Q3 2022 SilverBow Resources Inc Earnings Call
[music].
Thank you for standing by at this time I would like to welcome everyone to the Silver Bowl of resources third quarter 2022 earnings Conference call. All lines have been placed on mute to prevent any background noise. After the 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, Jeff Magid director of Finance and Investor Relations you May begin your conference.
Thank you Cheryl and good morning, everyone. Thank you very much for joining us for our third quarter 2022 conference call with me on the call today are Sean Woolverton, our CEO , Steve Adam our CFO and Chris <unk>, Our CFO yesterday afternoon, we posted a new corporate presentation to our <unk>.
Website and will occasionally refer to it during this call we encourage listeners to download the latest materials.
Note that we may make references to certain non-GAAP financial measures, which are reconciled to their closest GAAP measure in the earnings press release.
Our discussion today may include forward looking statements, which are subject to risks and uncertainties many of which are beyond our control. These risks and uncertainties are described more fully in our documents on file with the SEC, which are also available on our website.
With that I'll now turn the call over to Sean.
Thank you, Jeff and thank you everyone for joining our call. This morning.
<unk> continues to execute on both our organic drilling program and are accretive A&D strategy.
Third quarter marked a key inflection point in our growth strategy.
During the quarter, we announced our sixth and seventh acquisitions since August of last year and operationally we focused on the addition of a second drilling rig in the integration of the Sundance assets.
We have added significant scale through acquisitions and high return drilling over the last 18 months and going forward Silver Bowl is primed for further growth.
Before I lay out our multi year strategic objectives I would like to briefly review some notable highlights since our last call.
In September we announced a new 7500 net acre position in the dry gas Dorado window of web County.
This was the culmination of a series of bolt on acquisitions leasing deals and drill to earn agreements assembled over the last year.
The stacked pay co development opportunity consists of over 50 net drilling locations.
Which our northeast of our existing web county position and expands our high return gas inventory in the Eagle Ford and Austin chalk.
As a result at quarter end, our web county position totaled 17000 net acres and nearly 200 drilling locations with an average rate of return exceeding 100%.
At the beginning of October we moved both of our drilling rigs to our Webb County gas area.
This decision was based on continued strong Austin chalk results.
To date, we have brought online seven Austin chalk wells and all of them are exceeding expectations.
In total we will drill 16 wells at SaaS skin during the third and fourth quarters with 15 of the 16 targeting the Austin chalk and one targeting the upper Eagle Ford.
The returns we are generating in the Austin chalk warranted this shift in our capital allocation and much of this development should benefit from strong winter pricing.
In addition specific to 12 of the 16 wells are non op partner elected not to participate in those projects.
As a result, we will add an incremental four five net wells to our 22 development, which increases our working interest in those wells from 64% to 100%.
We really like this opportunity and we estimate the PV 10 value of the incremental working interest to be approximately $100 million.
The ability to execute on this opportunity highlights silver Bose operational flexibility.
By the end of 'twenty two this rig will return to its planned liquids development and we will resume our balanced strategy of one gas focused rig and one liquids focused rig.
Also in October we announced the acquisition of 5200 net acres and our karnes trough position, which now spans gonzales to wit and Lavaka counties.
I am happy to report that we successfully closed the acquisition earlier this week.
The karnes trough assets significantly enhance our existing position by adding incremental working interest in new adjacent acreage.
Which provides for extended laterals additional drilling locations and more efficient operations.
Pro forma for this deal we have a consolidated 13000 net acre block, which now has 100 high rate of return locations spanning the Eagle Ford and Austin chalk.
We plan to allocate capital to this area early next year.
This has been a banner year for the company and we have significant momentum to build on for the remainder of the year and into 2023.
Silver <unk> growth trajectory is driven by strong execution by our operational and business development teams as they drill high rate of return projects and make accretive acquisitions.
Having covered our recent results I would now like to outline our multi year strategic objectives and the roadmap ahead.
Our first objective is to drive double digit growth while living within cash flow.
Using 2022 as a baseline we expect to grow production and EBITDA by more than 25% annually over the next two years.
This growth will be governed by our reinvestment rate below 75% with free cash flow used to pay down debt.
Subject to reinvestment rate and leverage thresholds, we have contingent capital earmarked to deploy a third rig in the second half of 2023, and our karnes trough area.
With the addition of a third rig we have visibility towards recent reaching a key scale target of over a half a billion cubic feet equivalent per day of production.
Our second key objective is portfolio expansion.
Silver bow has added over 350 drilling locations year to date through acquisitions.
And currently has well over a decade of inventory life.
As of today, two thirds of our locations our oil weighted representing a major shift from silver both historical inventory mix and highlighting the meaningful change accomplished through our strategic A&D activity.
A core tenant of our strategy going forward.
Will be to maintain a minimum inventory life of 10 years as we focus not only on sustaining but building scale.
We believe the Eagle Ford remains an opportunity rich area to add additional inventory as we've done in the past.
We believe we can unlock additional potential through multiple avenues, including grassroots leasing acquisitions and identifying stack pay potential on existing acreage.
Our third key objective is to lead our peers and capital efficiency and cost structure.
As shown on slide 16 of our corporate presentation Silver BOE has one of the lowest breakeven cost across the domestic landscape.
Additionally, as shown on slide 17, <unk> has drilled half of the top 50 Webb County gas wells.
Furthermore, favorable Gulf coast pricing allows us to realize prices close to or above benchmarks and.
And to deliver consistently higher net backs.
And finally, we have one of the lowest G&A platforms in the industry.
We estimate next year's per unit cash G&A to fall below 10 per Mcf.
Our fourth objective is to Delever, our balance sheet and increased liquidity.
Through September 30.
We have funded $300 million in cash acquisition payments, while simultaneously increasing liquidity by over $60 million and holding leverage flat from year end.
Through cash flow generation and debt reduction we are targeting long term leverage between a half a turn in one turn.
With these multiple multiyear objectives in mind.
We have provided updated 23 guidance our outlook incorporates the most recent acquisitions and third quarter production updates.
We are raising our 23 production guidance to average between 400 to 420 <unk> per day with EBITDA of approximately $700 million.
As we settle into a leverage ratio below one times next year.
We will have contingent capital to deploy a third rig.
As I.
<unk> earlier, this will accelerate our ability to build greater scale.
We continue to see the highest near term reinvestment opportunities through the drill bit and accretive acquisitions with share repurchases being the priority of our future shareholder returns program.
Last but not least I am excited to share that silver bow, we'll be publishing its inaugural sustainability report in the first half of next year.
As a company that prides itself on operating in a responsible manner with steadfast transparency, we look forward to sharing our ESG best practice commitments initiatives and goals.
With that I will turn the call over to Steve to provide an operational update Steve. Please go ahead.
Thank you Sean in the third quarter, we drilled 15, net wells and completed and brought online 11 net wells the increase in our quarterly well counts reflects the addition of our second drilling rig in July .
As Sean mentioned, the third quarter marks a key inflection point in silver <unk> growth trajectory.
And our Webb County gas area, we had a full rig running throughout the quarter, we completed and brought online a two well San Ramon pad located on our recently announced Dorado acreage block.
One of the wells on this pad targeted the Austin chalk and represents the seventh and best performing chalk well and silver both has drilled today.
This two well pad achieved an IP 30 of 30 <unk> per day and continues to confirm our view of unlocking additional inventory in the Austin chalk as we transition to full scale development.
As shown on slide 18 of our presentation, our chalk wells payback in less than a year and generate rates of return well above 100%.
We also completed and brought online a three well pad, which has yet to reach 30 days of production and is performing above expectations.
In our central oil area. We also had a full rig running throughout the third quarter, we completed and brought online a two well pads.
Which had been drilled by the previous operator prior to silver bow, taking ownership on June 30.
As noted in our press release the performance from these wells has exceeded expectations delivering an IP 30 of 'twenty 400 Boe per day with a 94% liquids cut.
Additionally, we completed and brought online a three well pad and are encouraged by the early results as we approached 30 days of production.
Third quarter production of 299 Mcf per day was at the midpoint of our guidance with our gas and NGL production at or above the high end of the range.
Third quarter oil production fell below our guidance range early in the quarter, we experienced cycle time delays due to drilling efficiencies and casing problems from the previous operator.
The well with a casing problem has been temporarily abandoned.
These transitory issues in combination with underperformance from our non operated pad brought online during the third quarter drove quarterly oil volumes below our initial expectations.
For the fourth quarter, we are guiding to production of 322 Mcf per day at the midpoint with natural gas representing 70% of our production mix.
Our guidance implies a 5% to 10% production increase sequentially in the fourth quarter.
Incorporated in our fourth quarter guidance ranges previously unscheduled plant maintenance on third party systems.
It is anticipated that these maintenance projects will impact dry gas volumes out of web county during the quarter as Sean noted earlier, we plan to return to one gas rig and one oil rig by year end.
Our updated full year 2022, Capex guidance is $320 million to $340 million. We estimate. The addition of the 12 asking wells into our drilling schedule together with recent land and leasing spanned in Webb county to comprise roughly $30 million of incremental capital to our Bud.
Yes.
It is worth noting that our full year capex guidance only increased $15 million at the midpoint as our team continues to find cost efficiencies elsewhere in our program.
Looking to 2023 or.
Our production forecast of approximately 400 to 420 <unk> per day represents a 50% increase year over year.
Roughly half of that increase is attributable to the acquisitions, we have closed over the course of 2022.
Our capital budget next year is expected to range between $450 million to $550 million with the higher end, reflecting the potential third rig added in our karnes trough area in the second half of next year.
As always silver ROE optimizes as drilling schedule in real time to allocate capital to our highest return projects based on prevailing commodity prices production timing and expected rates of return.
As has been discussed throughout the industry cost inflation continues to move operating and capital expenses higher.
We estimate costs are up approximately 25% year over year across all major basins.
On the drilling side, the largest cost increases continue to come from casing day rates fuel in cement.
On the completion side horsepower logistics sand and fuel are seeing the most pressure. Furthermore, the labor market remains tight across the service sector, which typically results in service provided challenges.
We experienced similar efficiency challenges with the rig we added back in July .
After taking control of operations the rig returned to expected efficiency levels and we believe these issues to be transitory.
The silver pro team continues to set the standard for safety amongst our peers. We again achieved a zero total recordable incident rate for the quarter.
As we double the size of our drilling program safety remains our top priority in the field to all of our employees contractors and service partners.
Thank you for upholding this core pillar of silver Rose culture.
With that I will turn it over to Chris. Thanks.
Thanks, Steve in my comments. This morning, I will highlight our third quarter financial results as well as our price realizations hedging program operating cost and capital structure.
Third quarter oil and gas sales were $242 million, excluding derivatives with natural gas, representing 70% of production and 62% of sales.
During the quarter, our realized oil price was 100% of Nymex <unk>.
Realized gas price was 95% of Nymex Henry hub, and our realized NGL price was 36% of Nymex <unk>.
Our price realizations in line with benchmarks.
Highlights of our both competitive advantage operating in the Gulf Coast markets.
Our realized hedging loss on contracts for the quarter was approximately $84 million. Nevertheless, silver both hedge book will strengthen over time as it rolls off below market hedges and continues to lock in strong project returns with new hedges at attractive prices.
Based on our hedge book as of October 28 for the remainder of 2022, we have 167 Mcf per day of natural gas hedged 8400 barrels per day of oil hedged and 3750 barrels per day of Ngls hedged.
For 2023, we have approximately a 180 Mcf per day of natural gas hedged 7300 barrels per day of oil hedged and 3750 barrels per day of Ngls hedged.
The hedged amount are inclusive of both swaps and collars and include the assumptions of existing hedge books from our recent acquisition.
A detailed summary of our derivative contract is contained in our presentation and 10-Q filing for the third quarter, which we expect to file later today.
Turning to cost.
Lease operating expenses were <unk> 65 per.
<unk> transportation and processing costs were <unk> 35 per Mcf production taxes were 5% of oil and gas sales.
Cash G&A, which excludes stock based compensation.
$3 2 million for the quarter as we continue to add scale to the company a function of both organic and acquisitive growth, we do not anticipate a meaningful increase to our G&A, rather we expect G&A on a per unit basis to decline compared to historical ranges.
Our third quarter cash G&A was <unk> 11 per Mcf fee on a unit basis, which is roughly half half of our unit costs in 2021.
We consider our lean cost structure to be a differentiator, allowing silver bow to sustained profitability during periods of volatile commodity prices.
Adjusted EBITDA for the third quarter was $115 million as reconciled in our earnings materials, we recorded a slight free cash flow deficit for the quarter, excluding $6 million of opportunistic leasing free cash flow would have been positive.
Capital expenditures for the quarter on an accrual basis totaled approximately $110 million.
This excludes acquisition and divestiture activity.
Turning to our balance sheet.
Total debt was $630 million.
Higher adjusted EBITDA in the third quarter was offset by cash payments for deals associated with our dorado position as well as the cash deposit for our Karnes trough acquisition.
Which together totaled $50 million.
We funded these cash payments using our credit facility and operating cash flow.
Irrespective of the cash outlay for Atlanta, and acquisition, we paid down $14 million of debt quarter over quarter.
As of September 30, we had $295 million of availability under our credit facility and $2 million of cash on hand, resulting in $297 million of liquidity.
Silver bow in accordance with our credit facility includes contribution from closed acquisitions for the entirety of the LTM adjusted EBITDA period used for the leverage ratio calculation.
On an LTM basis for the period ending with the third quarter of 2022, the contributions from acquired properties totaled approximately $139 million.
Bringing our LTM adjusted EBITDA for covenant purposes to $495 million and our quarter end leverage ratio to 127 times impressively supervised the maintain a flat leverage ratio since year end 2021, while funding over $350 million in cash acquisition payments.
At the end of the quarter, we were in full compliance with our financial covenants and have sufficient headroom.
With that I will turn it over to Sean to wrap up our prepared remarks.
Thanks, Chris.
<unk> continues to execute on its differentiated growth strategy.
Between organic growth and in basin consolidation the company is positioned for significant value creation going forward.
We are a prime for double digit growth as we march towards our longer longer term scale target of over a half a billion cubic feet equivalent per day of production.
In the near term a key catalyst for our stakeholders will be our industry, leading commitment towards safety and clean operations and the release of our inaugural sustainability report in the first half of next year.
As we find ways to increase cash flow and pay down debt. We continue to see the highest return on investment through the drill bit and accretive acquisitions.
With production growth debt reduction and a concern a conservative reinvestment rate our liquidity position should expand over time, providing us the dry powder to stay opportunistic and further consolidation within the basin.
I want to thank all our stakeholders for their continued support we look forward to providing further updates on our next call and with that I will turn the call back to the operator for questions.
To ask a question. Please press star one on your telephone keypad. Your first question is from Neal Dingmann of Chill with Securities. Please go ahead. Your line is open.
Good morning, guys I'm, just wondering could you talk a little bit of an allocation between you've talked a little bit of the press release about your web County play out like the returns on the gas side.
The obviously future Karnes trough just wondering how you think about allocations typically in 'twenty three there.
Yeah, Hey, good morning, Neil.
During the first half of 'twenty, three we will plan to allocate half of the capital to web County, and have the capital to our oil locations.
Areas, which include central oil and the Karnes trough area so 50%.
To each area with.
With one rig operating in each area during the second half of 'twenty three as we moved to three rigs.
We seek to two thirds of the capital will be allocated to liquids oil properties, both across our central oil area in the Karnes trough area and one third of the capital allocation going to Webb County gas.
Sure.
Thank you and maybe just talk about M&A opportunities going forward, specifically as it relates to the Eagle Ford obviously after the big deal we've seen last night.
Yes, yes.
Over the last four to five months Theres been actually a couple of large publicly announced transactions in the Eagle Ford as well as some private transactions that didn't get announced but in all of them. We feel like it's a really good read through to silver bow in that they traded at value.
<unk> that demonstrates.
Demonstrates the upside value that silver Bowl has.
<unk>.
Those announcements show the Eagle Ford continues to be a great place to own assets in terms of go forward inventory, we continue to see a tremendous amount of runway there there remains a large.
Inventory of private operators that have been in the basin and their investments for quite a long period of time.
And.
We continue to have discussions with them amongst marketed.
Deals as well as.
As we look to continue to add deals.
And so yes, we think that there's a ton of runway going forward and Youll continue to see transactions occur in the Eagle Ford.
Thank you Sean.
I appreciate the questions Neil.
Your next question is from Charles Meade of Johnson Rice. Please go ahead. Your line is open.
Good morning, Sean to you and the rest of the the rest of the team there.
On the line.
I was wondering if I could start by asking about the.
The Webb County.
Yes, I guess third party midstream constraints.
You upped your I guess two questions you up your guide for for.
For 'twenty three can you talk about what is implicit in that guide about about the duration of those.
Midstream increased rates that youre seeing.
Yes, yes, no I appreciate the question.
So as we look into 'twenty four and what's implicit in the guide up in production first is the activity in the fourth quarter.
Specifically the increase of our working interest in.
And our fast can properties that resulted in $4 five net wells.
That essentially really drives an early production growth for us going into the first quarter of next year.
So getting those volumes on.
Higher net volumes due to the increased working interest is driving.
That growth early into next year, So that's where that's really being driven from.
In terms of the.
Issues that we're seeing out of Webb County.
At this point in time.
The maintenance is occurring throughout November and potentially early December .
So we expect those to be resolved early into next year.
But with that said, we'll continue to watch there has been a tremendous amount of supply growth.
In Webb County.
So infrastructure for.
For the first time in a long time in that area is now starting to to reach capacity.
Future.
Expansions.
Being planned in one that's been publicly announced out of web County so.
Foresee that we get into early next year.
We shouldnt see these constraints, but we're also keeping a close eye on web county supply and takeaway capacity.
And we will need to be doing that over the next quarters.
Got it that is helpful detail and then and then as a follow up.
I wanted to ask about the third rig and I think you addressed.
In broad terms, how youre going to approach that theyre right, but I'm wondering if you could elaborate a little bit on.
On the timeline for your decision.
Like you know, whether you're going to have to decide at the end of <unk> to bring it on for the middle of the year and then and then just.
Maybe share a little more specifics on the key indicators youre going to be looking at to decide whether you bring that third rig on.
Yes.
Great question.
We are always in the market.
Nothing.
Rig availability are really around making sure that we have competitive.
Pricing for our rigs so Steve and his team are always looking at rig availability and we have great dialogue with a number of service providers. So we'll usually be like you said 90 days out in front of the decision and starting to get those rigs lined up.
So it's really in and around the end of the first quarter early part of second quarter that will probably be looking at making a decision and going forward with the third rig.
Criteria to make that decision first.
We plan to drill two wells early next year on our Karnes trough position these will be longer laterals, we plan to target one in the Austin chalk one in the Eagle Ford just to confirm the the acquisition assumptions that we've made that the reservoir is going to be as good as we anticipate and generate the.
Turns were returns we're expecting so that'll be the first criteria second will be commodity prices.
Commodity prices remain where they are at those returns will be pretty substantial so.
That'll be the next check that hey, commodity prices justify the returns to invest capital and then the third is just the balance sheet, we wanted to.
You can expect that will be.
Delever below one turn as we get into the early part of next year and moved forward a half a turn mid to late year. So thats. The last check that will we will make that hey, the balance sheets, where we want it before we accelerate more capital expense.
Yes.
That's great detail. Thank you Sean.
Appreciate the question is Charles good morning.
Your next question is from Jonathan Shaffer.
<unk> of Northland Capital markets. Please go ahead your line is open.
Yes.
Donovan Schafer your line is open.
Hey, maybe if donovan's available operator, maybe we can go to the next question and circle back.
Your next question is from Tim <unk> of Keybanc capital markets. Please go ahead. Your line is open.
Hey, good morning, everybody.
At Charles kind of stalled my first question on the rig so I appreciate the color there.
So I guess related to that 2023 commentary you provided you talked about it 2023, EBITDA number of $700 million.
Can you just kind of tell us what commodity prices sort of underwrite that outlook.
Yes, yes.
Really.
Pricing.
As of early to mid October .
And it reflects our hedge hedge book at that time as well.
So that number may move around as.
As we put on additional hedges as we go into 'twenty, three and if strip prices changes, but that's the assumption.
The assumptions that were used to generate that number.
Okay. Okay. Thanks.
And then if I could.
And since you haven't really announced any any capital return you gave a little bit of color on repurchases.
And I know, it's theoretical at this point so.
I guess my question is.
Is that.
Small cap company with a really big kind of growth runway.
Why why would you consider this at all at this time.
These growth stage and why why that form.
What I'm getting at yes.
Yes, yes, good question and we agree that Hey, we continue to think the best returns on capital are first and foremost through the drill bit at these commodity prices.
So that's where we'll continue to allocate the majority of the capital and.
Through accretive acquisitions.
We fully believe that to continue to unlock value for silver bow and T recognize higher valuations as we traded a discount scale as the primary driver. There. So we do believe that's where to put.
Our our investment as we think about going forward.
One of the things that we will consider is just the volatility of our stock we see.
Some volatility in our stock.
As part of our acquisition program we.
Put shares out too.
Hi.
Folks that we bought assets from <unk>.
So we think a shareholder or a share repurchase program could be helpful to manage overhang in the stock going forward and that would probably be the first use.
Sure share buyback program is to.
Kind of ensure that if the stock is pressured down to some overhang selling we supported with buybacks.
Okay, Okay and is there a certain thresholds when you would maybe look to the.
The board and gains that is at a leverage target in absolute debt target here.
Yes, we're still we haven't.
Finalized.
The program, what we're signaling that it's something that we're thinking about but we havent formally.
Approved it.
Right now it's it would be like you said geared around where we're at from a leverage standpoint liquidity standpoint.
But don't have like specifics.
We've put in place yet as we're still working on deciding if we formally announced and put the program in place.
Okay. Okay. That's helpful. And then if I could go back to that on that topic with debt and leverage.
Based on that strip pricing scenario.
The parameters you can put around 2023.
How do you see leverage at the end of 2023 playing out.
Under the under the two or three rig kind of scenarios.
Have you have you can't do that math there.
Target in place.
Yes.
As we thought through the questions that we've received around leverage.
It's always been hey, you're tracking towards a half a turn.
And what do you do once you get there.
Along the way right, we've continued to find accretive acquisitions to do.
That periodically we will drive that leverage up a little bit and we saw that here in the third quarter.
With the transactions that we did all in cash so I would tell you. Our objective is probably to live within a half a turn in one turn.
As we look at next year and get towards the end of the year, it's probably within that range probably towards the middle to the lower side of that range.
Okay. Okay. Thanks, and then if I could sneak one more in.
As you.
Sundance acquisition.
Obviously did quite a bit to.
To diversify your inventory.
But kind of given.
You talked about the well failure on that acquisition was that due diligence issue was that something completely out of the blue and I guess.
How do you think about.
Yeah.
Okay.
I am sorry, rambling a bit but.
What's your kind of postmortem review of what happened and how you can kind of avoid that issue going forward given you you're clearly going to be acquisitive.
Yes no.
Great question. It was something we would view as a one off.
The wells on that pad were extended laterals that had a trajectory change in the middle of the lateral.
Something that I think in house, we would have probably recognized.
<unk>.
That that potentially would be creating a stress on the casing.
Upon pressuring up at the beginning of the Frac could cause of failure and.
And Thats what happened.
So yes in retrospect it's.
<unk> encountered this on any acquisitions is working with the operator, you are acquiring from two really due diligence everything thats.
Part of the transaction, but thats ongoing from an operational standpoint as well so.
We do again, we view it as a one off could have we avoided it.
Paul.
Not two of the three wells didn't fail so.
We think it was just just a one off occurrence. Unfortunately.
Okay. Okay. Thank you for the context.
I appreciate all the questions have a good day.
Your next question is from Jonathan Shaffer at Northland Capital markets. Please go ahead. Your line is open.
Hey, guys. Thanks for taking my questions.
So I wanted to ask about.
The opportunity with the non op partner, how you were able to.
Increase your working interest.
Is this something.
So clearly kind of a great opportunity in this place where.
So really good about the quality of the rock and the acreage and everything.
So this is the case.
I guess to me.
I'm guessing it was kind of a no brainer, but I'm wondering.
Going forward.
Other dynamics, where you see other opportunities like this.
Whether it's.
The same non operator.
Maybe not being in a position to.
It doesn't have the cash available right now or other different non operators around where you can.
Just sort of the.
Pricing environment or whether these are other companies that are global and are worried about a recession things or something and conserving cash as there was like an opportunity out there too.
Go after.
Drilling locations, where you can kind of.
Essentially forced stand of someone else to yes to maybe pass the.
That answer you and allow you to gross up your interests.
Yes.
For the most part it's a limited opportunity set for us and that's driven by.
Pretty much across all of our asset base, we have nearly a 100% working interest. So this happens to be one area, where on our fast can block, where we have two thirds working interest in our partner has a one third working interest and you care characterized it correctly.
I think it.
It's not that they feel like it wasn't a.
Capital investment opportunity.
Through their budget process.
Sure.
Yes.
We are limited in their ability to allocate capital to the increased activity late in the year. So.
So we see that as probably a unique one off occurrence for us.
Okay.
And then for the third rig Youre trying to think through.
How far along are you in terms of kind of <unk>.
So that rig.
But the degree of confidence and visibility you have.
And what kind of a rate.
Or at least I guess.
<unk>.
The economics on those.
An assumption around what the associated drilling cost.
And then even maybe talking about the Frac crews to I know you kind of lock in the rig for a period, sometimes there's an aspect of that frac crews. So how far along are you.
Negotiators, how much confidence you have around those economic assumptions for for that.
That step up and bringing on the rig.
Yes.
Something that just being very active operator.
We're in market always.
Testing the rig availability.
And other service providers providers availability across our our.
Capital program.
It's something that we're not actively negotiating on yet.
We'll have plenty of time there.
But it's something that we'll take into consideration right Hey, we're a returns driven company. So in order to allocate capital and put it to work it needs to meet face.
Favorable returns thresholds if.
The cost of the wells reach a point, where the capital is not.
The allocation is not justified then then we'll back away from it right now the current.
Cost of picking up a rig and availability, we think that's going to be there and so thats why were planning forward accordingly, but we'll adjust.
As necessary and what's nice is we have.
Plenty of flexibility.
Right now the production guidance that we gave at that 420 million a day reflects the third rig being at it.
And that really drives growth into 'twenty four but.
But I mean, we're already growing 50% next year. So if we happen to slide that back down to two rigs and only run the.
Two rigs through the year, we're still going to have one of the largest growth.
Trajectories of any of our peers.
And then we'll revisit where returns are at 24, so I think we're positioned well to have flexibility around our decision to add the third rig.
Okay. Okay, that's great.
And then for Phil.
This winter and kind of how you.
The two rigs two to focus on gas.
Timing of.
Fracking and bringing them online and stuff. It seems like this is all around it.
It's partly about the quality of the asset.
Those returns.
<unk>.
Just.
Some sort of in the abstract but it also seems like.
You guys have this view.
That will get you'll be getting better winter pricing near term.
This winter.
With large volumes of gas with initial production.
So.
I'm kind of curious in general this is.
Some what of a common practice, where you would see this for instance, just being repeated in the future in future winters or.
Do you feel like you have a sort of differentiated view.
About specifically the gas prices at the hubs youre selling into.
Specifically this winter.
And then if that all.
Do you see that as kind of pure upside to that gas price exposure or is it a certain amount of whatever that incremental would be.
<unk> mitigated by hedging.
Yes no.
From a practice by the company. This is something that we have in the past employed as well.
That's what we love about the Eagle Ford and our position is we can move operations around and capital allocation.
In a very short order, we love the Eagle Ford that you can drill gas one weekend in oil. The next week. So we've employed this practice in the past to ramp.
Our gas production.
Into the fourth quarter, and first quarters to take advantage of winter pricing.
And it's also we're very bullish on gas prices.
Over the winter.
<unk>.
Long term as well so yes, it's something that we have employed in the past and we'll probably keep as a strategy going forward as well.
Okay, great. Thanks, guys.
That covers it for me.
Follow up offline.
Any other questions okay.
Donovan have a good day. Thank you.
We have completed the allotted time for questions I will now turn the call over to Sean Woolverton for closing remarks.
Again.
Operator, thank you for moderating the call I appreciate everyone's interest in the company and we look forward to updating you on our next call.
This.
Today's conference call. Thank you for your participation you may now disconnect.
Okay.
[music].
Yeah.