Q2 2022 Centennial Resource Development Inc Earnings Call

Good morning, and welcome to the Centennial Resource Development conference call to discuss its Jack.

<unk> quarter 2022 earnings two.

Todays call is being recorded a replay of the call will be accessible until August 11, 2022 by dialing 877.

Three or four.

Seven five to nine.

Entering the replay access code.

Four one.

653 for one.

Or by visiting Centennial's website at Www Dot C. D E V I N C dot com.

At this time I will turn the call over to Hayes Napery Centennial's senior director of Investor Relations for some opening remarks. Please go ahead Sir.

Thanks, Chris and thank you all for joining us on the company's second quarter earnings call.

Presenting on the call today are Sean Smith, our Chief Executive Officer.

George Lucas, our Chief Financial Officer, and Matt Garrison, our Chief operating officer.

Yesterday August 3rd we filed a form 8-K with an earnings release reporting second quarter earnings as well as operational results for the company.

We also posted an earnings presentation to our website that we will reference during today's call you.

You can find the presentation on our website homepage or under presentations at Www Dot SEDAR, Inc. Dot com.

I'd like to note that many of the comments. During this earnings call are forward looking statements that involve risk and uncertainties.

It could affect our actual results and plans.

These risks are beyond our control and are discussed in more detail in the risk factors and forward looking statements sections of our filings with the SEC.

Including excuse me our quarterly report on Form 10-Q for the quarter ended June 32022.

Which is expected to be filed with the SEC later on this afternoon.

Although we believe the expectations expressed are based on reasonable assumptions.

They are not guarantees of future performance and actual results or developments may differ materially.

We may also refer to non-GAAP financial measures that help facilitate comparisons across periods and with our peers.

For any non-GAAP measure we use a reconciliation to the nearest corresponding GAAP measure can be found in our earnings release or presentation, which are both available on our website with that I will turn the call over to Sean Smith, our CEO .

Thank you Hey, good morning, and welcome to Centennial's second quarter earnings call.

During the quarter the company generated very strong operational and financial results with a significant increase in production levels strong pricing realizations record free cash flow a substantial amount of cash on the balance sheet and a low leverage profile.

With George before George covers the quarterly results in more detail I'd like to provide a brief update on our pending merger with Colgate energy.

Overall I'm very pleased with the tremendous progress that's been made since the announcement as you've likely seen from last week's definitive proxy filing the shareholder vote is scheduled for Monday August 29, and we expect to close shortly thereafter.

Both the Centennial and Colgate teams have made significant progress on the merger integration. So that the new company will hit the ground running on day one.

With all of that said for the purposes of today's call that will be the extent of my remarks related to the Centennial Colgate merger.

Around the time of closing senior management will provide a fulsome company update which will include forward guidance anticipated drilling and completion activity and details on the return of capital program amongst other things now I'll turn it over to George to cover the results for the second quarter.

Thank you, Sean turning to our financial and operational results, which can be referenced on slides four and 10 of the earnings presentation Q.

Q2 results were quite strong as a significant increase in production levels and higher commodity prices drove record free cash flow in a material decrease in leverage.

Net oil production for the second quarter was approximately 36700 barrels per day, which was a 12% increase relative to Q1 average net.

Equivalent production increased 14% compared to Q1 and totaled 70240 barrels per day.

Total revenues increased by 36% to approximately $473 million.

With a 33% increase in oil revenues are notable 74% increase in natural gas revenues and a 21% increase in NGL revenues.

Unit costs for the quarter benefited from the increase in total production. In addition to continued cost control in the field.

Compared to Q1, Q2, LOE of $4 52 per barrel declined 13% and cash G&A of $1 95 per barrel was down approximately 8%.

G P and tea was up slightly at $4 three per barrel, primarily as a result of strength in natural gas prices.

The company generated approximately a 137 million of free cash flow during the quarter, which was inclusive of $5 $7 million of merger related expenses.

This represented a 55% increase in free cash flow compared to Q1 adjusted.

Adjusted EBITDAX totaled $297 million, which was up approximately 37% from Q1.

Lastly, net income for Q2 totaled approximately $192 million.

Turning to Capex.

During Q2 Centennial incurred approximately $141 million of total capital expenditures.

We spud 19 wells during the quarter, which was six more wells than were spud in Q1. Additionally.

Additionally, we completed 13 wells during the quarter and also incurred capital from additional wells that were ultimately completed in early July .

Overall capital levels increased on a quarter over quarter over quarter basis, as a result of higher drilling activity tied to the temporary use of just sputter rigs.

17% increase in the average completed lateral length and general inflation.

On slide five we summarize our capital structure leverage and liquidity.

As of June 30, we had approximately $200 million of cash on hand, and no borrowings on our revolving credit facility as.

As a result total net debt was approximately $615 million and net debt to LTM EBITDAX declined to <unk> seven times compared to one one times at the end of Q1.

Finally, I wanted to note that centennial has been unable to repurchase any company stock due to restrictions related to the pending Colgate merger, we look forward to communicating the new company shareholder return program around the time of closing with that I'll turn the call over to Matt to review operations.

Thank you George Q.

Q2 was another solid quarter for the operations group.

Turning online some strong wells, while sustaining our operational efficiencies gained to date on the drilling and completion side.

More specifically our completions crew continues to impress as we believe it is one of the most efficient zipper crews in the Delaware Basin.

Overall, our fleet has averaged approximately.

Approximately 2000 feet of lateral stimulated per day for the first half of the year.

Which compares to 1700 feet per day in 2021.

Is nearly 20% increase in footage per day is another example of centennial operations driving additional efficiencies in the field.

And informed our decision to implement a spudder rig program for the portion of the quarter to assist with the drilling of the first and second intermediate sections.

As a result, we spud 19 wells during the quarter, which represents a 58% increase versus our quarterly average for 2021.

Turning to well results our operations team brought online some outstanding wells in the second quarter, including four out of our top 10 wells in company history.

Located in Lee County, the Tostada and Gordita package was a five well grouping targeting the third bone spring sand.

This development averaged just shy of 10000 foot lateral lengths the.

The IP thirties for the package, where approximately 3000 Boe per day.

Which is 84% oil or.

Or 2500 barrels of oil per day per well.

Additionally, the Tostada six O. Two saw single day production numbers that exceeded 5400 barrels of oil per day, while the Tostada State, Tom 601, and Gordita State Com 602, and 603, each posted single day production numbers exceeding 4001 hub.

<unk> barrels of oil per day per well.

These are fantastic wells and I'm extremely proud of our operations and asset teams for delivering these results.

A little further south in new Mexico, the airstream wells were drilled as a three well pad also targeting the third bone spring sand interval with approximately 9800 foot lateral lengths on average like.

Like the Tostada and Gordita package production numbers were strong posting IP 30 numbers of almost 2300 Boe per day or 1900 barrels of oil per day.

Overall, our team did a tremendous job during the first quarter, bringing online some strong wells and puts us on our front foot heading into the merger.

Turning now to ESG on slide six we recently released our second annual corporate sustainability report.

Which covers 2021 performance and is available on our website.

I'm extremely proud of our employees and the ownership they have taken relative to our ESG initiatives.

In this year's report, we introduced our alignment with the task force on climate related disclosures framework expanded our emissions reporting to include scope to disclosures and expressed our commitment to the World Bank World Bank's initiative to end routine flaring by 2030.

Which we have already implemented in our operations.

With regard to performance, we reduced our 2021 scope, one greenhouse gas intensity rate by almost 30% year over year lowered our flaring right to one 2% compared to four 4% in 2020 and increased our recycled water usage by 17% year over year.

These are just a few of the highlights from this year's annual report and I encourage everyone to review it further at your convenience.

Also in Q2, we completed the build out of our merchant water recycling facility in Lea County, New Mexico.

This facility is capable of recycling 1 million barrels of water. Each time it is filled up to capacity.

For wells within the operational area of this recycling facility. We believe our recycling efforts will save on average approximately $100000 in completions related costs per well not to mention the additional LOE savings associated with the project.

It is our goal for future wells in this area to utilize 90% to 100% recycled water going forward.

This water recycling facility is just another example of our operations teams pursuit to generating cost savings opportunities across every discipline.

To wrap up I'd like to make a couple of comments about my thoughts relative to the future of the combined company.

After spending time with both the Colgate and Centennial teams. One thing has stood out to me and that is the quality of the employees in both companies.

Upon closing I believe that we will have one of the highest caliber employee bases in the industry and I am proud to lead the operations and technical teams in the next phase of this company's history.

With that I'll turn the call back over to Sean for closing remarks.

Thank you Matt.

Centennial team is performing at a very high level turning back to slide slide four you can see that during the quarter, we increased oil production volumes by 12% delivered almost $300 million of EBITDAX generated record free cash flow of approximately $137 million reduced.

It'll net debt by $150 million and lowered our leverage to <unk> seven times combined this provides us with very strong operational and financial momentum headed into the combination with Colgate energy in.

In closing I am truly excited for the company's next chapter and I couldn't be more grateful for our employees' hard work and dedication over the years and during the integration period. Upon closing the combined company will have a high margin low cost asset base with an extensive portfolio of long dated high.

Return inventory capable of delivering significant shareholder returns and we look forward to closing the transaction. Shortly after the shareholder meeting which is scheduled for later this month.

Before we go to into Q&A I'd like to remind everyone to please hold your questions related to the pro forma company as we expect to provide more details on the combined company at closing thanks for listening and now we'll go to Q&A.

Thank you.

Question and answer session will be conducted electronically.

If you would like to ask a question. Please do so by pressing Star then one on your telephone keypad.

If you are using a speakerphone please pick up your handset before pressing the keys.

If you would like to withdraw your question. Please press Star then two.

At this time, we will pause momentarily to assemble our roster.

Yeah.

Today's first question comes from Scott Hanold with RBC. Please proceed.

Thanks, Good morning.

Just curious on the wells that you drilled this quarter season, or the second quarter seem like you.

Had a number of them that are as you put it were company records can you talk about what's going on there is that.

More geology or the techniques that are you you're tweaking and then also begin add a little bit of color on the you know the cost savings you get for using the spudder rig in and you know obviously drilling the longer laterals.

Sure I'll go ahead and kicked out one off with the with some of those well results.

This those wells the Tostada and Gordita wells are located in our northern prior block, which is kind of the big Central block and our Lea County acreage and it's been an area that traditionally we've been developing across multiple different horizons second bone spring is more of the historical.

Well result that we've been talking about.

These new wells are now in the third bone spring below the second bone spring and they represent kind of our best practices to date, right with regard to targeting and well spacing and our most modern and up to date completion designs that we've been we've been looking at over the past several years.

So we believe you know the well results themselves are the reflection of our ability to develop multiple zones as well as the larger packages of wells, which I think historically we've done.

No.

<unk> to 2022.

Our our average pad size, we're in the range of two to three well pads. These are much more robust development packages. So we're seeing a lot.

Our ratios of parent type performance of these wells as we start to really.

Developed larger packages of wells and our infrastructure setup in new Mexico. At this point is able to accommodate those larger packages of wells as we've grown into that asset and been able to to make sure that we've got the ability to do these large package as well. So we think it's it's kind of a culmination of a bunch of different things geology on the floor.

Warfront and then our operations ability to execute larger packages of wells.

And flow them back the way, we've been doing it but but very good results I would say, it's not really surprising to us we always view that acreage is top tier.

And so we think that.

These results are in line and exceeding.

Some of our even though our some of our internal expectations, but that bar is high.

Maybe turning to the spudder rig now I'll I'll address some of that you know that the reason the spudder rig program was set up is because our completions efficiencies have have skyrocketed. This year, we're very pleased with the average cycle times of our of our completions crew at 2000 feet.

Day.

Average average treated lateral lengths that really forced us to consider with the size of our program the ability to balance that increased pace on the completion side with our drilling cadence and so the way we see that spudder rig is it really further compresses our cycle times and it allows us to.

To run still with that.

The two rig primary program and the single Frac spread.

And balance those two schedules out together it just fundamentally as as the completions cadence has significantly uptick this year.

Okay that makes sense and I.

I appreciate the fact, you don't want to get too much into the pro forma I'll look for the merged companies, but maybe if I could ask a question on.

Just how are you seeing inflation how are you all set up with inflation from here going into 2023, and when you think about the combination of Colgate in Centennial, how does that sort of potentially mitigate some inflationary pressures in your view.

I can start with that and then I can I'll pass it around the room if anybody needs. This is Matt again.

You know one of the things, we really sought to do between the two companies is is a look towards the size and scale component.

As a as a way to avoid <unk>.

Having to do things like for example, the <unk>.

Flood of rig as a whole we can in the new company, where theres more rig activity more acreage positions, there's opportunities for us to do things on a larger scale.

With regard to rig in fleet activity.

I would think some of that may be in the form of a different different vending vendor companies third parties.

And we have to we have to still kind of work through some of that as it pertains to things that we can control we have done our best to lock in pricing on some of the some of the tangible elements like steel and casing as well as sand contracts and things like that those those have been done.

Both independently by the company is heading into the merger and we are you know.

We're pleased with how both companies have managed those independent of one another so we believe we're in a very good place heading into.

The new the new company to be able to mitigate and address a lot of those inflationary concerns and frankly.

We see a lot of opportunities to bring our cycle time reductions in our completions cycle times are over and over in the new company that just is going to keep the pressure on those costs are heading in the right direction.

So like what do you think the leading edge inflationary as you know pressures are into 2023 with you.

Do you have an opinion on that yet.

Scott I'll take that and you know it's it's.

We're still working through some of those things obviously with the combined company and we're looking for.

Operational best practices as well as thinking outbreak cadences and things like that so there's a lot to work on on the capital side. Obviously, we think there is going to be pressure prices remain high where they are today. Although my guess is that is starting to level off some prices have backed off from their previous highs. So I think we've seen a lot of the major <unk>.

Relation area items already hit and they're already priced into our our current budget. So without giving you too much more specific I would say look forward to releasing kind of forward looking capital guidance and rig cadence.

After we close the deal.

Understood. Thanks, Thanks, Scott.

The next question comes from John <unk> with Stifel. Please proceed.

Hey, good morning for my first question I wanted to touch on the inflation reduction Act and specifically the minimum tax and methane fee components could you speak to the expected implications for centennial.

Sure I'll take a look at that I take first shot at that and George can chime in if he needs to we certainly are aware of that and have been monitoring that as it comes along it and understand what is at least initially being proposed obviously theres a lot of legislation that still has to take place for that to get passed.

And we'll see what form that takes there are certain.

Limits that they are proposing on the size of company based on amount of income that you generate and so we'll see how all that comes together and how we need to forecast that for the pro forma company, but as of right. Now. It's just a it's kind of a wait and see and monitor mode and we're certainly on top of that.

Regulatory and government relations point of view and making sure. It gets forecast if should it become legislation.

When it gets voted upon.

Got it and then building off of Scott's question on the two starting core data package was there anything specific in the geology or development approach of those wells that strengthens your view on the implied value of colgate's acreage or is the geology somewhat different bits.

Those two areas.

The geology is is quite different between the two areas, but but but I I've also seen there well results in the Eddy County assets.

They're extremely economic in in different ways, I mean, the shallower drilling costs, the lower cost overall of completions and then the steady and solid production that comes from the Eddy County assets. Both in the second and the third bone Spring Sands are are very very comparable in terms of.

The asset quality and a and just the sheer size and scale ability of that asset in in Eddy County, but the geology is very different from one area to the other with the exception of the formation names I mean, the formation names are common but the quality of the rocks are very different and so the.

Hey, we will execute the Eddy county assets is going to be different than the way, we execute the Lee County assets.

Makes sense, thanks for taking my questions. Thank you.

As a reminder, if you do have a question. Please press Star then one.

Our next question comes from Danny Puking with Truest. Please proceed.

Hi, good morning.

I was wondering if you could talk about.

Some of the operating efficiencies specifically.

You all continue to highlight the laterals. So I'm wondering how much higher returns you all assume.

The longer lateral labs.

Without giving specifics on that I think that we've continued to push where we can on extending laterals longer laterals tend to be better from an efficiency point of view, it and and generate higher returns we average it.

It was eight.

<unk> 8000, or so those.

Gross lateral feet this quarter and anywhere we can push that we will that's one of the interesting things about the combination with Colgate. We think there are some opportunities there to continue to extend laterals that being said, it's not a brand new thing for US we have been doing this for a few years now and just look for any opportunity we can to drill longer laterals.

Our average well going forward is typically a it leans towards a two mile lateral and so that's that's how we think we will be developing the assets on a go forward basis and I think it's the most efficient way going forward.

Okay, great. Thank you very much and then my second question is on pad size.

How large of a well packages should we think about that.

Near term.

Yes, a good question there Danny.

We've been.

Working on over the past couple of years is is building out a pad sizes from smaller incremental numbers in the past historically, two wells and three wells to more robust three four and five well packages of on average I would say.

You know that that <unk>.

The answer varies by the asset and which we are developing some of the assets.

Just have different well spacing assumptions and so more packages of wells in more of a stacked component.

It can be what you might expect to see in some areas like like the Lee county assets or even even some of the assets in Reeves County, those those may be different on the order of threes fours and five wells. So I think the opportunities to put more wells on the pads they they really emerge.

You know across areas, where theres mature infrastructure in place, where we know we have the flow capacity to take that kind of volume.

Relative to the initial flow backs, but I wouldn't be surprised if you continued to see well packages.

That vary between three and six on average with the occasional hire size pad being thrown in.

Just by virtue of proximity to known infrastructures and things like that.

Okay, great. Thank you that's it from me thank.

Thank you Jenny.

At this time there are no further questioners in the queue. This concludes our question and answer session as well as our conference. Thank.

Thank you for attending today's presentation and you may now disconnect.

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