Q1 2022 Pioneer Natural Resources Co Earnings Call
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Go to the pioneer natural resources first quarter earnings conference call joining us today will be Scott, Sheffield Chief Executive Officer, Rich Daly, President and Chief operating Officer.
And Neal Shah Senior Vice President and Chief Financial Officer.
Pioneer has prepared presentation slides to supplement comments made today. These slides can be accessed on the internet at Www Dot P X D Dot com.
Again, the Internet website taxes slides presented in today's call is www Dot P X D Dot com.
Navigate to the investors tab found at the top of the web page and then select investor presentations. Please.
Today's call is being recorded.
The call will be archived on www dot <unk> dot com through May 31, 2022.
The company's comments today will include forward looking statements made pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995. These statements and the business prospects of pioneer are subject to a number of risks and uncertainties that may cause actual results in the future periods to differ materially.
<unk> from forward looking statements. These risks and uncertainties are described in Pioneer's news release on page two of the slide presentation and in Pioneer's public filings made with the Securities and Exchange Commission.
At this time for opening remarks, I would like to turn the call over to Pioneer's senior.
<unk> Senior Vice President and Chief Financial Officer Neal Shah. Please go ahead.
Thank you Jake good morning, everyone and thank you for joining us for pioneers first quarter earnings call.
Today, we will be discussing our excellent first quarter results, which underscore the power of our investment framework.
I'll also highlight our leading return of capital strategy and the value that we're creating for shareholders, while simultaneously, providing the world with affordable reliable and low emissions intensity oil and gas. We will then open up the call for your questions with that I will turn it over to Scott.
Thank you Neil good morning.
Before we discuss the results of the quarter I want to acknowledge the terrible situation in Ukraine that is impacting the safety and freedom of millions of people, which is a direct result of Russia's unprovoked invasion, we recognize that our path to peace could take an extended period of time.
During which more innocent people will suffer pioneer stands with Ukraine, we've committed $20 million to humanitarian relief organizations in Ukraine to help those most in need.
During this time, we stay in resolute, knowing that we are providing the world of much needed source.
Portable energy with one of the lowest emissions per barrel produced and can do so for decades to come.
Shifting our focus to pioneer's quarterly results I'll begin on slide number three pioneer delivered a strong first quarter generating significant value for our shareholders, our high quality assets top tier margins.
Unhedged oil position drove significant free cash flow generation during the first quarter of more than $2 3 billion of which we are returning $2 billion to the shareholders. This translates to pioneer returning $7 38 per share to our stockholders.
Our second quarter dividend.
As peer leading return of capital framework reflects a 13% annualized dividend yield which represents a 95% increase from last quarter's base plus variable dividend that 13% calculated based on the stock price.
<unk> 26 based on today's stock price, it's about 12% annualized dividend yield.
In addition to the strong dividend payout pioneer repurchased $250 million of stock in the first quarter. When you annualize the first quarter share repurchases and second quarter dividends, we delivered a 15% total return yield.
Our robust free cash flow was underpinned by our strong corporate returns, we forecast 2020 to return on capital employed to be greater than 30%.
Going to slide number four.
Strong execution continued during the first quarter with total production in the upper half of our guidance range supporting significant free cash flow generation of $2 3 billion.
Additionally, we forecast our top tier leverage profile will be strengthened further by year end and approximately.
One five net debt to EBITDA, that's based on the forward strip.
Going to slide number five.
Pioneer's capital return program Best in class. This is underpinned by our strong and growing base dividend, a peer leading variable dividend payout, which represents up to 75% of post base dividend free cash flow, resulting base plus variable reflects approximately 80% of our quarterly free cash flow being returned to shareholders.
This compelling cash returns enhanced by opportunistic share repurchases, which provides additional shareholder returns.
Again, our total return yield is approximately 15% when you annualize the first quarter share repurchases in the second quarter dividend.
We go on to slide number six.
Pioneer's capital return framework is resilient through cycle, resulting in significant dividend payouts over a wide range of commodity prices, even when including the impact of cash taxes as.
As seen on the graph if oil prices were to average $60 for the remainder of the year upon year shareholders would receive approximately $17 in dividends per share.
At $120 approximately $31.
Shareholders have significant upside on higher oil prices as we have zero 2022, all hedges.
We expect to return dividends in excess of $27, a share representing a 12% or greater dividend if oil prices remain above $100 a barrel.
The depth of Pioneer's high quality inventory provides durability to this compelling free cash flow generation, but beyond 2022.
For example, pioneers five year cumulative free cash flow in combination with 5% oil growth is forecasted to exceed over $30 billion at current strip prices and current strip prices theyre dropping about $35 on the current price over the next five years.
Going to slide number seven the significant dividend payouts online previously results in an annualized dividend yield of approximately 13% as I mentioned that was the stock price on April 26.
This yield exceeds our peers majors and the average yield of the S&P 500.
This top tier yield demonstrates the cash flow generation.
Generation power underlying quality of pioneer's assets and the strength of our peer leading return of capital strategy.
Going to slide eight pioneers, 13% dividend again surpasses the S&P 500 average by nearly eight times.
Looking beyond our peer group to the broader market pioneers dividend yield far surpasses every S&P 500 sector and is higher than any individual company in the S&P 500.
With our double digit dividend yield complementary share repurchases at 5% of all growth the case for owning pioneer stock is compelling.
Going to slide number nine.
It's third party data.
Substantiates pioneer is the premier independent oil and gas company with the longest high quality inventory of our peers.
As gather from this slide the Midland Basin, where pioneer exclusively operates as home.
Some of the highest quality acreage in the world representing the right to Midland Basin has more than two times the remaining top tier inventories in the Delaware Basin.
As seen on the last pioneer has the longest duration of high quality inventory when compared to peers, resulting from our expansive position within the core of the Midland Basin.
On slide number 10 again long term total return outperformance pioneers legacy legacy Midland Basin position has been the foundation of the company since its founding 25 years ago has been a major contributor to our success pioneers.
Pioneer has outperformed large cap peers in U S majors over the previous 310, and 20 year periods with returns over the 20 year period exceeding the peer group by nearly 80% our deep inventory decades of development experience and consistent performance positions pioneer to outperform for years to come.
I'll now turn it over to rich Thanks, Scott and good morning, everybody I'm going to start on slide 11, where you can see that we are reiterating our plan for 2022 with full year production and capital guidance at the same levels, we announced in February .
Based on the midpoint of both capital and production guidance and current strip pricing. We expect this plan to generate greater than $12 5 billion of operating cash flow, which results in more than $9 billion of forecasted free cash flow for 2022.
This represents an increase of approximately $2 billion.
And free cash flow since our last update in February .
Consistent with our investment framework, we are modestly growing production this year with a reinvestment rate of less than 30% returning over 80% of our free cash flow back to shareholders via dividends and share repurchases.
Our average activity level for the year remains unchanged, we plan to run between 22% and 24 drilling rigs and approximately six frac fleets of which two of those are simulcast <unk> fleets. This activity results in placing roughly $475 to 505, new wells on production during the year.
As we outlined last week, we are temporarily adding a frac fleet during the second quarter mitigate this and disruption that we experienced during the latter part of the first quarter. This will increase second quarter capital, which is expected to be our highest capital spend quarter of the year.
Assuming current inflationary pressures persist, we would expect our capital to migrate towards the upper half of our full year capital budget of three three to $3 6 billion, primarily driven by higher steel and diesel prices. Despite.
Despite these inflationary pressures the improved operating cash flow more than offset these increases given the strong commodity commodity price outlook.
Thanks to the continued hard work of our teams across the company Pioneer has established a track record of continued operational improvement as demonstrated on slide 12. These operational efficiencies are helping to dampen the effects of inflation in 2022.
One contributing.
Factor to our efficiency gains as our history of consistently increasing our average lateral length driving drilling and completion cost per foot lower looking to the future. We expect further lateral feet gained as we add more 15000 foot laterals to our program in 2022, we expect to place approximately 50 wells with fifth a 15000 foot laterals.
On production with that well count increasing to over 100 wells that are longer than 15000 feet in 2023.
Additionally, you can see from the graph on the right. We have nearly doubled our completed feet per day since 2018, and we've consistently outperformed peers on a completed feet per day basis, the gap with peers, even further widen with the deployment of two simulcast fleets in 2021, and we have the goal of adding a third simulcast fleet later this year or early next.
Year.
Turning to slide 13.
<unk> continues to have the best in class cash margins you can see on the left chart. The pioneer maintained the highest realized price per Boe amongst our peers in 2021, which demonstrates the great work by our marketing team and the value of our oil weighted production.
Looking to the right chart. We Additionally maintained best in class cash costs in 2021, resulting from the combination of our highly efficient operations low corporate overhead and inexpensive borrowing rates.
This combination of high revenue and low cost translates into peer leading margins. The strong corporate returns that Scott discussed and significant free cash flow generation as demonstrated by our Q1 results.
Turning to slide 14, I think this slide fits nicely with the prior slide highlighting that the combination of our peer leading margins and our efficient capital program generate best in class free cash flow per BOE. Most importantly, though is it is sustainable for decades, given <unk> extensive inventory depth with a low breakeven.
Cost.
With that I'll turn it over to Neil Thank you rich.
Turning to slide 15.
The graph on the right demonstrates the strength of our balance sheet, highlighting the combination of our low leverage and peer leading average coupon rate. This.
This financial discipline supports our strong cash margins robust corporate returns and.
And strong free cash flow profile.
Maintaining this fortress like balance sheet provides pioneer the financial flexibility for opportunistic share repurchases supplementing our peer leading dividend program.
Turning to the next page.
This is one of my favorite slides in the deck, we believe our high quality inventory efficient operations and best in class cash margins are key drivers to our strong corporate returns.
When looking across the broader S&P 500 pioneers projected <unk> exceeds all other sectors within the S&P 500, yet trades at a discounted valuation relative to these various sectors.
We believe this combination of market, leading <unk> and discounted valuation makes pioneer a compelling investment opportunity when compared to the broader market I'll now turn it over back to Scott.
Thank you Neil Slide number 17 late last year, we published our updated 2021 sustainability and climate risk report, which outlined our leading ESG strategies, including the ones you see on this slide our focus on ESG is established pioneer is a leader in the industry, which continues to be reflected.
By many third party rating agencies.
While the initiatives to date are some of the best in our sector. We are working on many more that we will highlight in our update of sustainability and climate risk report later this year.
On slide number 18.
Pioneer is focused on maintaining one of the lowest scope, one and scope two emissions intensity that of our peers as seen in this graph the scope one and two are the emissions intensity reduction targets of our peers are significantly higher than pioneer our commitment as demonstrated through 2030 emissions intensity goes representing one of the strongest emission reduction targets.
In the industry.
On slide number 19.
<unk>.
This is one of the favorite charged by several long term shareholders.
<unk> is producing some of the lowest emission barrels in the world, helping to supply the world with affordable energy, while minimizing emissions.
A barrel produced combined with low maintenance breakeven oil price of $30 per barrel. Our production remains resilient and we expect our products to have a place in the global market for a very very long time.
Slide number 20 again summarizes the fact that pioneer is committed to driving value and returning capital for our shareholders. We will now open it up for Q&A.
Yes.
Ladies and.
If you'd like to ask a question. Please now by pressing star one on your telephone keypad keep in mind, if you're using a speakerphone make sure. Your mute function is released.
Hello, <unk> equipment once again star one for questions.
We will begin with Jeanine Wai with Barclays.
Hi, good morning, everyone. Thanks for taking our questions.
And good morning Jeanine.
Scott My first question is maybe on inflation, because it's obviously top of mind.
We just wanted to kind of hit on the maybe medium term implications of all of this so youre, 5% zero to 5% medium term growth plan that requires adding a modest amount of activity every year and so can you talk about your latest take on how the current service supply labor markets et cetera, how that <unk>.
This is really causing you to either think differently about contracting next year or just overall implications for 2023. It sounds like from here is that people are just getting a lot.
Earlier start to 'twenty, three and it sounds like E&ps are sorry near term up deals longer. Thank you.
Yes, Jeanine I think youre exactly right I think.
US like others are starting to focus on 'twenty three and it really we look at on our contracting strategy is such that we already have a lot of our services locked in for 23, but we are looking at those services that aren't locked in to make sure that we've got ample supply we're not concerned about it but it is something that we want to start earlier. This year then.
In years past, just given the inflationary pressure that's out there.
I think most of the inflation that we're seeing is really on steel and diesel as I mentioned I think as we think about our zero to 5% also it's adding 1% to two rigs per year, so modest amount of activity increases and hopefully with efficiency gains we can.
<unk>, what we have to add just by getting more efficient on the work that we're doing so that's really the key things that we're focused on as we think about 'twenty three in the program, but it hasnt changed our thought process in terms of growing at around 5% for 2023.
Okay, Great and then maybe hitting on cash returns, which clearly.
For pioneer you frame your buybacks as being opportunistic we've noticed that they've been consistent for the past two quarters now at this $250 million is that just a coincidence that Q1 was the same level as Q4.
Or should we kind of think about that level as being a minimum on a quarterly basis.
Yes, Jeanine, we will continue to buy shares on a quarterly basis as our balance sheet has strengthened our long term objective is continuing to reduce the share count.
And we have the balance sheet and the authorization to repurchase a significant amount of stock opportunistically. So that'll be the continued.
Strategy.
Okay perfect. Thank you.
Sure.
Now moving to your next question will come from Neil Mehta with Goldman Sachs.
Yeah. Thanks, Thanks, so much and great dividend distribution here this quarter Scott I just wanted to start with the macro question and get your perspective on the Permian, specifically, which is given the bottlenecks that exist, whether it's around natural gas or pressure pumping how much of a current strain is that going to be in terms of.
Yes.
The Permian broadly.
Growing and as you think about X date to exit U S. Production. There has been a wide range of numbers thrown out there from half a million barrels a day to over 1 million barrels a day, where do you fit within that range for oil.
Yes, Neil I've always been probably towards the $5 to 600000.
But generally if you look at EIA data, what they've published now January and February and we've had several months now just flat production. So the rig count as you know has moved up several months ago.
The rig count in the Permian and in the U S.
<unk> already seen some production growth and so I think.
Too many.
Then tank farms are way too high on U S production and then you put on top of what's happening now in regard to labor constraints Frac fleet constraints inflation constraints I, just think it's going to be tough to hit some of the numbers.
So it even makes me even more bullish about some of the oil price numbers that are out there.
Alright, Great and then Scott would love your perspective on the natural gas takeaway situation in the Permian at.
It seems like a resolvable problem, but.
It could be get a little tight here in 2003, so how do you see the fix here how do you see pioneer positioned to.
To mitigate some of those risks.
Rusty, Brazil always puts out a good morning briefing for the people that don't have access to it summarizes.
The takeaways in today's report Theres, two large compression deals that are adding I think I have a b a day and 650 million a day that will be on the towards the third fourth quarter of 2003 that will help the situation at an interest rate pipelines that are vying for two bcf each that are buying forward to come on in <unk>.
24, and so it's going to get solved not really concern in pioneer Ole obviously participate.
Obviously in some of those.
Grades and also in one of those three pipelines so.
It will be resolved fairly quickly and then we'll have room to add more pipelines, but every 225 years going forward, so not really concerned and the problem gets solved fairly quickly.
Thank you Sir.
Now, we'll hear from John Freeman with Raymond James.
Good morning, guys.
Hey, John .
Just a follow up on <unk> question on the cost inflation.
Rich you said that you all had a lot of our budget that's already sort of locked in for for 'twenty three just the nature of how your outsourcer.
<unk> services I know going into this year about 50% of your Capex budget of Lockdown.
Can you give me a sense of just at this point I guess, both for the rest of 'twenty two how much of your sort of locked in versus exposed to inflation along sort of the same question for 2003.
Yes, John I'd say were probably right around 60% that were locked in now for all of 2002 and really the biggest items that are still subject to inflation, our steel diesel chemicals and a much smaller extent sand. So those are the kind of the key items that we will face some.
Potential for incremental inflation when you look at 'twenty three I'd say, we're probably locked in on 25% to 30% being mostly on the drilling side and on SaaS.
Sand supply because we've locked that in way in advance, but a lot of the other ones that we have contracts such that we're assured supply is still could be subject to some inflation, but.
Assured the supplies im not worried about the execution of that program, but we still got it.
Some of it maybe subject to inflation, that's not that we've locked out or locked in for 2022, So hopefully that helps.
That does thanks, and then looking at the 15000 foot laterals, which you mentioned will be 50. This year and 100 next year. So just sort of as a percentage of your total activity. That's about 10% this year and I guess kind of closer to 20% next year can you give us kind of an idea of how much of your <unk>.
Inventory is applicable for these kind of extra long laterals or maybe just that definitely how large a percentage of your drilling activity would it be unreasonable wholesaler.
Look out four or five years.
Yes, we've got I think we've talked about about a thousand locations that we've identified and clearly with land trades and small acquisitions of incremental working interest or just extensions to our acreage out there and we're hoping to continue to add to that because the capital efficiency of getting that 15% reduction in drilling and completion costs on a per foot.
Basis.
As important.
So we're going to go to 102023 I would expect that will be 100 150 in future program. So it's in that like you said, 20% to 25% of our program will be those longer laterals for the foreseeable next year of five to seven years probably.
Great. Thanks, Rich I appreciate it.
Sure.
Now moving to our next question and that will come from Charles Meade with Johnson Rice.
Good morning, Scott and the rest of the <unk>.
Pioneer team there.
Charles.
Rich maybe this is a question for you and it's about the it's about the spot Frac fleet that you picked up I have no doubt that that is one of the.
One of the.
The big operators on the Midland Basin, you guys are able to get equipment to come to your location, but I wonder if you could just.
Share with us a little bit what that process was like.
The spot crew because.
Most of the service companies messaging, which has been there are no spot crews available, especially especially right where you are so.
I Wonder if you could just share what that was like as a as a means of kind of.
Delivering some insight about what the how tight the service market is and how that might carry into next year.
Yes, Charles I think it really was relatively easy to be transparent about it in the sense that one of the benefits of pioneer that some of the other operators in the basin have is just our security of sand and diesel supply was such that really a number of brightcove is why their tie.
Right.
They'll have availability if companies have sand and diesel and chemicals, and we have all that stuff lined up and so it's really the ancillary services that go along with it that really where the benefit of pioneer and allowed us to attract that spot fleet relatively easy and I think we had multiple choices. It was really a case of timing of.
When they could get there and so the one we choose chose boost because they can get their the quickest and that was really the.
Defining thing that made it.
Why that one came versus another one that we could have had had a couple of other ones on a spot basis, if we needed it.
But it is really about this other supplies, having those available that really drove the.
Our ability to get our spot fleet.
That's interesting detail. Thank you for that and then and then one other question if I could ask could you can you remind us what this with respect to the convertible notes you guys have out there can you remind us what your posture is with respect to those.
In the context of the overall share buyback and Delevering and where that where that sits in your stack and what your plans are.
Hey, Charles this is Neil I mean, our expectation is similar to when we engaged in the convert and we spoke about it previously it's our expectation.
To settle that in cash the free cash flow generation is strong.
We're paying out 80% through the dividend we've got the remainder of that 20% that we utilize in place on the balance sheet of which he is a small percent or a certain amount to repurchase shares and do that opportunistically Scott articulated earlier, so we'll be in a position to some of that with cash as we sit now thats our intention.
Any timeframe you'd want to communicate on that new alert.
No.
The ability to even call bag has until may of 2023 and it matures in 2025. So I think we will view it as at that time comes it comes closer to see what those options are and what's the most economic and financial decision to make.
Got it thank you reiterating it sorry.
Cash thanks.
And Bertrand Donuts the truth has the next question.
Hey, good morning, guys.
Just a little nuance, but given your dividend payout.
Your yields a little bit higher than the group can you maybe talk about keeping it that high versus maybe hypothetically just a few percent above the group and pushing more buybacks.
Hypothetically.
Do you think of it as an output of your free cash flow or is it an intentional strategy to kind of show the market that you can you can push these yields to get stock appreciation.
Yes.
The primary goal really is to attract dividend value income funds in the retail sector and we've been spending a lot of time with both net feels like is our is our market growth that we're targeting.
And now having the highest.
Paying dividend in the S&P 500.
It gives us a leg up on people that want dividends, especially going into an inflationary environment.
So I think that will continue to attract more and more retail we still have a very very small retail sector and pioneer.
So we're focused on that retail sector and were focused on dividend funds, we are getting some growth funds.
Buying the sector also but that's where our focus is.
Okay that makes sense and then maybe just shifting gears on on divestitures I think thats. The last update you guys still had some noncore stuff youre going to get rid of May.
Maybe some of your peers have signaled that they are stepping away from the M&A market at least large scale stuff.
Is that put a hold on divestitures are you just kind of willing to meet in the middle with potential buyers to get these products sold.
Yes, I'd say, we're still entertaining people that are coming to us on smaller acreage divestitures here and there that are what we would call tier three related acreage. So youll see in the first quarter we had.
Some amount of those that data will continue to look at <unk> as an option as well. So I think we're still plan that they will have a modest amount each year of divestitures that will happen that are non strategic or tier three type acreage that we can accelerate value on but thats really the focus right now nothing of size.
Okay. Thanks, guys.
Sure.
And now we will take our next question now will come from Doug Leggate with Bank of America.
Thanks, Good morning, everybody.
Scott.
I think hey, good morning, guys thinking prior calls you've talked about.
50 of inventory and AR.
Realize you're using third party data this morning, which shows.
I'm just wondering if you could speak to that.
Obviously, the macro backdrop has changed drastically.
Your view of your sustainability.
Three months ago.
No I think.
In a higher price environment.
Everybody's inventory goes up.
But we've advertised over 15000 locations we are drilling.
500, a year so.
All we have changed is instead of using greater than 15000, we've said greater than 20 years. It could be 30 years could be 25 years. It all depends.
A logged on.
What the oil prices.
Also we are looking at going into over the next two or three years, obviously testing some of the deeper zones. So youll see us do that.
We have another six zones, we've advertised over the last few years and so we have some gas and gas condensate zone. So youll, probably see us test some of those over the next couple of years also.
So it really hasn't been a change just emphasizing instead of getting away from locations where focus more on greater than 20 years.
Okay. Thank you for that I, just wanted to check the subsequent to your presentation.
Scott My follow up is.
Maybe for rich.
Neil but I wanted to ask you about the inflection.
In this commodity environment, what we see is.
Kind of a rounding error, but nevertheless, a meaningful change in there.
Historically, so can you just give us an update the steepness of the forward.
Good day.
Dissipate.
Tough stock position.
Have a thumb with your current level of spending.
Like as well.
Our go forward guidance.
Hey, Doug It's Neal if you think about how we spoke about cash taxes last quarter color NOL balance was approximately <unk>.
6 billion at year end 2021.
<unk> will utilize the extent of that NOL balance for the most part through 2022.
Last spoke I spoke of cash taxes of course, the oil price was lower being about $150 million to $200 million for the year, that's more of a $500 million number for the full year, so $500 million for the full year now if you look at our.
Our guidance on cash taxes for this quarter will start prepaying, so to speak our estimated tax burden full year tax burden. So we'll be paying that here this quarter and next quarter and again in the fourth quarter, but if you look at it in the fourth quarter excuse me and a full year in fullness based.
Based on current strip prices its $500 million.
Now fast forward to 2023 looking at strip prices Youre more in that range of let's call. It one three to $1 5 billion.
Great.
Hey, guys. Thank you.
You're welcome Doug.
Now, we'll move to David <unk> with Cowen.
Thanks, everyone for taking my questions and good morning.
Okay.
Wanted to follow up on just confirm the added frac.
Fleet Thats coming in in the second quarter.
As long as that term that's not staying in the full year.
No. We're just doing a couple of pads and then it'll be released and so.
Our already on location and working.
And I guess I appreciate that my follow up would just be Scott I know.
When you presented in front of Congress, you discussed the changing and lead times now being 18 to 24 months for sort of.
Long term planning or planning around growth, which might have doubled or tripled from a few years ago.
How is that changing I guess the way that you guys are approaching things now whether it be contracting for services and are you looking at anything on the vertical integration side to kind of alleviate some of the planning and procurement process.
No amount again rich has already covered it all I mean.
I think it's obvious that based on comments from the three large service companies starting with <unk>.
Miller's comments that.
Things are pretty much.
Even with John Lindsay and <unk>.
Frac fleets are pretty much used up.
Good spec rigs are pretty much used.
And you can always do new builds, but youre going to pay significantly higher pricing and you're going to sign three year type contracts.
I think in this in this world of returning capital to shareholders I, just don't see that happening so.
Its really.
Really I don't think the growth profile that EIA has in some of the other think tank firms I think it's too aggressive of the <unk>.
Two years for U S oil production.
And so rich has already commented on some of the things that we're doing in regard to.
'twenty two 'twenty three 'twenty four in regard to lock it up.
Service cost.
I appreciate the comments Scott Thanks, guys.
Thanks.
And as a reminder, everyone is star one if you'd like to enter the queue for questions. We will now move to Scott Hanold with RBC capital markets.
Yes. Thanks, a couple of things one first on the conversation earlier on the budget, obviously with inflation is trending toward the higher end of the range and also you all talked about.
5% growth cap as you think about 2023 and beyond and just to clarify two things with that number one.
Is.
Adding a couple of rigs in the back half of this year to prepare for a 5% growth in 2023.
In the budget at this point is that.
You say it was part of the top end of the 22 spending.
Yeah, just for clarity I mean, when we are building our capital program for 'twenty, two it's already a forecasting and what we're going to do for 2023. So that was already built into our original guidance range and so of what activity, we need to accomplish the 5% growth for 'twenty three so that's really built into what we've already laid out.
Okay. Thank you for that and then Scott.
A little bit again on the oil macro obviously, it's been the important driver here over the course of the last several.
Several months.
But what is your view like what the right mid cycle oil prices right now where do you think from a longer term perspective. It should be obviously right now are a little bit more heightened than how does that play into your strategy in terms of being opportunistic on the buybacks.
Yes.
I think thats the big $64 question I mean, as you know the strip drops on down to $70 after five years.
On WTO effect is below 70 after five years, there's got to be a lot more.
I think comfort that the strip is going to move up I think.
I think it will long term instead of just marching forward.
We still I mean, we had a lot of negative.
Items around the world with Chinese Lockdown inflation and.
And we still had over $100 oil over the last two or three weeks. So.
And now we're seeing the potential ban.
And on Russian crude in a phase in.
Now and over the next six months into the end of the year from EU, So things are going to get tighter.
I still think is going to go higher.
And we have to decide obviously the intrinsic value at various price decks of the company and window, obviously opportunistically buyback stock. So we have the firepower in the balance sheet to do it.
Right and so I guess.
This point, obviously, you all buying back I mean, certainly you've seen that opportunity when <unk> seen kind of the moves in some of these E&P equities, including yourselves would you continue to buy into that or even though that youre bullish oil you're going to wait for I guess pullbacks through the periods.
We have to realize we're already dispersing 80% of our framework is all back towards the dividend.
So it's 80% of our cash flow is going to the dividend and so we're looking for people that want stabilized dividend. So I mean over five years youre going to get over half the value of the market cap of the company back as dividends.
And so unless you got something.
However, the next downturn is and which are not for a long time, the lease look back and say I've got half Mike.
Stock price back in dividends that you can do whatever you want to and that's the big benefit of dividends versus buying back stock right.
Part of the total return to shareholders I appreciate that thank you.
Exactly.
And now we'll take a question from Bob Brackett with Bernstein Research.
Good morning, I have a question around the dividend yield it's almost a bit of a half empty half full cup argument, which is to say you've laid out a pretty compelling case around higher margins than peers.
Lower opex longer inventory better geopolitical position in terms of pure play, Texas, yet your peers have had their share prices bid up or their dividend yield down to significantly lower levels. So it begs. The question what are you guys being <unk>.
<unk> on and if you are not getting full credit for dividends would that lead you down the path to consider other cash return strategies.
You got to realize Bob that we just announced the first unhedged paid dividend and <unk>.
We paid four quarters, it's barely creeped up it was 6% last quarter.
You asked me that question in four quarters from now if we're continuing at 12% to 13%.
Youll see we should not be trading at 12%, 13% yield, but you got to establish entry it's got to be it's going to continue it's got to be so.
We're just now making the FERC in fact, the payment is not going to be made until.
Jim.
So.
Let's get several quarters of payments in that 12% to 13% yield and say if we continue to trade where we're at on a yield basis.
Looking at majors and Theres No reason why anybody.
Anybody should be by at a major oil company and a 4% to 5% yield.
<unk> pioneered a 12, 13% yield we're growing 5% a year had just as long as inventory better Ro's CE and so it just we have to reach out to that retail sector. We got to reach out to all those dividend funds and we just got out on the road for the first time in the last three to four weeks. So give me about 12 months and we'll see where it ends up.
Yes, I agree with your logic.
Yes, I think you will prove correct with time I think thats a good answer.
Thanks.
And ladies and gentlemen, that's all the time, we have for questions today, I'll turn the call back over to Scott for any additional or closing remarks.
Again, thanks, we appreciate everybody's Q&A and look forward to the next quarter and seeing everybody out on the road.
Again, thank you everybody stay safe.
Yes.
With that ladies and gentlemen, this will conclude your conference for today, we do thank you for your participation and you may now disconnect.
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