Q3 2022 Ranger Oil Corp Earnings Call

Good day and welcome to the Ranger Oil Corporation third quarter 2022 earnings Conference call.

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So this event is being recorded.

I would now like to turn the conference over to Rangers Senior Vice President and CFO Rusty Kelley. Please go ahead.

Good morning.

Thanks for dialing in today for our third quarter Conference call with me. This morning is our CEO Darin Hinky and our COO Julian wealthy.

Please note that we will discuss certain non-GAAP measures definitions and reconciliations of these measures to the most comparable GAAP measures are provided in our news release and earnings presentation, which can both be found at www Dot Ranger oil dot com or.

Our comments today will also contain forward looking statements within the meaning of federal Securities laws. These statements are subject to a number of risks and uncertainties that could cause actual results to be materially different from those forward looking statements, including those identified in the risk factors in our annual report on Form 10-K.

And quarterly reports on Form 10-Q, I'll now hand, it over to Darren.

Thanks, Rusty and welcome everyone.

Yesterday, we published our third quarter results, along with an updated slide deck.

2022 is proving to be another great year for Ranger, we continue to deliver on our key objectives. This year operationally financially and strategically.

Our company has been dramatically transformed over the last two years, we've strengthened our balance sheet materially extended our inventory through highly accretive acquisitions, we've grown organically through the drill bit and returned significant cash back to shareholders Ranger.

Ranger truly is doing at all.

Our company differentiates itself from its peers.

We have the highest margins in the business, thanks to our low cost structure and the premium pricing our products received in the Eagle Ford.

We have an estimated 20 year inventory of high return development opportunities.

We are creating value on a per share basis.

Since the fourth quarter of last year Ranger has more than doubled operating cash flow per share reduced leverage by nearly 45% and increased production per debt adjusted share at a 20% compound annual growth rate.

We were buying back shares paying a dividend, reducing leverage and growing through both accretive acquisitions and the drill bit.

Ranger certainly has all the right ingredients for a premium valuation.

I would like to now summarize our operational financial and strategic accomplishments.

Our operating team delivered during a very challenging macro environment for our industry.

And our third quarter results were exceptional.

Our sales volumes again topped the high end of guidance for the quarter coming in at 42600 barrels of oil equivalent per day.

Over the course of the year, we increased our total sales guidance nearly 4% relative to our March guidance and expect to deliver year over year oil equivalent sales growth of 48%.

Total drilling and completion capital of $151 9 million stayed inside the guidance range, even with $3 4 million associated with accelerated timing.

Capital discipline was paramount to ensure that we funded our best projects, while not overspending or allowing inflation to erode our cash margins.

Our operating team maintained unprecedented flexibility and found creative ways to simply get the job done.

We previously announced the addition of a third operated rig through year end.

When reviewing the best uses for cash the economics of the third rig are very compelling.

Especially considering the average expected well level rate of returns year to date are exceeding 100% at strip prices.

This rig will provide strong momentum into 2023.

And we may choose to continued development with the third rig next year. If it is the best investment for our shareholders.

We have an exceptional team at Ranger focused squarely on continuous improvement.

It's through drilling longer laterals optimizing completion efficiencies are negotiating creative land deals our teams operating performance in the Eagle Ford is among the best in the business.

We are able to identify and capture synergies that others simply cannot.

Next I'd like to talk about our admirable financial results.

Because of our solid operating performance, we've been able to deliver on our key financial objectives.

Our pro forma adjusted free cash flow was $58 million and we had net income up $228 million.

Adjusted EBITDAX was $209 million.

Our framework to return cash to shareholders as well defined having returned approximately $80 million to shareholders since mid may.

Repurchases make up about 5% of our total shares outstanding more than 2 million shares.

We expect to continue buying our shares having utilized only about one half of our $140 million authorization.

We see repurchasing our shares today is a very compelling investment.

Dividends.

Are also an important component of our cash return framework.

Our third quarter dividend of <unk>, seven and one half cents per share will be paid on November 28 to shareholders of record as of November 16th.

Our balance sheet has also continued to strengthen.

Our leverage ratio was 0.75 times as of quarter end more than half a turn lower than the beginning of this year.

We plan to maintain capital discipline, ensuring our capital is allocated to our highest return opportunities.

Our enviable balance sheet is the best risk management tool, we have and puts us in a good position to weather future commodity price cycles.

The third and final bucket to discuss today is our strategic highlights.

Rangers executing five key value creation strategies.

Those been reducing leverage purchasing shares paying dividends growing organically and increasing scale through accretive acquisitions.

$139 million in bolt ons, we've closed this year provide a solid runway, adding 2000 barrels of oil equivalent per day of low decline production, along with 20000 net acres and over 60 estimated gross high return drilling locations more than replacing the well count we will drill this year.

Importantly, they were funded substantially through cash flow.

We are screening nearly every available acquisition opportunity in the Eagle Ford and selectively competing for those deals that meet our strict criteria, where we can lower cost improved cycle times and generate incremental free cash all while maintaining our enviable balance sheet.

Our strategy today is proven in our execution of the business plan has been very consistent.

Because of the quality of both our team and our assets, we can generate attractive cash on cash returns while growing the business through high return investments in smart strategic M&A to create future value.

All while returning significant cash to shareholders and improving our per share metrics.

Before closing out our remarks, let me provide some early thoughts on 2023.

First be assured that our strategy to create value will remain unchanged. We are confident that we have the key ingredients to earn a premium valuation in the market today.

Second our recent decision to keep a third operated rig running through year end will provide strong momentum for us in 2023.

We have the flexibility to keep this rig past year end and we'll make that decision late this year.

And lastly, we look to 2023 with great confidence, we have the inventory the team and the right business strategy to create value and we intend to deliver.

That concludes our prepared remarks today and we are happy to take your questions operator.

We will now begin the question and answer session.

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

Okay.

The first question today comes from Neal Dingmann with Chile Securities. Please go ahead.

Good morning, all thanks for the time My first question is on M&A, specifically I, usually don't ask about specific or other company deal. So I'm just hoping maybe you all can share your thoughts on today's enzyme deal given to me the size looks quite similar to you all and maybe get an addition that just your thoughts on M&A Eagle Ford M&A opportunities in general.

Yes, Thank you Neil Great Great question.

Look at marathons disclosures or what what a great deal for marathon and for inside.

Per those disclosures ensign is predicted to have 2023 EBITDA of about $900 million.

Which is basically the same number as consensus has for Ranger for 2023.

They also show a 130000 acres in 600 future locations.

Ranger has about 160000 acres and about 1000 future locations.

The ensign positions, a little deeper a little gas here position, it'll it'll likely be a little more expensive to develop.

Rangers, but and.

And we will have a materially lower oil cut as well.

Regardless, it's a great deal for for marathon.

And congrats to them for getting the deal done.

To your second question there relative to.

Future M&A and in the Eagle Ford, we've seen a strong pipeline and increasing pipeline of opportunities. This year and we've been active as we said really trying to look at each and every deal that that takes place in the Eagle Ford.

We will remain steadfastly focused on the Eagle Ford.

And when we think about M&A, you know scale equals relevance today, and it's a pathway to higher multiples.

We intend to look at everything and the key criteria that we will judge future Eagle Ford opportunities will be first and foremost strategic fit we're looking at operational efficiencies as long with the G&A efficiencies.

We're gonna look at accretion to value both on a cash flow per share basis, and an <unk> basis.

We're also going to judge the merit based on the attractiveness of the opportunity relative to Rangers enterprise value in concert with its AAV.

And lease, but definitely very important is maintaining at least but not last maintaining a strong balance sheet. We leverage ratio today is <unk> 75 times and when we did the lone Star deal, we got up to one five times with line of sight of getting down below one times and a few quarters and that's.

We think about larger strategic opportunities, we don't want to go above one five times and we want to have that line of sight to getting back below one times and a few quarters.

Great details and then just maybe secondly, maybe talk a little bit on spending if you will typically look like.

Sure.

Slightly stepped up the 22 capex spend but I'm wondering I guess my question around that is how you know how do you anticipate with without having full.

23 got it and then you talked about potentially 50000, plus a day next year could you just talk about your thoughts on on boosting that capex and what it should imply for 'twenty three.

Yes, so focusing first on the midpoint of our guidance for fourth quarter Capex is $160 million.

And.

About $30 million of that is associated with the addition of the third rig and an incremental $25 million is associated with.

Additional working interest that we've acquired here in the fourth quarter as well as some non op activity.

Taking place with a large high quality operator, just off our lease lines.

No.

About $55 million of the $160 million is associated with additional activity or additional interest in our wells.

So if you back that out our fourth quarter guide would have been about $105 million, which is right in line with what we had expected back in the third quarter.

Relative to yeah, and I think just to add on as we look forward to 2023.

Enviable position, where we are going to deliver double digit production growth next year, whether we run two rigs and we stay in the low teens on that production growth are we.

Stick with the three rig program.

We'll have high high teens production growth year over year and as as we said, we will break 50000 Boe per day.

Sometime in the first half of the year of course dependent upon that cadence.

Yeah.

Great details thanks, Karen yes.

Thank you Neil.

The next question comes from Michael <unk> with Johnson Rice. Please go ahead.

Hi, good morning, Thanks for taking my questions.

Good morning, Michael.

So I'd just like to ask a question about the balance between accretive A&D and then share repurchases I appreciate slide seven I think it illustrates the benefit.

Share repurchase is very clearly, where we've seen operating cash flow increase on a per share basis, despite the commodity you're actually going down quarter over quarter.

So my question is how does ranger balance these buyback opportunities versus accretive A&D.

Yes, you know what at the time were looking at A&D opportunities. We're also evaluating all of the other opportunities for investment of that incremental free cash flow and it really it all comes back to what's the greatest return was the greatest investment for our shareholder.

We've been blessed with the free cash flow this year too.

Reduced leverage.

Back shares pay a dividend and also do a significant amount of A&D as well as grow organically. So hopefully next year will be will be comparable.

Alright Thats helpful.

So I guess my next question kind of piggybacking off that in terms of doing whats right for the shareholders.

In regard to running that third rig into 2023 with.

Individual well level rates of return over a 100%.

<unk> Leverages down three quarters of a turn.

You've got a strong hedge book it it almost seems like a no brainer to continue into 2023 so.

My question is is what would be some things are a rationale to decide not to run that rig into 2023.

Yes, I think theres a lot of macro things going on in the world right now we have a midterm elections coming up next week recession likely on the coming down the path.

In the last two years have taught us if anything that.

Being able to see the future is it's not always clear and we've seen some very low commodity prices and some pretty vicious cycles in the commodity price sector. So we intend to watch the commodity prices watch inflation and look at other strategic M&A opportunities and we can make this decision later in the year and we're going to keep our <unk>.

Flexibility open as long as we possibly can on making that decision.

Great that makes sense, it's always always good to have some flexibility, especially these days.

Appreciate it guys.

Yes, Thank you Michael.

As a reminder, if you would like to ask a question. Please press Star then one to enter the question queue.

Your next question comes from Nicholas Pope.

Global Please go ahead.

Good morning, everyone.

Good morning, Nick how are you today.

<unk>.

I was hoping you guys could talk a little bit about the future locations.

Laid out I think you'll see 750 Eagle Ford locations and as you kind of look at that central area Im assuming the bulk of that is in the central area I guess is there.

What risks remain with those locations and are there.

Areas within.

That footprint that.

But you need to drill to get more comfortable with with with kind of the risk profile I guess I'm trying to understand the 750 in and kind of what stage of that.

Right now.

Yes, so the our confidence level on the 750 locations is very high nicotine.

It's only a single landing zone at roughly 450 to 500 foot well spacing.

The acreage is all highly delineated.

So very very low risk on those 750 locations and then in fact.

If you look at what some of the folks off of our lease lines are drilling wells at 300 350 foot spacing one could argue that's really a pretty conservative number.

Helpful.

And the distribution of kind of like the expectation of of well returns I mean is it are things fairly consistent across that entire central area like how wide is the distribution on a kind of expectation.

Well it certainly depends upon commodity price and the update portion we're very in the black oil area, where we're very high oil cut and economics look great today and lower drilling costs and then as you get further down dip you get you get gas year and Youre drilling costs go up a touch but you know with gas prices we've seen over.

Last year that that's very attractive as well so.

We have a premium curve that we update regularly internally looking at strip pricing and other prices in and that's how we choose we're always choosing our best inventory of our best putting our best foot first relative to what we drill going forward and that changes materially with technology.

As well as.

Technology on drilling and how fast we can drill and how cheap we can drill them as well as the biggest impact is likely commodity prices.

Got it that's helpful. And then just one cleanup item on the financial side now.

Now that youre paying dividends.

The class B shares.

Those are non economic interest they don't receive dividends is that does that correct.

For all intents and purposes they do.

They are given.

Distributions technically but they do receive the equivalent of the dividends.

Got it.

Alright, that's all I had thanks guys.

Yeah. Thank you Nick.

The next question comes from David Petra with RBC capital markets. Please go ahead.

Good morning, just one from me since most of the questions is kind of already been asked but.

Hello, we last quarter ticked up a bit and then I think youll quoted.

Workover activity given the returns at current prices and then kind of a <unk> guide implies a step down again Ken.

Can you just kind of talk about what youre seeing on the inflation front in terms of.

On the operating cost side as well as the capital cost side going into year end and then how maybe your preliminary thoughts into 2023 Youre looking at this point.

Yes. This is Julia on.

The operating expense side.

We've been largely been able to manage that.

The ongoing inflationary pressures largely coming from fuel and labor cost through increased efficiency, putting more of our SW deal.

Our water on pipe.

Along with some of the increase in costs. We've seen was due to picking up we've tripled our workover activity, which is highly accretive very valuable.

Projects that we do that really drive.

Improving production volumes. So we see you know when you see the rate decline a little bit on that Louie coming into fourth quarter, It's really driven by the growth in production volumes more than a change in expense.

Predicting the future on inflation is it incredibly challenging these days.

Hesitant to make a lot of predictions.

We do continue to see.

Commodity price increases.

We continue to battle that and fight that with improving efficiency, improving our efficiency on the drilling rigs completion, making more use of our time in equipment when it's on location.

I guess pricing kind of on the cat.

Yes, it does kind of pressing a little bit on that answer, though on the capital cost side and we've been hearing from some peers just maybe some some early signs of inflation maybe tempering.

The bigger line items, you're all experiencing any of that or kind of any any color on that yes.

Yes, I would agree that rate of change quarter over quarter definitely has improved.

From what we saw in the early part of 2022.

Yes, particularly.

It's it has leveled off.

As like trickling in I would call it more of inflationary pressures and we are hearing a similar message coming into 2023 that will see increases further in Q1, but then that it's likely going to taper off.

Yeah.

But yes, it would be transparent we heard similar messages going into 2022.

We as an industry realized pretty heavy pressures coming through the early half of 2022. So.

Yes, I think we all need.

We need to navigate that and watch really closely and work very closely with our partners.

We work very closely with our service partners that have great relationships, they want them to be sustainable as well as a continuing ongoing very viable project base for ourselves.

Thats something we value very closely.

We will continue to monitor that.

And understand exactly what the market conditions are.

Got it and one last one for me the two rigs running in the third one you just recently picked up or any of those three be up for kind of new contracts into next year are they locked into.

To rates all the way through next year already.

So we have one that is on a two year contract right now and we have two that are on shorter term contracts.

Got it okay.

At the time.

Thank you David.

This concludes our question and answer session I would like to turn the conference back over to Darren for any closing remarks.

Thank you Betsy first and foremost I wanted to give a big shout out to all of our staff for the hard work and dedication what they delivered for Ranger each and every day.

Grainger has a demonstrated record of creating shareholder value both organically and through M&A, we'll generate in free cash to reduce leverage buy back shares pay a dividend grow organically and execute on accretive acquisitions. We're really excited about 2023. Thank you for joining our call today take care.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.