Q3 2022 Earthstone Energy Inc Earnings Call
Good morning, and welcome to Earth Stones Energy's conference call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation.
Anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference call is being recorded.
Joining us today from Archstone are Rob Anderson <unk>.
President and Chief Executive Officer, Mark Lumpkin, Executive Vice President and Chief Financial Officer.
Steve Collins Executive Vice President and Chief Operating Officer, Scott Landers, Vice President of Finance and Clay Shaw Director of Investor Relations. Mr. Shaw you may begin.
Thank you and welcome to our third quarter 2022 conference call before we get started I'd like to remind you that today's call will contain forward looking statements within the meaning of federal Securities law.
Although management believes these statements are based on reasonable expectations. They can give no assurance that they will prove to be correct. These statements are subject to certain risks uncertainties and assumptions as described in our annual report on Form 10-K for the year ended December 31, 2021 the third quarter of 2020.
Two earnings announcement and in our Form 10-Q for the third quarter that we filed yesterday. These documents can be found in the investors section of the website www dot or stone energy Dot com.
Should one or more of these risks materialize or should underlying assumptions prove incorrect actual results may vary materially.
This conference call also includes references to certain non-GAAP financial measures reconciliations of these non-GAAP financial measures to the most directly comparable measure under GAAP are contained in our earnings announcement issued yesterday.
Also please note information recorded on this call speaks only as of today November 3rd 2022, therefore, any time sensitive information may no longer be accurate at the time of any replay listening or transcript reading.
Today's call will begin with comments from Robert Anderson, President and CEO , followed by remarks from Steve Collins, our CFO and Mark Lumpkin, our CFO and Dan will have some closing comments from Robert.
I'll now turn the call over to Robert.
Yeah, Thanks, Clay and most of you know clay and he joined US a few months ago and glad to have him here and good morning to everyone on the call today. Thank you for taking the time to join the call and look or listen on the web I'm, a little bit horse and I'm sure. It's because of our Astros and we got one more good game left out of town Tonight, Let's get started I'm very proud of how we.
Have transformed Earth's down in such a short time frame and we continue to see the benefits from the seven acquisitions. We have closed in the last seven quarters, our targeted consolidation efforts have materially reposition the company and provided our shareholders with an investment in an entity that has a substantial operating footprint in the Permian basin.
I'm incredibly incredibly proud of our team and I want to thank our existing and recently added workforce for their outstanding hard work and dedication, which enabled us to report the strong financial the strong third quarter financial and operational performance, we announced yesterday.
This includes record production levels that exceeded the top end of our guidance range by approximately 5% as well as record setting levels of adjusted net income adjusted EBITDAX and free cash flow and I'm pleased to report that we reached over 100000 Boe per day in September .
Our overall outperformance for the third quarter was primarily driven by the continued success of our development program, which highlights the quality inventory from all the acquisitions, along with our inventory from our existing asset base. The strength of this large low declining asset base also assisted in our outperformance.
Steve will discuss our targeted cost synergy initiatives and recent well results in greater detail in a bit but when you have 14 of 19 wells brought online in the quarter with oil rates above 1000 Boe per day, it's sure highlights the asset quality, we have accumulated.
As you'll recall, we closed the tightest acquisition on August 10th with assets in the Northern Delaware Basin and including.
Including the Stateline trend area of New Mexico, and Texas.
I'm, particularly pleased with this immediately accretive acquisition and while we are continuing the integration of these assets. They contributed to the company's results this quarter.
We remain committed to capital discipline and the continued strengthening of our balance sheet and we delivered on those commitments during the quarter, we generated over a $174 million of free cash flow year to date, we have generated over $374 million of free cash flow and you will recall that this includes three.
Acquisitions, this year, which closed in February April and August the only a partial year for all these acquisitions.
Our continued generation of substantial free cash flow resulted in the pay down of a significant amount of debt, which mark will address here shortly and allowed us to deliver on our promise of strengthening our balance sheet by achieving a leverage ratio of about <unk> eight times at the end of the quarter when using third quarter annualized adjusted EBITDAX.
In early October we were presented with a unique opportunity to repurchase a portion of Warburg pincus ownership position in the company.
We proactively repurchased 3 million shares of class a common stock at a discount to the closing price.
The repurchase shares have reduced our total outstanding share count by 2%. We view this as a highly accretive opportunistic use of free cash flow while at the same time not degrees decreasing our growing trading liquidity.
The strength of our balance sheet remains the top priority for <unk> in support of that effort. We will continue to focus on investing our substantial free cash flow generation and reducing our debt as well as evaluating other opportunities that provide the optimal return for our shareholders. We expect to have a better view of how these options will play out as we move into 2020.
Three.
We are leveraging our expanded position to drive down overall, corporate operating and development costs, and we will continue to execute our deliberate asset consolidation strategy as appropriate.
To be clear, we are not interested in simply growing scale. Our efforts have been and will continue to remain focused on profitable growth that benefits our shareholders in short our consolidation strategy is focused on one strategically expanding our operational foot, but footprint to increasing our inventory.
At a high rate of return drilling locations and three and perhaps most importantly, continuing to build upon the foundation, we have created with our growth to date in sustainable free cash flow, which will benefit all of our shareholders now I'll turn the call over to Steve to provide an update.
Thanks, Robert and good morning, everyone. The third quarter was another outstanding quarter for the operations group and I want to thank all of them for their tireless efforts as we continue to execute on opportunities to reduce costs on our expanded operational footprint and the drilling of high rate of return wells.
Continue to be very active in the third quarter running two drilling rigs in the Midland and Northern Delaware Basin. We recently added additional Delaware basin rig that will focus on our newly acquired Chisholm and tightest asset it's.
It's first activity will be focused on the dark canyon pad in Eddy County.
In addition, we also have frac operations underway in both the Midland and Delaware basins.
It seems but at 18 wells in the third quarter and COVID-19 wells.
Our focused acquisition strategy has assembled a high quality asset base with a deep inventory of very economic derisked future drilling locations as Robert mentioned during the quarter our operations team brought online some great wells.
Which have met or in many cases exceeded our expectations helped.
He helped us reach record levels of production for <unk>.
We have shown the areas the results on page eight of our updated corporate presentation, which is available on our website.
Addition to the Delaware Basin on our recently acquired acreage from Tightest, we completed six wells in Lea County, New Mexico near the state line.
The cattlemen Lonesome Dove Wells began producing in early September and targeted the first and second bone Springs.
The six wells, which are 7700 foot laterals had an average 30 day IP rate of over 1500, 20 Boe per day per well with over 73% Okay.
We expect these wells to have an average payout of less than six months.
Also in the northern Delaware Basin on our Chisholm acreage we acquired earlier this year, we completed six additional wells on four separate pads I'll highlight a couple of those.
We brought on four wells during the quarter in Eddy County, New Mexico, the two well cletus pad targeting the Wolfcamp a had an average IP 30 rate of 1300 70 Boe per day, both wells had laterals of 90 750 feet and all kind of around 70%.
In early September we turned to say we've turned to sales two wells in the salt draw pad, which had an average IP 30 of over 1500 70 Boe per day.
Literally a 4700 feet and an oil cut of approximately 77%.
Both wells targeted the second bone spring interval.
And finally in the Midland Basin I'd like to highlight the Barnhart patent Iranian County, Texas.
This five well pad was developed on the acreage we acquired from tracker in July of 'twenty one.
These wells were drilled with a lateral length of approximately 10000 feet.
We've been pleased with the results from these five wells to pad began producing in mid August with an average IP 30 rate of 1100 70 Boe per day.
And is 81% oil on average the drilling and completion costs for each well was only $8 million and given the production rate and low cost nature of these wells, we expect them to pay out in just over a year. We've identified over 40 future locations in this area and we'll continue to allocate a portion of our capital program to this area.
As in the past, we will continue to be laser focused on reducing costs on our recently acquired assets as well as across our existing asset base, we recognize L. O for the quarter was higher than expected. This was due to several items, including increased workover activity.
During and processing charges and increased influx deflationary pressures.
The work over program has additional benefits long term as we repair and return wells to production. They were offline are needed to or need to work at the time of the acquisitions.
The goal is to reduce failure rates and increased run times by Artemis optimizing lift methods and improving mechanical designs.
We estimate we have spent a little over $7 million over the last two quarters on Workover projects, returning approximately 6000 Boe.
Her day to production.
Given our low cost mindset, we will continue to increase operational synergies with personnel and systems to lower overall LOE per Boe.
When we put together our guidance in July we expected to see inflation from Q3 into Q4 in the range of 5% on the D&C side that estimate has held true the rate of inflation change certainly has decreased relative to what we were seeing in the first half of the year, but inflation is still a factor.
With that I'll turn it over to Mark. Thank you, Steve so much in the past I'll focus my comments today on providing additional details on some meaningful metrics and key highlights as you know a detailed breakdown of our results is available in our earnings release and in our 10-Q.
First starting with the balance sheet and our credit facility in particular be elected commitments under our credit facility or increase from $800 million to $1 $2 billion in August in conjunction with the closing of the tightest acquisition.
Alongside the increasing commitments the borrowing base at that time increased by more than 20% to $1 $7 billion.
Subsequently, our normal course borrowing base Redetermination was conducted in September and the borrowing base was increased further from $1 $7 billion to $1 eight $5 billion I'd really like to thank our banks for their commitment and continued support of our stone with a significant increase in our borrowing base being indicative of the high quality of our increased asset base now.
Let me turn to financial results for the quarter net income for the third quarter was $299 million or $2.09 per adjusted diluted share. Our adjusted net income per share was $1 30, and adjusted EBITDAX was $346 million, which was 15% higher quarter over quarter.
Third quarter adjusted net income and adjusted EBITDAX were both records for the company and were driven by the incremental production from a full quarter of bighorn assets and a partial quarter of tightest assets complemented by commodity prices that remain very strong despite the despite being down from the peak oil prices, we saw in the second quarter.
Free cash flow for the quarter was approximately $175 million, which was a 7% increase from the second quarter for the nine months ended September 30th would your Internet generated free cash flow of $374 million, which was also a record for the company.
We have continued to utilize free cash flow to repay credit facility debt.
During the quarter adjusting for the tightest acquisition, we paid down over $290 million in debt on the credit facility on September 32022, we had approximately $636 million drawn on the credit facility and total debt of just under $1.2 billion, our debt to annualized EBITDAX ratio for the third quarter was the report.
Eight times, which was ahead of our plan we plan to continue to use free cash flow to reduce debt and fully expect to remain below one times debt to adjusted EBITDA going forward.
From a production standpoint, we were pleased to surpass the high end of our third quarter guidance range by approximately 5% with company record production of 94329 barrels of oil equivalent per day, which was comprised of 41% oil, 32% natural gas and 27% natural gas liquids.
Given the recent strong results from our drilling program, we are raising our fourth quarter guidance by about 2% with production expected to range from 98000 202000 barrels of oil equivalent per day.
Turning to the capital expenditures, we spent $147 million in the third quarter, which was a little bit lower than our prior third quarter expectations for the fourth quarter, we expect capital of a range.
From $170 million to $185 million. This is an increase of a little over $10 million at the midpoint for the second half of the year compared to our prior guidance in August for the second half of the year Capex. This was largely driven by our ability to extend the completed lateral length of wells drilled in the fourth quarter by about 30% compare.
To our prior plan and our guidance, which was really resulting in significantly improved capital efficiency with the longer laterals and to a lesser degree. We also expect higher non op non op capital activity levels in the fourth quarter.
As Steve mentioned, our operating expense was higher than expected for several reasons with alloy per Boe coming in at $8.74 for the quarter, which was about $1 per Boe above the midpoint of our guidance. This was driven at an approximately equal parts by workover activity.
On the recently acquired assets.
By inflationary pressures and by renegotiated gas processing agreements on the gas processing side, which we do include in our Louise the increase is largely a function of contracts that were renegotiated or.
Re cut to move from percent of proceeds to fee based agreements. This increases the L. O. We are but it's more than offset by incremental increases in revenue. It's just that this flows through our ela. We so the net benefit is very positive, but it does increase all the way, we do expect <unk> to be moderately lower than the <unk>.
Quarter, and we are guiding to a range of $8 to $8 50 per Boe.
On the commodity hedging front were currently hedged for the fourth quarter at around 54% for oil and 62% for gas and for 2022 and for 2023 based on the midpoint of our fourth quarter guidance, we're hedged about 35% oil and about 31% for gas I would note that we've continued to enter into a mix of hedging structures that provide downside protection.
But also provide upside exposure with our 2023 oil book being approximately equally split between swaps collars and puts and our gas book book largely utilizing relatively wide colors, you can find our updated hedge position in the earnings presentation, we posted to the website. Additionally, I'd like to highlight that we are heavily hedged on wahhab basis going.
Four with hedges in place for 2020 three that cut.
About 75% of our total gas and really close to 100% of our Oaxaca pricing exposed gas is we do have a bit of gas that is exposed to Houston ship channel versus to Wahaha and we've got a good percentage of 'twenty 'twenty four hedge for a while how basis as well finally I'd like to highlight the significant increase in our current trading liquidity for the third quarter trading volumes average one.
One 8 million shares per day or $24 million of value traded per day, which was an increase of about 8% over the second quarter. We believe this added trade liquidity will benefit existing and future shareholders and we're really pleased to see the improvements in the trans quiddity with that I'll turn it back over to Robert for closing comments. Thanks, Mark looking ahead, a bit we will continue to deploy.
Like to deploy our substantial cash flow into opportunities that we believe will provide the best options to create long term shareholder value versus down those options include reducing the outstanding debt on our credit facility acquiring additional complementary assets that fit our stringent criteria, while at the same time, allowing us to maintain our strong balance.
Sheet continue to execute our expanded high rate of return drilling program, which will add production organically and finally executing on potential future shareholder return initiatives as.
As we continue to evaluate these available options our near term focus is to use free cash flow to reduce borrowings on our credit facility.
In closing in less than two years, we have transformed <unk> into a leading E&P with a stable production base of approximately 100000 Boe per day that provides a more diverse product mix of low cost operating structure and a deep inventory of high return future drilling locations that further support our efforts to maintain.
But perhaps a bit grow production over the long term in summary, we believe we've built a company that offers an attractive value proposition to investors, including having one of the highest free cash flow yields at one of the lowest enterprise values to EBITDA multiples in the E&P sector and a current valuation that is.
Gently below our proved developed reserves value of course, none of this would have been possible without our best in class Workforces constant dedication and hard work as important has been the continued commitment and support of our shareholders. So with that operator I'd like to turn the call back to you to take some questions.
Yeah.
Thank you, ladies and gentlemen at this time well be conducting a question and answer session.
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Our first question comes from the line of Charles Meade with Johnson Rice. Please proceed with your question.
Good afternoon, Robert do you and your team there.
Hey, Thanks Charles.
Robert.
Good to see those those Delaware basin results on those are your two most recent acquisitions there I Wonder if you could talk about I think you addressed this a bit in your prepared comments.
How those wells.
Those wells.
Performed versus your acquisition case.
And second what the opportunities are going forward to further improve those well results. So it seems like the most.
It is obvious.
To do that but it might be a longer laterals, but that's probably not the only one so if you could just talk about those two aspects.
Yeah, we really liked the results as Steve mentioned it kind of in some cases met our kind of acquisition cases in and in a couple of cases, maybe we were a little bit higher on the actual results compared to our type curves, which is always nice to see we're pretty conservative on the way we value assets. So that's kind of lined up with.
The way the outcome of these wells are.
Probably it's a you know a few trades happen that allow us to do longer laterals, which is super important but more importantly is just controlling your destiny. So we're working on some trades, where we'll actually have control of when we can go drill wells.
I would expect that all of our wells look this good in the future, but you know depending on where we're drilling and what horizon and as we co develop different horizons together you know, they're not all going to be the exactly the same but we're really pleased with the results. We've seen so far and we'd probably have some more coming up.
Got it and then just sticking on the theme of well results.
You know I was.
Prized by the where results that you guys turned in in Iran.
And you know I think that that that's not an area that you guys ascribed a lot of value to locations. When he picked up those assets, but you know I recognize there are 10000 foot laterals, but those are are those are better well results than than I think other.
The other peers in general have turned in in that area. So I know you've mentioned that the payout for there is around a year. So I don't imagine that puts those erie in wells at the top of your stack, but can you talk about about where they slot in on your.
On your inventory and and.
Yeah, I guess you already mentioned you have 34 more locations there.
Yeah, I mean, we like them Charles there good there a little bit gas here they come on at a pretty high oil rate our oil cut to begin with but they will get a little bit gas here over time, and ultimately end up you know, 25% to 35% oil and the rest gas but.
We knew going into that acquisition that we weren't going to have to value the upside and so we got that acreage literally those locations for free didn't pay anything for them, depending on how you want to value the PDP and we'll we'll drill a little bit of our capital program allocated in that area won't be 100 per.
<unk> Ah they look really good at $9 gas, maybe not quite as economic at $6 gas, but still good.
And its a good portfolio mix for us to add those in there little cheaper to drill.
In general So you know the economics still compete but you know, it's not going to command a full rig line.
That is helpful detail. Thank you Robert.
Okay.
Our next question comes from the line of Neal Dingmann with Trust Securities. Please proceed with your question.
Good afternoon guys.
My first question's on Permian development, specifically, there's certainly at least this earnings season, but a lot of industry attention on the people talking about larger scale stacked type development. So Robert I was wondering if you were Steve can maybe give the details of your upcoming development plans, including you know how many zones you might start targeted.
We continue to target and maybe just how in general you plan to attack the tightest and numerous other place of yours.
Well Neil it's a good question, but it's not something that's been new for US we've been co developing benches for the last few years in our development plan, whether it's on the Midland side and now on the on the Delaware side.
It depends where you are in some places we've actually co developed four benches at one time.
And we can continue to do that you know as we develop acreage in Upton County for instance, where we've got the a b upper b lower than a C and in the Delaware. It just depends where we are whether we're going to develop the shallower first and second bone Springs, and then the deeper third in.
And Wolfcamp X y or a whatever you want to call. It and then the b even beyond that so given our size and our relative.
Cash flows now we can do larger pads and we're getting to that point on the new Mexico side finally.
But we've been doing that on the Midland side for quite some time, so it's not a new concept to us and it's the most optimum way to develop the reservoirs.
Fair enough that makes a lot of sense and then secondly, maybe for you or Mark just on shareholder returns specifically to stock buybacks. You know I think we estimated I think your recent 3 million share purchased to be one of the more creative transactions, we've seen in months out there anywhere and I'm. Just wondering my question then is.
You all continue to remain active in buybacks. If you know specifically if any of your private holders have further sales and you know how tied is this too you know looking at what your stock price is at.
Well, it's definitely related to our stock price in and sort of valuation and then other opportunities that we have so this was a unique maybe a one off situation.
With that particular owner and we'll continue to evaluate other opportunities like that come up it'll be something that we think about for 2023 as I mentioned in terms of the overall shareholder return initiatives, it's a little bit early yet still for us to comment on that.
Understood. Thank you.
Our next question comes from the line of Jeffrey Campbell with Alliance Global Partners. Please proceed with your question.
Good afternoon, Robert and take care of your voice for the World series.
I wanted to approaches.
So I'll draw.
The result, a little bit differently.
It was a very.
Pressured results, particularly with the short lateral lengths and Eddie.
Eddie hasn't really been top of mind compared to Midland and Lea counties.
Wondered wise.
If any of the 'twenty two 'twenty three Eddie activity will test any of the large contiguous portion that you have in there.
The county to the northwest of Salto.
Yes, great question Jeff.
The cleanest wells are actually in that block.
And we will drill some more wells towards the end of this year and into 2023 as well in different pads over there.
We're really pleased with the Cletus results and they give us a little additional confidence in continuing to develop over there much like Erie and county in my response, there, it's not going to command a full rig program our one rig.
In that area, but good.
<unk> and just gives us the ability to spread out our capital amongst different projects.
Right.
Although it wasn't a huge number I noticed that the exploration expense was up.
Pretty significantly relative to recent quarters I just wonder if you.
Good.
Give us any high level color on what.
What that represented.
Yeah. That's a good question and most people don't catch those kind of things. It was one well we had an issue on and we ended up plugging it and it was on a four well pad in new Mexico, and we've since drilled out the entire pad and we had we did a replacement well. So it's a mechanical issue we had in the shallow portion of the hull and.
And ultimately has not created any other confusion or problems from the execution standpoint, other than that a little bit of accounting noise.
Okay.
Good.
And finally.
On a limb here a little bit just wondered if you could provide.
Any color at this time regarding what 2023 might look like I'm really thinking about.
Got an additional rig in the Delaware basin relative to most of two.
2022, and also wondered if we should continue to expect average lateral lengths to increase throughout the portfolio next year as that was a big part of the 2022 effort.
Yeah.
To do the best we can to drill the most capital efficient program possible, we'll end up with some 5000 voters in there in 75, hundreds and 10000 foot or so it'll be sort of a mixed bag I suspect that what we end up in the two areas. This year will probably look similar to next year, where you know.
Well hopefully have some 15000 footer, we can scatter in there, which really help us.
We've got five rigs running today.
And kind of just ballpark thinking about 2023, and you know, we've obviously done a lot of planning because this.
Program that we have takes a lot of upfront planning, we're planning for five rigs for 2023.
It's a little bit early to think about what that capital program might cost, but fourth quarter is probably good.
Good proxy for that at this stage, but we will see as we think about what inflation looks like in 2023 and from a production standpoint.
Five rigs is about a maintenance program you know there is a bit of flush production from tightest that has a pretty steep decline in some of that as well who brought in the quarter, but really before that too.
So we think that's about a maintenance program if the midpoint of our guidance for the fourth quarter is a 100 a day, we think that's about what <unk> does for next year.
Okay, well, that's very helpful. I appreciate it.
Our next question comes from the line of Sea bass genre with benchmark. Please proceed with your question.
Thanks, Hey, Robert can you just maybe talk.
Talk about the sort of field optimization work workovers artificial lift et cetera, how that might you know phase out.
Heading into the new year if at all.
Yeah, I mean from a high level standpoint, Sue box when you.
Make acquisitions, you end up with wells that Werent maintained going through a process of a sale.
And Steve can give lots of examples of wells that we needed to spend time on.
Our equipment is for one reason or another stuck in the hole and you know it.
It is something that we knew going into these acquisitions, we're going to spend some capital on.
<unk>.
I think that's.
Not an ongoing program and we've got some identified wells, we're going to do some work on of course and wells fail. You know when you have as many wells as we do wells do fail, but I think the big slug of Workover from these acquisitions is behind us.
I think so we peaked out at about 12 Workover rigs working at one time and now we're about in the six or seven range. So we went through the crest of that and got everything on and now we're pretty much back to.
Basic maintenance and some chosen workovers based on economics.
Okay. Good detail. Thanks.
So mark.
You talked about paying off I guess.
That.
Are you, making a distinction between the revolver and the term loan.
Or should we sort of assume that everything short term.
Is what you're trying to pay.
Pay offs.
Yeah, I wouldnt differentiate between the revolving component and the term loan component and they are both part of the same credit facility and the term loan is priced a little bit higher from a rate standpoint.
Yeah, there's a tradeoff there if we could.
Dedicate all of our free cash flow to paying off the term loan piece, but when we do that the commitments decrease some.
Some point, if we don't have another use for.
Cash.
You could see how it makes sense to pay off term loan we've not done any of that yet.
Before year end might we pay off some on the terminal maybe but it's not something that we've decided or have to decide right. Now so right now we like the flexibility of having more commitments and the.
The small incremental price that that cost us is a pretty good trade off right now yeah, as we pay down more debt if there's nothing on the acquisition front.
I think probably we'll pay down some of the term loan, but we like having that dry powder available right now we're pretty close to to be and have paid down on the total $1 2 billion of commitments.
That will feel better for us and really sort of our target was to get half of it paid down by year end and even with spending $43 million year.
This past month on some buybacks, we're about on track for that maybe even a little bit below that so that feels pretty good.
And we'll feel better about it.
Paying down some of that term loan permanently as we have more undrawn available.
Okay Gotcha.
And final for me with the fifth rig coming on can you sort of maybe talk to your your comfort familiarity with that rig line and you know.
How do you sort of see it you know.
Being deployed or do you think you might need a little bit of time to.
Assess how it performs for Ya.
Well, there's always a learning curve both from the operator standpoint, and the service company standpoint, as you put new <unk>.
Equipment to work, whether it's a rig or a workover rig or a frac crew. So.
But I don't expect it to be up to full efficiency for six months.
But we've got the acreage position for the three rigs to run in new Mexico, and they're sort of going to be scattered out for a while and then at some point. We may find an area. We want to put two of them to work right side by side and kind of fully develop out some acreage. So it's.
It's all in our it has been in our planning for the last several months, adding this rig in and the types of acquisition.
That prompted that sooner than later.
We feel pretty good about the ability to just get this rig up in the air and going.
Got it thanks guys.
Our next question comes from the line of Jeff J from Daniel Energy Partners. Please proceed with your question.
Hey, guys. One quick question on the five rig program.
<unk> in the fourth quarter Capex feels about right now $150 million to $200 million of rig kind of level, but just wondering what are the terms of the five rigs like when do those you know I guess how are they.
Much exposure do you have sort of spot pricing through next year on those rigs.
Well they are all varying contract terms, Jay generally six or 12 months I think we have two of the rigs under 12 month contract.
And the other three or six month contracts that roll off at different periods of time.
So in a.
Really bad scenario, we could let a rig go or to <unk>.
Next year, but if oil's in this 80 to $100 range, we feel really good and as we get close to the end of those terms, we always had the chance to renegotiate.
That exposes you to a little higher price, but you know with the efficiency, we're seeing on these rigs if.
If we can if they go up a few thousand dollars a day and we can continue to cut off hours.
Were basically keeping are priced the same.
Right no that makes sense and then unrelated but just wondering on the on the deal front you know as I go around.
In the Midland or Delaware and talked about.
Basically it seems like everybody says every acre is magnified, but then you you know every so often you see deals come to the table anyway, just wondering what what you can delay of the land is there on the M&A market.
Well things are getting done and when we saw a big deal announced yesterday, a we've seen some other deals here recently and some of them pretty sizeable in the in the Permian.
I think that the landscape of private equity guys considering sale in 2023.
We'll pick up a little bit I think the fourth quarter or the rest of this quarter is going to be a little bit slow on the deal front and nothing will get you know I doubt a whole lot gets close between now and year end, maybe a few more things get announced but.
I'm optimistic that there's going to be plenty of deals for us to look at and we will have our plate full evaluating things but.
We're going to be cautious about that.
Everything we look at.
Okay. Thanks, guys.
I appreciate it.
Thanks, Jeff.
Next question comes from the line of Jeff Robertson with.
Water Tower research. Please proceed with your question.
Thank you Robert or Steve if I remember correctly.
The Eddy County acreage in the Delaware Basin you all.
Didn't put as high value on it when you acquired it.
In February .
It sounds like the results from some of this drilling you've done are better than what you might have expected. When you acquired is that fair.
There are at least met our expectations.
And it was just the way we allocated value that we didn't have to allocate a whole lot to the bigger block of acreage in Eddy County, the salt dry areas in the core of the core of the Delaware basin or at least the northern Delaware Basin. So we had high expectations for it and it proved out like we thought.
So I wouldn't say, we didn't allocate zero to our bigger block in Eddy County, but we're pleased with what we saw.
Thus, we're going to spend more capital.
This is the three rig Delaware Basin program, the right number of rigs just given some of the permitting and logistical issues that you deal with over there.
For now it is yeah. It like we've said over and over and over again, we'd like to walk before we run we were.
We got to the running stage with the two rigs and now we're going to pick up the third rig for Delaware and now we're going to walk again and make sure that Steve and his group are executing you know as well as we can and I know, we'll get there and then we'll figure out if we buy some more acreage or find another deal whether it makes sense to have a fourth rig but three.
The acreage footprint and like you say, the permitting and infrastructures it feels like it's about the right amount.
Thanks for the question Mark on the on the term loan maybe I have not read this in the 10-Q, yet but.
You mentioned that if you pay down term loan it would have.
In fact on the on the committed amount under the RVO is that a is that a one for one or can you talk a little bit more about that I didn't see it in the footnote.
Yes sure.
And really that was the only close tie to so the structure is and now we've got a 185 billion to our borrowing base, we have $1 2 billion of total commitments.
Thats allocated $950 million to a revolving tranche and $250 million to a term loan tranche a term loan of course is fully funded.
Any repayment of the term loan that's not a revolving piece. So if we were to pay off $50 million of term loan that would reduce the term loan from $2 50 to 200 and it will reduce the overall commitment from one two to one 5 billion.
Okay.
Thank you.
That's very mondor. It is star one to ask a question.
Okay.
There are no further questions in the queue I'd like to hand, the call back over to Mr. Robert Anderson for closing remarks.
Thanks, everybody and we'll look forward to talking to you in the spring once we get through the year end.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.