Q4 2022 Callon Petroleum Co Earnings Call
To ask a question simply press Star then the number one on your telephone keypad to withdraw your question Press Star. One again, please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today, Kevin Smith Director of Investor Relations. Please go ahead Sir.
Thank you Regina good morning, and thank you for taking the time to join our conference call with me on today's call are Joe Gatto, President and Chief Executive Officer, Dr. Jeff Balmer, SVP, and Chief operating Officer, and Kevin Hagger, SVP and Chief Financial Officer. During our prepared remarks, we may reference our fourth quarter and full year earn.
<unk> press release, our 2023 outlook news release, and our supplemental slides all of which are available on our website at www Dot Cowen Dot com.
Today's call will include forward looking statements that refer to estimates and plans actual results could differ materially due to risk factors noted in our presentation and our periodic SEC filings. We will also refer to some non-GAAP financial measures, which we believe help to facilitate comparisons across periods and with our peers for any non-GAAP .
Measures, we reference we provide a reconciliation to the nearest corresponding GAAP measure you may find these reconciliations in the appendix to the earnings presentation slides and in our earnings press release, both of which are available on our website.
Following our prepared remarks, we will open the call for Q&A I would now like to turn the call over to Joe got it Joe. Thank you Kevin.
And welcome everyone. We have a lot of good news to share with you and are excited about our plans to unlock the tremendous value we see in Cowen today.
By now I Trust, you've had a chance to review our two press releases issued last night, one detailing our Q4 results and the other are 2023 outlook.
These are accompanied by other supplemental disclosure slides on our website.
We will reference a few of these slides in today's call. We encourage you to review the entire package to provide background for questions.
As demonstrated in our fourth quarter and full year 2022 results, we had a strong finish to the year on the production front despite periods of adverse weather conditions and we're right on the mark with our capital spending forecast.
Looking forward, our 2023 business plan is designed to capture capital efficiencies through larger scale projects and we expect to deliver solid returns and help offset industry wide inflation.
Creating value for our shareholders through reinvestment in our high quality inventory.
We are eager to address your questions. So we plan to keep the prepared remarks relatively brief today.
The call today will be divided into three buckets first I will outline our key objectives for 2023.
We are confident that our 2023 development plan will drive significant free cash flow clearly demonstrate and crude efficiencies through continued application of our life of field co development model enable us to further reduce debt balances.
Next we will move to a brief summary of our fourth quarter and full year 2022 financial and operational highlights and lastly, ill discuss our capital allocation framework and some important updates on our path to returns of capital.
Let's get started.
Our top priorities in 2023 are pretty simple.
Invest in our premier assets to generate free cash flow and pay down debt.
So the last point, our track record of strengthening the balance sheet has been outstanding since the first quarter of 2021, we've improved our leverage ratio by more than three turns or over 70%.
Overall, we anticipate investing approximately $1 billion this year with more than 80% of our D&C activity allocated a high return Permian basin projects, which are expected to generate average IRR of approximately 70% and average payouts of less than two years.
Cowen has a premier asset base with an inventory of over 500 risk locations and core zones, representing over 10 years of locations that are economic at $60 per barrel or lower and Thats, assuming current service costs.
We are fortunate to be positioned with a quality asset base. We possess today, which is a result of many years of important decisions related to building our team and a development strategy. We have employed on our multi zone asset base over time.
Our life of field co developed model has been a key tenant of <unk> operations going back several years as we built our position in the Midland Basin and that philosophy carry with us into the Delaware basin. Upon our initial entry in 2017.
While co development is not unique to Cowen.
We are part of a select group that is adhere to the strategy over time.
This is a critical point.
The power of the model comes from the cumulative impact of consistent application over time, ultimately, creating inventory with more consistent quality into the future and maximizing the NPV of the resource base.
Focusing on one element of our development model, we will continue to increase the average number of wells targeted within our projects this year.
Co developing multiple zones to mitigate risks associated with parent child, well interactions and balancing today's well productivity with tomorrows value proposition.
In addition to the subsurface optimization there also economies of scale to translate into D&C savings in 2023, our average project size will increase by over 20% <unk>.
Importantly, as our development program has achieved critical mass and we've established a solid ongoing DUC inventory, we can increase the use of simultaneous operations to reduce our cycle times.
We estimate that our simultaneous D&C activities will reduce cycle times by approximately 20%, which significantly improves capital efficiency, even as larger project sizes are used.
On the cost savings front, our scale program has been instrumental in limiting the inflationary increase in our D&C cost per foot to roughly 10% year over year.
I ask you to now take a look at slide 10.
This is a powerful chart that really captures the prospective impact of our life of field focus and the implications for sustainable free cash flow generation.
Over the next five years, we expect that our annual capital efficiency metrics as measured by total capital invested divided by total average daily production well.
It will be consistent and directionally improve on average under the development scenarios captured.
This dynamic is underpinned by a couple of key drivers.
In terms of wedge production from new drilling activity, which is the production that is incremental to establish base production, we expect to benefit from the relatively consistent return profiles of new co development projects as discussed earlier.
Improved project cycle times from the ongoing use of simultaneous operations and optimization of project sizes over time and leveraging our past facilities investments as we returned to previously developed areas.
In addition capital efficiency will benefit from the maturing of our corporate PDP decline profile overtime.
Clearly this type of analysis represents a point in time outlook with several underlying assumptions and resulting outputs, but I want to make sure. There is one key takeaway the.
The capital efficiency profile embedded in our current inventory provides differentiated flexibility for meaningful capital allocation to what we envision as the three key drivers of shareholder value going forward.
Disciplined investment in our high return inventory ongoing debt reduction and.
In an impactful return of capital program.
Let me switch gears and cover our fourth quarter and full year 2022 financial and operating results.
For the fourth quarter total production averaged 106000 barrels of oil equivalent per day and oil sales averaged just over 66000 barrels per day.
We're in line with expectations, despite weather impacts we experienced from winter storms around year end.
For the year, our 2022 production increased by about 9% over 2021.
We generated $412 million and adjusted EBITDA and posted adjusted net income per diluted share of $3 36 during the fourth quarter.
Our results were driven by strong well performance and the continued strength of both oil and natural gas realizations.
We realized 102% of Nymex <unk> during the fourth quarter, owing to our close proximity to premium Gulf coast markets and contracts tied to waterborne and international pricing.
Of particular importance 2022 marked the third consecutive year that we posted improvements in EBITDA margins, our work to control costs through supply chain efficiencies LOE reductions from the <unk> acquisition and.
And strong price realizations has helped us enhance margins and mitigate industry wide inflation.
Overall, our cash operating cost during the fourth quarter were in line with expectations with LOE per Boe down, 2% sequentially and cash G&A in line with the previous quarter.
Proved reserves at year end were approximately 480 million Boe.
Of which 57% oil and 85% weighted to the Permian with an associated PV 10 value of $10 5 billion.
During 2022, we added 68 million Boe from extensions and discoveries, which represented 180% of 2022 production.
As a result, our proved developed reserve volumes grew by 7% over 2022 to approximately 295 million Boe.
With an associated PV 10 value of $7 1 billion.
Said another way the PV 10 value of our of just our proved developed reserves represents over $75 per share in equity value after deducting debt balances.
We get a lot of questions from shareholders regarding our capital return strategy.
Our answer has been consistent.
Let's make sure that we have addressed balance sheet first and not declare victory too soon.
We made tremendous progress on this front, which was recognized in credit rating upgrades from all three agencies in 2022.
We reduced our debt by $462 million last year and by them by more than $715 million since the start of the first quarter of 2021 and.
In sum the balance sheet is very close to being in a position for us to implement a return of capital program.
But before I address this further let's take a step back and start with a few points on the broader allocation of cash flow generated from operations.
Cowen has a deep and robust inventory of development projects, and then outlook for improving capital efficiencies as evidenced by the stats around our 2023 capital program <unk>.
Reinvestment in our assets is the cornerstone of our strategy and disciplined capital allocation into an asset base with consistent return profile that provides confidence in our ability to generate sustainable free cash flow.
Given the high returns and quick payouts on our portfolio of investments, we expect to generate a significant amount of free cash flow for allocation to an expanded set of shareholder value initiatives.
Based on the assumptions detailed in the presentation, we expect to generate more than $2 $75 billion of free cash flow over the next five years under our baseline development scenarios.
As a frame of reference this amount of free cash flow represents approximately 125% of our equity market cap and over 60% of our total enterprise value today.
The next logical question is how will we deploy this free cash flow.
We expect to achieve our key $2 billion that milestone later this year, which is now our only gating financial metric to achieve before adding a return of capital program. So this element will now squarely be part of our broader capital allocation framework.
And as to the form of this program.
Based on our equity value today, and our desire to retain financial flexibility. We believe the highest return proposition for execution of our capital return framework for shareholders as a stock repurchase program.
In addition to capturing the value arbitrage between our public market valuation and our internal view of intrinsic value share repurchases will enhance production growth per share beyond our organic potential and also increased per share exposure to our strong inventory position.
And to front run the question, we will be detailing elements of this program as we get closer to formal initiation.
I want to make one last point here and refer you to page eight of the materials and the check list on the left hand side of the page.
Just to be clear, even when we reach $2 billion in debt and commenced capital return initiatives debt reduction will continue to be a key priority for our free cash flow deployment with an eye towards achieving less than $1 5 billion of gross debt and a leverage ratio of less than one times.
Before taking your questions I'll summarize what we believe are the key ingredients for calendar warrant a premium valuation.
A deep and high quality inventory that contributes to an improving capital efficiency profile over the next five years the development of.
Our LIFO field co development model that has been consistently followed over the past several years differentiates our longer term asset value proposition.
A solid plan to attain our $2 billion that milestone and commenced a return of capital to shareholders. Later this year that will complement further debt reduction.
And the successful integration of ESG initiatives and targets across the business, which tie to compensation to incentivize right behaviors.
Overall, we are confident that the execution of our plan, we'll close a significant value valuation gap, we see in our equity today.
This concludes our prepared remarks, and we're now happy to take your questions operator, I'll turn it back to you.
As a reminder to ask a question simply press star one on your telephone keypad. Our first question will come from the line of no demon with <unk> Securities. Please go ahead.
Good morning, all thanks for the time first my first question is on the operating plan really Joe for you or the guys. Just wondering how sensitive is this plan would you considered to the volatile energy tape or maybe asked another way.
What would it take to add or drop one or two of those current I think seven rates yes.
Yes.
Neil I think were pretty well dialed in on this program with a large scale program.
Theres a lot of planning that goes into that than we are.
We've got to stay very well advance of our plan so.
We'll see how the commodity shapes up obviously alongside of that we got to see how service costs react because it's not about any one headline price I would say that as we look at the landscape here, we look at our program and how we're setting up for next year that we see optionality for additional activity into <unk>.
2024 would probably be where.
Where we stand today, but 2023 is pretty locked in on a flip side of that.
If we see things pull back into the low <unk>, probably time to revisit.
Our plans.
Moving forward, but for right now we think this is a resilient plan, obviously with the return profiles.
<unk> for 2023.
Theres a lot of economics to go around and weather the ups and downs.
No great great to hear and then that's kind of my thought and then.
Just lastly could you talk about I know youre getting much closer to sort of hitting those optimal leverage debt levels could you talk about.
Would you get do you have to wait till you actually get there or.
Maybe just talk about the timeline if you could thank you.
Yes, Neil why don't I think that this is Kevin.
We've been asked this question before our answer remains the same when we hit those debt targets will be ready to go with an announcement period.
Okay.
Thanks you.
Your next question will come from the line of Phillips Johnston with capital one. Please go ahead.
Okay.
Hey, guys. Thanks, Joe in the third quarter call you guys highlighted a 28% improvement in the Midland Basin, well productivity just in terms of.
22 vintage wells relative to the average for the prior three years just wondering if you have an update on how the productivity is turning now.
I think were similarly in line with that just because we didn't have a huge body of work there in terms of extended performance.
We didn't provide an update here, but you can expect that as we move forward to supplementing that Jeff is there anything you want to know the Midland Basin continues to be a very strong opportunity area.
Extremely good capital efficiency metrics across the board.
Okay sounds good and then on the LOE guidance looks like it's ticking up a little bit.
<unk> to $8 50 range from sort of the high <unk>.
700, or so for 'twenty two.
Just wondering what the drivers might be there.
Yes, the primary ones or just a modest inflationary costs that we're seeing we're hoping to obviously trim that back.
One area that I would point out as a strong successes.
The significant improvement in the Delaware basin, South ore over the prime mix acquisition occurred.
<unk> have come down quite a bit. Despite the fact that inflation is does continue to of course through 2022, and the beginning of 2023, but but thats the primary.
The headwind is still a little bit of inflationary pressure that.
We hope, we again anticipate nibbling away at that.
Great. Thanks, so much.
Thank you. Your next question will come from the line of Paul Diamond with Citi. Please go ahead.
Hey, good morning, Thanks for taking my time.
Thanks for taking the time and I was wondering if you guys could just kind of walk through kind of the rationale of shifting.
Kind of those gating targets more towards that so we get leverage and kind of away from the web or kind of a leverage ratio is that more of a comment on your perceived disconnect in the equity value, which is why youre focusing on share.
Focus on a share buyback.
Walk through the thought process there.
Yes. This is Kevin again, I think what you are asking is what happens to the one times leverage target and I would say in our discussions with debt and equity investors based on our analyses internally, we realized that the absolute debt target is the key one here to help us get through this.
Any commodity price volatility.
For us achieving that $2 billion milestone is going to represent a strong balance sheet.
And I would say also that $2 billion is just the first stop so we're going to look to continue to reduce debt and want to reach what we call an optimal level and that optimal level is less than 1 billion and a half and less than one times debt to EBITDA and we say optimal because at these levels of debt, we feel very comfortable with what our leverage metrics.
It would look like down too.
Low $40 OTI price for a prolonged period of time.
Does that help.
Yeah understood perfect.
Just one quick follow up on kind of its more of the macro inflationary environment.
Do your conversations are you seeing anything of particular bright or dark spots across the complex as anything that.
The conversations that are going well versus those that are going poorly kind of how you see those ramping out with.
What we have done to the microphone.
Sure a very relevant question I'm very happy with how we've addressed our 2023 needs earlier in the year in 2022 inside our fuel.
Like we have a very strong foundation from a contracting standpoint, we're not in the market to get any new equipment right now relative to the drill bit and the completion side, which are our primary spend but we are very foundational solid relative to the pricing. If we see some some breakover in items like <unk> and casing.
<unk> chemicals some of the ancillary service items, we should be able to realize some cost savings of those things going forward into 2023.
So that's kind of where we sit.
Understood. Thanks.
Your next.
<unk> will come from the line of John <unk> with Stifel. Please go ahead.
Hey, good morning, all and thanks for taking my questions.
Referencing slide 11, I wanted to ask what in your view is driving the out period productivity and the Delaware is it better fracture conductivity rock quality any color would be much appreciated.
Sure.
One of the strong foundational items of Cowen I would suggest if you look at the inventory and then the very thoughtful development program. So we put in place in the Delaware.
That those multiple year thoughtful LIFO field development.
Decisions that we've made have yielded what we see here on page <unk>.
<unk> as far as the co development philosophy.
And it is fairly complicated of course.
And it adds in a number of items, the correct spacing and stacking understanding the geology and the geologic barriers.
The existing natural fracture systems that you have in the area defaulting.
Defaulting systems that you have and then also how we propagate the frac systems based upon existing wells.
So the parent child relationships et cetera.
And Catlin has really been able to flex its muscles on its knowledge base.
<unk> was a great example, where they that group had a tremendous subsurface dataset that we were able to leverage on everything from seismic all the way up to.
Induced fracture propagation.
That whole aggregates setup.
Set of disciplines. When you put that altogether, that's what's needed in order to really put together.
Strong <unk>.
Development program over multiple years, not just one year at a time.
So it's a little bit of a broad answer with some some disciplined specific items that roll into that.
But we see the Delaware basin is a strong competitive advantage for Cowen.
Just to add there I think thats really well sums up our life of field development, a little bit more detail. We saw the power of that overlaying the model on <unk> and also what Youll see.
Life of field is not something Thats cookie cutter overlay on something there is things that we continue to tweak.
Completion designs that we've tested some some larger proppant loadings, there last year, which have a nice impact.
Sort of optimize some of our artificial lift programs over time with ESP. So.
The lifestyle of the model is very powerful, but we continue to look for ways to continuously improve that.
Terrific terrific I appreciate the color.
Then shifting to the Midland you show some sticks on the map on slide 21 planned for 2023 that are in or close to Dawson County that appears to be the most northern wells drilled to date can you share any color on pre drill expectations based on your subsurface work or industry activity.
Sure it should be pretty much in line that there are some geologic changes as you go up into the northwest in that area.
We feel again, we're a very experienced Midland basin operator.
And we've taken advantage of.
Being.
<unk> full about how we progressed our.
Development programs in those areas. So we've seen very very good well results in the center portion of that and feel good about expanding that up into the northwest.
Perfect. That's it for me thanks for taking my questions.
Thanks.
For any questions Press Star one your next question will come from the line of Ken <unk> with Keybanc. Please go ahead.
Good morning, everybody and thank you for taking my question.
I'd like to start with the I guess, the five year free cash flow plan.
I know, it's a volatile oil tape.
Plan is predicated on $80 oil well below that and.
We get continued bearish macro statistics.
So I'm just curious have you sort of stress tested. This model is it something that will hold in a 50 to $60 kind of an environment and if we are in a sort of lower for longer environment, you mentioned earlier.
Pull back rates and a low <unk> world.
What is that free cash flow program kind of look like longer term is this sort of is that.
Set in stone for better for us longer term.
Yes.
First a clarification I guess I want to emphasize those scenarios based on as you pointed out the assumptions of $80 oil.
So this is not set in stone they are really meant to be scenarios and as much as we're trying to provide a five year outlook I think the key point to take away from that is that capital efficiency profile, which really highlights the ongoing.
Efficiencies within our inventory program that are relatively consistent over time that we don't see any periods, we're going to hit a cliff on capital efficiency.
Because we co developed our asset base over time, that's the biggest takeaway Sam so don't take away from that that alright, well, they're locked and loaded.
Damn the torpedoes. This is what we're going to do but if you look at that capital efficiency. It gives us a lot of flexibility through ups and downs of tweaking the program.
To continue to deliver free cash flow and thats going to be used for debt reduction and return of capital, but the key point. There is really just looking at that profile of capital efficiency. We think over time is going to be differentiated it Mike.
<unk> might not come to pass, but given the tools that we have to work with gives us a lot of flexibility for the right outcomes on free cash flow.
Okay that makes a lot of that's pretty helpful.
And then I just wanted to circle back Joe you mentioned kind of repurchases.
Earlier I wasn't clear on what you are what you were sort of referring to I know there is a pretty clear arbitrage.
That's sort of underscoring everything youre doing here with the long term strategy, but.
I guess I know you can't talk about the plan, but yes.
I think the concern would be.
If you implemented before one times leverage target that the intensity could have negative effects of oil declines so.
Can you just talk about the repurchases what youre, referring to it and I guess, how youre thinking about the intensity of capital returns if you initiate something with leverage over one times.
Yes. So this is Kevin again, I think I think there's a couple of questions. There one.
You're kind of asking what does the shareholder return.
<unk> program going to look like and that is the repurchases right.
With the compelling value of our equity today, we think that the share buyback program as the first initiative and we will definitely evaluate other potential methods in overtime and I would say that we don't have specifics as approved by the board.
In terms of size, but we do believe a multiyear share repurchase authorization is going to allow us the most flexibility.
Does that provide you.
Enough guidance.
Yeah, Yeah. That's helpful. I, just think box will suffer in with something rigorous kicking it could have negative effects.
That makes a lot that's Australia.
I understand overall, we've talked about this over time with the investors.
Had the chance to watch other programs get released over the last year, plus so you have those aged over time, but it.
It was really clear to US was we wanted to maintain flexibility that was the number one priority for us so getting locked into things that we are overly formulaic or.
Maybe fixed in nature at this juncture I don't think are appropriate for <unk>, because as a smid cap company and the opportunities that we have a one flexibility to be nimble.
And pinning us down, especially with.
Leverage not exactly where we want to be long term, yet keeping flexibility its capital return.
Program, while still delivering on something in the near term it was are really.
Really guiding.
Just on this.
Okay I appreciate the color it certainly shows conviction in the resource base, which I think.
People are looking for so thanks for the comments.
Thanks, Tim.
We have no further questions at this time I'll hand, the call back over to Joe <unk> for closing remarks.
Thank you and thanks again for joining.
Hopefully everyone. Joining this call and obviously, please feel free to reach out to the team here with any questions and we'll look forward to talking to you next quarter.
Thank you.
Ladies and gentlemen that will conclude today's meeting. Thank you all for joining you may now disconnect.
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