Q4 2022 Chord Energy Corp Earnings Call

Good day, and welcome CT energy fourth quarter 2022.

This call all participants will be in listen only mode.

Systems, He signal conference specialist by pressing the star key followed by people.

After today's presentation there'll be opportunity to ask questions at least called that this event is being recorded.

I would like to turn the call over to Michael Lou Chief Financial Officer. Please go ahead.

Thank you Nick good morning, everyone.

Today, we are reporting our fourth quarter 2022 financial and operational results. We're delighted to have you on our call I'm joined today by Danny Brown Chip Rimer and other members of the team.

Please be advised that our remarks, including the answers to your questions include statements that we believe to be forward looking statements within the meaning of the private Securities Litigation Reform Act.

These forward looking statements are subject to risks and uncertainties that could cause actual results to be materially different from those currently disclosed in our earnings releases and conference calls.

Those risks include among others matters that we have described in our earnings releases as well as in our filings with the Securities and Exchange Commission, including our annual report on Form 10-K, and our quarterly reports on Form 10-Q, we disclaim any obligation to update these forward looking statements.

During this conference call, we will make reference to non-GAAP measures and reconciliations to the applicable GAAP measures can be found in our earnings releases and on our website.

We may also reference our current Investor presentation, which you can find on our website with that I'll turn the call over to our CEO Danny Brown.

Good morning, everyone and thanks for joining our call I'd like to start off this morning, reflecting on an eventful 2022 prior to talking about our fourth quarter results and ultimately our expectations for 2023.

2022 was a transformational year for our organization as we completed a merger of equals transaction to create CT energy a company with substantial scale in the Williston basin, and one with an opportunity to create and extract significant value through operational and corporate synergies importantly, we executed this transaction, while maintaining our commitment.

The balance sheet strength capital discipline and to our shareholders as we also announced the compelling and peer leading return of capital framework.

In our March leading up to the merger and through the balance of last year, we laid the groundwork and begin the process of integration and establishing how we would operate as a new organization it.

This integration process is now fully underway and for 2023, we're focused on delivering value from the best practices and synergies. We've identified as a reminder, through this process cord previously announced that we have increased our target annual synergies from the 65 million. We originally targeted at the announcement to our current expectation over 100 billion.

Per year we.

We expect to realize over 70% of these targeted synergies by the second half of 2023 with the remainder in 2024 and have incorporated these numbers into our guidance.

Taking the time and effort to establish what we believe are the best practices for the go forward organization, regardless of legacy practice will make us a stronger company and I want to thank the employees of poor who through their commitment and dedication have placed us on such strong free.

The integration is going well and I remain excited about our future through the merger, we created a better company with a strong financial outlook capable of supporting high levels of sustainable free cash flow at prices much lower than current market benchmarks.

In court solid outlook allowed us to enact a progressive shareholder returns framework, which resulted in returning over 75% of adjusted free cash flow in the second half of 2022 through a combination of base and variable dividends and opportunistic share repurchases.

If you examine our program in more detail, you'll see that our annualized base dividend of $5 per share has a yield of three 8% and represents a 233% cumulative increase over the past two years.

Our strong base dividend is a core part of our return of capital strategy and is designed to be resilient at low prices and sustainable through commodity cycles and importantly, we believe our base dividend is very attractive burst, both our peer group and the broader market.

More broadly our focus on strong shareholder returns was evident in 2022.

On a pro forma basis for the full year core generated approximately $1 3 billion of adjusted free cash flow and returned over $1 2 billion or approximately 93% through dividends cash merger consideration and share repurchases.

Turning to the fourth quarter last night, we announced our operating and financial results and as noted in our release and our presentation on slide seven severe winter weather and elevated downtime related to frac protect negatively impacted volume delivery for the company.

When combined these impacts resulted in the delivery of approximately 3200 barrels of oil per day less than the midpoint of guidance for the quarter with a lion's share attributable to the severe winter weather in late December .

Were also delayed some of our capital activity and shifted completions into 2023, resulting in us investing about $21 million less in the fourth quarter than originally planned correspondingly this reduced capital investment resulted in delivering higher free cash flow and anticipated for the quarter.

Most importantly, we continue to be very pleased with the underlying well performance as our development program continues to deliver above expectations as can be seen on slide 10 in our investor deck, which is partially attributed to our practice of wider well spacing, which we believe improves per well recoveries and reduces variability of performance across the asset.

From a return of capital perspective in the fourth quarter, we repurchased $27 million worth of stock at an average price of $133 30 per share. This means that over the course of 2022, we've reaped purchased about $152 million for an average price of about $110 24 per share and currently have.

$273 million remaining on our $300 million share repurchase authorization, given this level of share repurchases and the adjusted free cash flow generating during the quarter for the fourth quarter of 2022, we declared a variable dividend of $3 55 per share.

When combined with the base dividend of $1 25 per share this yields a total quarterly dividend of $4 80 per share.

Turning to 2023.

On a full year basis, we are expecting to deliver a slight oil volume growth in line with consensus estimates at a program level cord plans to complete and deliver 90 to 94 gross operated wells in 2023 with an average working interest of approximately 73% complete.

Completions activity is concentrated in the second and third quarter of 2023 with over two thirds of our turn in lines or tills expected during these quarters.

The first quarter is expected to have only 13 backend weighted pills and volumes are affected by this completion timing as well as the lingering weather downtime. We saw in January but production is expected to increase sequentially each quarter with fourth quarter of 2023 volumes being the highest of the year.

I mentioned downtime due to frac protect a little earlier on the call and wanted to spend a moment discussing its impact on 2022, and our expectations for 2023, which is detailed on slide seven of our investor deck.

As we previously discussed delayed completions activity, whether due to inclement weather conditions or mechanical issues impacted the volume delivery of not just those wells that are delayed but also those surrounding wells that are shut in from a precautionary standpoint until nearby completions activities has concluded.

In 2022, mechanical issues and weather delays, while developing and densely developed areas like Indian Hills FTIR in Sanish led to very high and extended Frac protect downtime.

For the 2023 program completions are concentrated and relatively less congested areas, which makes frac protect less of an issue year over year. Additionally, we expect downtime related to artificial lift to improve over the year and into 2024 as we are implementing best practices from the merger.

As we look at the capital investment landscape for 2023, there's obviously uncertainty uncertainty related to service prices, which are dependent on various supply and demand variables that I won't discuss in depth on this call.

While there are some signs that pricing has plateaued in certain areas I would note equipment utilization remains high and pricing remains elevated.

Our best view, which does incorporate significant year on year inflation that we've experienced we expect to invest approximately 825 million to $865 million of capital in 2023, which is in line with consensus what's accounting for the roughly $20 million of capital pushed from the fourth quarter of last year, which I discussed previously.

Accordingly, quartz program focuses on operational efficiency and consistency, which we believe not only supports cost effective operations, but also supports safer operations. This.

This operational efficiency is also supported by synergies derived from the merger and our development strategy three mile laterals are a big part of the 2023 story as we're expecting three milers to comprise approximately 50% of pills in 2023.

We brought online our first three mile laterals in.

In the second half of last year in Indian Hills, and they are performing nicely.

<unk> nine illustrates what we are seeing with three mile performance and culminates in an economic uplift of about 25 points when going from two miles to three miles in total court's 2023 programs are expected to result in a reinvestment rate around 50% at $75 <unk>.

Finally, I want to spend a moment on ESG and sustainability before passing it over to Michael <unk>.

Following the closing of the merger we posted a letter to our shareholders along with pro forma ESG metrics for the combined company. We provided this information in the interest of transparency and to remind the market. We are dedicated to providing robust disclosure and improving our performance in these areas and in 2023, we plan to resume publishing a full sustainability report.

Core continues to have strong performance in ghd intensity and we see opportunities for further improvement. Additionally court has improved freshwater intensity and remains focused on the safety of our employees and contractors and maintaining strong corporate governance short overtime Youll continue to see our disclosure growth with a continued focus on improving.

It's across the board.

I'll now turn it over to Michael for some additional updates.

Thanks, Danny I'll highlight a handful of key operating items for the fourth quarter and also discuss a few of our 2023 guidance items.

Crude realizations remain at a premium to <unk> and our pricing averaged 99 premium to the benchmark over the quarter. While this was slightly below fourth quarter midpoint guidance pricing has been strong and we continued to expect that in 2023.

NGL and residual gas pricing deteriorated sequentially.

Reflecting falling benchmark pricing.

NGL prices fell more than wty sequentially, which resulted in lower NGL realizations as a percent of crude.

Residual gas pricing was weaker than expected, primarily reflecting increased regional gas competition, resulting from a warm start to the winter.

LOE averaged $9 87 per Boe for the fourth quarter towards the high end of our guidance as the volume disruptions increased per unit costs for full year 2023, we baked in some of the inflation that we saw on the production side in 2022 into our guidance.

Production taxes were approximately 8% of oil and gas revenue in line with guidance in 2023, we expect this to go down modestly, reflecting lower trailing WTO pricing, which recently lowered the north Dakota oil tax rate back to early 2022 levels.

Corporate cash G&A expense was $22 4 million in the fourth quarter, which was a little higher than expected due to conforming the two company's accounting policies.

The number excludes about $12 million of cash costs associated with the merger.

Core to exclude these charges in calculating adjusted free cash flow for the return of capital program is they are viewed as one time costs associated.

With integrating the merger.

At this juncture, we believe the majority of merger related expenses have been taken in the second half of 2022, although we expect about $9 million of merger related expenses to hit 2023 for things like relocation and severance.

Our 2023 cash G&A guidance of $68 million reflects recurring operations only.

Core paid about approximately $10 million in cash taxes in the fourth quarter associated with the September monetization of $16 million Crestwood units.

These cash taxes were excluded from our adjusted free cash flow calculation, given they are not associated with continuing operations and.

In 2023, we estimate estimate no cash taxes in the first quarter and for subsequent quarters, we're expecting about.

2% to 8% of EBITDA at oil prices of $70 to $90.

Turning to liquidity court has nothing drawn on its $2 seven 5 billion borrowing base, which has elected commitments of $1 billion.

Cash was approximately $593 million as of December 31, as well.

In closing courted generating strong returns, which.

Supports our sustainable free cash flow profile and feeds our robust return of capital program.

We demonstrated this with approximately $1 3 billion of free cash flow in 2022 and over $1 2 billion returned to shareholders.

Our operations team continues to improve the asset base demonstrably through spacing and longer laterals, which drives a longer more predictable and more economic inventory life.

To close we are incredibly proud to be a safe and responsible low cost provider of energy, which fueled a better world and we are also proud of the entire <unk>, who has come together and chooses to do the right.

What is right for each other the company and our communities with that I'll hand, the call over to Nick to open the line for questions.

Thank you we will now begin the question and answer session ask any question you May Press Star then one on you touched on phone.

The speakerphone, please pick up your handset before pressing magee.

So part of your question. Please press Star then two.

At this time, we'll pause momentarily to assemble the Ross.

Yeah.

First question will be from Derrick Whitfield with Stifel. Please go ahead.

Thanks, Dan and good morning, all.

Good morning.

Perhaps for Danny or hardship.

As you evaluate your inventory and three mile lateral results to date.

Or are you thinking about the implementation of three mile laterals over the next several years with the understanding that you meaningfully stepping up activity in 2023 could we see even in a higher percentage of three mile lateral activity in 2024.

Thanks for the question Derik I'll start off and then ask chip to jump in with some additional color commentary I think when you look at the total amount of inventory we have as an organization that we associate with three mile lateral just roughly 50% to 60% of that of our inventory is left and so we will do maybe on the low end of that.

In 2023 on about 50% and so you might see it increase a little bit just because it it comprises a little slightly higher percentage of our total inventory. That's left as we move forward, but I think it really will be a little bit dependent upon our development plans for the year. The specific areas that are at the lease geometry that we're developing in.

And the infrastructure that is available to us at the time. So I think that 2023 plan is at 50% is probably about what we'll be doing as we move forward, maybe slightly higher in sub points versus another but I'll ask chip to maybe provide some more commentary.

Hey, I appreciate the question, Yeah, and Dan you're right. If you look at it what we're drilling versus what we're telling this year will be slightly higher than that so we'll be a little bit above that number, but and we'll be going across all parts of the basin. There. So we're looking forward to taking that capital efficiency that we've seen that we're seeing right now and use that across the entire basin to really add value for the company.

Terrific and for my follow up staying broadly on inventory the focus of your communication has generally been on new wells and thinking about the productivity. Some of your peers are experiencing with re fracs. What are your thoughts on how investments in re fracs in Sanish, let's say an area, where you play, which clearly developed an early early times.

How would that compare versus new development in other areas, particularly if you were to couple new development with re completes which would also give you the benefit of Frac protect.

Yes.

Question. So yes, we are definitely looking into that we've already challenged ourselves a little bit in the cynosure, you're doing some of those things I think with some of the new technologies with the coil drill outs. The hydro lift systems. The mud systems are really allowing us to potentially look and gain some value on the refracts in the Sanish area, but also other areas that were probably completed.

Back in the 10 years ago, not with the completions that we have today. So I think there is huge value will compare those compared to our entire inventory, but I'm excited where that potentially could go for the basin.

That's very helpful. Thanks for your time.

Thanks, Eric.

Thank you next question from <unk> Securities. Please go ahead.

Morning, all.

First question is on the Bakken takeaway is physically.

Talk to you guys. It seems the dips now have been quite quite good now for some time and I'm. Just wondering is this more result of just the takeaway contracts are really just curious if theres been any change to your marketing group to that you all have done an excellent job there.

Yes, thanks Neil.

Yes, I'll take on the marketing side differentials have been strong in the basin. We think they will continue to we've got a large takeaway capacity and we're not feeling that at the basin. So really there's a lot of competition that crude market is pretty robust on the back end side and I think Bakken crude is.

Really bid out because because it is a a great barrel for the refineries.

So with all of that combined strong takeaway.

Not not.

Way more supply are way more capacity than what we're supplying right now.

That all leads to kind of a really nice setup on the crude side. So I think we will see continued.

Crude realizations that are strong for awhile.

Great to hear and then just secondly on the operating plan can you give us some color just on the regional operating plans I'm, just wondering how concentrated that drilling might be or.

What would you consider sort of the optimal pad size.

Yeah.

<unk> pad size for us is typically.

A couple of wells to four wells, a pad, we're going to be spread out the entire basin I think we are being concentrated in certain areas.

Causes some.

Frac protect things that Danny was talking about that I think we can spread this year, we're looking at too.

Two of our wells are you know.

In the second and third quarter, which is a good time of the year.

With weather.

Situations and so we're going to be across the entire basin spreading our work. That's a nice thing about being you know, bringing two companies together and synergies of course, you have the ability to do those things.

Thanks for the details guys.

Thanks Neil.

Yes.

Thank you next question will be from Phillips Johnston capital one. Please go ahead.

Hey, guys. Thanks, the return of capital remains high and impressive my question's on the mix that the fourth quarter return included.

$27 million of buybacks out of the $227 million total so relatively light mix. Despite what many would probably be would probably agree.

Cheap stock.

I think the opportunistic approach is the right one but I'm just wondering how youre thinking about the mix going forward.

What it might take to sort of get more aggressive on the buyback.

Yes, thanks for the question Filipe so.

I would say just broadly speaking.

We tried to learn some from the lessons of the past and one of those clearly is to avoid pro cyclical buybacks and so that certainly goes into our thinking we've got a pretty disciplined view on how we think about share repurchases. As you noted I think importantly, we view them opportunistically not really programmatically.

And I would say, we would define that opportunity as a combination of when our shares are trading under what we think our intrinsic value is at conservative pricing and when we're trading at a discount to our peers and so we're really looking at dislocations on both of those on both of those items not just not just a single item and.

And so when when we see that.

And dependent depending upon the magnitude of those dislocations I think youll see us be pretty aggressive certainly there was an example of that last summer, but but really it's not just it's not just our the discount to our intrinsic value, but also how we're how we're trading relative to our peers.

Okay makes sense and then.

Maybe a question for Michael you reference the wide gas differentials embedded in the 'twenty three guidance I think you said that as a result of.

Gas on gas competition in the basin, but I was wondering if you could maybe give us a little bit more insight as to what the drivers are there.

What's different about this year versus the past few years.

Recognize theres a fixed cost component, that's coming into play relative to lower Nymex prices, but.

The 40% to 50% of Nymex realizations seems pretty low considering than production in the basin hasn't really been growing.

Yes. It is.

Great question, Phil and I think you hit on both of them. One there is some kind of regional competition with Canadian gas for the Bakken that we experienced there in the fourth quarter and then on top of that it does have to do with that fixed component that fixed cost component that you are talking about and so as you think about it.

In higher gas price environment.

Youre going to have a larger piece of that kind of go into.

That differential to hub in lower gas price environment, that's going to be.

A little bit lower realization.

Because of that fixed component, so theres going to be.

Some of it has to do with kind of where we are on the gas on the actual gas price is lower today and has it at a lower level.

So that means that the realizations are going to be lower as well and then the historical periods aren't comparable just given the fact that we just switched from two stream to three stream. So theres just a little bit of a nuance from what you've seen from the companies and the <unk>.

As to where we are today.

Sure Okay makes sense.

Thanks.

Sure.

Thanks, Alex.

Thank you next question will be from John Abbott Bank of America.

Go ahead.

Hey, good morning, Thank you for taking our questions.

First question is on the first question is on your outlook so looking to 2023.

It looks like production is going to grow steadily up to the fourth quarter of looking on looking at slide 11.

With the move to with more three land mile laterals, how youre looking at.

Oil in 2020 for potentially and how does the move towards more three mile laterals potentially impact your underlying decline rate.

Great question, John So as we think about.

As we think about the impact of the three mile laterals.

In oil delivery in the basin I would say, it's not just about it.

It's not just about the length of the wells, but also about where we're drilling within the basin and so an important sort of overlying factor is the fact that we're moving into oily or areas of the basin generally and so we are anticipating that our oil cut as a percentage of our of our new wedge production is probably going to be a little higher than it has been historically and so.

You've got the you've got the broad.

Broad basin, and our historic legacy development, where our <unk> are increasing slightly and then that's being offset with a wedge program, that's delivering slightly more oil than we would've delivered historically.

So thats going on in the backdrop.

It's going to affect the entire field level production at a three mile lateral of level, what we would typically anticipate from a three mile lateral relative to a two mile lateral from a production delivery standpoint would be sort of similar production over early time.

We don't really upsize the facilities, we don't pull those wells a whole lot harder than we do two mile laterals, but what we see is that they run flat for a longer period of time before they start to decline and then those decline rates are a little shallower because you have a longer lateral feeding into the wellbore and so and just the overall the overall decline profile does change as you move.

From two miles to three miles, but there's other there's other impacts of the field development that will also impact what we deliver as far as the commodity mix and I'll ask Jeff to weigh in with any additional color I mean, you're exactly right Danny and I. Appreciate the question, but it's a.

Whether the two out of three mile or we don't overbuild, our facilities and so then we flow them back we want to make sure we have Sam maintenance and those kind of things that we flowback choking back in the right level and they tend to stay flatter for longer. So that's what we see so youll see that three.

Three miler stay out there for a lot longer than you would on tomorrow.

I appreciate it and then for our second question. What are you seeing in terms of potential bolt up how would you describe the potential bolt on opportunity market at this point in time in the box in the Bakken.

Yes.

So from a bolt on opportunities, we continue to see a mix of different opportunities in the basin and whether it would be.

Small asset packages potentially larger asset packages.

Private organizations et cetera, So it's really it's a mix and so there is a there is an opportunity set and as you can as you would expect with the with our footprint within the basin that is something we follow them pretty that we follow pretty closely and if we see opportunities to do it.

Accretive bolt ons that make us a better organization, that's certainly something we're going to look at.

I appreciate it thank you for taking our questions.

Thanks, John .

Thank you and again if you have a question. Please press Star then one.

The next question will be from Paul Donahue.

Go ahead.

Good morning, guys. Thanks for taking my call.

A quick shift of conversation here to a bit more of the longer term development plan slide six you referenced some kind of areas that are more in the longer term upside for Optionality on development just wanted to get your ideas of how are you guys thinking about those as far as priorities.

And current in the current volatile pricing environment and kind of how would you look about those going forward.

Yes, I think as we think about those.

Those areas that are largely without with on this on the slide highlighted in blue those.

We really do see those as long term upside for us They don't play a role in our current development plan. We are typically looking at investing and are one of the opportunities that are near infrastructure than two opportunities that deliver the highest returns to us and so we view those as upside we're going to monitor development.

In those areas that we see others doing it will help inform our views moving forward, but what we really do look at that as long term upside and that's not part of our near term development plan.

I would also say Danny gas capture is important to us and so we see.

And in the core areas, we have who would take away and those kind of things on the gas capture side.

They maybe a little more limited on those other areas.

Yeah.

Understood. Thank you just for a quick follow up on slide seven you guys.

Detail you are kind of the cadence of your choke timing coming into two.

2023, Im just curious if there was a.

Kind of the rationale for the quarter or the year over year.

Difference in Q4 'twenty two versus Q4 23 is that just operational planning or is there or is that trying to avoid.

Do you have another weather incident or kind of just the thought process behind that.

So I would say if you think about the 2020 to plan. The 2022 plan was really a continuation of the legacy plans between both legacy organizations and so when the merger both legacy organizations had a bit of a backend weighted program and so when you combine the two companies.

That those plans, which is where we had permits we had rig contracts. We had completion crew contracts that really just sort of perpetuated through the balance of the year, leading to the sort of the.

Timing that you see noted.

As we were able to take a a view an integrated view as an organization about how we really wanted to develop the asset moving forward I think this this timing of doing completions more towards the middle of the year concentrated in the middle of the year just makes a little more sense from an operational perspective as chip noted the weather's better during that timeframe.

We're able to get a solid frac crew during that timeframe, which we know delivers efficiencies and so youll see that programs a little bit different than it has been it was last year, but it's really just it's a product of us being able to sit down as a combined larger organization and put together a schedule that makes sense for us relative to schedule that makes sense it made sense for them.

Two legacy companies independently.

Understood. Thanks for your time.

Thanks, Paul.

Sure.

This concludes our question and answer session I would like to turn the conference back over to Mr. Danny Brown, Chief Executive Officer for closing remarks.

Thank you Nick.

Closeout, we remain committed to our core strategy, which revolves around being strong capital allocators retaining financial flexibility.

Flooring opportunities continue to consolidate and having a robust return of capital program. We're doing this with a focus on sustainability and drive for further improvement across every aspect of our business. We are now over six months into the integration and remain as excited as ever about the opportunities in front of us for our shareholders employees communities and other stakeholders. Thank you again for your.

Thank you again to our people are driving this progress in making it happen. Your efforts are sincerely appreciate it and with that I will conclude by also saying thank you to those joining our call.

Conference has now concluded. Thank you for the presentation you may now disconnect.

Okay.