really crowded LNG market and.
That's really shown through in the deals that are being offered to the producers. So.
We're railing all of that right now and trying to understand it but we've got to find a long term deal that works for our shareholders and creates value, but also works for the buyer and we haven't found one yet, but where we're going to keep hammering away at it.
Great appreciate the color guys and then Tom Congrats on the successful quarter of the buyback.
You entered the second quarter were $10 five.
It sounds like you are still leaning into that buyback programs.
I could.
How do you see the buyback program evolving you've talked in the past about mid cycle pricing.
Have you seen a change in the mid cycle prices that why you are still buying back more shares just want to understand how this evolves from here.
Well of course, we then we filed that tend to be five before we went into a quiet period.
We will talk at the.
Scott has said at our next quarter release on.
What action spurred.
But.
I'll say this.
We are constantly having to rethink mid cycle pricing.
Classically we entered the year with 55 and $3 75 billion, our definition of mid cycle pricing and for.
Certain period of last fall that sounded fairly aggressive to us.
Now when you look at that today, you would say Wow, that's a pretty conservative view of mid cycle pricing.
We don't like to get in the business of publicly speculating on the value of a courtyard share.
And.
With that Scott why don't you comment on this yes.
Yes, sure Tom I think as we said when we laid it out.
Just over history of.
Legacy companies.
It's just simply another arrow in the quiver to return capital to shareholders and we will continue we're not gonna be granular and kind of explain where we put the price points and the <unk> plan. We were effective in we did execute on some of that but we saw the prices while we have seen in the prices run up.
The outcome of the.
First quarter highlights exactly where we want to be in that as well.
The average of what we bought in that we've announced is $24 16, we got a price.
Pushing 29, pushing 30. This morning on the announcement again, we're not going to chase the thing up but when we find opportunities and look at the relative valuation and they're intrigued and evaluation. It will continue to be part of the return strategy in certain periods in the cycles will lean more heavily and in others, we won't but I agree with Tom.
Point wholeheartedly, we got to kind of reassess what that mid cycle prices right now.
And then I'll just wrap it up we are extremely constructive on Cartera as you can.
Hope will not surprise you were extremely constructive on our asset performance, we're constructive on our inventory and we're really constructive on our positioning and the cyclic market.
In the oil and natural gas I mean, thats, all where we wanted to be.
That said when we launched the buyback we want to pursue it aggressively but we just feel like it ought to be tempered at some mid cycle pricing. So no. The answer to your question. Your question is more about what do we think mid cycle ought to be rather than.
Are we bullish on co chair of our current share price.
Think with my opening remarks on the constructive Miss on commodities.
They're underpinned by supply demand fundamentals, it's been a long time since I have been able to say that and so you know this mid cycle pricing in the last couple of years has been.
Best guess of what the median is in a huge oscillating commodity market and now suddenly it looks like we have some ground support and so I think we're all watching and rethinking how we how we ought to view what mid cycle means and that's kind of where we are but we are we are extremely bullish on <unk>.
Great. Thanks, Tommy I feel good to be bullish on great shales deepwater execution.
Okay.
Your next question is from Arun <unk> of Jpmorgan Chase. Please go ahead. Your line is open.
Good morning, Tom and team I wanted to see if you could maybe give us an update Tom on just the broader supply chain.
We're hearing about.
Some challenges on the Frac sand side in the Permian, but I was wondering if you can maybe run through your management of the supply chain and what gives you confidence on being able to execute in this kind of environment.
Well I'll tee it up and then I'm going to let Lee comment we always have.
Built relationships Arun as I think you know that.
We've had many times when relationships cost us a little and many times when it had benefits and we are long term planners, we're long term thinkers and.
We like to have relationships through thick and thin.
So we don't we don't wake up every morning, and panic, we've got some really good partners out there in the oilfield service space. Its Blake why don't you comment on supply chain.
Yeah Arun.
Specifically, starting with sand we saw early in the year things, especially in the Permian, we're getting pretty pretty hectic out there in the San market and so we actually went out and purchased all our sand for the whole Permian program for the year.
Marcellus runner under contract for our Sam for the year. So we took that one off the table. We've covered the majority of our big cost drivers frac spreads rigs.
With contracts that get us through the end of the year, but we still have exposure and items like diesel labor trucking, we're subject to all of those and we watch really closely we've built in all of the inflation, we've experienced to date in our projections and Thats whats reflected.
But ultimately we can't control the market or inflation, we can control our efficiencies in our execution and that's where we're always laser focused.
Some of that you can see our average lateral length in the Permian is up 12% year over year, our average development sizes up 51% and year over year in number of wells and as Tom mentioned in his opening remarks, we're really starting to bear the fruit of our electrification projects and those are real savings and we expect to.
Extend those with our grid power track Lee coming on this summer so supply chain is a challenge inflation is a challenge, but our our op teams are up to it and they're finding new ways to fight against it everyday.
Rune, if I could just follow on with that Blake.
Blake mentioned two elements one is cost inflation, but the other is just supply chain bottlenecks and cost inflation that that's just out there in the hard to hard to fully predict.
But we can do something about supply chain bottlenecks by careful planning by ordering ahead by making sure that we have conversations with our partners and let them plan as Blake said, we did pre buyers, saying, yeah. We're preordering a lot of stuff for 2023.
We're.
It's just remarkable the extension in lead time between order and delivery.
You know we're on top of it as we look into 'twenty three and beyond.
And.
We're doing multi year planning and we've got a good head start on this.
Great and just my follow up Tom You know you guys have always had a very dynamic kind of capital allocation program.
I was wondering you know.
A lot of the program as we think about today was based on a much different pricing environment.
I think today, you're spending just under 50% of your Capex in the Permian, 45% or something in the Marcellus and call. It mid single digit so and then.
Our upper single digits or so in the Anadarko.
In a darko basin, but I was wondering how you think about adjusting the development plan and a much higher price environment, where there may be some inventory that in a call. It a $3 case it didn't get to but maybe in a five that yes that may make sense.
To take advantage of so I was wondering if you could give us give us your philosophical thoughts on on that question.
<unk>.
Well.
Some said, so I'm going to answer it describing an embarrassment of riches.
One of the great things about having a deep inventory as we really can make decisions around capital return.
And not worry about any other issues.
So we do rank our inventory.
Excuse me.
Yes.
Okay.
We're certainly going to fund from the best returns down.
So a lot of that excuse me lower inventory stuff.
Is still going to be lower in the ranking.
But marcellus.
So they are all competing for those top slots and we are going to be aggressive.
And just wake up everyday and putting capital where it needs to flow, but thats something around <unk> heard from us for a long long time.
Yeah.
Great. Thanks, a lot Tom.
Your next question is from Jeanine Wai of Barclays. Please go ahead. Your line is open.
Hi, good morning, everyone. Thanks for taking our questions.
Good morning.
Our first question is just on the 2022 plan.
Sorry to get a little bit in the detail here, but I think the expectation was that 22 would be back half weighted and both the Permian and the Marcellus when we're looking at the <unk> Guide implies flat sequential oil production at the midpoint is also flat versus the midpoint of the full year guide. So just wondering if you could talk about maybe any update.
Thoughts on how you're viewing oil during the second half of the year and then on the gas side, maybe it's a little more straightforward.
Q2 is down a little bit, but maybe any commentary on the gas side as well.
Well, Oh, Paul Tee It up and then maybe Scott will want to comment, but we do see.
Second quarter flattish and then we'll have a little bit of growth into Q3 and Q4, there is a little dip in the year, but that's just around the project timing it's around pad size, there's nothing you know organically.
Problematic to it as we get into longer laterals and larger pads and this is just nature of the Beast.
Yes.
Yes.
Scott, Yes, yes, sure and what I would add is exactly what Tom said, it's just the timing. It's the cadence we had that we had some positives coming out of the first quarter that gave us more comfort in terms of guiding more of a flatter trajectory in the second quarter, but the plan as I said in my remarks is still dominated it's it's back.
<unk> weighted as it was on the gas side, particularly on the Marcellus business unit. When you look at the cadence because again very few rigs running very few completion crews running so it's just it's a lumpy profile, we will only have 35% of the footage turned in line by the end of the second quarter, which will again solidify.
That second half ramp that we are planning for so no big changes a little bit of positive that I alluded to in my remarks that gave us more comfort with the second quarter and we will watch the dynamic continue to play out.
Okay, great. Thank you and then maybe just circling back on cash returns can you just maybe talk about how you set the 50% free cash flow payout level for the base plus variable versus it was 60% last quarter and is it really more about the absolute return rather than the percentage every quarter. Thank you.
Well, it's yes.
I wish I could tell you we had some formula or machine learning algorithm to do this but it's.
It's a judgment call and this quarter, we were pleased to have a combined ordinary and variable dividend. It exceeded what we paid last quarter, but we also took into consideration the progress we've made in our buyback and the progress that we hope to make on our buyback. So you know we didn't want to keep a little dry powder in terms of cash.
Cash.
But ginnie.
It's a judgment call.
And.
There's no absolute right answer Scott do you have any wisdom I missed there.
I think you covered it perfectly time the key thing.
Versus the first quarter when we didn't have the buyback authorization. That's why we leaned harder on the variable having another again not to overuse. The analogy arrow in the quiver that played into the discussion and that's why we we landed it at 50%. This time because as Tom also indicated we exceeded what we did last time at the 50% level.
Understood. Thank you.
Your next question is from Holly Stewart of Scotia, Howard Weil. Please go ahead. Your line is open.
Good morning, gentlemen.
Tom maybe just I appreciate the comments on the global energy crisis, I know you've spent some time in Washington.
As well as with other folks just pushing that global.
<unk> agenda, what can you tell us about your conversations and maybe how do you see these global policy is playing out.
Well, we've had very constructive conversations and thank you for that question.
Washington, but also we were recently on a.
Non deal Roadshow, and engage with a lot of our owners and those were really good conversations.
And I will say that I.
I Hope you gleaned from my remarks that.
It's not just one string you can pull here.
Look I think the solutions here are self evident and I think everybody knows it.
Just don't think we have the collective will to execute it.
We need the infrastructure, we need support broadly from our regulators from from our investors you know, we're not going to stray for investors here.
Absolute are absolutely going to stay close to our owners on this topic, we need support out of the American public and we need the will to solve this problem the American producers ready to do our part.
And I'll just say again is not a complex problem that is perhaps the most discouraging part of this whole situation.
We have the resources U S onshore.
Onshore and offshore.
Two to return to global dominance in terms of energy later.
We're seeding geopolitical influence in ways that are.
Unnecessary.
And we need leadership, but we also need people to just.
Come together and solve the problem and we're ready to do our part and I think our owners are to work. So to say, we're not going to stray from our owners were going to certainly be.
In constant communication with our owners, but we're not talking about returning to the.
I think.
Irresponsible capital days of your and the largest change in our business. One is a lot of our projects pay out in a very short amount of time.
No we're not talking about years to pay out we're talking about months on some of these projects. So that's kind of changed your thinking on the risk of cap location.
But we just need we just need some very thoughtful people, helping solve this problem, but thank you for that question.
Yeah, Yeah, no. There's just some good point Scott.
Scott, maybe asking you won that.
Hasn't been asked yet there is an eight handle on gas this morning. So.
There looks to be kind of minimal updates on <unk>.
On the hedging front here and we're hearing obviously a lot on inflationary pressure. So I guess my question would be can this price be ignored on the on the natural gas side for hedges.
The simple answer is no it cannot be ignored and.
And we will continue as we have in the past we have a hedge committee.
We're active again recently, even in this week and we will continue to lean in and monitor the market.
Great. Thank you gentlemen.
Thank you.
Your next question is from Michael Skyla of Stifel. Please go ahead. Your line is open.
Yes, hi, good morning, everyone.
On Slide 11, you mentioned, a new shale and the Permian and just wanted to see if you could give any more color on that anything you can say about the the two wells you've completed the returns look like and what's the potential inventory there.
Yeah, Mike.
I'll handle that one this really isn't a new shale in the base and it's one that.
A number of other operators are drilling.
It's in the bone spring section.
And historically, we've drilled second bone spring sand.
Excuse me third bone spring sand.
Sand yeah. They are.
Second bone spring sand and Thats a shale that lies in the bone Springs section. It is a shale or it's a sand up in Eddy.
As you can into Mexico, and then at the <unk>.
Goes into a shale in Culberson Reeves and loving County.
Yeah.
Kotara legacy <unk>, we drilled our first test in it in late 2019 brought it online.
December of that year.
<unk> had a very very nice result, so we've tested a number of places and have had outstanding success.
We.
Really brought or bring a nice project now that.
Is four wells per section, we see this landing zone is probably 4% to six wells per section and it adds significantly to our top tier inventory.
Somewhere.
I think adding five years of top tier inventory would not be a stretch.
This landing zone alone.
Yes.
It's not at grades in quality.
Sure.
But it's really good.
Second tier is really good here. So we've been excited about it for a while this first time, we've publicly discussed it.
We have results to talk about.
Looking forward to just adding this in our tool kit for <unk>.
General and.
Developing great return on capital.
Alright, thanks for that sounds encouraging.
Wanted to ask two on your you've pushed the number of wells per pad in the Permian to more than eight last few years from I think you were just a little over three that's in 2018 to help improve the efficiencies.
With that increase typically comes longer lag times between capital investment and cash flow I want to see.
How are you viewing that trade off in this inflationary environment and do you think you near the limits I guess is what I'm really getting at in terms of the number of wells per pad or are you comfortable pushing that number higher.
I am very comfortable with pushing that number higher now.
That's how I view it like Oh, I'm gonna be clear with you as you always expect them to be I view it completely through a lens of what's the best business decision.
And I know from time to time that it's very difficult for the external world to understand Lumpiness in production and the production cadence that's not just smooth and consistently up to the right.
I wish that were the way the world works, but it's not the way the world works. These larger pads really makes sense from a capital efficiency standpoint from a land disturbance standpoint from a return on capital standpoint, but also from an emission standpoint by centralizing our facilities we have the.
Two to reduce our number of emitters centralize them and really deliver the cleanest barrel in the world and so I think about it in terms of what's the best business decision and going to a larger number of wells per pad.
Can be the best business decision.
Always the best business decision because it also extend your lead time from first spud to first production, but we you know.
Answer to your question is how do I think about it is the absolute best business decision and I always take the approach that we're going to make good business decisions.
<unk>.
I'd, rather explain a good business decision.
And react to a market that doesn't understand and so make a poor one so that's the way we think about it.
I appreciate that Tom Thanks.
Your next question is from Matt Portillo of PTH. Please go ahead. Your line is open.
Okay.
Thanks for the question.
Hi, Matt.
Just one quick one for me Tom I know the team is always evolving thoughts on completion design and spacing design across all three areas of operation I was curious as you've gotten a little more time to look at the Marcellus how youre thinking about the completion completion and spacing design.
And when we might start to see some well results that would potentially change your views on the capital efficiency for that asset moving forward.
Well I'll tee, it up and I'm going to turn it over to Blake I am just so pleased with the technical integration Thats going on at Kotara in fact, there's a.
The team in Pittsburgh today, that's reviewing a lot of machine learning.
That we've pioneered machine learning has become a really important part of our completion design and Thats something I really look forward to discussing in greater detail in future years, but there's just such a great spirit of technical Curie.
Curiosity that shared between our Anadarko, our Permian at our Marcellus business unit and from that collaboration everybody gets better but Blake why don't you just comment on that.
Yes, just to just to Echo Tom.
You take the Permian and the Anadarko in the Marcellus and they all have their very unique challenges and so they all have very unique solution sets that never get presented outside of that basin. Unless you have these teams that are cross pollinating across them and so that's bringing some really interesting discussions some really interesting solution.
<unk> that we would never see just looking over the lease line.
Really as far as completions and well spacing, we challenge that every day.
There's lots of work going on in the Marcellus right now to run new models and look at things, the new way and vice versa. Lee the Marcellus team is challenging the Permian team and the Anadarko teams. So.
Be exciting to see where it goes.
Yes.
And one quick follow up on the financial side, maybe a question for Scott looking at the cash balance you guys have today is in excess of maturities you have through 2024.
Staring down kind of something north of probably four $5 billion of free cash flow in 2022 and given the recent shipment is.
Just curious I guess as we.
We kind of factor in the variable plus common.
Dividend and look at the buyback it looks like you still probably add another $1 billion or so of free cash flow to distributed just wanted to see.
How we should be thinking about that return mechanism as we step through the rest of this year given the upside to your free cash flow profile.
Yes, Matt I think Youre looking at I mean, if you go back to my prepared remarks, we've got the base. We've got the variable we've got buybacks and I. Appreciate the fact that you did bring up that is there a wedge of that that goes to debt repayment and we have the maturities in 2020 for $1 $3 billion again, we're not lean.
And hard on that but that's all going to be part of the equation internal and in the boardroom as to what we do obviously the fed is going to meet tomorrow, and we will see it.
See what interest rates do in response to that but at the same time, what is that refinancing risk. That's out there 24 months from now again, we've got an eye on that right now while we're seeing this excess free cash flow and everything is in play but keep in mind, we remain committed to at least 50% of that $4 five.
$1 billion coming back to shareholders, if that number stays and has solidified throughout the course of the year, obviously commodity prices would change, but as Tom in his remarks said, we're seeing kind of a shift here in terms of weather.
The system is set up for very positive prices for an extended period of time.
Thank you.
Your next question is from Doug Leggate of Bank of America. Please go ahead. Your line is open.
Thanks, Good morning, everyone. Tom Thanks for getting me on this morning I appreciate the opportunity.
I guess my first question I wanted to go back to the question about capital allocation.
Understand this the change that appears to be no.
Emerging and long term natural gas.
With all the weight of the short term LNG constraints in the Gulf coast, but let's assume that.
We're resetting the long term natural gas.
Does kuchera reconsider capital allocation back to the legacy Cabot portfolio in lieu of the Delaware, How do you think about.
With the opportunities that might reset for you within the portfolio.
Yes, Doug we're looking at that now we're getting a head start on 2023, but yes, I would not be surprised to see us pivot.
Capital.
And to the Marcellus.
It's remarkable asset with remarkable returns.
Uh huh.
As I said earlier, it's kind of an embarrassment of riches.
We've got.
So many great choices and I challenge the organization to make our job difficult on capital allocation and boy, They're taken me for my word on that we've got some really good options.
I guess I hope Don doesn't take this as a second question is kind of not go into the relative economics, but.
Has that decision been augmented by the NOL.
Situation as it relates to deferred cash taxes in the Marcellus I'm just curious if that's part of the narrative.
Doug This is Scott no thats not part of the narrative again as Tom has alluded to many times, we're going to make the best business decision and.
As we alluded to we got and.
An abundance of riches in terms of our portfolio, we have the ability to lean in depending on how we see that macro environment.
But taxes, while part of the discussion arent the driving factor.
Okay Doug.
Giving me too much credit for financial engineering that we're capital allocators of our services.
There was a big NOL that you know is getting monetize that so we like that.
So if.
I apologize I have to I'll have to touch on the buybacks because obviously, it's on Youtube in your portfolio, but I want to frame. It like this storm because I mean this with the greatest respect to what you've put together here.
Designed to combine companies a little bit of a company.
As a consequence materially underperformed your E&P peers.
Through the commodity recovery since the deal closed and fight I was looking at it. This morning your share price is almost exactly in line with Exxon Mobil believe it or not over the last the last year or two. So my question is when you think about this higher commodity environment and the relative underperformance versus your peer group how does that.
Change or shift your view of what the buyback can do to help close the gap versus the variable distribution excuse me.
Which is obviously somewhat transitory.
Scott I'm going to let you handle that one sure.
Yes, Doug.
I hear your point exactly that was part of our decision that was part of our presentation to the board in February when we got the $1. Two 5 billion dollar authorization approved we were looking at that relative performance and as I said in my comments are.
We look at that relative performance, we look at the intrinsic value tie those both of those to where the commodity is and kind of look at where where we think we should be trading now we're not going to tell you, where we think that is but that all plays into it. We have made the commitment on the other side to return at least 50% in the form of cash.
Cash through the base plus variable.
Again, you know us from both legacy companies and as a combined company, we're not going to go back on our word, but youll see a little.
Inkling of going at the end of the day, we stopped at 50% in the second quarter.
Or in the first quarter because of the fact that and that will be paid in the second quarter and use that increment to lean in on the buyback now keep in mind the buyback I feel we were very successful at that we only had march to do that we put a <unk> five in place and you know you have to put parameters in in and let it run you can't touch it so.
We will continue to lean in on this we hear your point, but we still think the all of the above approach.
<unk> is the right way to do it and over time, I believe and I think the team believes that we will close that gap eventually.
Thanks Fellows appreciate the long answer.
Thanks, Doug.
Your next question is from Neal Dingmann of <unk> Securities. Please go ahead. Your line is open.
Good morning, I'll take the first question for you on some of the specifics on the Marcellus and I'm, just wondering could you speak to the potential opportunity.
I'll cede the upper Marcellus.
How many of these locations are currently when you think about your total Detroit today, I mean is there upside to that based on success from that.
Okay.
You came in pretty scratchy there.
But your question is on the upper Marcellus inventory.
Yes, Sir.
As we have.
Previously discussed we're currently flowing back some upper Marcellus tests, we're very encouraged by what we see.
Uh huh.
I haven't changed my thinking on the upper Marcellus I really liked the upper Marcellus I think that's going to surprise to the upside we have a very broad deep inventory there, but you know its interesting problem. It is different than the lower Marcellus and may involve some different completion techniques, it's part of the.
What the team is discussing today.
It's a big thick section and not not.
Bound as much as the lower Marcellus.
And yeah, we are.
We're gonna be experimenting to optimize it but.
It's a tremendous source rock and I think it's going to be everything that we hoped it would be I mean, we really we really do have very good data.
Backstops, our optimism on the upper Marcellus.
Your next question is from David <unk> of Cowen. Please go ahead. Your line is open.
Thanks for taking the questions Tom and Scott.
Tom I Wonder if.
Hey, there I wanted to ask you Tom just to elaborate a little bit more on the embarrassment of riches problem.
I know Doug asked a good question around the allocation of capital I guess.
From the investment side or the analysts side when you when you lay out the context of being constructive on natural gas macro.
Should we think about capital going into areas like the Marcellus or Anadarko as really an allocation or reallocation.
And potentially saving capital from the Permian or should we think that we would see gross capital in those areas first.
Well those are my only two choices.
I guess you could.
Yes, Sir.
Okay all right.
Yes.
We really do look at it from a I a zero.
ROE start I mean, there is no capital in our program, but it has a permanent placeholder.
We look at asset performance, we look at particular projects and what they can deliver we look at market conditions and if we think there are any over prints on marketing and that can be basis can be.
Restraints along those lines.
But.
Yeah, we are extremely constructive on oil and natural gas now that said you know in the <unk>.
Midst of all this optimistic talk and I'm probably the.
The most optimistic on the call.
Want to remind everybody that we have a repeal the commodity cycles.
And you know, it's not like we said to ourselves well, we don't have to worry ever again about prices cycling downloads.
We probably as I said in my opening remarks.
The fundamentals look fantastic, but.
Look nobody should follow me around on this topic.
I don't I'm not aware of too many experts out there that have consistently got that right.
The diversity of our assets the diversity of our exposure to the commodity in our ability to pivot capital is really important to us we don't want to put all of our eggs in one basket, regardless, where that basket sits in Midland or Pittsburgh.
The fact that we have.
Absolutely stellar returns.
Quick payouts and such great operating teams and really three different basins.
Is everything that was our rationale for building cartera.
And now more than ever we are convinced that co Tara is fit for our times.
I appreciate the comments there Tom.
Maybe just as a quick follow up just.
When we think about specifically to the Marcellus gas price exposure by index.
Is there is there a meaningful shift in composition that we would expect in 'twenty three versus say 'twenty two whether it's on like the fixed price or Nymex linked pricing.
Or any other areas that we might be considering or not considering where youre pricing mechanisms might be improving next year.
Yes, David This is Blake I'll take that one I wouldn't expect any material changes.
We have a lot of great long term deals we're diversified to a lot of good indexes.
Gives us lots of different pricing power and we.
We expect that to continue so I wouldn't expect anything.
Thanks, Blake and thanks, guys.
Yeah.
Your next question is from Leo Mariani of Keybanc. Please go ahead. Your line is open.
Okay.
Hey, guys wanted to follow up with sort of a big picture question here, you, obviously talked about co Caribbean well positioned for LNG exports and trying to find the right deal out there, but just realistically do you guys think there can be any material expansion of U S. LNG export capacity and say <unk>.
<unk> thousand 23, or do you think that whatever does kind of occur out there is kind of more of a sort of mid decade potential.
Potential expansion and then just additionally, do you think that there will be available deals for U S producers to get more international pricing in some of these deals are going to be more Henry hub linked type deals.
Yes, Leo this is Blake I'll take a crack at that I mean in general most of the new capacity that's coming on right away was spoken for years ago, and new capacity coming is all mid decade, and Thats whats being shopped in the market.
I think there is competition is a great thing and if there is a lot of demand overseas and theres more LNG projects.
The U S. That's going to drive more competition in the in the deals for producers and so we're a big supporter of LNG.
We would love to see a bunch of new LNG terminals pop up along the east coast. So if we can figure that one out there is plenty of opportunities, but time will tell.
Yes, Okay. That's helpful and just wanted to follow up on cash taxes as well. So you all are.
Predicting kind of a 20% to 30%.
Basically.
Deferred tax rate here in <unk> and in 2022 at these kind of prices do you think where may be looking closer to the 20 and do you think that that cash tax rate goes up next year, if prices stay strong maybe you'll burn through a lot of incremental Nols or something.
Yes, Leo this is Scott Dan sort of both of them in GFS.
<unk> closer to the 20 as you see to that.
Impact on commodity prices this year being way more positive moving closer to the 20% and if those stay in place Youll see Youll have the same effect next year, maybe move and even below 20%.
Okay. Thanks, guys.
We have completed the allotted time for questions I will now turn the call over to Tom Jorden for closing remarks.
Thank you Cheryl.
Want to thank everybody for joining us. This morning, we look forward to continuing to deliver great results. As you know, we like talking about results and we're going to be working hard to consistently generate.
Which is the theme that form cartera.
One of them wish everybody.
The best and thank you for your support and thank you for a lot of very good questions. This morning. Thanks.
Thanks, everybody.
This concludes today's conference call. Thank you for your participation you may now disconnect.
Yes.
[music].
Yeah.
Yes.
[music].
Thank you.
[music].
Okay.
[music].
Yeah.
Yes.
[music].
Yeah.
[music].
Yes.