Q1 2023 Coterra Energy Inc Earnings Call
Okay.
Good morning, My name is Rob you know I'll be your conference operator today at this.
This time I would like to welcome everyone to the co chair of energy first quarter 2023 earnings Conference 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'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad.
I would like to withdraw your question again press the star one. Thank you Dan Guffey, Vice President Finance planning analysis, and Investor Relations you May begin your conference.
Thank you good morning, and thank you for joining <unk> Energy's first quarter 2023 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 as Blake Serco Senior Vice.
It didn't of operations.
Following 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 forward 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.
Patients 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 have joined US for our first quarter conference call.
Oh Terra had an excellent first quarter, we delivered on all fronts production at the high end of our guidance capital within our targeted frontloaded cadence and significant progress on our buyback.
These results were driven by outstanding asset performance, a recurring trend you should expect from Alterra oil production exceeded the high end of our guidance driven by strong performance in our Permian Wolfcamp and harkey developments are Anadarko projects also continued to deliver above our expectations and set the stage.
<unk> for future activity increases in particular part of our production beat was driven by continued outperformance of the Anadarko Miller Trust project, which was brought online last year.
The Anadarko is an underappreciated gem within a strong portfolio.
Finally, our Marcellus program outperformed in Q1, as we continue to develop a max lower and upper Marcellus targets.
As we look ahead, we see continuing volatility in our underlying commodities as of the close of business yesterday 12 months Nymex gas strip had fallen to $2 90 per Mcf.
<unk> W. T I oil strip stood at $67 per barrel.
Two quarters ago, we were looking at the 2023, all strip of $83 and natural gas strip of $5 30.
There are growing fears of a significant recession, which have been exacerbated by the ongoing banking challenges.
Fortunately, we had co chair I have some experience with living through volatility and uncertainty our.
Our formula is simple keep our debt low strive for assets with a low cost of supply stress test our investments with downside commodity price scenarios and make capital allocation decisions and optimize returns and preserve flexibility.
Service of caught service costs appear to have crested and are trending modestly downward. Although we welcome service cost moderation it does not substitute for our mandate to push forward with operational efficiencies.
<unk> architectures that maximize the investment returns and the application of best in class technology to leverage our efforts for value creation we.
We focus on things that are within our control.
We are on track with the three year plan outlined in our Q1 release in line with our initial plan, we will reduce activity in the Marcellus in the coming weeks and expect to remain at two rigs and one frac crew during the second half of the year.
If we were to hold this level of activity flat through 2025, future Marcellus Capex would decrease significantly and yet hold our northeast production flat, allowing us the option to redirect activity due to the Permian Anadarko.
Both of these basins have opportunities at the ready that provide great returns.
Furthermore, our Marcellus assets retained the flexibility to grow in the future should macro conditions on prices warrant increased investment.
Looking forward, we retain maximum optionality deploy capital to its best years.
We also look forward to publishing our 2023 sustainability report later this year, we're making great progress in understanding methane monitoring, including the discrepancies between the various technologies available to the industry.
Co Terra is working with our vendors to improve the available technologies understand the limitations and choose the best solution for the problem at hand.
With the varying environmental conditions between the Permian and the dark line Marcellus we have learned that there is no single scalable solution that can be successfully deployed across our portfolio.
Instead, we will rely on multiple technologies to detect measure and reduce our methane emissions.
Tara will remain a leading company in innovative design and facility modification to reduce emissions. We also appreciate the collaboration with an outstanding set of competitor companies as we work together to solve this problem.
This is an industry wide challenge and industry collaboration will be key to finding workable solutions, our nation and the world dependent upon us.
With that I will turn the call over to Scott to walk us through the particulars of our great Q1.
Thanks, Tom today, I will discuss our first quarter 'twenty three results shareholder returns and updates to guidance during.
During the first quarter <unk> reported net income of $677 million discretionary cash flow of $1.139 billion accrued capital expenditures of $569 million and free cash flow of $556 million.
Despite natural gas and oil prices falling 30% at 19%, respectively versus <unk> 22 district discretionary cash flow declined to only 16% year over year. This was driven by an increase of the company's oil and NGL production, which caused co terrorists liquids production base.
Two increased 3% year over year to 28% the company expects a greater than 55% of its 2023 revenue to come from oil and NGL sales.
Also during the quarter the company realized a cash hedge gains totaling $100 million versus $172 million loss in Q1 'twenty two.
First quarter total production volumes averaged 635 Boe per day with oil averaging 92.2 M. B O per day and natural gas volumes at 276 Bcf per day.
Oil and BOE finished two 5% and one 6% above the high end of guidance, respectively, and natural gas hit the high yet.
Strong performance was driven by a combination of positive well productivity trends and improved cycle times turn in lines. During the quarter totaled 49, net wells above expectations. The incremental wells came online late in the quarter.
First quarter accrued capital expenditures totaled $5 69, $569 million as I said before but the cash capital expenditures only $483 million consistent with expectations turning to return of capital.
<unk> 20 per share base dividend and remain one of the highest yielding base dividends in the industry.
Management and the board remain committed to responsibly, increasing the base dividend on an annual cadence.
During the first quarter Kotara, followed through on its return priorities by repurchasing 11 million shares for $268 million in total we returned 76% of free cash flow during the quarter.
As we communicated in February it is our intention to pursue strategic buybacks ahead of variable dividends, we have over $1 7 billion remaining on our $2 billion buyback authorization. We are reiterating our annual commitment to return, 50% plus of free cash flow to shareholders.
Lastly, I will discuss the refinements to our 23 guidance and activity outlook.
<unk> reiterated the company's capital estimate of two point out the $2 $2 billion. While we are seeing clear signs of cost softening, we have yet to realize meaningful savings and therefore have not felt any future cost reductions into our forecast.
We're increasing our full year oil guidance, 1% to 87 to 93 Mbo per day, driven by efficient operations and strong well performance in both the Permian and Anadarko basins.
Total company well turn in lines are unchanged from our original guidance.
In the Marcellus as Todd.
As Tom has stated in his remarks, we are finishing up a development. This month and then plan to drop one of our two frac crews and hold a single crew for the balance of the year. We also plan to drop from three rigs to two rigs. This summer as planned earlier this year in.
In the Anadarko a late 'twenty three turned in line was pushed into 'twenty for this lowers our Anadarko turn in lines to seven wells down from our prior range of 10 to 15 wells, we now intend to maintain one to two rigs in the basin for the remainder of 'twenty three.
In the Permian, we expect to continue to run six rigs for the remainder of the year and we will pivot between two and three frac crews due to improved cycle times, we expect to bring on an additional five wells in the Permian during late 'twenty three offsetting the lower turn in lines and Anadarko.
Turning to unit cost the company's guidance remains unchanged at mid point, but there was some moving pieces, primarily driven by reclassifications between cost categories, which occurred after completing our integration into a single accounting system earlier this year.
We also reiterated our three year outlook, which assumes the company achieved a three year oil CAGR of 5%.
Our natural gas CAGR of zero to 5%, which is achievable with capital and activity that is flat to down relative to 'twenty three.
In summary, despite commodity headwinds <unk> outlook remains strong driven by continued strong execution, we are well positioned to meet or exceed our 2023 targets with that I will turn it back to the operator for Q&A.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
And your first question comes from the line of Arun <unk> from JP Morgan Your line is open.
Good morning, Tom Nice results from your team.
I wanted to.
See if I could delve into your commentary around the potential.
Activity.
In the Marcellus you mentioned that your original plan was to go down to two rigs and one Frac crew, but you also signaled that you may stay at this level for a certain amount of time.
Given the gas macro.
I was wondering if you could give us a sense of do you think you could hold.
Your Marcellus production relatively flat it called the two one Bcf a day.
What would that mean for capex.
If you did go down to that level, because I think this year's capex guys around $835 million at the midpoint.
Wherever we are.
Just kind of repeat what I've said, so I'll try to give a little bit of detail there.
We are what we what I said is if we were to stay at the two rig and one Frac crew and that's that's not a plan. That's that's kind of a guide as to what would happen we kind of as we look at the macro right now, we kind of like that and where it positions us.
Our Marcellus team has done a really nice job of smoothing out their cadence and getting onto a regular program. So as we look ahead at that level of activity.
We think we will be.
Be able to shave off significant capital in the Marcellus and have the opportunity to redeploy that elsewhere.
Hold our production flat or actually slightly grow.
Oh within that range, we've already telegraphed.
And it's really a nice place to be right now.
Strategically what we'd like to do is keep that Marcellus production flattish and be ready to go when the gas macro improves.
That's exactly the position that are really great team in Pittsburgh has put us in.
So everything you said is true.
Not sure what other color, we can give but you know one of the one of the things we really like is the flexibility to pivot and we're maintaining that gas production. We don't wanted to see it decline. So it will indeed maintain if we were to hold those two rigs and one frac crew.
Yeah, Tom I don't know if he could follow up it just a one question was how much.
Lower Capex would it be if you if you went to that program.
As with current cost we think to your out years would probably be a couple of hundred million below what we're currently spending.
So was that.
Super helpful.
The second question, perhaps for you and Scott.
Tom you have been you know handedly surpassing.
You know the 50 plus percent minimum cash return.
Threshold to shareholders.
Youre at 76%. This year I was wondering if you could get some color.
On thoughts over the balance of the year and I know that you're.
Your framework.
You'd like under your framework you'd like to keep around $1 billion of cash on the balance sheet, you're essentially at that level at the end of March so any thoughts on the ability to kind of sustain this call it mid seventies.
Our cash return over the balance of the year, because you really don't have much debt due until a little bit into 2024 I believe.
Yeah. This is Scott.
Great question.
We want everything you said is exactly correct. We did reaffirm the 50 plus percent, we're very comfortable with that that affords us.
Really as we shared with our board yesterday.
The ability to be very opportunistic when you go back and look at the report card for the last five quarters, including this first one this year, we have surpassed the 50% it is a fore depend.
Depending on market conditions, and where we want to be and what the commodity strip is doing well.
Well, it's a it's an investment decision with all three pieces.
Playing into it do we want to lean in more on the buyback do we want to hold cash for some other strategic opportunity.
Or do we just want to kind of stand Pat and just rely more on the base dividend, we have all of that Optionality.
Sorry to come across as a little coy, but we're very comfortable with that framework and we're set up tremendously for this year in terms of that Optionality.
Arun if I could just follow up on I'll say this Scott and his team.
Really been masterfully, how they've executed our buyback taking opportunities when the price steps, we're going to continue to be disciplined there.
But.
The fact that we're reaffirming our 50 plus is.
None arbitrary.
We really want to maintain flexibility in our balance sheet and if we were to have a quarter in the future. While we returned exactly 50, we have nothing to apologize for them. We wanted to be really clear with people, but that's our intent and that we think that there may be alternate uses of cash it could be.
<unk>.
Constructive buyback program, but if we.
We don't think that's the right way to go.
We're just starting to embark in an arms race of cash return. We just don't think that's in the best interests of the couture.
Owner, and we have great opportunities within our portfolio.
And we're fairly constructive on commodity pricing going forward. So we're right where we wanted to be.
Sounds good and it does give you a lot of flexibility. Thanks, a lot Tom.
And your next question comes from the line of <unk> Choudhary from Goldman Sachs. Your line is open.
Hi, good morning, and thank you for taking my questions.
My first question was hey, good morning. My first question was just wanted to get the Hudson on the macro.
Both oil and gas I mean definitely a lot of concerns around demand for oil.
And the pace at which we would expect supply to a balanced market for natural gas and.
And given these concerns.
Teams through your program one of the goals has been to maintain consistent after would be.
<unk> efficiency, how do you what are the levers you can pull right through to maximize your free cash flow outlook or the next two years.
Well along that's excellent question I think we've described it as the fact that we do have the optionality to liberate some capital out of our Marcellus program and redeployed to more liquids rich opportunities would be.
The pivot to maximize our cash flow in the next few years.
We have historically not done a really good job of predicting commodity swings and you know as I said in my opening remarks, six months ago. The situation looked entirely different it's changed and yet now we're all highly confident that we know what the future looks like and so having that flexibility really.
How's us to get up every morning.
And make good long term decisions, we don't make those decisions based on the daily spot price, we make those decisions as we see macro trends right now as we look forward.
In the long run highly constructive on gas over the next year, we're going to be cautious thats why we wanted to maintain our gas production, but not go nuts there.
So.
Yeah, We think our program does answer the question you asked as far as maximizing our cash flow.
Yeah that makes a lot of sense and then I guess a follow up on that would be the other way.
We need to ensure that manage risks would be add on hedging.
So any thoughts around.
Oil and gas hedging over the next for the next one or two years.
Yeah.
In terms of hedging, obviously or we haven't moved away from R. R.
Our strategy around.
So our organization and all the opportunities we don't have to lean in on hedging. The last thing you want to do is lean in on hedging when prices are low.
History will show that that always kind of comes back to bite you.
We're looking at them more.
Okay.
Calculated more refined way we're in the early stages of that more to come on it but right now we don't feel the need to lean in in either oil or gas to protect the downside, we're pretty comfortable with where we're at.
Show some optimism on both products or at least particularly on the gas side going out farther.
We'll stand Pat right now, but we are open to looking at disconnects farther out on the curve one dynamic that may you may see in place.
With the team we're working with is maybe look a little further out than just the 12 months that we've been doing historically and I think that behooves us to really open our minds to be more open minded to how we hedge going forward.
Thank you. Thank you for the color.
And your next question comes from the line of Doug Leggate from Bank of America. Your line is open.
Hey, Good morning, guys. This is actually clay on for Doug. Thanks for taking my question. My first question is on inflation, so as the commodity its pulled back a bit activity seem to be softening.
Are you guys seeing on leading edge pricing at the moment and how are you guys positioned to respond to it.
Yes.
Clay this is Blake I'll take that one.
We are seeing.
Offsetting across the whole market that's.
It's been slight but it's starting to pick up some steam.
I'll start with those CTG, we've seen pipe prices rollover.
The way, we order pipe that really wont impact us to Q3 or Q4, we estimate that could impact our program, 15% to $20 per foot, if we realize all of that.
On the Frac side, we talked about last time on how our contracts for the year, we have quarterly renegotiation points and semiannual renegotiation points on our Frac crews. We saw some very slight reductions from Q1 going into Q2, but it was a reduction and riding.
Now, we're having the conversations to Q2 to Q3 and there are different conversations than we were having just a quarter ago. So we'll see how those progress.
On the rig side you know, we're really in really good shape. Most of our long term contracts are actually falling off within Q2 by the end of Q2, only 20% of our rig fleet will be under any type of long term contract.
We're seeing movement there we are seeing.
Some deflation we're in discussion with all those folks right now, but we have really long term service partners folks we've been through a lot of cycles with and they're productive.
<unk> discussion I think everyone understands the market. We're in today is not the market we're in.
I guess the dip.
That's a little bit.
If you were to renegotiate some of those contracts is that more of a benefit to the back half of 'twenty threes.
Capital budget or is this more of a 'twenty for consideration.
I would think of it more as it would impact second half 'twenty, three and kind of set up a run rate going into 'twenty four.
Thank you I appreciate that my next question is on the revised oil guidance.
You guys raised it by 1000 barrels per day, and I guess I'm wondering if you can really call it that much accuracy or the intention here is to send a signal and if it is the status. They know what are you trying to convey about the performance that you're seeing so far.
Sort of continues at this pace do you see further upside risk to guidance as we go through the year.
Clay. This is I think it speaks for itself.
We're seeing a great performance on these projects. We are we are optimistic we tried to guide.
As we see it.
Yeah, we don't sandbag.
But we're really seeing some surprises to the upside.
And I think that we would we would love to see further surprises the upside, but we really tried to call. It is received.
Okay.
I get it.
You raised the guidance is it based on what you saw in <unk> continuing.
Or is it sort of assuming that you get back to a more normal level or what what does it say about the expectations for the balance of the year.
When it says that we were seeing increasing results that recalibrated, our analysis and as we look at the projects coming forward, we think that.
Appropriate.
<unk> Recalibration.
Yes.
We learned along the way.
And we love to learn on the upside, but you know what every now and then you go the other way.
Now our oil assets are really really performing well.
Alright, I appreciate those comments thank you.
Your next question comes from the line of Michael <unk> from Stephens. Your line is open.
Hi, Good morning, everybody, Tom you talked about being ready to grow your Marcellus production when the market signals you should.
Wanted to get your view on constraints on pipelines or I guess Blake talked about the rig and crew.
Situations softening, but any potential constraints on getting rigs or crews back when you decided to pivot back to growth mode.
We will I'll tee, it up and turn it over to Blake, we do have some available capacity to grow.
It's not unlimited it's not.
Without boundaries, but with over a few.
A few year time period, we've got a lot of availability on that market takeaway like why don't you, yes, just to echo Tom we do have options to grow our gas volumes. There there is the pipeline space.
Might come with a little higher cost than our current differentials. So that that would be something that would have to go into the discussion.
As far as rig in Fracs.
You just got to stay ahead of it it's not something we could be but we could get the crews and rigs as long as we planned out in time.
I appreciate that and I wanted to ask on the upper Marcellus talked about.
Delineation there.
When you look at your 529 upper Marcellus locations that you had in inventory at the end of the year. If the delineation works I guess, what would be the impact on the number you're talking about potentially.
Doubling the inventory or the modest increase I'm just looking for some sense of what delineation could mean for the inventory.
No that that inventory is.
With our current acreage footprint.
We are back to leasing in the Marcellus and filling in that acreage footprint and our team in Pittsburgh has done a really nice job of that but that is with our current model is facing with our current acreage. So that's well.
That's the number.
Got it thank you.
Your next question comes from the line of Neal Dingmann from Jewish Securities. Your line is open.
Hi, good morning, Thanks for taking my question.
Got it.
I guess in M&A type question, specifically I'm, just wondering could you discuss opportunities to sort of trade and block up your Delaware acreage, specifically in new Mexico, where it looks like you had a little bit more scattered position there.
Well in new Mexico.
Tough areas block.
Ownership is like a quote work patch there are some assets on the market that we've looked at but you know.
Even at today's prices.
Big Martin assets are marketed at full retail.
We're going to be very cautious on M&A.
With our balance sheet and our organizational capacity, we would love to find a transaction that adds value to our owners so that increases our opportunity for operations.
But quite frankly, a lot of the assets out there.
Have peaked production they've really drilled to increase production over the short run is rather short inventory behind that.
And.
That doesn't do much for us.
Yes.
We've also traded and done a lot of swaps to increase our ability to block up our drilling spacing units and have long laterals. So theres a lot of that type of activity. That's the benefit of us and the operators, we trade with but.
You know we look at everything we're very active in that market, but.
<unk>.
We're going to be really cautious and preserve value for our shareholders.
Yes.
Strategic nature, Tom its always paid dividends. My second question, maybe just sticking with the Dell could you give me an idea of sort of I know you mentioned or you or Scott mentioned six rigs likely to continue to active in the Dell. This year could you remind me kind of what area that'll focus and as a result.
Really any any notable change in the <unk> this year versus last.
No you know that tends to move around depending on the nature of the program where were permitted.
This year looking ahead, we're heavily in Reeves were heavy in culberson.
He has a lower share Lea County is still very active it's in our deck, our breakdown of where our activity is but it does tend to ebb and flow, but you're probably going to see.
The majority of it on any given year B in Reeves Culberson.
Just because of the state of Texas, the timeline between project inception, and move endured as free short, whereas you're getting into Mexico, you have state and federal permit constraints.
It's just not as nimble, but it's going to it's going to slow.
Very good thank you Tom.
And again it is star one to ask a question. Your next question comes from the line of David <unk> from TD Cowen Your line is open.
Good morning, Tom and Scott Thanks for your time today.
I was just curious.
I wanted to ask a bit on I don't know if my eyes are just playing tricks on me, but when I look at presentation is it or are you are you, including greater activity at this point for the <unk> zones and how.
You didn't touch on that specifically I guess with this presentation, but can you update us on how the hockey performances relative to sort of the other programs in culberson and and how you're thinking about that zone and.
Perhaps the more challenged commodity environment today.
Well, we love the harkey.
I'll say the <unk>.
Like so many.
Is highly variable.
Not a one size fits all so around the basin, it's going to vary but.
A lot of our position.
It's highly <unk>.
And compete very.
Very nicely with the Wolfcamp.
We've.
You know we're very active in the Harkey is you can look at our slide 12, we've got a lot of hurricane in our program I think we will continue with that.
Yes.
It depends on where you are there's places where it's right on top of the Wolfcamp Theres places where.
So a little lower than the Wolfcamp b.
But it's it's one of the best landing zones in the basin I will say that played out.
I appreciate the color there.
It doesn't sound like like necessarily composition has shifted from quarter to quarter per se, though.
No no okay.
Shifting just to the Marcellus briefly just to revisit lateral length progression over the next several years.
You know the upper obviously has a greater weight and I think and thank you all said in the in the 'twenty three program versus what you expect to do in 'twenty four 'twenty five.
Should we expect that future upper wells that are in the program in 'twenty four 'twenty five or still in that call. It 11500 foot range or how do you think about the average lateral length for the upper versus the lower and then in the next few years.
Well the average lateral length in the upper is going to be on the longer end of that.
Upper is fairly wide open so I think you're looking at average lateral lengths that are going to be 10 to 15000 feet.
<unk> closer to the lower end of that depending on what our units look like so a lot of the average lateral length of our Marcellus program is really a combination or a function of the upper versus lower mix as we fill out the lower we're gonna have shorter lateral lengths because we're filling in islands that are undeveloped.
Hopefully that answers your question.
Yeah, No I appreciate that thanks, Tom.
And there are no further questions at this time, Mr. Tom Jorden, and I will now turn the call back over to you for some final closing remarks.
Thank you all for joining us.
It's nice to.
Generate and discuss great results, we've always been a team that likes to talk about results more than promises I look forward to continuing to talk about results.
<unk>. Thank you very much.
This concludes today's conference call. Thank you for your participation you may now disconnect.
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Sure.
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