Q3 2022 Coterra Energy Inc Earnings Call
Thank you for standing by at this time I would like to welcome everyone. So called Terra energy third quarter 2022 earnings conference call all.
All lines have been placed on mute to prevent any background noise.
So to speakers remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question again Press Star one. Thank you Dan Guffey, Vice President Finance planning and analysis and Investor Relations you may begin your.
Conference.
Thanks, Cheryl and good morning. Thank you for joining Kotara Energy's third quarter 2022 earnings Conference call. Today's prepared remarks will include an overview from Tom Jorden, CEO , and President and Scott Schroeder Executive Vice President and CFO also on the call we have like Serco and Todd Roemer.
Following our prepared remarks, we will take your questions during our Q&A session. As a reminder, on today's call. We will make forward looking statements based on our current expectations. Additionally, some of our comments will reference non-GAAP financial measures forward looking statements and other disclaimers as well as reconciliations to the most.
Correctly comparable GAAP financial measures were provided in our earnings release and updated investor presentation, both of which can be found on our website with that I'll turn the call over to Tom. Thank.
Thank you Dan and thank you all for joining us today for <unk> third quarter 2020 to recap that.
Third quarter and co chair completed our first full year as a new company.
We've made remarkable progress in establishing consistent operating rhythm a spirit of collaboration and teamwork.
Commitment to excellence and a common economic language throughout the company.
We've developed new methodologies learn from one another and are building a culture of technical excellence capital discipline transparency and open and productive debate.
We are deeply proud of the organization and the progress we've made.
It all starts in the field, 100% of our assets are in the field and the top notch field staff is foundational to an excellent operating company I wanted to give a shout out and a big thank you to our field personnel, whose perseverance and hostile environments inspires us all.
During the past week I visited co chair of field offices in Susquehanna, Pennsylvania, Carlsbad, New Mexico, and Oklahoma. It is impossible to spend time in these offices without coming home fired up by the commitment that our field team has to the company and the one another their passion for excellence safe.
D and environmental stewardship reflects the heartbeat of coach era.
We had a great third quarter as we announced last night, we reported total production on a BOE basis that was above the high end of our guidance more importantly, we had excellent economic returns in all three operating basins, our Permian Marcellus and Anadarko business units all posted out.
Standing economic returns in spite of inflationary headwinds.
We reported earnings of $1 51 per share we declared a fixed plus variable dividend of 68 cents per share, which was an increase over the second quarter.
We continued to execute on our buyback with approximately 60% of the authorization now complete and we retired $874 million of long term debt.
All in we returned a total of $1 per share during the third quarter in the form of dividends and share repurchases. We have now executed in our return promises for a full year and look forward to making this behavior routine.
We are hard at work planning, our 2023 capital program all three of our business units have fielded options that allow us to continue to generate top tier returns while maintaining flexibility.
Although we will not be announcing specifics of our 2023 capital program until our fourth quarter update we are working on plans that preserve the flexibility to accelerate or decelerate as conditions warrant.
We will accomplish this with a mix of rigs and Frac crews under both long term contracts and short term agreements, although were optimistic about 2023 and beyond we're not good at predicting commodity prices or inflation, and we will be prepared to adapt to changing conditions.
<unk> up or down.
As I have said flexibility as the coin of the realm in a commodity business.
A few words about inflation.
We currently project total well cost in 2023, increasing 10 to 20 per says on the dollar per foot basis year over year.
Individual line items, which include rig rates frac crews sand tubular <unk> fuel and labor may exceed these ranges with our projected total well costs are a function of our particular timing and particular efficiencies.
Although we will continue to fight or flight inflation with efficiencies longer laterals and optimal pad designs. We do not have a silver bullet here, we are a market takers. The good news is that once we arrive at a total capital number for 2023, we have the asset quality.
<unk> to generate excellent returns in spite of these inflationary headwinds.
You will also note that we disclosed some recent flowback data from our nine well Marcellus development.
Seven upper Marcellus wells and two lower Marcellus wells.
This project also contains three fully bound infill wells drilled at an 800 foot well spacing, allowing us the opportunity to study well to well interference.
We also studied communication between the upper and the lower Marcellus.
There were 11 existing lower Marcellus wells underlying this project and offsetting the new upper Marcellus wells those wells have cute a total of 127 Bcf coming online between 2012 in 2019.
So that was preexisting production in the lower Marcellus under these new upper Marcellus Wells, we're pleased to announce that we see little to no communication between the upper and lower Marcellus wells confirming our thesis that the Purcell limestone that separates them serves as an effect.
A frac barrier.
This will be very important to our future development at the upper Marcellus.
Owing to the lower dollar per foot cost of the upper Marcellus wells, the economic returns of the lower and upper Marcellus or comparable at a flat $4 25, Nymex gas price.
We will continue to delineate the upper Marcellus and seek to enhance further capital efficiencies by optimizing spacing and completion parameters. We're very encouraged with the economic learnings from this important test.
Finally, let me comment on the Marcellus Reserve revision that we discussed in our release. This was a culmination of bringing the teams together from both legacy companies, establishing technical consistency and applying learnings from across co terrorists three basins.
These expected revisions are spread over the 50 year life of our producing wells.
For new wells the difference between our revised forecast parameters in your original forecast parameters have minor differences within the first five years of production when 80% of the net present value of a new well is captured.
Furthermore, these expected revisions will have no material impact on our near term cash flow capital allocation or our ability to deliver on the return of capital promises that we've made.
I also want to highlight that last night, we released our first co terrorist sustainability report, which can be found on our website. We hope that you will find it to be ratable, Chris and factual. It reflects our commitment to be the very best and to communicate with authenticity and integra.
Okay.
With that I will turn the call over to Scott, who will recap our great quarter. Thanks, Tom today, I will briefly touch on third quarter 'twenty two results shareholder returns and then finish with updated guidance during the quarter Kotara generated discretionary cash flow of $1 5 billion, which was up two.
<unk> quarter over quarter, driven by strong operational execution and robust natural gas prices.
Crude third quarter capital expenditures totaled $456 million down 3% sequentially.
<unk> free cash flow totaled $1 $1 billion for the quarter, which included cash hedge losses totaling $259 million.
Third quarter 2022, total production volumes averaged 641 Boe per day with natural gas volumes, averaging 281 Bcf per day Boe.
Our natural gas production were above the high end of guidance oil volumes averaged 87, nine mbo per day above the midpoint of expectations. The strong third quarter 'twenty to volume performance was driven by a combination of accelerated cycle times positive well productivity.
And the result of being in ethane recovery for the majority of the quarter third quarter turned in lines totaled 46 net wells in line with expectations.
During the third quarter. The company retired a total of $830 million of long term notes, which is a combination of the previously announced $124 million of private notes and $706 million of 2020 for public notes after the quarter closed the company retired the remaining portion.
Of the 24 notes, which totaled an incremental $44 million. The company exited the quarter was $778 million of cash a net debt to trailing 12 month.
EBITDAX leverage ratio of two times and liquidity standing at two $3 billion, we've been clear about our desire to reduce absolute debt levels in the third quarter actions achieved our targeted level.
Turning to return of capital October one 2022, as Tom said was the one year anniversary of co Tara.
If you recall on the merger date, we guided that <unk> had the potential to generate $4 7 billion in cumulative free cash flow for the period of 2022 through 2024 at mid cycle prices driven by strong operational performance and higher commodity prices <unk> is expected to generate close to 4 billion.
And free cash flow in 2022 alone.
Since our formation and including yesterday's announced dividends. The company will have returned $4 3 billion to shareholders or 18% of our current market cap in its first 14 months. This includes $2 $6 billion in cash dividends made up of 583 million.
Dollars and base dividends $407 million in special dividend upon that.
The transaction being closed and $1 7 billion in variable dividends.
Also included in that number is $740 million in share repurchases and $874 million in debt repayment. We will continue to follow through on our commitment to a disciplined capital allocation and return strategy.
For the most recent quarter, we announce shareholder returns totaling 74% of the third quarter 'twenty, two free cash flow or 44% of cash flow from operations. The return of capital is being delivered through three methods first we maintained our <unk> per share common dividend, which remains one of the largest base dividend yield.
And the industry.
Second we announced a variable dividend of <unk> 53 per share combined with our base plus variable dividends that totaled <unk> 68 per share up from 65 per share paid in the second quarter.
Our total cash dividend is equal to 50% of free cash flow as is our continuing commitment.
Third during the third quarter, we repurchased $253 million of common stock or $9 3 million shares at an average price of 27 or three the buyback amounted to 32 per share or 24% of our free cash flow just over seven months since announcing our $1 $2 billion by.
Back authorization, we have repurchased 28 million shares for $740 million utilizing 59% of our authorization. We previously discussed our intention to execute the full authorization with any within a year and remain on track.
Lastly, I will discuss guidance.
We modestly increased our full year, 2022, Boe and natural gas production guidance, while maintaining capital and unit cost guidance.
Our annual production guidance is up 1% to 625% to 640 Boe per day, and $2 78 to eight five Bcf per day, respectively. We have no change to our 2020 to turn in line guidance and expect total company turning lines to be near the midpoint of guidance.
Our fourth quarter total production guidance is $6 15 to $6 35 Boe per day with natural gas and oil volume guidance set at $2 73 to 278 Bcf per day, and 86 to 89 <unk> per day, respectively.
On the 22 capital we are maintaining our guidance range, but expect to be at the high end driven by ongoing inflation.
While we are continuing to see inflationary pressures relating to operating cost we are maintaining unit cost guidance for LOE E. G. PMT G&A taxes other than income and deferred tax ratio.
One note the deferred tax ratio during the third quarter of 8% was below the expected run rate due to a favorable tax law change in Pennsylvania that was enacted during the quarter with the Pennsylvania corporate income tax rate was lowered for all future years, reducing co terrorist future tax liability. This reversal was <unk>.
Ignite is a deferred tax gain on the quarter, which caused a one time adjustment and drove the deferred tax ratio below our annual guidance.
As it relates to the reserve news and its impact to third quarter results reflect the increased DD&A required. After the adjustment this will carry through into the fourth quarter and even with the adjustments our full year DD&A guidance remains unchanged.
In summary, <unk> continues to deliver on all fronts with strong operational execution and disciplined capital allocation as always maintaining one of the best balance sheets in the industry remains foundational to our future success.
With that I will turn it back over to the operator for Q&A.
Two last questions. Please press star one please limit yourself to one question and one follow up. Your first question is from Jeanine Wai of Barclays. Please go ahead. Your line is open.
Hi, good morning, everyone. Thanks for taking our questions.
Hi, Good morning, Tom I.
First question is on capital allocation and I guess with the upper Marcellus now looking like it's comparing more favorably to the lower than maybe what perhaps may have I appreciate it.
And the Permian it looks like it's firing on all cylinders, there seems to be a lot of optionality for capital allocation next year.
Do you have any further commentary on what that allocation could look like between the upper and lower going forward and also perhaps any commentary on what it could look like between your three basins next year.
Well. Thank you for that question Jeanine, we don't have any specifics I will say your observation is spot on we're very pleased by the upper and we're also pleased by the economics of the upper.
As we look at the Marcellus you know there are a lot of factors that come into play. One is we are kind of finishing out that lower and our choices of pads is also a function of our system line pressure, where we have compression capability.
I think youll see us have a sizable mix of upper in our portfolio going forward sizable is somewhere 30% to 40%, but we're still working on that.
Yes, we would like to continue to delineate, but thus far.
We're pretty encouraged as you can see you also rightly noted our Permian is firing on all cylinders. So we're right now we have a lot of options in front of us for 2023.
We've got some outstanding economic returns.
Look forward to continuing to work it but yes.
Yeah, we don't we don't really have anything.
<unk> to say this morning on how we're going to allocate capital.
Okay, Great you know we had to try thank you.
Okay.
Second question, maybe moving to the reserves on that.
Reserves update the Permian Anadarko reserves are expected to increase by about 10% year over year and the Marcellus is expected to decrease about by a third.
On the Marcellus the deal closed a little over a year ago.
Change really just a matter of having maybe more time under your belt to study the asset and Thats whats driving the updated view on the type curves or is it something more related to like or change in philosophy or your price deck assumption.
Any additional color would be great on where youre seeing the most impact along the performance curve and we heard your prepared remarks that 80% of the MPV value is within the first five years, but a lot of questions in there, but just an important topic. Thank you yeah no. Thank you for that Janine.
When you bring two teams together, there's lots of differences there's differences in operating techniques differences in safety philosophy. There are differences incentive systems, there's differences in technical analysis.
So we really set to work October one 2021 of just reconciling a lot of these differences and we brought some new techniques and technologies, we learn from one another but I will say one of the things you've heard me talk about in the past is this annual look back we do and it really wasn't until the third quarter that we were able to look.
At the kind of the systemic issue of.
The reserves and a light that was I think new to many of our colleagues that have worked for the Marcellus for a long time and it really was third quarter. When we said Okay. You know this is this is worth digging into and we had all the experts in the room.
But I really want to say and hopefully this came out from our remarks, we really see this as having.
Little.
Little to modest financial impact in fact, we're saying it's not a material event. There are certainly no impairment involved in with it and the DD&A is extremely modest.
We also don't see it really impacting our cash flow significantly over the next three to five years and now you may say well, how do you say that.
Well you know.
You cannot take reserve forecast and just immediately translated into a cash flow forecast and the reason is that field in Susquehanna County is very complex you have line pressure issues, you're a parent child effects you have occasional shut ins that you have to deal with so what happens is our team in Pittsburgh.
Takes the.
Projects are going to drill and then take it into our system wide model and see what it's going to generate in terms of our production forecast and that although that starts with a base reserve forecast you do look at all the various things that are going to impact that those reserves are going to be produced over 50.
Year timeframe, but over a three 510 year timeframe. The actual production actual cash flow is going to be based on particulars of the field hydraulics and field situations. So for many many years and certainly for co terrorists history, our cash flow forecast.
<unk> have come from that field level analysis, and the actual operating conditions on the ground and so we are we don't see this as having a material impact to our cash flow forecast over the next three to five years now you know in fairness to your question over that 50 year life that gap is going to be closed.
But that differential is decades out into the future and the well life. So this is not a significant impact on our cash flow as we go forward certainly won't won't impact our capital allocation.
But we did the analysis in the third quarter and we felt like Okay. We saw it at least we can defined ranges with certain confidence and we thought it was our responsibility to communicate it and that's why we came out for it.
We appreciate all the detail thank you Tom.
Your next question is from an Omega Cadbury of Goldman Sachs. Please go ahead. Your line is open.
Hi, good morning, and thank you for taking my questions.
I wanted to circle back on the activity that you mentioned.
I understand it's early days, but wanted to pick it cuts on the Permian and.
And the gas being such risks next next year, and how you're thinking about managing that risk.
That would bias activity towards R&D.
In the Permian Basin.
Well, that's a great question and I'll invite Blake circle here to join me in the answer.
You know one of the thing we look at this very carefully now obviously in the Permian Basin.
Oil is our dominant revenue.
And in fact part of the part of the problem in the Permian Basin is gas is kind of a byproduct and oil is such a dominant part of the revenue that you know its associated gas, but the drilling decisions are really driven by that oil.
We've taken great place great pains over the years and our marketing group and Blake can comment on this has been very effective in giving us assuredness of flow Wahhab pricing is a very small exposure to overall corporate price structure, but the critical issue is we feel.
Very confident saying that we have shared this a flow and regardless of that basis, we think our wells will flow and we will be able to capture that all revenue, which is really foundational to the investment decision, but Blake I'll, let you comment on that yes. Thanks Tom.
I think we all saw what go negative late last week, which of course, we don't like seeing any of the commodities. We work so hard to produce go negative.
October is still finished above $3 for the months historically, that's really strong for a while.
But it's not a surprise was really tight capacity is going to be tight until the end of 'twenty three when the expansion projects come online. So anytime there's major planned maintenance events like this we're going to see these fluctuations Tom.
Tom just alluded to eight well wahhab priced gas is 60% of our Permian gas portfolio is only 6% of our co tear gas portfolio, we have layered in some hedges going into 'twenty three to help minimize that volatility cash flow, but really all we're focused on as flow assurance as Tom said.
All are more off price sales our firm with grade Counterparties that was on display last week, so we're going to need.
<unk> offline in the Permian, we had absolutely no interruption to flow.
While we expect some blips along the way throughout 'twenty three it's we view it has minimal impact to cash flow and we have the flow assurance we need.
Yeah.
Great. Thank you and my next question was on inflation expectations for next year I know, it's early days, but you talked about 10% to 20% increase potentially in 2000, and we need to be.
I didn't see any regional differences between Permian and Appalachia, and especially in the bundle because I believe last quarter, you had talked about cost in could easing by 20% to 35% of what anyone in 2022.
Yes, Sheryl this is Blake I'll comment on that.
We see inflation and widely in every basin and all the same categories. We just went through this process contracting a lot of our services for 'twenty, three and I would say in general the Marcellus is a little higher.
That's not unique to just this moment in time.
Everything in the Marcellus is winterized, so a command a little higher price and it's just the smaller swimming pool in the Permian, So theres, a little less competition for services and that comes out and more inflation. When we look ahead to 'twenty three right now we are saying, 10% to 20% is what we're seeing and that's based on them.
Most recent contracts we're entering into.
We do have some cap cost categories, though that are beyond that range. The reason, we're not projecting beyond that is there is a lot of things that go into our $23 per foot lateral.
Lateral length timing 22 contracts extending into 2003, our efficiencies all of those things come into play so right now we're modeling closer to the lower end of that range, but it's inflation runs through 'twenty three like it did in 2002, we could easily see the high end there.
Until then we'll focus on what we can control.
Makes sense.
Okay.
Your next question is from Arun <unk> of Jpmorgan. Please go ahead. Your line is open.
Yeah, Good morning, Tom.
Tom I was wondering if I could maybe ask the question on the River reserve.
Write down maybe a different way.
If you did the PV 10 standardized measure kind of at a flat deck is there any way you can give us a sense of what the impact would be.
Because it sounds like a lot of the impacts us in the later portion of the production life of the wells. So just wanted to give a sense of maybe you could haircut it like that.
You know rune is what I can tell you is in something like this the value impact is significantly less than the volume impact I think thats, probably clear to everybody, but I just want to say, although we've come out and we've really tried to give ranges that we think are going to be.
Yeah, we're going to we think they're realistic.
This was really a fourth quarter process and we want to finish our reserves, we've got our auditor that we'd like to get through our reserve audit. We have a lot a lot of remaining work to finish that out and if I could indulge you to hold that question until we're finished in the fourth quarter I think we can be pretty forth.
Coming but yeah, we think the ranges we've given are realistic in.
You know, we're kind of coming out of a quarter early on reserve talk.
Understood understood.
Tom you mentioned that the cash flow impact would be minimal.
Yes.
Could you give us a sense of what kind of impact do you sense on your <unk>.
Your production outlook and view of sustaining capital.
Requirements.
In the Marcellus does this have any impact.
About $23 24 production.
I don't think that this has any impact on it now I will say you know it depends whether you're talking about the upper or lower I mean, as we're as we're finishing out the lower as we've talked in the past we're dealing with situations, where we may have shorter lateral lengths.
We have up space, but you know we are in filling islands of Undrawn. So we have some constraints and that will inevitably probably lead to a slight decrease in capital efficiency over what we're all used to but that's just kind of the nature of the Beast, We think it's most prudent with.
The field because of our infrastructure requirements to go ahead and.
As we continue to poke around in the upper we're going to finish out that lower.
But.
We don't see the issue on reserves, having any material effect on that issue at all.
Alright, great. Thanks, a lot.
Yeah.
Your next question is from Neal Dingmann of <unk> Securities. Please go ahead. Your line is open.
Yeah.
Hi, Good morning can you hear me fine.
Loud and clear nail Alright, My first question just on the Marcellus Marcellus specifically.
Loved the some of the upper Marcellus news that you had put out and some of those results I'm just wondering going forward two questions around that one how active would you be able to co developing in those areas between the upper and lower and then right now the opportunity where you've had some of those stellar lower Marcellus wells is there opportunities to.
Go back and go after some upper.
While our team is looking at that right now.
Yeah.
We've challenged them.
Yes.
I may Karadzic My answer the last question, we're filling were filling out the lower but we've challenged them to really look at that in infrastructure and let's just try to break the mold and do it in the most.
Profitable way, so you don't always realize to rank our opportunities and do the best first and work our way down the ladder there on economic value. So.
It's really it's a complex function of infrastructure compression availability.
Yeah.
We're going to try to be active on our best opportunities.
But I appreciate your comments were really are quite pleased with what we're seeing out of the upper.
And we're going to try to fit as much of that and as we can.
But you just have to kind of wait until we announce our 2023 program. We've got some really bright people working on the best economic model they can field.
Okay.
Love to hear it thanks, Tom and then just secondly on inventory Tom do you find yourself now with this upper Marcellus success with that and obviously with the Dell and mid Con.
Feeling that you have more than ample acreage or I'm, just everybody sort of ask the M&A question I guess my my way to tackle that as how actively are you looking at.
Sort of the plays and assets being thrown out there or are you pretty content given the size now of inventory you have Oscar after this upper Marcellus success.
Boy, you know Neil I'm, an exploration that's a hard words like ample Lake Washington had just don't say well.
That's right.
And look we've got a very deep inventory in all of our basins were in fact I was reviewing that in.
Some detail. This morning, we're very pleased with our inventory, but you know were also pretty high on <unk> ability to be an outstanding operator and as.
I mentioned, our field staff I mentioned, our outstanding scientists throughout this organization, if we had the opportunity to acquire more assets at an entry price. It added value for the co chair of shareholder we would do it we look at everything.
We are highly curious as an organization.
Yes, but we're just not going to try to play financial games with that it's going to have to be something that adds real sustainable value over cycles and.
It's my hope and intent that we're going to find something.
Great. Thanks, Scott, it's managed by say, it's not a it's not a goal.
It's an ongoing.
Kind of wish we don't we don't lay down markers on annual basis, and say, let's go buy something I mean that that's a that's kind of a dangerous way to manage.
We wanted to be opportunistic.
Great. Thanks for the details.
Your next question is from Derek Whitefield with Stifel. Please go ahead. Your line is open.
Good morning, all and thanks for taking my questions.
Hi, there.
Tom I wanted to lead with the question on your broader outlook.
And youre not offering formal 2023 guidance today.
Ask you to comment on your high level takeaways from the Capex proposals you've received from your three business units and how these proposals compare versus past years.
Well, we are inflation is having an impact I will say 2021, the economics, we're lights out good as it get.
Certainly we've seen a little softening in commodity prices as we look into 2023 and we've seen inflation.
But you kind of have to put things in context.
We look at the plans have been laid in front of us in 2023, the economics on any normalize decade long history historical look are really really strong we have a lot of things to do we've asked each one of our business units to kind of give us a.
Small medium and large.
Yeah. We're small is maintenance and then we look at various options and so that we can mix and match and formed the best capital program. We can yes, we talked earlier about 2022 being.
Largely underway when we formed <unk> that's not the case for 2023, so we truly do have options to construct the best program possible.
With you.
You heard me semi opening remarks, we have services under contract that gives us flexibility because as we look at 'twenty three boy if anybody in this call can tell us what 23 look like we'll get to the front of the line here.
We've got commodity price uncertainty, we also have inflation uncertainty, we have world economic outlook, that's uncertain and global demand.
So.
I'm not being tried it when I say flexibility as kind of the realm. We will we will enter 'twenty three with services under our.
Control that would allow us to accelerate or decelerate and we'll have flexibility.
Really we're working this hard.
One thing I can promise you is that 2023 will be a very profitable program or we won't make the investments and right now as we model. It we're going to have a lot of options within a very wide band of potential capital our.
Total capital and were reallocated.
Just look forward to coming out with some detail once we.
Really make these commitments to our business units.
And as my follow up regarding your comments on the harkey moving into development mode. It's clear that you are comfortable with the subsurface and well designs.
<unk> said that could you speak to how the <unk> competes for capital versus the upper Wolfcamp B.
Well it kind of depends where you are in the basin. The harkey is excellent compared to the Wolfcamp I mean their neck and neck.
Yes.
Of course, the Wolfcamp as.
Look there's a lot of variability in Delaware basin, So it's kind of hard to average but.
If you had to choose between really great Wolfcamp, a our harkey.
It'd be like asking which one of your kids you like best it's a really tough choice.
That's great color. Thanks for your time.
Your next question is from David Beckel, Bob at Cowen. Please go ahead. Your line is open.
Thanks for taking my questions Tom.
David.
Are there.
I wanted to ask maybe a point of clarification on the Marcellus and I'm, sorry, you're getting a lot of questions on this today.
But I guess as it relates to when you first looked at the assets.
During the M&A process or during the merger process. If you compare it to today, whereas a lot of other write downs more on the parent or child well size is this more of a an.
An indication that the parent wells are being more impacted as you do more in field activity drilling or is there just multiple variables that weren't necessarily describe the majority of the move.
Well when you look at the Marcellus program, obviously like any shale basin.
Over time gravitating to a higher percentage of.
Child infill wells.
So.
If you look at just the complex.
It could be.
Makeup of the drilling programs over the last few years.
For the last number of years have been drilling a majority of infill wells. So yes to your question I mean, a lot a lot of it is of course driven by the behavior of infill wells, we're doing a lot. We're looking at changing our spacing as we've talked about in the past.
We're also.
We had a really good technical meeting in Pittsburgh couple of weeks ago, and they're doing some great work revisiting our completions and we think we may have some optimization by rethinking that.
But.
Yes.
It's driven by well performance and well performance is mostly infill wells because thats been the complexion of our program.
I appreciate that thanks, Tom.
Maybe if I could just ask a quick follow up on there was I mentioned, obviously in your prepared remarks in the presentation about looking at long term service contracts and then obviously also maintaining flexibility on the view that perhaps that market might soften next year. I guess have you are you are you in the midst now of.
Of signing long term agreements and I guess, when you think about the long term agreement for a base level of activity. How long is the duration of those contracts and I guess.
What would what would be the benefit of doing that is there is there a fear that you won't have the availability of quality crews going forward in a tight market or is it really price driven protection.
Yes, David This is Blake I'll take that one.
You nailed it priority number one is securing premium rigs increase we have to have those to execute our capital programs and the market requiring a lot of long term contracts to get that done right. Now. So that's what's forcing that decision second of course is price.
As Tom mentioned, who knows with 23 is going to do so.
Prices.
Little tough to get our arms around but.
What we do is we leverage our longer term commitments and blocking up a whole bunch of work and we use that to leverage flexibility on additional work. So that if we pick up or drop crews. We know they are available to us and some surety of price around what that'll be so it's just a combination of managing that portfolio.
And sorry, just to clarify are the are the terms longer than we would normally expect with a term contract or are these multiyear agreements or this typically for 12 months.
Now typically 12 months.
Thank you guys for less.
Your next question is from Doug Leggate of Bank of America. Please go ahead. Your line is open.
Okay.
Thank you good morning, everybody Hi, Tom Thanks for taking my questions.
Tom.
I apologize for going back to the upper lower Marcellus, but I wanted to ask a couple of.
Technical issues to try and maybe connect the dots a little bit here.
So you talked about the per cell in an effective truck body or but.
I think we're aware that there is some pinching out across the acreage and I assume that the wells you've tested were probably in the thickest part of the body or if you want to call. It that so can you walk us through how you see the risking across the acreage.
And what it might have it might inform your view of inventory depth today versus at the time of the acquisition.
Yeah, Doug as we map the Purcell. It is we think reasonably thick over almost all of our asset.
We're talking <unk>.
<unk> 40 50 feet generally.
So we don't see an area in our asset where we would have heightened concern about the purcell not being a frac barrier now if you zoom out and you look at the region outside of our asset that statement is going to change. The Purcell does then and there are areas around us where the upper and lower.
Marcellus behave as one continuous petroleum system.
We don't think thats going to be the case on our asset now Doug you know as well.
I wanted to be very careful with how I answer that question.
With our best Technology, right now and we've got a fair number of tests, where we've put tracers and looked at communication across set for sale barrier with our best information now we have a high degree of confidence that that statement is.
Through and as we look at the area, we think it's going to be repeatable across area, but that is one thing that we will be testing as we look at additional upper Marcellus wells.
I always wanted to be careful of.
Getting ahead of ourselves.
What we believe against what we know I mean based on all of our technical experience. We believe that Purcell is going to frac barrier and all of our experiments today have confirm that but we will update you we feel very confident today in saying that the upper Marcellus will be an independent petroleum system from the lower and we will.
Developed.
Without significant interference.
Yes.
That's very clear Tom I appreciate that and that might be trying to peel. The onion by two two in too much detail here, but my follow up is also related to that I'm. Just wondering if you could share.
You've observed through your testing as it relates to high pressure gradient has evolved across the upper Marcellus.
Hinted about.
Lack of communication between the two zones have you seen any shift as you started to any any evidence for example, as Chesapeake pointed out.
Co development might be the right way forward because there is some communication are you seeing that now you don't believe that to be the case.
Now.
Different areas are going to behave differently and I don't want to comment on another operator, but that comment doesn't surprise me.
We see our area is somewhat unique in that Purcell and the thickness across our area. We think co development would not be the right approach and in fact, we also think that the fact that we have that barrier really allows us to take more efficient use of our infrastructure because we have.
Pression and field hydraulics, and if we were required to co develop that would be a much more challenging complex problem. So the fact that we've got that Purcell Frac barrier is really I think an important part of our economic development. So we just we just think we're in a different area.
Thanks, Tom and we will see in a couple of weeks I. Appreciate you taking my questions.
Your next question is from Joe Chang of Scotiabank. Please go ahead. Your line is open.
Hi, Paul.
Paul Cheng.
Tom.
Yes, I want to go back to the M&A question.
Can you give us some <unk> on.
Financial matrix that you might be looking at and also that in the ideal world, what all geographic region or at all.
All of that gas hearths at <unk>.
Might be focused on what that you don't really have any of those specific pocket.
Well, yes, thanks Paul.
Yes, when it comes to M&A first and foremost we would like to find some things that compete for capital in a reasonable timeframe.
And you know you wake up every morning, and rethink every problem at least in the changing world. If you don't you're making a mistake.
It's kind of tough for us to just say flat out we will not consider anything if it doesn't have the kind of returns that are currently.
In our inventory.
Because if that's our criteria we're done.
There is very little out there that competes with our inventory.
We want to thank decades in the future and find assets that we think are more valuable in our hands and the current owner, which is another way of saying that we think we might be able to buy it right.
And create value through that and Thats, a really really high bar.
So I, yeah, we remain opportunistic but.
We're.
Fortunately because of the depth of our inventory under no pressure here.
As far as your second part of the question to geography.
We're a multi basin company, we're a multi commodity company. So we know how to play and how to manage a company that's geographically spread out in fact, we think it's one of the strengths of co terror and we think over time the marketplace, we'll see how that strength produces more.
System results over time.
But there are some things that we'd want to be careful of there are some operating environments that are more difficult. There are some areas that are more politically difficult and so you know we would be selective in terms of what new areas, we would look at but.
You know, we know how to manage multi basin company and that wouldn't deter us if it checked all the boxes, but that said I wanted to just finished with the statement I made because of the depth and quality of our inventory.
We have the luxury of really forcing ourselves to have a high bar and make sure that anything we look at is in the best interest of the owners.
Tom do you have a patent between oil or gas or F&B met and also from the.
Organization capability.
Since you're still in the process of integrating do you think that Youll, Randy you're spending enough on the integration.
And take on <unk>.
And so the nuance at or that you.
It may take another six to nine months before you reach that state.
Well I mean, there's a lot of hypotheticals here because the M&A question is always one that.
Yes.
It's a it's a optionality.
Not necessarily something that we have specifics to talk about.
But yes.
The integration is going very very well our teams as I said in my opening remarks are really coming together and the fun thing from my standpoint.
Is that Theres really an organic cooperation that's leveraging the great ideas and experience of all of our organization as they get to know one another and there's a lot of power in that.
Good ideas are not regionally constrained when you have a lot of cross company collaboration.
It was the first part.
Do you have a preference oil versus gas.
Yes, that's right.
Our preference is generating profits and profitable investments and we do like a commodity mix just because of the.
Swing and the commodity that that was part of the thesis informing co Tara.
You know were roughly balanced between liquids and natural gas on a revenue standpoint.
We would consider any asset any commodity mix, if we thought it made co chair a stronger company. So we're not we're not in the interests of.
Picking commodities, where in the interest of picking profitability.
A final question.
And then Darko.
I think that you guys have been evaluating the offset.
At this point is there anything you can say it that what do you think will be the Finch report that offset.
Well I think you will start increasing your activity level for next year, it's going to take some more time. Thank you.
Yeah, we haven't we're not prepared to talk about 'twenty three capital on this call and a great detail I will share we've got a couple of projects flowing back in your Anadarko right now.
And we're watching them with great interest look forward to updating you on them.
<unk>.
Although we're very encouraged by what we see.
We've been around this business long enough to know, particularly on projects that have infill potential you want you want to watch things over some months before you call it but.
We're flowing a couple of projects back that are look pretty interesting to us.
Thank you.
Your next question is from Noel Parks of Tuohy Brothers. Please go ahead. Your line is open.
Good morning.
Okay.
No.
I realize it's a little early.
Early in the process, but.
As you head into <unk> and.
And given what you are.
Told us about.
At reserves and the talent.
Comment a bit on.
And cost assumption and how.
Have those I guess, just what your what you were thinking long term.
I don't know if any of US expected we would see.
Such a sharp.
Increasing tightness in a service environment. So if you could just comment on the cost component as you look ahead.
Yes.
In the fourth quarter as we finish out our normal reserve process, we'll be updating lease operating expenses or LOE we.
We do expect <unk> to increase but there is not a one for one connection between LOI and reserves and Thats, particularly true in the Marcellus I mean, those operating costs are so low that we.
We run at a 50 year reserve life, and you really find that pricing and low doesn't really have much of an impact in that.
It's not true elsewhere.
As part of our fourth quarter process, and we do as I said earlier want to want to dot the I's and cross the Ts and although we've talked about a range. We have some work to do one of that is around L. O. One of the items, but we don't we don't see that as a.
Certainly, it's certainly not a item that will have meaningful impact on Marcellus reserves and I will have to do the process.
We anticipate.
Updating low having much of an impact on our end of year.
Great. Thanks for the clarification and.
Turning again to the Anadarko for a minute.
In general terms it is interesting that even amongst some of that.
Basins that are.
Maturing are further along in their development in the Permian for instance.
We've seen a fair amount of M&A and consolidation activity this year.
And.
Just wondering if not so much in the money in Indiana.
In the Anadarko.
Just wondering as you think that still lies ahead or why there.
A piece of that is just as an industry the capital answer on that.
Logical advantages arent necessarily being an effect not play the way they are.
More aggressively than others.
You're talking specifically as van Darko.
Yes.
Yes.
One of them one of the interesting things in our business is you do have single basin players and so often technology, even though you think well it's known by all.
Technological adoptions and innovation, sometimes don't spread like wildfire from basin to basin. So you can occasionally have disconnection and yeah. If we had more time I could offer a lot of examples of that I've seen in my career.
You know my experience and observation is there's some pretty smart players in Anadarko.
A lot of these private equity companies are fairly innovative a lot of these teams came out of larger shops, and certainly we're schooled in understanding the full range of available technologies. So I don't know if I would share the opinion that the Anadarko is behind on technology.
Yes.
Love to take that offline, but I, just don't see it that way.
Great. Thanks, a lot.
There are no further questions at this time I will now turn the call over to Tom Jorden for closing remarks, well.
Well listen I want to thank everybody for your great questions.
Delved into some good issues and really do look forward to continuing to generate the type of outstanding results. We did in the third quarter. We're very confident that co chair is lined up to continue to have a landscape of.
Just outstanding returns good capital.
Turns great discipline and also look forward to discussing our 2023 capital program next time, we convince so thank you all very much.
This concludes today's conference call. Thank you for your participation you may now disconnect.
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Yeah.
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