Q1 2022 Callon Petroleum Co Earnings Call
In our earnings press release, both which are available on our website.
Following our prepared remarks, we'll open the call for Q&A and with that I'd like to turn the call over to Joe Joe.
Kevin and good morning to open on the calls.
As always I encourage you to review the earnings presentation on our website and as background for our commentary.
I will start with a review of our first quarter results.
To a great start to the year with operating and financial results exceeding both guidance and consensus expectations.
For the quarter total production came in above the top end of guidance at over 102000 barrels of oil equivalent per day oil cum 63% and total liquids content of 82%.
Part of the outperformance was driven by well productivity from the initial round of larger scale projects and our new Delaware out there.
Better than forecast in both the Wolfcamp, a and Wolfcamp b formations.
Just as impactful.
Meaningful progress lowering operating costs, despite important deflationary pressures in the field.
We were able to reduce absolute lease operating costs by $6 $2 million and gathering and transportation expense by $1 3 million on a sequential basis.
As Jeff will discuss in his prepared remarks, we are taking additional steps to further decrease operating costs over the course of the year.
Strong oil and natural gas price realizations experienced during the quarter.
And the cost structure improvements.
Consecutive increase in quarterly operating margins drive, leading operating margin exceeding $58 per Boe in the first quarter.
Switching to the capital program, our disciplined reinvestment rate of just over 45% drove another quarterly decrease in free cash flow.
While also setting us up for efficient production growth in the second half of the year.
During the quarter, we increased our drilled but uncompleted backlog by 15 to a total of 42 wells with.
Backlog at a more normalized level, we are now positioned to start decreasing our completion pace.
So you can pick activity will drive our projected 10% increase in daily oil production by the fourth quarter as previously outlined at our 2022 operational plans in February .
<unk> operational capital spending for the first quarter was $157 million.
So our guidance of between 175 and $185 million.
This was driven by a deferral of a portion of our Permian infrastructure spend which we now expect to occur in the second quarter. In addition to realized capital efficiencies.
As we have over this earning season for energy companies across the value chain.
Additionally, cost pressures have continued to build and the labor materials and equipment markets.
A reminder, we factored in an average price escalator of 10% for 2022 capital budget at the beginning of the year to account for inflation estimates at that time.
This outlook also gave consideration to capital efficiencies from longer laterals unexpected integration synergies related to Delaware.
Given the rapid increase in oil prices and resulting market tightness, we've been proactive in recent months entering into new or modified agreements that provide a certainty of T services to ensure execution of our program with top tier service and materials providers.
I am pleased to say that we have secured all of our needs for completion crews drilling brings sand and steel casing for 2022.
And for some of these categories into 2023.
In addition to reliable access these agreements come with a varying level of price certainty for.
For example, the agreement for one of our completion crews provides a full year firm pricing in 2022.
However, and other agreements we are exposed.
This reopening discussions over the course of the year, which is typical for these types of industry agreements.
Given the rapidly developing Denise mentioned the service market and recent industry data points, we are evaluating several scenarios for incrementals headline inflation impacts on our capital program for 2022.
Depending on the outcomes of upcoming pricing discussions and the overall pace of oilfield price increases as the year continues to unfold. Some scenario show service inflation impacts moving into the mid to upper single digits. However.
However, as evidenced by our first quarter capital spend in a rising price environment. We will continue to drive initiatives to decrease our operating efficiency help mitigate potential drilling and completion related price increases in the coming quarters.
Importantly, our operational program remains intact.
Confident in achieving our targeted leverage metrics of between one to two five times EBITDA by year end 2022 at prices well below the current strip.
It covers a wide range of outcomes from our vendor pricing discussions and benefits from having a four months of the year behind us.
Nicole certainty embedded some of our existing service agreements extending into year end.
We also remain focused on lease operating expense to preserve our differentiated cash margins.
<unk> has been made to offset inflationary cost pressures with first quarter results serving as a good example, we delivered a sequential decrease in absolute dollar you spend.
Large part some synergies we have realized in the Delaware South area.
Lastly, thanks to a strong start to the year, we continue to pay down debt and strengthen our balance sheet at a faster than anticipated pace.
Generating over $108 million in free cash flow in the first quarter, which was our eighth consecutive quarter generating free cash flow and third consecutive quarterly increase were on pace to achieve our goals of exiting this year with a leverage ratio nearing one times EBITDA and absolute debt approaching $2 billion.
As we turn to the second quarter outlook, we recently accelerated the timing of a portion of our 2022 Eagle Ford program.
Potential Permian bottlenecks that we saw earlier in the year and mitigated some pricing pressures.
Looking at our second quarter production profile, we expect volumes to be relatively flat with the first quarter of 2022, while momentum builds from increased completion activity into the second half of the year.
The number of wells drilled will be relatively similar in the second quarter versus the first quarter were placed on production wells are expected to rebound to over 30 net wells.
With a meaningful uptick in activity, our operational capital spending is forecast to be between $225 million to $240 million.
Accrual basis income.
You can catch up on some deferred spending from the first quarter.
I'll now turn it over to Jeff to discuss operations.
Thank you Joe and good morning, everyone as Joe mentioned, we had a great structure of the year.
Operationally, we exceeded our production forecast as well results yet.
And Midland basins met or beat our expectations.
And despite the ongoing inflationary environment, we've maintained discipline with our capital costs coming in below forecast.
Lastly, I'm proud to report that we are successfully implementing our strategy to reduce operating expenses on the depth of our south assets.
Partly in response to the increase in oil and natural gas prices during the quarter, we elected to add a workover rig and increase the companys workover activities by approximately $3 million sequentially.
Workovers and re completion activity or some of the highest rate of return projects in our portfolio.
Payback periods of less than two months.
And during the three month period reflected the increase.
Pace of installation of electric submersible pumps or ESP.
Some of these ESP is after only two months of initial production versus the normal forbearance.
Specifically in our <unk>.
<unk> inhibits wells, we realized average production increase is up 40% with the days of installing the downhole pumps.
We remain extremely focused on overall operating expenses in all of our areas.
Excellent started in 2020, and a large part of offset.
The inflationary pressures by increased operational efficiencies such as improvements in overall artificial disc strategy compression advancements in sourcing cheaper apartments like chemicals.
And I'm also very excited to mention that our efforts to reduce our methane intensity remained on track.
Program to change out and that mix has had a great start.
Now I'd like to provide you with an update on each of our operating areas. So starting with the Eagle Ford.
During the quarter, we drilled nine wells on three pads as part of <unk>.
526, well 2020 for development program.
We commenced completion operations on the purchase of these pads in early April and plan to complete the remaining balance in the second and third quarters.
As we discussed last quarter as part of this program, we will be drilling and completing the Austin chalk well and we plan to complete this well in the third quarter.
Shifting to the Midland Basin, we continue to have success with multi bench development in our life of field development philosophy.
One example of this our two four well pads.
We placed on production in our Sidewinder area completed.
Completed at year end.
800, 9500 foot lateral wells were completed targeting multi bench development in the Wolfcamp b and lower sprayberry partnerships.
It had an average 30 day production rate of $11 50 per day with 84% oil.
During the quarter, we had two rigs running in the basin and drilled nine wells with completion operations commencing at the beginning of April .
Can you try and keep a two rig drilling program on the Midland acreage through the second quarter.
Yes, the one rig for the remainder of the year.
Moving to the Delaware.
All of our completion activity in the first quarter. It was focused on high Def or acreage.
During the quarter, we completed 16 wells across the line is open.
What was it.
Were completed targeting multi bench development, well campaign and Wolfcamp b formations.
Two pads.
Are the six <unk> units in the firewall Campbell.
On our Delaware South acreage.
9000, plus foot laterals achieved strong production results with the key is generating a peak average 30 day rate of 13 12 Boe's per day in the camp of wells with an average 30 day rate of 11.
<unk> per day and around 80%.
Thank you Krishna Prasad from two to three wells to $5 six respectively.
The revised cost benefits.
Given the lower cost and the strong production profile, we expect these wells to pay as little as.
Six to seven months.
Our capacity to generate free cash flow.
This strong.
Results, we've made strides in lowering our operating costs on our Delaware asset.
During the quarter, we switched surface providers on items like chemicals to enter into more favorable pricing.
This helped to reduce our <unk> on our Delaware south asset by 23% sequentially.
We've scheduled facility upgrades for the asset later in the year, which should also provide the opportunity to increase efficiency rates.
For our global feature comments.
Before turning the call over to Kevin.
The current price environment.
And the steps that we've taken at the contractor service needed to mitigate price volatility.
Over the last several quarters, we felt inflationary cost pressures on many different certain assumptions such as the labor materials like tool steel.
Also equipment.
Our multi basin asset base provides flexibility as the service market is not as tight in the Eagle Ford.
As in the Permian Basin, which provided us the opportunity to flex our program as we've done in the second quarter.
Additionally, we've used our scale and steady development base to enter into service contracts that reduced price volatility and provide greater service assurance.
Okay.
We entered the year operating seven rigs with staggered maturities locked in for most of 2022.
And in keeping with the original plan, we will be dropping one rig next month.
On the completion side.
<unk>.
We entered into a long term contract for one of the completion cadence in the fourth quarter of 2021.
This is renewable on an annual basis for two additional years with embedded performance incentives.
So restructured locally sourced sand supply contract during the quarter to lock in our sand requirements for our two completion crews for the remainder of the year.
If I could steal AC to meet our drilling program for 2022.
Therefore, we feel really good about the steps you've taken to provide service assurance, while maintaining our focus on margin improvement.
And with that I'll now turn it over to Kevin to handle the financials. Thank you Jeff.
To start the year generating financial results like those we achieved this quarter, we increased our operating margin by 20% sequentially and our adjusted EBITDA was up 16% sequentially. The strong free cash flow generation in the quarter result of the continued debt reduction.
Happy to be able to point out our LTM net debt to EBITDA metric now starts with a one handle at 197 times now let's go through the details our peer leading operating margin once again increased driven by a 23% increase in oil price realizations on a per unit of production basis on the cost side.
The actions that Jeff discussed helped lower lease operating expenses compared to last quarter. We also realize the total dollar increase in our gathering processing and transportation costs. However, both <unk> increased on a per unit basis due to the sequential reduction in production volumes.
Our top tier margins helped us generate adjusted EBITDA of $394 million in the first quarter. The increase in adjusted EBITDA combined with the reduction in interest expense and continued capital conservatism drove a significant sequential increase in adjusted free cash flow during the first quarter <unk> generated.
Adjusted free cash flow of approximately $183 million. This is a good place also to remind you that our 2022 oil hedges are more weighted to the first half of the year and in particular, the first quarter was our highest hedge quarter of the year.
Our near term plan continues to be to use our free cash flow to pay down debt.
During the quarter, we paid down our bank debt by approximately $73 million exiting the quarter with just over $700 million drawn on the facility.
Good luck in the second quarter using current strip prices, we would end Q2 with less than $600 million stronger credit facility, continuing the debt pay down.
As part of our work to optimize the balance sheet and increased cash flow, we will look to retire some of our high cost term debt this year.
As mentioned on our last call, we expect to retire the 9% secondly notes when they are callable on October one.
We also have a small portion of eight in the quarter bonds that are callable at reasonable premiums as well thankfully.
Thankfully with our free cash, but we are anticipating generating this year, we have many options to further reduce our overall debt balance and continue our process of extending our maturities while at the same time lowering our weighted average interest rate we laid out one of these options on page 10 of our first quarter earnings slide deck.
Turning to hedging.
Our hedging program for 2022 is essentially complete with approximately 45% of our oil production hedged for the balance of the year as we look to 2023.
The portfolio with a good base players with hedges with strength in the oil and natural gas curves, we will look to opportunistically at 2023 hedges over the remainder of this year.
We will note as our leverage continues to decline and our balance sheet strengthens we expect to hedge less volumes or said another way a lower percentage of production that we have historically.
Finally, I wanted to add on the likely questions from our Q&A session regarding the timing of shareholder returns.
Commodity prices, we are targeting using free cash flow to repay debt until we achieve a net debt to EBITDA ratio of one times or below $2 billion in total debt.
In addition, we would like the flexibility and time to do some balance sheet cleanup and optimization this year, including the second game redemption I discussed earlier.
Before starting to return capital to shareholders, we want to make sure. We have a balance sheet that can support a full range of commodity prices, including the mid cycle oil price and a downside case with WTO lowest $40.
While we work to continue to achieve leverage objectives. We will also be working internally to evaluate our financial capacity to offer sustainable shareholder returns and as I mentioned on our last call is important for us to retain corporate flexibility to invest in our business, which ultimately allows us to deliver sustainable long term returns to our shareholders.
Through all phases of the commodity cycle and with that I'm going to turn things back over to Joe before we move to Q&A. Thanks, Kent.
To wrap up we entered the second quarter have been consistently exceeded our commitment to leverage reduction and operational performance. Our LTM net debt to EBITDA ratio is now below two times and free cash flow generation has been repeatable and horizon.
Importantly, <unk>.
<unk> is one of the deepest inventory of top tier projects amongst our peer group, putting us in an enviable position for a critical component of the free cash flow discussion.
Sustainability over time.
Just longer term visibility will provide numerous capital allocation options for shareholder value, including further debt reduction.
Turning to capital.
And reinvestment in the business.
Operator, you may now.
The lines for Q&A.
Okay. Thank you if you would like to ask a question. Please press star followed by the number one on your telephone keypad to withdraw your question. Please press star one again, we'll pause for just a moment to compile the Q&A roster.
Our first question comes from Neal Dingmann from <unk> Securities. Please go ahead. Your line is open.
Good morning, Joe and team My first question is on <unk> operations.
Joe maybe for you or Jeff just specifically if you will.
Talk a bit more on I really like to hear more on that that build out of the DUC inventory in the new Delaware South acreage I'm, just really wondering around that what will this do to sort of future developments and results highlight that youll. Unlike some others are really building this out.
A larger full scale development, but then when I heard about the DUC inventory as well I'm curious to know what you think the upside will be around this.
Any incident this is Joe I'll start Mark.
Jeff wants to chime in on the back end, but if you recall we stepped into.
The physician historical moment, operator was really doing one two well types of patents.
That's not our philosophy as you know from what field development co development mindset.
In order to create flexibility to move to larger projects, we have to build out a DUC inventory.
Over the last couple of quarters in the first quarter, we started to get after it.
Well, Pat and six well pads. So we're sort of steady state now, but it was really a one time event to get that done.
Area.
Ready for the type of operational development that we deploy.
Yes, and just one other thing to add is we.
We've got a nice.
Ill close with development program throughout the acreage so each of the different areas.
I think that we have.
We have taken over or putting some pads in across the entire job or south acreage testing the entire stack of the Wolfcamp a wolfcamp b.
Yes.
The wells have performed extremely well so far we're very happy with that acquisition.
Great details, both and then maybe Joe just to follow up again for you or Jeff just one more and this one on logistics specifically.
You guys continue to do a nice job of.
Again, I know everybody else's, everybody sort of seen inflation out there.
My concern is more about potential logistical issues that im sure youre facing each day.
What are you guys doing to sort of overcome that it doesn't appear that you have any potential upcoming shortages, whether that the pipe casing crack spreads et cetera. So just wanted to hear more about what you do to sort of stay in front of this because it really does seem like you guys are doing a great job.
Yes, thank you very much.
I mentioned the team as a whole, but we've been able to you.
Work effectively in the current environment.
We've got an outstanding partners.
We took advantage of kind of the four side of what 2022 might look like by entering into agreements revenue for 'twenty two relatively early in 2021.
Wei.
Things started changing relative to.
Profit margins for our partners.
Sat down and got together and figured out things that we're going to work that would allows us security for a delivery of a pipe in particular is a big horn staying the course.
The labor market and other items are a little more of a gray area because they're so dependent upon the.
Individual discipline or supplier.
But in large part.
Also to a bank that having a multi basin.
That base.
Did pop up we can just shift gears a little.
More Eagle Ford working their door or get some folks some relief in some of the sourcing suppliers.
And that.
It generally tends to be a win win situation for both.
The partners.
So we feel very good about our ability to effectively through 2020, keeping this program into the ground.
And then have some continued discussions ongoing about at what we'd like to do for 23.
Very good thanks for the details guys.
Thanks Bill.
Our next question comes from Gary Whitfield from Stifel. Please go ahead. Your line is open.
Alright, Thanks for the next Aeroquip Bill and good morning on certainly congrats on your quarter and operational progress.
Thank you Sir.
With my first question I wanted to focus on your capital plan and build on.
Question, if I could.
And the majority of this sector has announced capex increases are firmly messaging inflationary pressures I wanted to first again compliment you on the progress you've made on holding the line on Capex and secondly, ask if you've quantified or could quantify the degree of Feltl.
Our operational efficiency youre effectively achieving in your capital budget.
Yeah.
It starts out.
Some of that at the beginning of the year with our.
Operational plan at that time.
I'd say headline inflation at that point was in that.
Well to 15% or so that we saw across the sector.
Reading some of the what you call it self help whether it would be.
Okay.
Increased efficiency, we continue to deliver over time get wells down faster over time, and then maybe a little bit unique to us being able to reach some synergies from the <unk> acquisition, we are closer to the 10%.
At that point, so hopefully that gives you a sense of what kind of fee.
A few percentage points that we saw a self-help delivering towards.
And on the operational side, we've made some modifications in particular on the completion design in the Delaware Basin, South assets, where we can look at some of the fuel.
Yes.
Water loading.
So moving the same amount of sand.
Changed.
Completion design perforation scheme et cetera, and so you save money going into well on some from water costs, but larger pads.
Work out a little bit better from a distribution of the upfront costs.
And then just overall operational efficiencies.
Having very effective completion crews.
And knocking out of the wells.
On a regular basis consistently so that's all been kind of a standard what Kevin has always tried to do and so far so good in the first part of 2000.
That's great and again congrats to you guys on those measures and as my follow up I wanted to ask a Delaware ops question focusing on the operating cost side.
<unk> slide eight could you, perhaps quantify the absolute gross volume improvement from the installation of ESP and speak to the amount of well maintenance projects you have planned for the balance of the year.
Well, it's a good question, it's kind of an ongoing effort because all these don't necessarily react the same.
So well.
Good to hear.
Or a little bit heavier on the water side.
We proactively came in and put an ESP is to get that.
A density issue.
Lighter than Walker, so if you have a little more water.
Lifting mechanisms from NASA process or worse.
The initial flow back period.
So we're going to do this systematically look at all the wells that we have.
Portfolios that are not on the list.
And determine when the best time is to put those on normally what you see if you look at our long term projection of a well over 18 months for instance that usually has a component of an artificial lift installation being done at some point in time and so we don't expect necessarily every single well.
And then we get 40% uplift.
Speaking do you see some of those uplifts initially these.
These happen to be consistent and are going to be sustainable.
The other ones just tend to be kind of part of the normal process for the world right.
You wouldn't necessarily achieve greater EUR for instance.
But it Hasnt GSP itself these wells.
Are you benefiting from.
These installations.
That's great color, Jeff and great update and thanks again for your time.
Thank you. Thank you.
As a reminder, if you'd like to ask a question. Please press star followed by the number one on your telephone keypad.
Our next question comes from David Petrus from RBC Capital markets. Please go ahead. Your line is open.
Thanks for taking my questions just kind of a first one and then I realized kind of debt reduction until you work towards that.
That one times leverage and $2 billion of you're at that level remains the focus for now but is there an update on when you think kind of discussions around a shareholder return strategy can start I mean, do you Dennis targets need to be met or.
And I'll start kind of a quarter or two ahead of time.
Yes.
I think all I wanted to say on this as well.
We're headed towards these numbers at the end of 2020. So the focus this year. He has taken that free cash flow can help us get our balance sheet in a position, where we can whether future commodity cycle. So all.
All I can say, we're heading towards those numbers than in 2022, we're going to be cleaned up some of that high cost debt and at the same time doing our work on shareholder returns.
Homework includes sensitivity work on our cash flows to ensure that whatever we decide is sustainable through cycle. It gives us flexibility and frankly mix meets the needs of shareholders. So.
I don't want to put specific timing out there at this point other than.
We're going to get close to these numbers at the end of 2022.
Got it makes sense and I guess, just kind of as a follow up on one of your peers recently announced kind of a bolt on acquisition in your backyard in Ward County, I'm wondering if there's any updated thoughts kind of on <unk> role in industry consolidation kind of moving forward.
As well as kind of how how youre seeing the M&A market today.
Yes.
Good question, and we've seen a little bit of an uptick in activity, although in the volatile markets, sometimes that's a little bit more challenging to get things done.
Hey.
For us, it's a very high bar on the acquisition front.
Certainly.
That we're going to focus on of any itself will have to be accretive to our asset quality more importantly advance the balance sheet just like private X was a great example of that Jeff talked about the results on that.
The property just as we had thought this is going to compete well and attract capital.
Effectively we were able to finance it with 75% equity.
And then be accretive to free cash flow per share. So it checks a lot of boxes, we will certainly continue to evaluate.
<unk> like that.
I think it's a very high bar in terms of the overall M&A market I think there is a lot of hope coming out of the gate. This year there'll be a lot of assets moving.
But sellers trying to monetize their positions.
The runoff.
The bid ask becomes pretty tough at this point, but again there is nothing for us to chase right now we've got a deep inventory as I talked about if an opportunity comes along to check all those boxes will certainly take a look.
Got it Okay, and just one last one if I can squeeze it in kind of building off that prayer. Prior question regarding the short cycle projects you all are doing.
Can you remind me kind of how exactly those flow through the financials and that would be kind of a capital cost or is that on workover low cost.
It'll be a mix depending on the type of.
The exact breakdown, but some forward capital Workover expense.
Got it I appreciate the time.
We have no further questions in queue I'd like to turn the call over to Joe Gatto for any closing remarks.
Great. Thank you and thanks, everyone for joining us before we go.
Take a quick moment to pass along a big thank you.
Welcome Us accounts.
He will be retiring from our board here upcoming annual meeting.
Larry its contribution to the board in the last 15 years have been nothing short and valuable.
Wish wherever he is.
Family all the best in the future.
Okay. Thanks, everyone.
And today and we'll look forward to talking to you next quarter. Thank you.
Thank you for joining us on this call and for your continued interest in Cowen. We look forward to speaking with you again next quarter. This concludes today's conference call you may now disconnect.
Okay.