Q4 2022 Earthstone Energy Inc Earnings Call

If anyone should require operator assistance during the call. Please press star zero on your telephone keypad as a reminder, this conference call is being recorded joining.

Joining us today from Archstone are Robert Anderson, President and Chief Executive Officer, Mark Lumpkin, Executive Vice President and Chief Financial Officer, Steve Collins, Executive Vice President and Chief operating Officer, and Scott The Atlanta, Vice President of Finance.

Now I'll turn the call over to claims also director of Investor Relations. Please go ahead.

Thank you and welcome to our fourth quarter and full year 2022 earnings conference call before we get started I'd like to remind you that today's call will contain forward looking statements within the meaning of federal Securities Law. Although management believes these statements are based on reasonable expectations. They can give no assurances that they will prove to be.

Be correct. These statements are subject to certain risks uncertainties and assumptions as described in our annual report on Form 10-K for the year ended December 31, 2022 in the fourth quarter and full year 2022 earnings announcement.

These documents can be found in the investors section of our website www dot urge stone energy Dot com.

Should one or more of these risks materialize or should underlying assumptions prove incorrect actual results may vary materially.

This conference call also includes references to certain non-GAAP financial measures reconciliation of these non-GAAP financial measures to the most directly comparable measure under GAAP are contained in our earnings announcement issued yesterday.

Also please note information recorded on this call speaks only as of today March nine 2023, therefore, any time sensitive information may no longer be accurate at the time of any replay listening or transcript reading todays call will begin with comments from Robert Anderson, our President and C.

Followed by remarks from Steve Collins, our CEO and Mark Lumpkin, our CFO and then we will have some closing comments from Robert.

I'll turn the call over to Robert.

Thanks, Clay and good morning, everyone. I appreciate you all taking time to join the call or listening via the web.

Over the past few years, even prior to Covid, Earth's Downs Board and management team recognize the importance of scale and we have been on a mission to strategically position the company as a significant operator in the Permian basin and as Al as you all know the most prolific and lowest breakeven onshore basin in the United States.

We went down a targeted path of identifying evaluating and executing upon strategic opportunities to grow our business prudently.

Our success in these efforts, including during this past year, where we invested over $2 billion directly reflects our outstanding employees hard work and perseverance.

I'm also excited about the many opportunities we see that will allow us to continue growing our business for our shareholders immediate and long term benefit.

However to be clear, we are not targeting a particular size or production level, but rather we are focused on creating additional value.

I'm exceptionally proud of the company we've built over the last few years and the entire team. We have is we have assembled who had been responsible for the success. We saw in 2022 and will lead us into the future.

Our focused consolidation efforts have materially repositioned the company and provided our shareholders with an investment in a much larger entity underpinned by a solid asset base with more than 10 years of future drilling locations and a substantial operating footprint in the Permian basin.

Not only during the fourth quarter, but throughout 2022, our team has performed.

It has outperformed expectations and achieved new company Heights. This includes record full year production levels record adjusted EBITDAX and the generation of over $500 million of free cash flow. The success. Our team achieved in 2022 was clearly amazing.

Burrstone continues to demonstrate that we are a proven acquirer with the ability to integrate these substantial assets and put up great performance metrics quarter after quarter as I mentioned 2022 was a transformational year for our company with the closing of three significant acquisitions totaling more than $2 billion and I'm pleased to report.

Then we have successfully integrated all of those assets into our business. These three acquisitions have delivered over 575 high quality high return low cost locations the quality and productivity of this recently acquired inventory are clearly apparent in our fourth quarter oil production levels.

Our production has increased to almost 105000 barrels of oil equivalent per day in the fourth quarter of 2022, which is an increase of approximately 250, 50% year over year. The record setting production level was driven by a number of significant new wells that came online and supported our strong fourth quarter performance.

<unk> the oil component of our fourth quarter production topped 46700 barrels per day, which exceeded the midpoint of our oil guidance range by 9%, Steve will highlight several wells that drove our strong quarterly outperformance.

As a result of strategic acquisitions and targeted development activities on our existing acreage. We saw an approximate one five time increase in our year over year proved reserves reserves increased to about 368 million barrels of oil equivalent under SEC guidelines with a proved developed component of about 72.

Sent the value of those proved reserves stands at $4 $6 billion at strip pricing and the proved developed component alone is valued at more than $3 $6 billion, which is more than our current enterprise value of about $3 billion.

In addition to driving value from our asset base, we always look for additional opportunities to create value per share.

In early October we returned approximately $44 million to our shareholders through the proactive repurchase of 3 million shares of our class a common stock from Warburg pincus, reducing our share count by about 2%.

The private equity investors in our stone have continued to support our consolidation strategy. They will continue to focus on the remaining shares they own while seeking to maximize the value of their investment as Warburg has done previously we expect them to manage future sales in the same prudent manner.

And cap as our largest shareholder has been with US now on three separate occasions and with their current investment in our stone. They too are focused on continuing to see us grow shareholder value further our focus on creating debt adjusted per share growth for all of our shareholders is clearly exhibited.

On page six of our earnings presentation. Since 2020, we have increased production and proved reserve value on a per share basis by 185% and 289% respectively.

And finally the.

The strength of our balance sheet has been and will continue to remain a top priority at Earth stone.

Despite using a considerable amount of debt to fund over 2 billion of acquisitions in 2022, our focus on a conservative balance sheet management, and our utilization of free cash flow to pay down debt resulted in us ending.

Ending the year with a lower leverage on a last quarter annualized debt to EBITDAX ratio than the level at which we entered the year.

Growth and reduce leverage how's that for a one two punch.

Looking ahead, our 2023 plans call for a five rig program with three rigs active in the Delaware Basin.

Focusing on our state line area during the first part of the year and two additional rigs in our Midland Basin properties.

Previously reporting guidance, our plans call for an investment of approximately $750 million and we expect to deliver production of approximately 100000 BOE a day for 2023, both at the midpoint of guidance with all that I'd like to now turn the call over to Steve to provide an update on operations.

Thanks, Robert Good morning, everyone. The fourth quarter was another outstanding quarter for the operations group, we had a busy quarter spending a total of 21 gross and 16 $316 three net wells and we put on production a total of 16 gross 12 net operated wells.

As Robert mentioned, our operations team brought on some a lot of online some really great wells during the quarter. We have shown the locations are results of these wells on page 11 of our updated corporate presentation, which is available on our website I want to highlight a few of those pads.

In early October in the Midland Basin, the <unk> East for well project located in Reagan County, Texas.

Let's put online and is producing from the Wolfcamp, a and b zones.

These wells were drilled with lateral lengths of approximately 14300 feet.

The wells had an average peak IP 30 rate of 1054 Boe per day per well production stream was around 80% oil.

Project highlights the strength of our Central Reagan County acreage and we expect similar results in this area in 2023.

We completed a J 34, three fed pad on our acreage acquired from Chisholm in the Northern Delaware Basin.

Lee County, New Mexico, the well.

Wells targeted first and second bone spring intervals with laterals, averaging 9800 feet.

The two wells averaged 1019 V O E per day for the first 35 days and the production stream was 85% oil.

<unk> started out on a high note with another Lea County, New Mexico, Pat also acquired from Chisholm.

The squeeze to state Com three well pad had an average peak IP 30 of 1606 Boe per day.

It was approximately 82% oil. These are very strong result, especially considering the wells have an average lateral length of 4560 feet.

And finally I'd like to highlight one pad that we're drilling now we.

We recently spud the al can't be one fed com for 32 H. This will be the first of six wells we plan to drill this year that will cross the state line of New Mexico and Texas.

We will have significant ownership in these wells will be drilled with laterals from 90 610000 feet.

As most of you know this area is known for having some of the best rock in the country and we look forward to seeing the results late in the core in the third quarter.

I want to thank the land team for their hard work and dedication in navigating a complex process to obtain this multi state permits.

As in the past, we will continue to be laser focused on reducing costs on our recent well the acquired assets across our existing asset base.

Given our low cost mindset, we will continue to increase operational synergies with personnel and systems to lower overall LOE per Boe.

As well as focus on improving production run times.

Given our continuous focus on cost we sold our sugg ranch asset and closed that transaction transaction for approximately $21 million in the fourth quarter.

Sugg Ranch had about 780 vertical wells a high operating cost at roughly $10 50 per Boe.

And only 850 Boe per day of production.

Finally, I want to thank the operations team for their tireless efforts as we continue to execute on opportunities to reduce cost.

Increased run times and improved capital efficiency on our expanded operational footprint and began to implement our 2023 capital budget.

With that I'll turn it over to Mark Thank you Steve.

I will focus my comments today on providing additional details on some meaningful metrics and key highlights, but I'd also refer you to our earnings release, and our 10-K for a more detailed breakdown of results.

Starting with the income statement adjusted net income for the fourth quarter was $147 million or $1 <unk> per share.

Adjusted EBITDAX was $338 million and free cash flow for the fourth quarter was approximately $134 million, bringing our free cash flow for the year to a $100 million to $509 million, which was the company records we continue.

To utilize free cash flow to repay credit facility debt paying down approximately $122 million in the fourth quarter as of December 31, 2022, we had approximately $515 million outstanding under the credit facility, which is now down a bit below that and total debt at that time was a bit under $1 $1 billion.

Our debt to annualize adjusted EBIT ex ratio for the fourth quarter as Robert mentioned was <unk> eight times, which was ahead of our plan and down from <unk> nine times at year end 2020 to.

Looking ahead, we plan to continue to utilize our free cash flow to reduce debt with that being earmarked credit facility repayments from <unk> from a production standpoint, we were pleased with surpassed the midpoint of our fourth quarter guidance range by approximately 4% and by 9% on the oil midpoint, achieving production of nearly 105000 barrels of oil.

Well per day, which was comprised of 45% oil, 31% natural gas and 24% natural gas liquids.

As Robert mentioned, we have guided our 2020 or 2023 production at 96000 to a 140000 104000 Boe per day from a production cadence standpoint throughout the year, we expect to be in the upper half of that range starting out the year through the first quarter with momentum carrying over from some really strong results in the fourth.

Quarter of last year, we expect a bit of a step down in the second quarter on production levels based on completion timing and we expect that the second quarter will be our lowest production quarter of the year with production normalizing more in the second half of the year after a lower second quarter.

Moving on to capital expenditures, we invested $182 million in the fourth quarter, which was in line with our guidance range for 2023, we expect to invest 725 million to $775 million of capital with our D&C capital representing over 85% of the total we expect our D&C.

Capital expenditures to be fairly evenly distributed throughout the year. However, we expect the $72 million to $75 million in non D&C capex in 2023 to be a bit more front half weighted with about 80% of that in total expected to be invested in the first half most of this capex is related to infrastructure projects that will.

Provide for more efficient program later in 2023 and in future years.

Next let's briefly briefly discuss general and administrative expenses cash G&A of $13 million for the fourth quarter was slightly higher than guidance due to an increase in head count and a higher than typical cash bonuses intend to reward our employees for an exceptional performance and results in 2022.

Stock based compensation for the fourth quarter was $20 million, bringing the total to the year for the year to $35 million.

A good chunk of that amount in the fourth quarter over half of it was a one time expense related to the impact of vesting of performance units that were originally issued in January 2020.

That hit Max payout of over 200% based on stock performance over that three year period going forward, we expect a more normalized level of quarterly stock based compensation expense.

Somewhere around half of what we reported in the fourth quarter, but it does remain impacted by movement in our stock price on the hedging front. We are currently hedged about 40% for oil and gas and for 2023 based on the midpoint of our guidance our utilization of cars and put US. In addition to some swaps provides us with not only significant downside protection, but also.

<unk> upside pricing exposure as well I would also highlight that we are heavily hedged on wahhab basis, which limits the impact of a potential widening of our gas differentials in both 2023 and 2024 and you can find our updated hedge position in the earnings presentation, we posted to the website.

For more detailed information on our 2023 guidance, which was originally released in mid February being reaffirmed with this release. Please see the earnings presentation as well with that I'll turn it back to Robert for closing comments. Thanks, Mark looking ahead, we will continue to deploy our substantial free cash flow like Mark mentioned on reducing the outstanding debt on our credit facility.

But we will all we also believe scale matters in our business and we will continue to look for accretive assets that will increase our size while at the same time, creating additional shareholder value in.

In closing in less than two years, we've transformed <unk> into a leading E&P was stable production with a base of approximately 100000 Boe per day that provides for a low cost operating structure.

And a deep inventory of high return future drilling locations that further support our efforts to maintain but perhaps grow production over the long term. We believe we have built a company that offers an attractive value proposition to investors, including having one of the highest free cash flow yields at one of the lowest enterprise values to EBITDA multiples in the.

E&P sector and our current valuation that is significantly below our total proved reserve value of $4 $6 billion, which is $1 6 billion higher than our current enterprise value of course, none of this would've been possible without our best in class employees their constant dedication and hard work.

We're carefully have.

Have propelled us to become the Premier Permian Smid cap operator today. This is supported by our leading lowest all in cash cost business as important has been the continued commitment and support of our shareholders with that operator, we'll turn it over for Q&A.

Thank you if you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to wish if you'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys, our first question.

Comes from the line of Neal Dingmann with true Securities. Please proceed with your question.

Good morning, guys. Thanks for all the time Rob.

Robert My first question is on asset allocation specifically.

Do you all anticipate keeping three rigs in the Delaware to the Midland for this entire year than maybe something kind of specifically on that do you view within the Delaware, you're Titus acreage to be among the best and I'm. Just wondering is it is it a single rig and are you going to continue to run there. So maybe just a little bit of color on potential plan for the year and I don't.

I don't know if you want a ranked assets, but just maybe specifically on that Titus because I think that's quite good.

Yeah.

Yeah Neil.

Good question, we right now are just going to continue our plan, which is three Delaware basin rigs into Midland Basin rigs.

And I don't see us varying off that anytime soon you know towards the end of the year as more availability of permits or things change in new Mexico can we adjust sure but that'll be inaudible, we wait till later in the year.

So all our guidance is based on that split.

Rightly so the tightest acreage along the Stateline and some of the best acreage in our portfolio are in anyone's portfolio for that matter, It's just great rock.

We'll spend quite a bit of capital in and a lot of drilling down there in the first part of the year and then the rigs will move north and drill on Chisholm acreage and then I think we transitioned back down there later in the year, but.

It is good rock will spend some time in capital there and really looked like Steve said look forward to the results of all these wells we're drilling down there now.

Great details and then maybe mark for you could.

Could you just.

Want to make sure I heard right on the Capex did you say you maybe talked about cadence of Capex cadence I guess I would call. It did you say, what 75% or so would be in the first half I'm. Just wondering again, what maybe talk about the how you see sort of throughout the year. The spending allocated and then obviously what you talked about the results in <unk>.

Given that.

Sure Yeah. Thank you. So so let me clarify that a little bit it's not 75% of our D&C Capex. That's the first half the D&C capex is fairly evenly distributed throughout the four quarter, but in addition to that we've got $72 million to $75 million of non D&C capex and that is more for.

Half loaded so let's just say if we were talking about $75 million it probably looks something like.

30 million 30 million 12, and a half 12, and a half instead of being evenly distributed so like as a whole were slightly more front end weighted but not drastically we are at 75%.

You can do the math on that if you really take the D&C capex in Nevada, before that's going to be Directionally close enough.

I just need a little bit more of the non D&C and the first and second quarter of the year versus the third and fourth quarter on the production side.

He did a really nice number in the fourth quarter and it was about 5% above what our guidance was and it surprised us I mean, there is some some reasons things went well and that has carried over into first quarter.

Not saying, we're going to hit that same number in the first quarter, but do you expect it to be above a 100 a day.

And then second quarter, just sort of looking at where we are it's probably closer to 100 or a bit below 100 a day.

And then the second half looks like it should be just a tad higher than however, second quarter shakes out now I'm, saying that looking.

910 months down the road, that's what it looks like right now obviously Phil.

More confident in the first quarter and second quarter, and the second third and fourth quarter could move around a little bit, but generally speaking we expect to start off relative relatively well in the first quarter dip a bit in <unk>, and then pick back up somewhere between probably <unk> and <unk>.

And Mark that 75 D. C. I mean is that is that non op or is that what exactly is that have you all set.

No it's not non op. There is a non op in our budget as well as it's laid out in our guidance.

Largely infrastructural and capital Workover, I think probably 20 or 25% of it is capital Workover and that just happens to be a little bit more front weighted too, but the bulk of the $72 million to $75 million is infrastructure and it's really designed to accelerate some of the things we're doing.

In Lee County in particular in the Delaware more broadly speaking and as you know Lea County is fantastic rock and we've got three rigs there most of the year and lots of other rigs are in the area. It is tight from an infrastructure standpoint, and we made a decision sometime later last year and definitely by January of this year that we'd spend a little more money to create.

Some more optionality on takeaway and it really on the on the on the water oil and gas gathering and processing standpoint.

Yeah, I'm glad you're doing that and then not to belabor, but is that is that more one time or is this because you've just bought these assets. Some of those you know Ron Titus and others is this something you would see continuing to annual or I don't know, Rob maybe Robert wants to comment on.

Steve just on what they would see kind of on a go forward I totally get and appreciate you all doing that this year early this year I'm. Just wondering is that something we would think annually you would have this or more kind of one time ish in nature.

I think Neal.

You know, we're a little conservative our model for next year is basically the same number I think practically.

There is a decent element that sort of a onetime thing and relates to the first half of this year. So I don't know that it's going to cut in half next year, but it's probably down a quarter or maybe a third based on everything we know right now.

Now what we're trying to do is just make sure we create options for ourselves and control our destiny and don't get hung up by different service companies or what have you have vendors who can.

Drive our business, we need to drive our business ourselves.

So it was Rob does this give you assets that at some point way down the line you could monetize or Youll end up. These are proprietary infrastructure assets that you would own. So I'm just I'm trying to make sure I understand what I think I think they'd go with they go with the wells Neal is the way to think about it like we're not building out a giant midstream entity here, it's infield gathering.

Central delivery points that just make our life a lot.

More in control.

Alright totally trust you all thank you.

Thanks Neil.

Thank you. Our next question comes from the line of Charles Meade with Johnson Rice. Please proceed with your question.

Hi, Good morning, Robert to you and your team this is actually Austin O'quinn Charles Associates.

Hey, Austin, how are you doing thanks for calling in.

Good quick question, how attractive is the current A&D landscape and second what would you what would your appetite be in equity in the transaction.

Yes, good questions.

We see the landscape is very attractive still a lot of opportunities. We are very focused in the Permian basin, most of the Midland side and the Delaware side.

And I think it's going to be a relatively active year for our guys to review and evaluate transactions of various types.

So we won't be <unk>.

Sitting around wondering where the next deal may come from there is there is a pipeline of opportunities out there and we're busy already looking at things.

Each deal probably needs to be evaluated from an equity and the use of equity in consideration independently.

So theres not a fixed answer a lot has to do with who the seller is a lot has to do with where our stock price is.

And where the commodity is at the time, but I think our track record is pretty consistent that were going to want to use equity in most deals over the last two years, we've averaged 30% equity.

And 70% cash.

In all the transactions we've done so I think you know it probably wont get higher than that but it sure could vacillate between 30 and 10% of the deal. So it just varies by deal.

Thank you for the color and as a follow up another strong quarter of strong results from the Delaware basin, especially what the average lateral length of 4500 feet do you see a path to be able to extend those laterals.

Our land team is constantly trying to do.

Do trades, where it makes sense, but a lot of cases in that particular instance, we had wells on both sides of us or other operators, who had their own development plans and so we were locked out from extending those laterals.

We're definitely.

Wanting to drill longer laterals everywhere, we can just capital efficiency no telling what those wells would have produced it you know 10 to 10000 foot laterals, but really strong economics there.

Yeah.

I appreciate it that's all from me.

Thank you, ladies and gentlemen, as a reminder, if you'd like to join the question queue. Please press star one on your telephone keypad. Our next question comes from the line of Sebastian genre with the benchmark Company. Please proceed with your question.

Yes, hi, everybody and congrats again, finishing the year.

Strong.

I just hopped on so if this is addressed before I apologize.

Now I guess that you're sort of have multiple rigs going on and is.

Is there a development philosophy that you have.

Whether it's mowing the lawn working co development by zones, yet drilling.

Drilling the best Wells is there something that will guide your development budget now that you've secured all these assets.

Yeah, Steve Ross Great question, I would say that our historical track record will show you, what's going to happen in the future and that's we've been co developing.

For the last five years or however, many years, we've been in the Midland Basin and we're doing the same thing now in the Delaware side. So we're not going to just pick one zone and Mo down a wolfcamp interval from one side of a unit to the other and then think about coming back later are the most effective efficient from a.

Reservoir standpoint, and then ultimately a full pad development or economically the best way to do it as co develop in some circumstances, you can leave out shallower zones or deeper zones because of the distance and you can come back later, we're going to drill a couple wolfcamp D well.

Yes.

In Midland County here, shortly and we're gonna be underneath existing wolfcamp, a and B and I think some lower sprayberry wells. So there are unique circumstances, where you can come back, but generally we're co developing everything that needs to be co developed at one time.

Do you plan any sort of exploration work in the Delaware, you know sort of delineating additional zones.

Mentioned the key in the Midland similar type stuff in the Delaware.

Well.

Would hate to tell you that we're doing great exploration work and lead you astray on the Wolfcamp D. There's lots of Wolfcamp D wells around us in Midland County, and other counties.

Joyce adjacent so it's really letting other operators sort of prove up the economics and the viability of certain zones. That's the case in the Wolfcamp D. We've seen other intervals in the Delaware side.

For instance, the Avalon, which is a little shallower than some people have it you know call it something different but we've seen Avalon results that are fantastic we needed maybe see a couple more wells closer to us in some circumstances, where our acreage position is but we're not going to go out there and do a deep exploration.

Well, we may target some of these other non typical wells from time to time like the Wolfcamp D.

Yeah.

Okay got it and just as my follow up and this might have been addressed before too, but your desired capacity appetite to sort of defend the stock in cases private equity sell off is there can you frame that in any way.

You, obviously have good amount of liquidity.

Sort of you know kind.

Kind of paint that picture a little bit.

Sure you know I mentioned in our kind of prepared remarks that warburg.

Has sold a few shares along the way.

It's all public.

Filings and things of that nature, but we actually did participate in a trade that Warburg did in October and we bought 3 million shares.

Yeah.

The circumstance will dictate whether we do that again in the future if that opportunity is available to us.

The undervalued nature of our stock right now makes that a great investment and in somewhat of an easy decision, depending on again, where our stock price is but we.

We are open to exploring that option as you know sellers want to come to the market.

Such as Warburg.

Okay.

Excellent. Thank you.

Thanks to both.

Thank you, ladies and gentlemen, I'm sorry.

Go ahead operator.

That concludes our question and answer session I'll turn the floor back to Mr. Anderson for final comments.

Hey, we really appreciate everybody's time today, we look forward to a very successful 2023 and glad that we got through the last few months of preparing our 10-K and appreciate your time this morning and reach out to US. If you have any further comments questions or concerns and we'll do the best we can to answer those thanks, a lot everybody have a great day.

Thank you. This concludes today's conference call you may disconnect. Your lines at this time. Thank you for your participation.