Q4 2022 Coterra Energy Inc Earnings Call
Thank you for standing by at this time I would like to welcome everyone. They're called Terra energy fourth quarter 2022 earnings 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.
And please press star followed by the number one on your telephone keypad. If you would like to withdraw your question again Press Star one. Thank you Dan Guffey, Vice President financial planning analysis, and Investor Relations you May begin your conference.
Thank you and good morning. Thank you for joining <unk> Energy's fourth quarter 2022 earnings Conference call. Today's prepared remarks will include an overview from Tom Jorden, Chairman, CEO , and President and Scott Schroeder Executive Vice President and CFO also on the call we have Blake Serco and Todd.
Following our.
Our prepared remarks, we will take your questions during our Q&A session.
As a reminder, on today's call we will make forward looking statements based on our current expectations. Additionally, some of our comments will reference non-GAAP financial measures.
We're looking statements and other disclaimers as well as reconciliations to the most directly comparable GAAP financial measures were provided in our earnings release and updated investor presentation, both of which can be found on our website with that I'll turn the call over to Tom.
Thank you Dan and welcome to all of you who joined US for our fourth quarter Conference call. We're looking forward to a fruitful discussion on co chair performance outlook for 'twenty to 'twenty, three three year outlook and our tune up on our return of capital approach.
We had an excellent fourth quarter and full year in 2022, driven by superior asset performance, good execution and some commodity price with it we finished the fourth quarter above the high end of our guidance on both oil and natural gas.
This was made possible by the efforts we undertook during the year on Weatherization, we experienced little downtime during the December winter storm events in the Permian Anadarko and the Marcellus This took careful planning.
Art engineering, great field coordination and perseverance and a lot of grid on the part of our operational staff in all three regions.
Lack of significant downtime was also helped by collaboration between our Permian Anadarko and Marcellus business units, we brought our teams together earlier in the fall to share experiences and best practices on Weatherization and it paid off kudos to our teams who kept us online and flowing during these challenging.
<unk> weather events.
We also generated excellent financial results during the quarter and full year for the full year 2022, we generated almost $4 billion of free cash flow, we returned almost $2 billion in cash to our shareholders through the dividends.
Back one point to $5 billion of co terrorist stock a retired $874 million of long term debt.
We achieved almost all of our annual operational goals, including a continuation of our multi effort multiyear effort towards emission reductions.
Gerry maintains one of the lowest emission intensities in our space.
This is also true if one separates our Permian assets and looks at them in isolation.
It's due to our continuing efforts towards Tankless facility implementation electrification moving to centralized emergency flurry, and establishing a more aggressive inspection cadence than federal and state rules demands.
Our entire organization is focused on these efforts are top tier results are a reflection of our commitment and focus.
We announced last night that our board of directors has authorized the $2 billion share buyback, which based on our current outlook could be executed over the next 18 to 24 months, we are pivoting our capital return priorities to favor buybacks over the variable dividend.
This is now growth of intensive study and debate about the macro environment, we find ourselves in investor feedback and our viewpoint on the looming global supply demand imbalance, we're not backing off our core pledged to return at least 50% of free cash flow to our owners in the form of our.
Base dividend buybacks and variable dividend the world has changed and we find it prudent to adjust our cash return tactics accordingly.
Furthermore, we think that one of the best most accretive opportunities in the acquisition market lies in coach Tara at our current market valuation.
As a wise general once said to US troops. If you find that the math doesn't match the terrain.
Go with the terrain and.
In 2023, we're going with the terrain.
We also announced the three year outlook with our release, although this plan does not set in stone and reflects our current multi year activity schedule. It's based on real ready to go locations updated and calibrated type curves and projects our current cost structure as slide six.
In our Investor deck shows we have an active plan that generates an annual average zero to 5% natural gas growth and an annual average of 5% oil growth by investing 2.0, the $2.1 billion per year in each of the next three years on average.
2023 is year one of this multi year plan.
Basically the 2023 plan that we announced last night it sets up the three year cadence nicely.
Although production is anticipated to be relatively flat in 2023, we establish a cadence that will have significant impact on 'twenty 'twenty four and beyond. Furthermore, we have optionality. The 'twenty two 'twenty three capital plan of 2.1 to 2.2 billion is off ramps and the event conditions, where there's significant.
It can lead to great we.
We have balanced our program with some services under annual contract while others are on a quarter to quarter basis. This provides flexibility as we navigate through the year. Our program is designed to be a guided missile not a rifle shot <unk>.
Tara enjoys one of the industry's lowest cost of supply with our Marcellus gas assets and at the current commodity strip our projected returns on our 'twenty to 'twenty three Marcellus program are outstanding.
We have the projects in market takeaway at the ready.
However, if conditions worsen and we choose to retrench, we can pare back our capital program is highly flexible depending upon commodity pricing and cost. This means that we can either significantly curtailed total activity in capital or shifted from basin to basin as conditions warrant.
We could pare back as much as 10% of our total capital this year without impacting 2023.
However, it would lower our growth trajectory in the out years.
That said, we do not manage our program based upon daily spot prices.
Our outlook for 2023 is both guarded and optimistic.
We're guarded owing to a muddled outlook on inflation on inflation and the inevitable impact that weather has on our natural gas business.
We're optimistic because of the current and projected oil and natural gas prices. Our project returns are excellent.
Although they're not as robust as they were in 2022 or in the commodity down draft and the fact that we drilled some spectacular opportunities from 'twenty to 'twenty two our projected 2023 returns are excellent by historical standards.
We've built a multiyear plan that invest through the cycles generates modest profitable growth and checks the box for ability to withstand further commodity price erosion there.
The ability to confidently invest through the cycles as one of the many benefits of having a fortress balance sheet and assets with a low cost of supply the flexibility of our multi year program allows us to control those elements within our control and adjust those elements outside of our control.
You'll also find a little more granularity on our acid inventory on slide seven in our investor deck as always these are real locations with defined calibrated targets in type curves.
These locations will be drilled I hope that you will draw the conclusion from this that we do although one needs to continually high grade inventory co Terra is well position for more than 15 years ahead.
I would also like to draw your attention to our Anadarko in inventory, which is significant and high quality, we're modestly increasing our activity in the Anadarko basin in 2023 in order to bring forward. Some outstanding projects. There are more like them waiting in the wings. The Anadarko has a significant role to play and co terrorist few.
Sure.
Finally, with this release, we have closed the books on our reserve revision issue. This was a necessary step to level set our evaluation across our portfolio. We finished in the middle of the fairway that we had defined at our Q3 release as we had promised there are no new surprises in our end of year numbers with that I will.
Turn the call over to Scott Thanks, Tom.
Today, I will discuss our fourth quarter and full year 2022 results Air holder return strategy, and then finish with our 'twenty three outlook.
During the fourth quarter excuse me fourth quarter <unk> reported net income of $1 billion discretionary cash flow of $1 $4 billion accrued capital expenditures of $483 million and free cash flow of $892 million.
Fourth quarter total production volumes averaged 632 Boe per day with natural gas volumes, averaging $2 78 Bcf per day and oil at $90 seven N V O per day oil finished 2% above the high end of guidance and natural gas at the high end the strong fourth quarter volume.
Performance was driven by a combination of positive well productivity trends and improved cycle times fourth quarter turned in lines totaled 46 net wells in line with expectations.
During the quarter, we returned 107% of free cash flow, which included 57 cents per share in cash dividends and 65 cents per share in the form of share repurchase.
Share repurchases totaled $510 million in the quarter, marking the completion of our $1 billion to $5 billion program first announced in the first quarter of 2022.
For the full year 2022 total production came in at the high end of guidance relative to our February 22 guidance.
All came in 2% above the high end and natural gas came in 2% above the midpoint net wells online during the year were 3% below our original guidance accrued capital expenditures, which were 16% above the original guidance totaled $1 $74 billion and were driven by significant service.
Cost inflation.
During 2022, the company returned 85% of its free cash flow, 50% in the form of base and variable dividends and 35% in the form of share repurchases in total the company returned $3 $2 billion to shareholders or 18% of its recent market capitalization.
After paying off $874 million of long term notes during the year co terrorist finished the year with $673 million of cash and a net leverage ratio of two times. The company has four manageable tranches of debt left with maturities ranging from 2024 and 2029.
Turning to return of capital as many of you read in our release and we've alluded to already we have multiple updates on the capital return front.
First we increased our annual base dividend, 33% to <unk> 80 per share. This reinforces the confidence management has in our business and our ability to perform across the cycles. It also reinforces our commitment to providing consistent and meaningful annual dividend increases to our owners next.
Next after completing our 1.25 billion dollar share repurchase authorization in 'twenty, two we announced a new $2 billion share repurchase program using current commodity prices. This authorization will not be fully executed in a single year, but the $2 billion thing those are commitment to the repurchase program and returned.
Value to our shareholders.
Lastly, we updated our return on capital priorities.
We are reiterating our commitment to returning 50% of free cash flow to shareholders. However, we are prioritizing share repurchases ahead of variable dividends due to market conditions and the value proposition, we see in our business with believe buybacks are the best vehicle to return value to shareholders.
Expect hauteur to pay its base dividend pursue strategic buybacks and supplement with variable dividends if needed to hit our minimum threshold.
Lastly, I will discuss the 2023 outlook the company's 2020 through capital is estimated to be 2.0 to $2 $2 billion.
Estimate includes approximately 10% cost inflation over the calendar year 2022 capital expenditures.
Total full year 'twenty three production on an equivalent unit of production basis and expect it to be relatively flat to slightly down oil is expected to grow 2% and natural gas volumes are expected to modestly declined 1% year over year.
Drilling activity in 2023 is expected to be relatively consistent with five to six rigs in the Permian two to three rigs in the Marcellus and two projects in the Anadarko.
Frac activity will be up 31% year over year due to projected DUC timing the.
The company average lateral length is expected to increase approximately 10% year over year, primarily due to longer laterals in our upper Marcellus program.
Since last summer 2023, natural gas prices have fallen from a $6 annual average to a recent strip of $3. However, front month prices are $2 or near $2 16, and it is yet to be seen if the forward curve will hold.
At the same time service costs have not softened or adjusted this dynamic has led <unk> to pursue a production maintenance plan in 2023 with anticipation of modest growth in our three year plan. The company has an industry, leading balance sheet and low breakeven to maintain consistent activity through the cycle to put this in content.
The company's corporate breakeven, which we define as free cash flow after paying the base dividend sits at $45 W. T I and $2 25 Henry hub.
The capital split in 2023 is expected to be 49% in the Permian and 44% in the Marcellus with the remainder going to the Anadarko.
On the heels of positive results in the upper Marcellus in 2022, we are allocating 40% to 50% of our 2023 Marcellus program dollars to further delineate the upper interval.
This is above the 30% to 40% range, we discussed in the preliminary target in late 'twenty. Two this range is likely to be the higher end of the range or the upper Marcellus versus the lower Marcellus, but over the three year period, we laid out.
Infrastructure timing pipeline availability and economics were all factors and increasing our allocation to the upper in 2023.
Cost guidance for 2023 assumes that dollar per BOE unit cost are flat to down across the board largely driven by lower commodity prices outlook.
Lastly, the future of Ecoterrorist bright based on the current service cost environment, we estimate that if the company invest to point out a $2 1 billion per year over the next three years. It will generate a compound annual growth rate of zero to 5% for both natural gas and closer to 5% for oil at current.
Drip this would generate cumulative free cash flow of approximately $7 billion or 35% of the current market cap.
In summary, our first full year at co Taro with stellar we met our planned production expenses and far exceeded revenues to us due to a small hedge book and robust pricing.
Our 23, the price dynamic is different but the engine of successes the same focus on operational execution of our high quality inventory to generate strong returns and outside.
Shareholder returns with that I'll turn it back to the operator for Q&A.
To ask a question. Please press star one please limit yourself to two questions. Your first question is from <unk> Kumar of makes you hold. Please go ahead. Your line is open.
Good morning, Tom and team and thanks for taking our questions.
Tom I'd like to maybe unpack a little bit on your commentary around the 2020 capital budget, you said about 10% of that is really targeted towards growth with some off ramp.
So should we expect if you were to be in a maintenance mode.
Is your capital of about one nine or $1 8 billion and then how does that trend over time, particularly.
Particularly over the three year period.
And then number let Blake and all that.
Yeah, Thanks, Nick and yeah, our twenty-three budget number represents the three year growth plan, we've laid out and not a maintenance plan. If you look at slide six you'll see we plan to spend two to 2.1 per year over the next three years and what that does for US is provide zero to 5% V O E gas growth.
On average annually and oil growth at 5% on average annually, that's something we're choosing to do because we have a deep inventory of high return projects.
But if we chose not to grow and go into maintenance mode that would drop to 1.8 to $1 9 billion per year over that same three year period at our current cost structure.
Great.
Helpful.
And then maybe this is for Scott, but.
We noticed the 90% of Nymex realizations in the Marcellus, which is pretty strong compared to your historical.
Realizations could you maybe walk us through how that's coming about in 2023, and how sustainable that is going beyond.
Actually Nick I'll give that to Blake ease over our marketing group now yeah. Thanks, and then Theres a couple of things going on there.
First we've seen a just a reduction in the total basis with the rundown at Nymex, we've seen that across all our indexes, but it's also our portfolio we have a more contracts and twenty-three pointed at premium markets than we did in 'twenty. Two we also have a good chunk of our portfolio that has floors under them.
And at these lower prices those floors come into play.
So it's really just overall great work by our marketing team. It's a it's a really good tailwind for in the U S that going into 'twenty three.
Great. Thanks, guys.
That's it.
Your next question is from Madden Kobe of Goldman Sachs. Please go ahead. Your line is open.
Hi, good morning, and thank you for taking my questions.
Wanted to start off with your free cash flow allocation priorities.
Would love your thoughts around allocation between share repurchase target of building a $1 billion in cash on the balance sheet and any thoughts on M&A.
Yeah.
Sure.
What we found in this past year is as we looked at you know.
Set out or about $1 $5 billion in variable dividends.
And watching how the market reacted to that is what gave us pause and we started researching as we've talked internally and in Tom's prepared remarks actually.
Tying into your M&A comment right now and we said this a year ago right out of the blocks one of the best investments is investing in ourselves because we think our assets are.
Head and shoulders above everybody and so leaning in on the buyback as that return of capital priority, but also increasing the base is what you know we havent telegraphed over the years too that we're going to continue to do annual base dividend increases so from an overall perspective.
It was an easy adjustment still reaffirming in terms of the $1 billion cash that's a target for us to have we had a couple of quarters, when where we were right at $1 billion. What took us below is the decision of getting to our debt level target of right around $2 billion.
So we will balance building the cash balance back up to $1 billion with the buybacks meeting the 50% remember that the stat. I gave we returned 83% of our free cash flow. So we far exceeded the 50% commitment last year.
That's very helpful. Thank you.
And then maybe to follow up on <unk> questions.
And flexibility of our capital program to changing macro conditions are what kind of flex do you have any program over the next three years and then any color you can provide on the recent cost trends would be helpful. Thank you.
Well I'll handle the first part and Blake talked about cost trends, where we have tremendous flexibility you know our our teams worked really hard as at the latter half of last year building in flexibility as you can recall.
Premium equipment was not available unless you were willing to sign a long term contract. We had a lot of services that came off contract in order to keep them, we had to renew it and we are our operations team worked really hard to give us flexibility. So we have some services under annual contract and some.
We have the option quarter to quarter.
Now the longest term we have is an annual contract. So if you look out to the three year program, we have tremendous flexibility, but you know the nice thing about sitting on top of co chairs assets in our three business units as we can pivot rather nimbly, depending on conditions right now, we like where we.
He said, but we are going to look at it continuously during the course of the year.
Yeah and on the cost trends that 10%, we're showing for 'twenty three is really a reflection of those contracts we entered into in late 'twenty two.
It sure feels like the market starting to soften you know, there's there's less talk about price increases.
Talk about costs, holding flat and if activity starts to drop across the lower 48, well, we'll be looking to claw some of those costs back.
Very helpful. Thank you guys.
Your next question is from Irina <unk> from J P. Morgan. Please go ahead. Your line is open.
Yes.
Hi, good morning.
Tom and team I wanted to get maybe some more thoughts on the three year kind of outlook that you provided.
I know in 2023.
The Capex budget includes about 180 million for call it growth Capex.
And this year you guys have provided an outlook for.
Call. It 168 net wells at the midpoint would that three year outlook called for a similar.
But wells tied to sales or do you have you know increases baked in to deliver all of that high single digits oil growth in 'twenty, four and 'twenty five based on this outlook.
Yeah, Arun I don't have the actual well count in front of me, but it's fairly flat level of activity is what we're projecting so I think you could.
Really see a level set in terms of the twenty-three activity going forward.
But you know just an editorial comment around you know if there's one thing that.
Many of US have learned is that in this shale era. The stop start around commodity prices is really damaging to your cost control your operational cadence and quite frankly, I think as an industry. We've typically kind of gotten that exactly wrong in terms of when we invest and where we can track.
So the nice thing about co chair is because our assets have such robustness of low commodity prices. We can maintain more of a regular operational cadence and that's what we're going to do and that's a strategic pivot for us. It's why we put culture together now whether that operational cadence as our current rig count or.
Our rig count less or you know rig higher we're going to try to maintain a steady cadence and not wake up every day with their hair on fire. When we read the paper, we can afford to prosecute this business the way this business needs to be prosecuted.
Great Tom and my follow up you know your your Delaware Basin team has.
I had a good year in terms of well productivity.
Which you highlight in.
You know in your deck.
I wanted to get some thoughts I mean, well productivity has been a.
Concern from the buy side, including you know from one of your partners called in Culberson County, two highlighted that on their call, but what are your thoughts on sustaining.
This level of well productivity in the Delaware on a go forward basis.
How does the hockey shale kind of fit into that.
You know overall development scheme.
We do not see a change in our Delaware productivity.
You know one of the one of the big differences as I said in my opening remarks is in 2020. Two we just drilled a couple of absolutely lights out outstanding projects.
Talking about projects with you you know over over 10 wells that average thousands of barrels a day so.
Or yeah, we don't have tons of those when we drilled a couple of them in 'twenty, two and that was a part of the productivity in 'twenty two but.
But specifically to your question about well the well their parents when it comes to the Wolfcamp and harkey, we generally see that as one petroleum system and there will be some degree of pressure communication between the Wolfcamp and harkey, depending on where you are in the basin.
But we do not see that as a factor that the grades overall well productivity.
We typically stage that development within reasonable proximity of time.
But our our thinking on that matter is that having the two landing zones does not interrupt or or impede your overall recovery out of that drilling spacing unit. So yeah, we don't see that as a significant issue for the Wolfcamp harkey.
And you know I think the big answer to your question is over that three year landscape, we don't see a significant change in our Delaware productivity.
Great. Thanks, a lot Tom.
Your next question is from Jeanine Wai of Barclays. Please go ahead. Your line is open.
Hi, good morning, Thanks for taking our questions.
Hi, Jeanine.
Hi, good morning.
My first question, maybe a macro question kind of following up on <unk> question about copper.
Capital allocation, so we realize it could be a moving target, but could you provide your view of mid cycle and natural gas prices, we know that <unk> certainly isn't reactive to the price that we see on the screen and you have good returns even at low prices that are stress tested but at what point do you really start to rethink capital allocation.
Well are you look mid cycle is kind of the older everybody says the word mid cycle and you know, we'd rather you didn't ask us what the number was but to do and we'll answer at our current mid cycle that as our walking around number is $2 75 natural gas.
Our assets are really really robust through 75 natural gas.
But we are we do it is as we said Ginny where the ability to move it around you know the nice thing about having both a deep oil and natural gas inventory is although we produce a lot of natural gas from the Delaware Basin.
Kind of a byproduct so it's not really a function of the other gas price.
But right now our returns are pretty good across your portfolio.
Okay, great. Thank you and then maybe just.
Following up on <unk> question on the three year plan.
Oil is expected to grow that 5% gas.
5% and there are certainly some nuance to the plan in the Marcellus this year with the upper Marcellus getting a bigger mix of the Capex there, but you know what really determines and the three year plan, where gas kind of land in that range of zero to 5% I think you addressed 2023 really wow them, we're thinking for <unk>.
It seems like Marcellus productivity per foot is getting worse this year, but 'twenty four 'twenty five could be better and.
The range is it primarily commodity driven what we're just trying to understand kind of the messaging on gas since the solid growth on oil seems to be pretty clear. Thank you.
Well, we're kind of in a shoulder period natural gas right now what's your outlook on natural gas.
24, we'll have LNG exports come online and so we are kind of in a wait and see load on natural gas. We're long term very bullish because of the world's need for natural gas and particularly the world's need for U S. LNG exports, we're optimistic that that's becoming more.
And more apparent to more and more policymakers.
And we remain ready to accelerate our natural gas assets.
You know we're in the mid Forty's on upper Marcellus this year on a total footage and you know we've we've talked openly that the upper Marcellus doesn't have the productivity per foot of the lower Marcellus. That's just something that's a fact of our assets.
<unk> outstanding still very good and we're going to continue to develop it as we go.
Alright, great. Thank you Tom.
Your next question is from Doug Leggate with Bank of America. Please go ahead. Your line is open.
Thanks, Good morning.
First of all guys I'd like to acknowledge.
Your disclosure the visibility you had given us a new portfolio of life Science Nothing you show prices staying at all thank you for that because it really takes a lot of boxes on inventory depths cash breakeven free cash flow capacity basically allows the market value of a company. So.
Thanks to whoever had the initiative to do that is brilliant so thanks for that.
That's my first is just general comment I've got two questions. One is not the information is never enough. So I guess my first one would be on slide number seven.
Can you give us some commodity benchmarks around your ranges.
Just so we can do and what's going on in spite sitting in the inventory as my first one.
When you say commodity benchmarks.
The inventory ranges, you've given to them are yes, yes, no I I've got that in front of me Doug.
We have quite a bit of robustness in our inventory and we typically run our inventory at multiple price files I'm looking at permutation in front of me that's run at $60 oil and $3 gas long term.
And $85 oil and four in a quarter gas long term.
I will say when we go to $3 or less we do assume some reduction in capital.
That currently we say all right if we're going to we're going to say $60 oil $3 gas, we're gonna take 70% of current cap capital expenditures.
But the 85 four in a quarter is that current costs.
And so you know depending on where you want to cut it off.
If I, if I say all right how much of that hurdles at a 1.25 P. V. I 10, which I think is a reasonable long term inventory cut off we were we've been using 1.5 and a lot of our disclosure, but I'm going to give you 1.25.
At 60, and 375% of our total inventory would hurdle that or are they a 1.25 P V. I 10, and the 85 and $4 25, 91% of our inventory, which hurdle at a 1.25 P V I 10 and again.
85, four in a quarter that is a current course.
So we we have a fair amount of downside protection on this inventory.
Great Great color. Thanks, Tom I appreciate that I guess my follow up is I really just wanted to.
Ask you to walk you know just the slight change in messaging over share buybacks I think you all know our view on variable dividends for the pizza business with a finite in Missouri I won't get on my soapbox, but it seems that you guys are pivoting.
To recognize that there probably is some value in your stock here. So can you walk us through the investor feedback that I think is how you described.
Part of your decision to make that shift and I'll leave it there. Thanks.
Well, Doug we we've heard very mixed signals out of our Investor base I mean, you know some people.
One is to do a and some people want us to do B.
We've also looked at the market response to the variable dividend in and I think that's a strong signal as to the what the market's looking for.
And then you know we listened to our critics and we think about it and we really do have an honest attempt to get better and adopt the best approach.
And you know, we we think that long term.
Buyback not only is the best acquisition opportunity in the market. When we look at co chair of stock, but its also highly accretive to our long term owners and that kind of checks two boxes and so you know I won't tell you was the casual decision to readjust our priorities, but we're very very confident that in 2020.
Three it's the right decision.
Again appreciate the color guys. Thanks, very much needed and congrats on all your all.
All your new disclosure.
Thanks, Doug.
Your next question is from David Becker of Cowen. Please go ahead. Your line is open.
Good morning, Tom and Scott Thanks for taking my questions today.
Hello.
Could just dive into the upper Marcellus a little bit just for my to better my understanding here.
This year it sounds like the mix is going to be higher relative to the overall upper versus lower mix and in the next several years.
So I guess I'm curious based on the wells that you have in the plan now in the upper <unk>, how much of the sort of resource do you think that you're going to be derisking. This year relative to what you have sort of envisioned overall and how many of those locations are going to be in areas, where the lower Marcellus has already been depleted.
Well I don't I can't have I don't have the answer to my fingertips as far as what we're gonna Derisk. We we are trying to space or upper Marcellus pads around our asset and we're developing a very good appreciation of how much of it will ultimately be develop I will say that.
Our viewpoint on that hasn't changed based on everything we've done and collected yeah Theres a lot of drilling in the upper Marcellus what we're really experimenting with now is longer lateral length wells spacing different completion designs and how it will behave when we put wells side by side thus far.
We've had great feedback and that's not changed our viewpoint of the asset.
And as far as the upper lower mix and in future years, that's governed by a lot of things, we still have a fair amount of lower left.
You know, it's it will be pivoting back to it yeah that that's more a function of our infrastructure availability and you know we're trying to manage that so that we keep our line pressure is reasonable and we don't overdrive the system.
Thanks, Tom and I guess my follow up to that is just as you look to that ramp of 100 million a day or so in the next couple of years.
I suppose it assumes sort of similar activities in the Marcellus. So is that just reflecting our quality mix between having more of the lower and perhaps just better infrastructure availability.
Yeah, I know what I'm not following your hundred billions of day David.
Sorry, I thought I saw in your presentation that the implication was that you would get a I'll.
Call It Oh, yeah.
<unk> Yeah, Yeah, no that's yeah, I see what you're saying no that that's look we we would love to get our natural gas back on a growth profile and that's just now come off our three year plan. It's just an outcome of the projects were drilling the staging of the completions and what we think it will deliver.
Also a function that the the the modest.
Extra investments, we're putting in the ground. This year really do pay off in the next two years. So some of that is just fruits of seeds. We're planting this year.
Alright.
Best of luck with the garden. Thanks, Tom.
Thank you [laughter].
Your next question is from Derrick Whitfield at Stifel. Please go ahead. Your line is open.
Good morning, Tom and team and congrats on a strong year end.
Thank you.
For my first question I wanted to focus on your 2023 capital program. If we were to assume flat commodity price a flat commodity price environment. How would you expect service cost to change across your operating areas and then more broadly.
Where are you seeing the greatest headwind and tailwind from a service cost component perspective.
Yeah. Derrick this is Blake I'll take that one.
It's hard to pin a service cost to a commodity price I mean, it's really ultimately a function of activity and how much services are available on the market.
We're seeing some softening.
I'm happy to say, we've seen a little bit in rig rates here recently and that's that's a good sign.
We've seen a softening in casing R. O C T G going out three to six months, we're starting to see some price coming down and that's a good sign but it you know ultimately its going to be a function of activity across the lower 48, all rigs and crews have wheels, and they will travel so we'll let's see where activity goes.
Terrific and as for my follow up maybe shifting over to the Anadarko.
Results on slide 17, and 18, seemingly bay or higher capital, particularly in the up dip part of the play.
Could you perhaps speak to the updates you've integrated in your design and spacing at Leer to Clark.
Yes, specifically the.
Clark, you know which was.
An outgrowth of a lot of.
Work, we've done over the years, we did spaced those wells a little farther apart one of the things. We also learned is to put our wells a little further away from the parent wells.
And very very pleased with the results.
You know what as we look ahead in our three year plan. The Anadarko has a few very very nice projects. This year and then we take a little pause and then we started up January one of 'twenty four additional activity, but we're you know as you look at that inventory slide. These are high quality locations are really.
Begging for more capital quite frankly, and the team is making it really hard for us and as we asked them to do they've come forward with some really really nice projects in inventory and yeah. We're just we're just in the progress of.
Trying to manage an embarrassment of riches.
Terrific. Thanks for your time and color.
Your next question is from Matt Portillo of PTH. Please go ahead. Your line is open.
Good morning, all.
Hi, Matt.
Just to tease out on kind of a consistent thread here, Tom Theres, obviously, a lot of interest from the broader market and gas capital allocation. So I just wanted to circle back around to that you mentioned the mid cycle price on gas <unk>.
<unk> hundred 75.
If that plays out could you just give us a little bit of color on how you think about Marcellus capital allocation heading into 2024 and the reason we asked because we know you're very returns focused and even at a $3 50 that.
The Permian still has better overall returns relative to the Marcellus based on your slides. So just curious if there is some flexibility in the program. Once you get through your service contracts, where the Marcellus may receive a little bit of less a little less capital in 2024, it's at 275 mid cycle price plays out.
Yeah.
Well, if $2 75 or the price. So I think that's probably something we'd look at seriously you know our current plan has fairly flat level of activity in the Marcellus and our intention is to.
Soldier on but you know, we we look very carefully at the oil gas ratio and the return differential.
And you know, we're going to pivot and try to find the best returns within our portfolio.
You know the oil gas ratio last year was 10 to one that's currently 30 of the one <unk>.
And you know we talked about mid cycle pricing you know that mid cycle ratio is really what we're looking at and we don't want to react yeah. We don't want a knee jerk near term, we've got the wherewithal to be patient on this.
That makes sense and then just a follow up to the Marcellus I know you guys have talked about the frac barrier and the ability to develop the zones.
Without co development here.
Can you just give us maybe a little bit of color on the program for the upper Marcellus and I know you've talked about 40% for this year, but in the three year outlook.
How should we be thinking about the percentage at a high level of the upper Marcellus wells in that program in 'twenty four 'twenty five.
Yeah. It is it's in.
And that three year plan the upper Marcellus has the highest percentage this year that we're currently projecting over the next three years, but yeah on the year in the out years, 24, and 25 and our current plan.
Is the upper Marcellus is going to be about 30% to 40% of our total program.
And you know I will just reaffirm we stand by our statement that that Frac barrier isn't did a hydraulic isolation between the two units, which which does gives us the luxury to stage the development in the most prudent way.
Thanks, so much.
Your next question is from Neal Dingmann of choice Securities. Please go ahead. Your line is open.
Morning, all thanks for getting me in my first question Tom for you or the gang is just on your Permian project size and specifically looked I was looking at that slide it looks like now what would you consider or would you consider kind of the eight to 10, well pads now as the most optimal and I was wondering if is that increase due to sort of just overall cost out their efficiencies.
Or what what has driven these larger project development.
Well I'll I'll chime in and then Blake will come in as well.
We got eight to 10, well project size, we didn't come up with that there's some deep thinking kind of just happened you know operationally as we look at cycle times, we look at facility design.
That seemed to be what look to to work the Delaware.
It's a little different beast than a lot of other basins, you'll look at we have a single pad in the Delaware that were flowing back that is flowing back in excess of 200000 barrels of water a day.
<unk> project.
And so you know Pat the size of the Delaware is a function of a lot of things one of which is our infrastructure. Yeah. I'll just tack on you know really the the wells per pad is an outcome of always looking for efficiency. That's really what we're constantly looking for on the cost side.
More wells per pad, we get more coming we can do it just drops to our per well costs a dollar per foot costs. Our teams have got really creative Ah you know we have pads now that have wells go into the north wells go into the south.
Come back as Tom said after those 200000 barrels declines and we added new zones and plug those into the same facilities.
Probably our biggest limit is just kick outs on drilling and theres a cost associated with that and that that's really our what we measured when we determine how many wells are you going to squeeze on one pad.
Hey, Neal I want to correct myself that projects.
Projects in pads or is it one pad is producing 100000 barrels a day I said that.
I was talking about project one pad is producing 1000 barrels of water a day.
Either way that's big.
Great.
Yeah, that's great as Marcellus, we produced 5000 barrels a day in the whole field [laughter] Alright, and then.
My second question is in the on your Marcellus delineation planning specifically like the I saw in the release you all mentioned about 40% of the Marcellus planet.
Asian Nature is is this plan to get to cover most of the broader position or there's some key areas that you delineated and then you know I know you're not going to give 'twenty four guide I'm not looking for that but well that delineation continue to that percentage well into next year as well.
You know this year, we are we do have a pretty good delineation across the field that we're testing upper Marcellus and <unk>.
Really it's a function of takeaway in infrastructure too.
Careful where we bring that on and you'll kind of see that theme in the upper as we go forward, where we put those locations similar to the lower how we've done in the past.
Infrastructure is a real guiding light there.
Yeah, Yeah. They all have looked at the map right now of our upper Marcellus project that it's a pretty good scatter shot over our acreage. So I think I think you'll all be pleased that our delineation I also wanted to remind everybody that infrastructure is important in these plans and will have a new compressor station opening here in the next year or two in the Marcellus in that.
It's always the opportunity for further extension.
That's a great answer it look forward to hearing all the details thanks Tom.
Your next question is from Kevin Mccarthy of Pickering Energy Partners. Please go ahead. Your line is open.
Hey, Good morning, I was wondering if you can give some color on how you plan to execute the share buybacks.
Will there be a set amount that you do each quarter based on your free cash flow or are you going to be more opportunistic based on your internal NAV.
We're gonna obviously based on a like you said the internal evaluations do but we're going to continue to just like we did with the last one would be more focused more on the opportunistic look at the marketplace.
Where we're trading versus our perception of where we should be trading at.
Again, we do have a commitment, but we're not going to become programmatic and doing it so it'll still be more opportunistic than anything else.
Great.
And then just if I can a question on the multi year outlook.
What would you say is the main driver of the increased oil production, obviously youre going to put on more wells, but are there any changes and productivity.
Willing and more productive areas or higher working interest areas that are contributing to that impressive growth.
Well a huge driver is the extra capital that we're putting in this year.
And setting some things up for next year that we're quite excited about.
But yeah look are we love our Delaware assets.
We love all of our assets and because of oil prices. It just makes sense to put a little extra effort forward this year and reap the rewards.
Great. Thank you for taking my questions.
Your next question is from Leo Mariani of Rock N. Kam. Please go ahead. Your line is open.
Yes.
Yeah, Hey, guys just wanted to ask a little about the Capex outlook here. So you guys were talking about two to $2 2 billion.
This year and in terms of the range was hoping to get a little bit of color around in terms of what puts you at the higher end versus the lower end I'm, assuming it might just be service cost and then as I look at the three year outlook.
You guys are expecting that to come in slightly to kind of more to point out a $2 1 billion in the next couple of years. So just wanted to get a sense of why that's coming down a little bad is there any expectation that service cost might come in and obviously you talked about some of the trends maybe starting to look favorable.
Yeah.
Yeah I'll Oh. This is Blake I'll take that one to the 23 program is all modeled at current cost and that that would put it maybe just a little north of the midpoint not assuming any deflation right now so we'll see where that goes the two to 2.1 going out in the next three years, it's really more a function of the.
Our project selection and the asset mix that comes in and comes out.
Some parts of the assets have higher dollar per foot some have lower that's just coming in and out throughout that three year program.
Okay. That's helpful.
And then just wanted to follow up on some of the comments you guys made about the variable dividend versus the buyback.
Just wanted to get a sense I know you guys are going to continuously monitor on this but you know because we have an outcome. This year, where we get very very little variable dividend then.
The buyback increases rather significantly versus kind of where it had been in the second half of 2022.
Obviously, you know the stock while it's doing well today and this has come in quite a bit off the highs from last year. So just trying to get a sense. If you guys are really going to kind of lean pretty hard on the buyback. This year and you kind of very little in the variable dividend depending on how are you.
If things play out.
I think that I think that's a good assumption.
Priorities as we said is the <unk>.
Base first.
Buybacks second and then fill in if needed with a variable dividend so to the core of your question, we're focused particularly because we agree with you what our stock has come in quite a bit and we see a great opportunity in that so.
If you pressed me today I would say your answers.
The direction Youre going to correct.
Yeah.
Okay. Appreciate it guys. Thanks.
Your next question is from Paul Cheng of Scotiabank. Please go ahead. Your line is open.
Hi.
Hi, good morning.
Your question please.
One question is going back into.
By back end.
Davidson.
After that that's assumed that later this year that you're already raise your cash balance to open in dollar and at that point should we assume that the excess cash will be essentially.
For the shareholder return and that means that if you end up that going to be about 50% or that even which that left that you may want to further strengthen our balance sheet.
So trying to understand that once you reach that level I mean, what kind of distribution that we should assume.
Secondly that Tom can you talk about do you have a.
Huge inventory back not already so bolt on that question you know something that you guys think.
Or that you have seen portend for you over the next couple of years or that it would be still focusing on your existing answer. Thank you.
Paul I'll take the first part.
It's not that clear of a formula as you watched us through this year again, our minimum commitment was 50 plus percent as we just highlighted we returned 83%. So there's not a magic point that we get a $1 billion in cash and then all of a sudden we start going.
$1 billion in cash as a target.
The 50 plus percent of cash flow is a rule so to speak and then we have flexibility around how we deliver that and how much more we wanted to deliver based on market conditions. So I can't pinpoint to something that once we get to this point, we're going to start doing this we have all those options on the table and we will continue.
To use all of those options, but the priorities right now at about 50, plus percent base dividend and buy back first and we'd like to get our cash balance up because what the cash balance does being a little bit higher affords us flexibility in the question that you're asking Tom.
And I'll take that question.
Inventory is always an important issue as I've said in the past having along the inventory really gives you the opportunity to run your program with only solid financial and operational considerations and not be panicked about some kind of a runway that's short.
We have a very deep inventory and we have the luxury of.
Being able to run our program based on the best financial returns.
That said, we're a learning organization.
We're constantly looking for opportunities.
We would love to find bolt ons that we could handle our operational teams you know, we're very proud of our operational teams and their ability to integrate operate smartly and really bring on a hidden value forward, we're going to constantly look but you know M&A is a is a perilous territory.
When you typically wanted to have some advantage that advantage can be information advantage can be operational advantage it could be geographic advantage.
But we're probably not going to be showing up.
And trying to outbid people that have the same information we do so we will be opportunistic but we're we're.
Blessed with the luxury of not having to do something and.
That's a nice place to be.
Your next question is from Charles Meade of Johnson Rice. Please go ahead. Your line is open.
Good morning, Tom and Scott. Thanks for fitting me in I just have one more question on the buyback and I know you guys have covered a lot of territory on it but.
I think it's an important shift.
And Scott I know this is a conversation that you've engaged in.
For a long time, but the sense I get is that in the current environment. You guys are tilted hard towards the buyback and I think you've been clear on that my question is about whether you guys are viewed this pivot is a durable pivot across time.
And also across price and if you are thinking about it as a as a durable pivot maybe you can share kind of up to what price you view it as being durable.
Well Charles that's a nice try I won't game [laughter], but I think it's fair to say it is more durable because you see that the technical term stickiness of buybacks because it has a lasting impact over all cycles and well into your future.
I'd be lying if I didn't say I'd run the math in my head based on the average of what I bought in last year, if I had to use that variable dividend money what would my shares outstanding B and that number kind of intrigued me now can't undo what we did last year. So I think where youre leaning is I view this as more durable add because it.
Is I think the best long term solution now there will be points in disconnects in the market, where it may not make sense.
But I'd love to have that challenge, where the whole perception is the market that stopped got ahead of itself, we're a long ways away from that.
But we're also going to make the best decision quarter by quarter and be prepared to pivot we're not we're not.
Making some wholly pledge for all time, what were saying is were reaffirming our commitment to return.
Cash store owners, and we think there's a better way to do it in 2023, and we're very confident with our move this morning.
Got it Tom and Scott that's it for me. Thank you.
Okay.
We have completed the allotted time for questions I will now turn the call over to Tom Jorden for closing remarks.
Thank you all for joining us we look forward to executing showing you that we're doing what we believe and we're going to deliver what we promise. So thank you all very much.
This concludes today's conference call. Thank you for your participation you may now disconnect.
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