Q1 2022 Continental Resources Inc Earnings Call
[music].
Good day, ladies and gentlemen, and welcome to the Continental Resources, Inc. First quarter 2022 earnings Conference call.
At this time all participants are in a listen only mode.
Later, we will conduct a question answer session and instructions will follow at that time.
Or do you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
As a reminder, this conference call is being recorded.
Now I'd like to turn the conference call over to Rory Sabino, Vice President of Investor Relations. Please go ahead Sir.
Great. Thank you very much and good morning, everyone and thank you for joining us and welcome today's earnings call. We will start today's call with remarks from Bill Berry, Continental's, President and Chief Executive Officer, and Doug Lawler, Chief operating Officer, and Executive Vice President additional members of our senior executive team.
Including John Hart, Chief Financial Officer, and Executive Vice President of strategic planning will be available for Q&A.
Today's call will contain forward looking statements that address projections assumptions and guidance actual results may differ materially from those contained in forward looking statements. Please refer to the company's SEC filings for additional information concerning these statements and risks.
In addition, continental does not undertake any obligation to update forward looking statements made on this call. Finally on the call we will refer to certain non-GAAP financial measures for a reconciliation of these measures to generally accepted accounting principles. Please refer to the updated investor presentation that has been posted on the.
Company's web site at Www Dot CLR dot com with that I will turn the call over to Mr. Byrd Phil.
Thanks Roy.
Good morning, and thank you for joining continental's first quarter 2022 earnings call. We have many compelling updates to share with you regarding our corporate returns driven and opportunity based investment value proposition.
At Continental we believe that consumer access to affordable and reliable oil and natural gas is and will continue to be the foundational determinant for the quality of life for Mannkind for decades to come.
And that our ability to produce hydrocarbons and then the ESG responsible and capital efficient manner.
Our society, our planet and our shareholders.
Start today's presentation by providing some comments on our outstanding first quarter results and 2022 full year guidance update and then Doug will provide insights on our operations, including the performance and activity of our recent asset acquisitions and exceptional operating results.
I want to take this opportunity to recognize and welcome Doug to our earnings call conversation. He has already made significant contributions to the continental and we are delighted to have him on the team.
To begin I'd like to turn your attention to slides three and four which describe who we are.
Naturally disciplined company with premier assets, driving as unique investment value opportunity.
I am proud of the financially disciplined investment value proposition, we outline on slide three.
While a number of the key components are covered throughout our comments I wanted to focus on the macro tenants of return on capital return of capital to shareholders.
Balance sheet strength.
As you may have seen earlier this week S&P has upgraded our issue level rating to triple B minus from double B, plus reflecting our strong sustainable credit metrics and supported by our prudent financial planning we.
We are now investment grade rated with all three major credit rating agencies.
With an approximately 31% return on capital employed projected for full year 2022 Continental provides a distinct investment thesis that is highly competitive on our returns on capital employed basis against industry peers.
And across S&P 500.
As shown on slide five.
This is the case not only in 2022, but across many years.
Continental has a deep rich inventory, enabling strong financial performance driving exceptional cash flows and return on capital employed.
As you can see on slide six.
We delivered outstanding first quarter 2022 results, our first quarter free cash flow of 1.15 billion is another T output that strongly exceeded consensus estimates by approximately $100 million driven by strong realizations and operating result.
This sets the stage for increased full year 2022 free cash flow guidance of four 3% to $4 7 billion, reflecting both current commodity.
Prices and strong operational performance.
With our projected 2022 free cash flow yield of approximately 22% at the midpoint and today's market cap, we are enhancing our balance sheet with our net debt to EBITDAX is expected to be less than one by mid year 2022, and net debt approaching $4 billion by year end 2022.
This is supportive of our mid cycle price base goal of having less than $3 billion net debt and less than one times net debt to EBITDAX at $55 oil and $2 75 gas.
Our underlying financial capacity and focus on shareholder returns have driven five quarters in a row of exceptional dividend growth. This includes the 22% increase we announced a few days ago, increasing our quarterly dividend from <unk> 23 cents 28 cents per share.
Our dividend is now paying out about $400 million a year of the shareholders.
In addition to the dividend increase our cash return profile is further complemented by our share repurchases.
We repurchased over $100 million worth of shares in the first quarter.
Continental's competitive advantage is predicated upon the high quality of our sizable inventory based into our four world class basin, the Bakken Anadarko powder River and Permian.
In the past 18 months alone we have added over 600000 net acres to our portfolio in core areas of these key resource basins, while driving significant value accretion.
This is coupled with the strong geologic capabilities and subsurface and operational expertise of our teams, allowing us to consistently produce low cost capital efficient and high margin result.
Continental is distinct from our peers and that we offer both geographic diversity and commodity Optionality. This has enabled us to consistently deliver free cash flow with this being our seventh year in a row that we are projected to do so.
Especially in the current pricing environment for both oil and natural gas. We believe there is no better producer to invest and then continental.
Cash flow and margins are fully participating in both oil and Ngls upward price movement, and we have approximately 50% of our gas hedged in 2022 at an effective price that is 80% above the 10 year average.
See the impact of this uplift in our updated gas differential guidance as we have increased our guidance to a 25 to $1 premium.
Let me now discuss our 2022 shareholder return of capital priorities, which you can see on slide seven.
This is essentially a summary on my earlier comments were as part of our unique investment value opportunity, we are deliberately and thoughtfully returning capital to shareholders in the form of increasing our fixed dividend yield and repurchasing shares.
Recently updated capital reinvestment rate is less than 40%.
We also remain keenly focused on continued financial discipline and targeting significant debt reduction in the first quarter, we saw a $264 million reduction in total debt, which places the company at less than one times net debt to EBITDAX on an annualized basis and puts us on track to achieve the same ratio.
Trailing 12 month basis mid year.
The next quarter fixed dividend of <unk> 28 per share represents an approximately 2% yield which exceeds the S&P 500 average yield and is in line with our target of 2% greater.
As I mentioned previously we have continued our share repurchase program at an active pace with since 2000 1919 over $540 million, representing 18 8 million shares repurchased to date at an average price of $28.76.
This is about 20% of our flow.
And we have approximately $960 million left in our authorized program.
Given our approximately $35 WCS cost of supply we are committed to returning cash at a wide variety of prices.
As you've heard from other operators in the industry is clearly seeing inflationary pressures Doug will provide further color, but I do want to mention that should inflationary pressures continuing to manifest itself beyond what we have planned for we have maximum operating flexibility and may choose not to participate.
With that I'll turn the call over to Doug.
Thank you Bill and good morning prior.
Prior to my operations comments I'd like to share a few observations with you having been a part of continental now for three months like you I have long known about the company's high quality reputation, but now I've seen it from the inside.
The strength of the assets is obvious but I've been very impressed with the quality of the company's employees and leadership, the Petro technical and operating strength of the company is outstanding and these capabilities serve as a differential foundation for enhancing shareholder value in the future.
Best example of these capabilities is the seamless integration of two additional major assets to the portfolio, where we are recognizing better than expected productivity capital efficiency and resource potential.
The company substantial and diverse resource base is uniquely positioned for outstanding returns and value creation for the next decade, and an extremely competitive cost of supply.
These attributes combined with a focused dedicated culture gives me great confidence in the company.
And I'm very excited to be part of the continental team.
Moving to the operating comments, please turn to slide eight which provides a side by side summary of our current annual guidance versus our original guidance. As previously noted we have increased our annual oil production guidance to 200 to 210000 barrels of oil per day inclusive of PDP volumes from our recent powder River acquisition.
<unk> significant ice and snow storm related downtime in North Dakota, we are confident in our production guidance for the full year and sequential production growth each quarter due to the recent storms. Our Bakken asset is currently producing approximately 85% of pre storm levels, but we expect to be back to 100% by mid may.
This downtime has been offset through accelerated drilling and completion activity in the beginning of the year increased workover activity and through better than expected productivity from our recently completed wells. We project a strong December 2022, corporate production exit rate of approximately 220 to 230000 barrels of oil per day.
Additionally, we have raised our natural gas production guidance to 1.1 to one 2 billion cubic feet of natural gas per day due to strong early performance from our 2022 gas wells in the scoop and stack areas of the Anadarko Basin. These.
These additional volumes are benefiting our free cash flow and return on capital employed.
We are maintaining our operating expense guidance for the year, including production expense, which was elevated in the first quarter due to the aforementioned after mentioned increase in Workover activity.
These accelerated workovers or paying out in an average of two weeks absent. These highly economic Workovers, we are within our operating expense guidance for the quarter.
Given strong pricing realizations, we are improving our oil and gas differentials and are projecting negative $2 50 to $3 50 per barrel of oil and positive 25 to $1 per thousand cubic feet for natural gas.
These increased realizations are driven by the attenuated drilling activity in the basins, where we operate leading to strong in basing pricing strategic pricing with our refinery customers in NGL pricing uplifts.
Also as noted previously we have allocated an additional $100 million to $125 million towards inflation as we see inflationary pressure of up to 20% versus 2021.
With the strength in year over year consistency of our operations, we have options when it comes to service providers and products, we use to execute our program we will continue.
To monitor inflation and respond accordingly, including the pursuit of further operational and technical efficiencies as well as adjusting our capital program up or down as economics dictate.
Overall, we believe our strong results and forward looking projections highlight the strength of our operations our teams and our assets and how this performance translates to significant and sustainable corporate returns and cash flow generation.
Please turn to slide nine Continental has acquired over 600000 net acres across the Bakken Anadarko powder River and Permian basins over the past 18 months through accretive bolt on acquisitions and organic exploration.
These acquisitions represent a 50% increase in our total net acres over this period for efficient future resource development at highly competitive acquisition prices.
As we messaged last quarter, our expansion into the Permian and powder River Basin has been exceptional our teams have done a great job on all fronts assimilating the existing assets as well as standing up multiple drilling rigs in both basins to develop and explore these two high quality assets I'm, particularly.
Really proud of our continental teammates and our Casper and Douglas, Wyoming field offices, and our Monahan, Texas field office for the great job. They have done making successful large scale transition as possible in a very short period of time.
From a geologic reservoir and land perspective, our teams in both basins are operating at a very high level, which is evidenced by the early time result. This is a product of many years of detailed and focused technical evaluation prior to entering these new basins and having an advanced understanding of the many stacked reservoirs available for commercial development in these <unk>.
Areas.
Slide 10 highlights our newly acquired position in the Delaware Basin, we have added new acreage to our total acreage position in the last 90 days identified by our Red outline on the northern portion of the highlighted yellow acreage map. We're excited about the initial results from our recently completed 10, well unit, which is meeting <unk> exceeding our expectations.
Following a cumulative 15300 barrels of oil equivalent per day from 10 wells targeting the third bone spring and the Wolfcamp a reservoirs.
We currently have four rigs operating in the Delaware and we are planning for one additional rig in the second half of 2022.
Our focus will be full unit development of the bone spring and Wolfcamp reservoirs across our position in the Delaware Basin.
As you look at Slide 11, you will see why we're excited about the powder River basin.
We're very pleased with the recent results from 19, new wells producing an average IP 30 of 1151 BOE per day. These wells span a 70 mile long continuous fairway through our core acreage and were completed in three different reservoirs, including the Shannon Niobrara and frontier.
Were currently operating two rigs in the basin focused on development in the Shannon and frontier, while further delineating the niobrara across our position. Additionally, we plan to complete wells and four other reservoirs by the end of the year.
We expect to drill more than 100 wells in the next two years in the powder with roughly 90% of these wells targeting the Niobrara and frontier slashed Turner formations.
Please turn to slide 12, you will see that another aspect of our differentiated differentiated ability to unlock opportunities as the continued positive rate of change to our capital efficiency and cost of supply.
Our sustainable free cash flow generation is not only a function of the commodity price environment, but the strength of our operations and support teams.
Since 2015, we have seen a 30% improvement to our company wide cost of supply and a 50% improvement to our capital efficiency back.
Backing out inflation in the current year the graphics show the sequential improvements in our operating capability and expertise over time at.
At present, our operating and subsurface teams have successfully mitigated inflation as demonstrated by the flat cost of supply in 2022 versus 2021.
This achievement is due to improved drilling and completion efficiencies as well as successful geotechnical evaluation, resulting in outstanding well performance in.
In summary, we're executing our program and a highly efficient value focused manner, while maximizing our cash generating capabilities.
I'll now pass the call back to Bill.
Thanks, Doug.
Finally, turning to slide 13, our commitment to ESG leadership continues to be front and center for continental slipped.
Look for 2020, one ESG report to be published in July.
As we have published in our previously ESG reports, we believe the existing frameworks do not adequately consider the contribution to the energy industry makes to the security and well being of the United States.
And the rest of the world.
Our framework considers these contributions and presents a view focused on the societal contribution that oil and gas makes to modern life.
The events the unfortunate events unfolding in Europe in the first half of this year highlight this very issue.
We remain committed to addressing the critical needs for society to access the secure reliable affordable clean energy we produce.
In addition to our focus on ongoing operational improvements during the recent quarter.
We announced a strategic investment of $250 million and summit carbon solutions.
Which is expected to be operational by 2024.
Once completed the project will be the largest carbon capture and sequestration project in the world expected to capture and sequester. It 10 to 12 million tons per year of C. O two biomarker.
By way of comparison, Continental's 2000, Twenty's scope, one emissions were approximately $2 3 million metric tons.
<unk> is currently raising additional equity and once finalized.
To own approximately 25% of this enterprise as an equity investment.
Our investment will be funded throughout 2022 and 2023, we're very excited about this project and encourage you to go with summit's website for greater detail.
With that we're ready to begin the Q&A section of our call and I will turn the call back over to the operator.
Alright, thank you.
And we will now begin the question and answer session to ask a question you May press star and one on your Touchtone phone.
We are using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two please.
Please limit your questions to one question and one follow up.
Our first question today will come from Neal Dingmann of tourists Securities. Please go ahead.
Good morning, guys can you hear me all right.
Impressive results. Both my questions are operational in nature first on the Permian position I'm, just wondering particularly now that you've had the asset for a number of months could you speak to the upside maybe you've experienced there and do you have any concern for gas takeaway next year.
Yeah, a couple of things I'll add this is bill then probably have dug in and Tony to add to it as well everything we've seen so far we have really liked.
Coming in at equal to or better than what our expectations are.
I think we're all seeing the same gas offtake issue that you've probably heard from other folks as well.
And the next 24 months or so that where the industry is going to need additional off takes for gas in that area, and where we're drilling and developing at a pace commensurate with our expectation of what that uptake is going to be but Tony Doug you may have some other comments on what we're seeing from the world.
The only thing I would add bill is just the the performance early time from some of the new completions is really strong and gives us further excitement from what we anticipated originally in our current plan in the next few years.
The results that we're sharing on one of the new 10, well units is particularly exciting as it gives us confidence in.
The areas, particularly to the north that can be fully <unk>.
Developed here in the next few years that theyre going to generate some serious volumes for the company I think also as noted in my comments that the Wolfcamp a bone spring our main target, but we see further opportunities and that the stratigraphic section. So it's exciting and what's really super cool about Aneel is.
This company has hit the ground running really fast and it's as if the asset has been a part of the company for 510 years.
Great details and then my second is just Doug on the on the Workovers you mentioned prepared remarks, you'll have a number of further work over opportunities either in the Bakken Anadarko Permian as you see in the horizon.
This is another really powerful story.
Im really excited about it when you when you look at what we've done our base <unk> runs a little bit less than three three bucks a barrel and workover expense for the company was forecasted to be a little less than a dollar a barrel to add to that so bringing us to what you see in our guidance is a little less than four bucks a barrel we have.
<unk> completed 301 workovers in the Bakken in the first quarter alone.
That is 65 more than the company has ever done historically.
Just an outstanding job that they are executing in the field up there at tremendous economics as I noted at.
A two week payout.
These these projects.
Bringing on anywhere from 50 to 55 barrels of oil net and you can just see tremendous runway there as we expect to continue at a similar pace, but we will be adjusting that through through the year as we see whats economically makes the most sense obviously the Bakken has the most opportunities for those Workovers we will.
Be continuing to look around the portfolio for opportunities there'll be some in the Permian obviously, some in the Anadarko and as we turn our attention to what's possible in the powder.
More limited number but opportunities there too so.
That's a that's a really powerful part of our program, that's improving our economics and.
Again, demonstrating our leadership in the company of how we can mobilize resource very cost effectively.
Give you a couple of numbers just to help on your modeling so last year expense Workovers averaged about 75 cents of Bowie first quarter. They were about 13, so that 40 cents uplift there.
The 301.
Projects that Doug referenced and obviously they paid out quickly as he indicated you back that out we're comfortably within our guidance, we modeled out for the year, we expect.
Obviously, we retained and reaffirmed our guidance, we expect to be within our guidance for the year. So we're well positioned.
Thanks for that John .
Our next question today will come from Derrick Whitfield of Stifel. Please go ahead.
Good morning, and congrats on a strong quarter and update.
Thank you Mike.
My first question I wanted to ask a more direct question on your long term return of capital objectives and thinking about the free cash flow projections you outlined on page eight is there a case to make for the institution of another return of capital means given the degree of free cash flow available President your float and your net debt leverage.
Yes. Thanks, Gerry appreciate it yes, what we've said in prior calls and I would go ahead and reemphasize it hears that.
We're looking at all the tools in the quiver so to speak and there is lots of different vehicles.
One of the <unk>.
Ones that is most important is the share buyback.
That's out there is another tool that can be used and we remodeled $100 million fourth in the first quarter.
The debt pay down the balance sheet is still where we're trying to get to and you've seen our targets.
$3 billion is where we've been obviously as we continue to generate cash flow and net debt license.
We may strengthen that bye bye lowering that target even further below $3 billion.
I think the point that ill use this as a springboard to the question I know you guys will always have on this but it builds into the end of this dialogue because.
M&A and what are you going to do on that.
If you look at our opportunity and I think.
Neil had a had a good comment and his.
Our comments last night on this is that.
Described continental is materially undervalued.
See that as well, which is why we see a lot of focus on the share buyback is something that has an opportunity to add value to the shareholders.
That's great and then as my follow up I wanted to shift over to your semi carbon solutions partnership and certainly complement you on your investment there their team covers both upstream and Biofuels. So we can fully appreciate it.
Regarding the partnership itself could you perhaps share some context around it structure and if you are expecting to receive some percentage of the IRS 45, Q and environmental attribute uplift as a result of the equity stake you've taken.
Yes, let me maybe to do a high level then.
John Hogg Mega until a little bit more detail on some of the commercial terms have not been released publicly we do have about 31 ethanol plants that are contributing ethanol I think theres another one or so in progress.
And the structure is that the.
The <unk>, there's two parts of it the 45 carriers as you know that's $50 a ton and hopefully then legislation is going to move that to $85. A ton and then also theres low carbon fuel credit for the ethanol as actually gets sold into the various states that have that.
So long term there is a commercial.
Arrangement between the providers and us, but we haven't released the details on that.
John you've got some what I would add on the economics as ethanol is one of the lowest cost sources of Cotwo.
The emissions from ethanol plants from 90, 798% pure cotwo and the remainder is largely water vapor.
So that benefits the economics.
<unk>. This is a project that we're attracted to for a number of reasons.
Bill in his comments referenced it.
Our percentage ownership.
Is greater than our scope one emissions for instance, but we are looking at this as a very viable strong economic project.
And the participation in various context, that's something that does summit can discuss it.
Appropriate time, but.
It's a very attractive project to us I think it lends to our expertise and our skill sets in.
And about a quarter of it as bill referenced in his comments going forward and.
It's a very large project yeah, Doug just building on that.
We're really excited about this and have had extensive conversations not only with the people involved in the investment side of it but also with the government center involve all the states. All the governors are very supportive of this and of course this is.
Very significant opportunity for the ethanol producers in those states too.
Have a chance to take their ethanol and put a much lower carbon intensity on it. So this is this is one that we're convinced is going to be a really good project for everyone concerned.
Our next question today will come from Neil Mehta of Goldman Sachs. Please go ahead.
Good morning team congrats on the strong quarter here.
My question My first question.
Related to the M&A environment, you guys have been more active on the A&D side.
With acreage acquisitions PRP, obviously the deals in the Permian as well as you look at the market going forward do you still see an attractive opportunity set in and the nature of the transactions to the extent that they continue to develop over the next year do you see them more in the Bolton bolt on type.
We saw so far this year.
Yeah. Thanks Neal.
Look at it from the from a high level and you've heard US say this before our preference is always bolt on.
It provides an opportunity to to go in and.
Embraced an area that we all already understand already are working in the things that we.
We talked about when we got into the into the Permian and I know that somewhat surprised people when we got in there, but I know you'll recall on the last call.
We discussed that actually the first time, we looked at making an acquisition in the Permian was at the turn of the century. So we do have a really thorough disciplined exhaustive job of looking at the rocks looking at the economics and before we get into any type of of M&A activity and I think we're all seeing where prices are right now that you're going to be in.
A much more difficult bid ask spread.
So bolt ons are still going on.
Probably the thing that we prefer to do as we go forward, but I think even the ability to do that because it's going to be somewhat constrained with where we are right now in the price cycle.
And Doug I don't know, whether you got anything else you want to add to that I may just add bill that.
We'll continue to look at these opportunities as Bill noted.
That makes strong economic sense and will provide opportunities for future investment that are competitive within our portfolio and what's really significant to note as we think about these acquisitions.
We in many cases, we're seeing that average acquisition price of less than $10000 per acre and so as we think about opportunities to invest in the future. We will we will evaluate the economics closely but this competitive price that we have.
Added to our portfolio gives us a lot of confidence in what we have and.
And there should be other opportunities that we're able to pursue in the future Neil I might throw out just one last perspective on that.
Another question is always out there.
What are we going to do and more importantly, what are you going to pay for it.
If you look at the disciplined approach we took in picking up that 600000 acres.
And back in what we actually paid for undeveloped acreage you'll find that it's a pretty low number and that was based on our approach to that and thats, even before the run up in crude prices, but with the run up it's it's even a smaller number but that's a reflection of who we are we take a very disciplined.
Approach as to how we're doing M&A and we don't do a lot.
But when we do we think it's going to be beneficial to the shareholders.
That's great Great perspective, the follow up is on natural gas if you look at it.
The quarter, you had very strong realized gas prices versus I think what most of US had modeled how does the strengthening of the gas forward curve change your activity expectations, where you wanted to deploy capital what you prioritize in your footprint and was there anything unusual in terms of the gas price realizations in the quarter.
Or are you just capturing.
Mark.
Yeah, Great Great question.
I'll share with you a little bit of some of the results we've seen some from some of the wells.
Youll recall that we actually started down the path in may of 2020, as saying that we we see that.
Gas fundamentals are going to be strengthening and we probably have elevated shifting our drilling activity to reflect that we did so.
Actually of course ran up a lot more than that and then I think all of us anticipated.
But we're benefiting from some of that deliver decision at that point in time to to move into that more gas area.
Were seeing great performance from the Anadarko wells.
Yes, probably in 19 of the 20 top wells, we have in the company owned basis or are in the Anadarko going forward.
I think if you look at the numbers and probably.
Calculate that from the exit rate that we described on the oil.
We're going to be shifting a little bit more of that percentage to on all your portfolio. This year and still have a lot of running room on the gas side.
You asked about whether there was anything unusual in the differential obviously ngls are benefiting significantly being a two stream reporting company. Our gas differential is inclusive of the NGL uplift that is obviously significant and pronounced.
That's a reflection of what we're continuing to see in the market. So I think we expect to continue seeing strong uplift there and the differentials and as a result, we uplifted our gas.
Parental guidance last week, we did all of us.
As well because in basin pricing strong so we're continuing to benefit one of the things you see that manifest itself with our assets is the geographic diversity and so as we talked about earlier as pipeline start getting constrained in one area or our services, we've got opportunity to to go somewhere else and so we can move from basin to basin depending on.
On what we think the optionality on their commodity is.
Our next question today will come from Jeanine Wai of Barclays. Please go ahead.
Hi, good morning, everyone. Thanks for taking our questions.
Thank you.
Our first question is maybe hitting back on the debt.
You said that you plan to take out the 2020 threes in 2020 fours by the end of this year that totals about call. It $1 6 billion. How aggressively are you thinking about the next tranche of debt. That's due which is the 2026 nodes and then a follow up.
It's on cash returns and it's kind of related so we know that you are committed to returning cash to shareholders and just to be clear does that over 40% of cash flow does that payout level extend to 2023 and beyond and I guess, depending on your answer to our first question does that percent of cash flow does that just include dividends.
Going forward. Thank you.
Okay. So you've got a lot in there if I Miss any fireback Ed is please.
Yes, we are very focused on the 20, <unk> and 24 as we will continue to be on that obviously, we're generating a significant amount of free cash flow that enables that this year. So as we work through those you referenced the 26, specifically the 26 is our unique structure or a five year non call too.
Which isn't a common.
A paper.
But when we did issue bonds those bonds back in November we did a good job of walking through the why with that with potential investors. The why we did that is because it gave us near term.
Instruments that we could pay off so theyre not in the call window yet.
But as we move forward that would likely be one of the next pieces of paper that we would look to reduce but I can't tell you that it will be this year this year will likely build.
Cash balances after we factor through those other two instruments and look towards a net debt.
Type considerations so.
Great deal of Optionality, we're really pleased with the progress we're making in <unk>.
As we've talked about for a long time debt reduction is very important to us.
And just looking at the first quarter were annual on an annualized basis, we're nicely below one, but where we want to be is below one.
55 to $2 75 type commodity environment that gives a lot of insulation against price volatility so.
Ill continue aggressively pursuing debt reduction.
Okay, and then on the 40% of cash flow extending especially beyond 2023.
Thank you.
Yes.
40%.
Addressing the 40% commitment to return to the shareholders.
And.
You'll see that as a strong commitment that we will continue on and of course, it's price dependent too, but I think as you would expect to see 'twenty three 'twenty four when we get the guidance out in 'twenty three you'll you'll see us continuing to subscribe to a strong return to shareholders and all of the vehicles, we have the choice to use dividends share repurchase.
And also paying down the debt, yes, we do consider debt reduction to be a component of that we do believe it's returned to shareholders not all investors necessarily look at it that way, we do because we think a strong prudent balance sheet.
<unk> is a benefit to shareholders and I'll point out that our reinvestment right, where it's at today, obviously is enabling a lot of that but even in lower commodity price environments. We kept.
Reinvestment rate in line with that 40% return to shareholders.
Okay. Thank you.
Thank you.
Our next question will come from Doug Leggate of Bank of America. Please go ahead.
Thanks I appreciate your patience. This morning, everyone because as you know there's multiple calls going on so thanks for getting me on the queue.
So John .
Laurie.
He is going to beat me up on this one and then I'll ask you to do our job for a second.
You're just generating an enormous amount of cash.
And even with the maturities you've talked about what do we do with that.
How do we know.
How do we think about does continental build cash to giving your comments John So our net debt zero type of position that even the net cash position.
So I wonder if you could address that first and secondly.
You have timing on M&A has been fortuitous strategic has certainly been terrific as it relates to what you've paid.
There is speculation of a very large package from a major oil company right in your backyard Im curious.
If you could comment to whether or not that's something that continental is a way at all.
It might consider and might build cash to accommodate.
Yes. Thanks.
Thanks, Doug.
Address the last part first and then you'll not be surprised by the answer is that.
Yes.
Pretty much stay plugged in as best we can with the things going on and obviously you don't talk about.
Anything that we might be considering or may not be considering to address the first one and John will do more articulate Jasmine and I will but if you look at the the cash that we're generating yes. It is really strong really robust.
There are $6 $5 billion of debt that we had coming into the year, we've got $400 million of dividend.
And on the pace of repurchase that's another $400 million of repurchase during the year that kind of pace opportunity. So there's a lot of opportunity for return to shareholders with the cash that we're generating Jonathan you got anything to build on that or not.
Still focused on ROI is going to beat you up but I don't think thats. The case, so I'm not too worried there.
We've got a lot of flexibility, Doug, we're very well positioned putting up four 3% to four 7% and free cash flow. This year, one year after putting off well in excess of 1 billion in the first quarter relative to that $6 5 billion of debt. I mean, you can do the math clearly we could execute our share but.
Buyback program the rest of that the remaining 960 million pay off all of our debt. If we chose to I'm not saying, that's the optimal capital structure, but we've got a great deal of flexibility. So debt reduction is going to be a continued to be a part of that this was the fifth quarter in a year, we've raised not only our state it did.
In but the yield on that so we continue to have a lot of benefit and opportunity to do that we do not have a variable dividend in place I'm not sure. That's the most appropriate way to do it.
To be honest we prefer.
Our strong fixed dividend, but we've got some capacity and ability to be considered if the cross what we do there and we'll continue to look at what we're doing operationally with the company and where we're at we're going to be appropriate and balanced and everything that we do.
Doug I don't know whether you were on the call earlier on when we had this conversation, but we've talked about.
<unk> put out a comment that I thought was very appropriately awarded that.
Continental or materially undervalued, which suggests that they.
The incremental dollar that's the best application of it is to use it for the stock repurchase program that we have.
So it's I don't want to elaborate and I appreciate the answer but I guess to be more specific about my question. We all know you could buy back the remaining suite fluid, but clearly launch.
A bit of an unrealistic scenario. So we're just trying to figure out.
What do we do with the cash.
Is this in your balance sheet, Jon I get your point about you could take that down or simply the net debt zero position, but it just seems a nice problem to have I'm just trying to figure out how do we actually think about it from a practical sense yes.
Yeah. Thanks, Thanks, Doug I think you were talking about 'twenty, two 'twenty three type of discussion.
As we've talked about and we've talked about in the script John talked about earlier, we really focus on mid cycle.
$55 to 75 type number and what type of cash generation, we can generate at that level, we're still living in a pretty uncertain world. If you look at what's going on with <unk> with the Covid with supply with the Russian invasion. So you can you can argue a lot of volatility is going to be out there.
And we think it's prudent for us to address the balance sheet.
And we're happy to do that with cash on a net debt basis.
I appreciate it as a very clear answer I was looking for thank you.
You bet.
Our next question today will come from Oliver Wong of Tudor Pickering Holt. Please go ahead.
Good morning, everyone and thanks for taking my question just had one quick one that I wanted to touch on from the service side of things, you're really briefly with how material costs labor inflation have trended higher which we are all aware of just wanted to get a better sense for what continental has in place from a contractual perspective and over what duration to kind of help mitigate.
Any near term moves towards spot rates on rigs and crews that we're seeing today is that kind of move into the back half of 'twenty, two and 2023.
Hey, Oliver it's Doug.
We have a number of services that are contracted for short periods of time.
The bulk of our service providers are not under long term contracts that gives us.
It gives us a lot of flexibility in how we execute our program.
To your point, we do see continued pressure and potentially we will see further pressure throughout the year. An example of that is.
For OTT tubular OTT G. Tubular is just in the month of March alone. There was a roughly six 5% to 7% increase in the pricing there and we're seeing continued.
Continued increase in fuel cost as well as labor and we'll be doing our best to offset and mitigate mitigated as best as possible.
Reising strategies for Us, we've got a robust supply chain group that.
Gives us a lot of opportunity with the number of providers and the consistency of our operations over the past several years to to.
To make sure that we get the best prices.
In a challenging inflationary environment.
But I guess the way I would look at it kind of in summary to answer. Your question is that we will take advantage of any pricing structure longer term shorter term agreements that maximize the cash flow of the company and at this point in time.
There are some services that we've done that with the bulk we have not we will continue to evaluate as we proceed through the next several quarters.
Awesome, Thanks for the color.
Our next question today will come from Leo Mariani of Keybanc. Please go ahead.
Hey, guys wanted to follow up a little bit on the summit carbon capture project.
And are you all kind of all announced in conjunction with <unk>.
$250 million equity investment it sounds like thats going to be paid over the next two years I just wanted to confirm that that $250 million. We'll give you the 25% or are there may be some other future equity calls that could come along with this project and then additionally, just.
Continental did themselves as more of a passive financial player in this role or do you think there is an active operational role here for continental as well.
Okay. So.
You can see this ed on the summit website, but its afford at $4 $5 billion project initial plans are to raise roughly $1 billion of equity of the news back leverage.
They may or may not choose to utilize some incremental equity in there at some point at later stages.
Likely at a higher price of equity because it will be a more consummated project as it moves forward. So initially we will own roughly 24% to 25% of the outstanding equity of about 25% will have to have a board seat as it moves forward.
I don't know that there's any need to grow.
Our board the board size or anything of that nature, if if they do choose to raise equity as we go forward. We are very active part of the board we're not active in the management or the actual physical execution other than in our role as a significant shareholder and as an active board member.
There's obviously a lot of dialogue that goes on we do have abilities that may benefit that venture. Obviously, we may do some operational aspects at some point in the future but.
That hasnt been determined as of yet so it's a great project.
As we've indicated the largest announced carbon sequestration project in the world, We believe carbon capture and sequestration is an integral part of climate.
Addressing climate change as you go forward and we're very pleased to be a part of it.
Okay. Thanks, and then also you also mentioned that some of the production downtime youre experiencing in the Bakken here in the second quarter, which I'll be able to quantify that at all.
Corona numbers that hey, maybe it's 8000 Boe per day or something or anything you can do to help us would be great.
It's kind of a moving number right now just as we're ramping back up our production I think I'd just point you to look at the fact that.
The efficiency of the operations and the quality of our investments.
We did that we increased our guidance and did that in the midst of that storm. So I think thats. The thing I'd ask you to look at rather focus on what we launched at a particular point in time in the last couple of weeks I think about the fact that this company's robust robust and powerful in its ability to continue to mobilize resources in the <unk>.
All year guidance is unchanged.
The increase but unchanged from what we put out last week.
Full year guidance has also benefited from our incremental powder River acquisition that closed right at the end of the first quarter. So there is a nice level of PDP volumes that come with it also so we're in good shape on our guidance.
Okay. Thanks, guys.
Our next question today will come from Paul Cheng of Scotiabank. Please go ahead.
Thank you good morning, guys.
Yes.
Paul.
The first question is that when Youre looking at some of that deal.
Ed defensive move that.
So that you can manage your top and intensity in exposure or what that will look at it as a window could be an offensive play that may comp and management at and not a pump.
It's a center for the holding company that's the first question.
Yes, Thanks, Paul Let me, let me repeat to make sure that capture the.
Another question. So your comment was the rationale for us investing in summit.
Vis vis carbon intensity is that correct.
Yes, I mean, what we need so that you can manage your tapping the intensity all of you.
That's a little water and potentially look at it as a window. So that you can build it in.
<unk> business.
And therefore in the future.
Yes, I'll build on John's comments about as we'd looked at.
What we have as far as our carbon intensity and we put this number out that when we in 2020 at about $2 3 million.
<unk> tons of Cotwo emitted in there and we look every every single day at what we can do to address that.
Methane reduction in greenhouse gas their own activities and one of the things that we look to and this is what John Hart was it was describing is what is the most capital efficient way to take carbon dioxide out of there.
Atmosphere.
Yes.
Conversation that we've had around the summit project.
This statement when we announced it in North Dakota is that.
We think that.
The World should look at the most capital efficient way to manage all types of emissions and all forms all forms of energy have some type of emission byproduct and maybe liquid maybe solid and in the case of hydrocarbons, it's usually gas in greenhouse gas and so our approach was what is the most capital efficient way to take off.
Delek sought out of the atmosphere and ethanol plants are the most capital efficient way to do that and Thats why we looked at Theres, just a natural combination of skills and if you look at the really strong summit team from the agricultural side.
Our skills from the transportation from the North Dakota from the subsurface size. It was actually a very strong matching of complementary skills that led us to say this is the right right thing to do it is a project that we think is going to capture cotwo off the ethanol plants going to capture cotwo off of other plants along the way.
That leads to a material reduction in carbon dioxide out of the globe and that's that's just part of who we are part of our ESG stewardship. That's the right thing to do and that's why we're doing it.
Okay.
I guess my question is that do you view hit at the future profit Center.
Or that it's really getting the credit so that you can manage.
On.
Carbon exposure.
Yes, we've said that.
This project is economic at the.
At the proposals that are out there if you look at the 45 Q today 50 go into 85, and the low carbon fuel credit said.
It's an economically viable project and that's that's why we've said that these are the type of projects that we think are and thats really the capital efficient comment at that time.
Talking about Paul your capital efficient mean that youre actually economically viable to make this project.
And ladies and gentlemen at this time, we will conclude our question and answer session I would like to turn the conference back over to Rory Sabino for any closing remarks.
I want to thank everyone for their time today I know, it's a busy day for everyone out in the financial community and we certainly appreciate the effort Steve part of our call and please reach out to the IR team with any further questions. Thank you very much.
The conference has now concluded and we thank you for attending today's presentation and you may now disconnect your lines.