Q1 2023 Pioneer Natural Resources Company Earnings Call
Chief Executive Officer, Rich Daly, President and Chief operating Officer, and Neal Shah Senior Vice President and Chief Financial Officer Pi.
Pioneer has prepared presentation slides to supplement comments made today. These slides are available on the internet at Www Dot <unk> Dot com again, the Internet website to access slides presented presented in today's call is www <unk> dot com navigate.
To the investors tab found at the top of the web page and then select quarterly results.
Today's call is being recorded a replay of the call will be archived on www dot <unk> dot com through May 27, 2023.
The company's comments today will include forward looking statements made pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 1095. These statements and the business prospects of pioneer are subject to a number of risks and uncertainties that may cause actual results in future periods.
To differ materially from the forward looking statements. These risks and uncertainties are described in Pioneer's news release on page two of the slide presentation and in Pioneer's public filings made with Securities and Exchange Commission at this time for opening remarks, I would like to turn the call over to Pioneer's senior.
President and Chief Financial Officer Neal Shah. Please go ahead Sir.
Thank you Joelle good morning, everyone and thank you for joining us for pioneers first quarter earnings call. Today, we will be discussing our excellent first quarter results driven by our strong oil production and fortified our capital return strategy.
In addition, we will discuss the resilience of our free cash flow generation at various oil prices, which is underpinned by our best in class margins and unmatched high return assets in the Midland Basin. We will then open up the call for your questions with that I will turn it over to Scott. Thank you Neil good morning.
As you all saw in the nose I announced yesterday that will retire as CEO of pioneer beginning January 2024, our president and Chief operating officer, Rich Daly will assume the role of CEO at that time.
Rich has been with pioneer and our predecessor company for over 30 years from a $500 million company two over a $50 billion company and has served in various executive leadership roles and are uniquely positioned to lead pioneer forward.
I am proud of the success that pioneer has achieved is 26 year history as well as key accomplishments over the previous several years with consistent focus on the Permian Basin, we have formed the largest contiguous acreage position in the Midland Basin.
Supported by a successful integration of two acquisitions during 2021 and have full confidence in.
Modifications, we made last year as we were seeing early indication.
Of great results with our first quarter results.
Methodical approach and highly efficient development program is positioned pioneer as the most active driller in the largest oil producer in the state of Texas.
I'm, especially proud to have led the independent transition to a free cash flow model that focuses on return of capital to shareholders and further strengthens our balance sheet.
Taking great pride in leading the efforts to reduce flaring intensity and methane and <unk> emissions in the Permian basin and its contribution to more sustainable practices throughout our industry.
Building on this foundation, we are one of the first U S operators to join.
GMP, the oil and gas methane partnership to point owed demonstrating our ongoing commitment to sustainable operations.
I am excited for riches continued leadership of pioneer as CEO in 2024.
I will now discuss our first quarter results go into slide number four.
During the first quarter pioneer generated approximately $950 million in free cash flow contributing to a base plus variable dividend $3 34 per share and $500 million in share repurchases completed during the quarter. The strong return of capital was supported by efficient operations and all production near the top end of our.
First quarter guidance range.
Fortifying our return of capital, we increased our quarterly base dividend by 14% and refreshed our repurchase program with a new 4 billion dollar authorization.
Going to slide number five.
First quarter results as we discussed on the previous slide pioneer delivered strong first quarter production with both oral and total production near the top end of first quarter guidance at 361000 barrels of oil per day, and 680 million barrels of oil equivalent per day, we continue to focus on efficient operations.
Maintained low horizontal lifting cost.
Support our top tier margins and significant free cash flow generation.
Now over to rich.
Thanks, Scott and good morning, everybody I'm going to turn and start on slide six where you can see the development of our high return assets compared with our peer leading margins is expected to generate approximately $27 billion.
A free cash flow over the next five years at $80 of WTS.
Scott mentioned, we are modifying how we return free cash flow to improve our financial flexibility and balance sheet. While also maintaining significant return of capital to shareholders. The modified framework provides the flexibility to allocate capital returns after the base dividend between variable dividends and share repurchases based on what provides the best value for shareholders.
Under the refined capital framework, 75% of our quarterly free cash flow starting with the second quarter will be returned to shareholders through a combination of base dividends variable dividends and opportunistic share repurchases, a strong and growing base dividend remains our highest return of capital priority in.
In total 75% of our quarterly cash flow will be directed towards capital returns, while the remaining 25% will be used to increase financial flexibility and further strengthen our balance sheet.
As you can see from the slide we expect to return a significant amount of free cash flow to investors over the next five years.
Turning to slide seven.
We are further strengthening the foundation of our capital return strategy by increasing our quarterly based dividend by 14% to $1 25 per share or $5 per share on an annualized basis. This increase is incorporated into this quarter's base plus variable dividend that will be paid in June and reflects the six or six <unk>.
<unk> as a base dividend increases.
This increase our base dividend yield of greater than 2%.
Passes the average S&P 500 dividend yield.
Turning to slide eight.
During the first quarter pioneer repurchased $500 million of stock at an average price of $206 per share demonstrating our willingness to step into the market during dislocation such as we saw in March in total pioneer has repurchased $2 1 billion in equity since the beginning of 2022, reducing shares outstanding by approximately 4%.
Which has benefited long term shareholder returns and per share metrics.
Further enhancing our strong shareholder returns the board of directors has approved a new $4 billion share repurchase authorization, providing additional capacity to return capital through opportunistic share repurchases. This replaces the previous authorization, which had $1 9 billion remaining.
Turning to slide nine.
Pioneer is return of capital framework with returns at least 75% of quarterly free cash flow remains amongst the strongest when compared to peers as illustrated by the graph on the left.
Our modified framework provides the flexibility to allocate capital returns after our strong base dividend between variable dividends and share repurchases based on what provides the best value for shareholders.
This peer leading return of capital strategy is sustained by our disciplined reinvestment rate and our deep inventory of high rate of return wells.
Turning to slide 10 the.
The graphic on the right illustrates the compelling free cash flow generation that our program is expected to produce over the next five years at various oil prices.
The combination of our world class assets top tier margins and moderate oil growth generating cumulative free cash flow of approximately $27 billion through 2027, assuming an $80 <unk> oil price.
As you can see a return of capital framework is expected to return approximately 40% of our current market cap to shareholders. During the same timeframe also at $80.
Even at $60 <unk>, our program is expected to generate approximately $13 billion cumulative free cash flow over the next five years, demonstrating the durability of our program even at lower oil prices are robust and durable free cash flow generation paired with our commitments to our substantial capital returns delivers compelling value to shareholders through cycle.
Yes.
Turning to slide 11, you can see here that we are reiterating our 2023 outlook with full year production and capital guidance remaining unchanged. The company plans to deliver 2023 full year oil production ranging from 357000 to 372000 barrels of oil per day, and total production ranging from <unk>.
670000 to 700000 barrels oil equivalent per day, resulting in moderate production growth consistent with our investment framework with.
Both our drilling completions and facilities capital budget of $4 45 billion to $4 75 billion and our exploration environmental and other capital budget of $150 million to $200 million are unchanged.
As we've discussed previously key projects within the exploration environmental and other category includes exploration drilling of four wells targeting the Barnett and Woodford formations in the Midland Basin as well as continued appraisal of our enhanced oil recovery project.
Based on the mid points of our capital and production ranges at strip pricing, we expect to generate greater than $4 billion of free cash flow in 2023 from approximately $9 billion of projected operating cash flow.
Yes.
Turning to slide 12, you can see it provides additional detail on our 2023 capital program.
<unk> 2000, 2023, we are expect to operate between 24, and 26 drilling rigs and place between 500 530 wells on production.
Our 2023 drilling and completion activity continues to be distributed across our large and contiguous Midland basin acreage position with approximately three drilling rigs operating on our joint venture.
Area in the south.
This unmatched acreage position provides a scalable operational advantages such as drilling completing our 15000 plus foot laterals with greater than 100 of these wells expected to be placed on production throughout the year.
We also benefit from the continued utilization of simultaneous operations as well as localized sand mines.
Which both reduced costs and provide incremental operational efficiencies. Additionally.
Additionally, our significant water infrastructure provides a diversified disposal and reuse network that spans across most of our acreage position.
Turning to slide 13.
As previously discussed we are continuing to realize improved.
Strong productivity from drilling a 15000 foot lateral wells developing these long laterals drive significant efficiency gains that reduced capital costs with drilling and completion savings of approximately 15% per lateral foot.
The combination of these savings and strong productivity drive increased returns with <unk>, increasing by more than 20 percentage points when compared to a 10000 foot lateral to date, we have identified more than 1000 locations for long lateral development supported by our highly contiguous acreage position and expect more than 100 of these wells we placed on production.
<unk> in 2023.
Turning to slide 14.
And looking at the chart on the left you can see pioneer's peer leading completions efficiencies and multiyear track record of efficiency improvements. We are now operating three fulltime simulcast fleets with which continues to be a major contributor to our high efficiencies and cost savings. Additionally, during the second quarter of 2023 pioneer will added.
Second <unk>.
Localized sand mine for completions operations.
Use of localized sand is providing average savings of approximately $200000 per well principally due to reduced trucking cost, resulting from the mines close proximity to our wells pine.
Pioneer expects, a 100% of our completions place to be either electric.
Dual fuel powered by the second half of 2023, both reducing emissions and capturing cost savings opportunities based on fuel prices.
Turning to slide 15.
Pioneer has the deepest inventory of high return Permian drilling locations when compared to peers. This third party analysis presents pioneer is a premier independent oil and gas operator across North America with decades of high quality inventory in the core of the Midland Basin at breakeven oil price of less than $50 <unk> with that I'll turn it over to Neil.
Thank you rich now starting on slide 16 the.
The combination of our low cash costs and strong realizations generated peer leading cash margins for the full year of 2022.
While our strong price realizations were driven by our oil weighted production our low operating costs are a function of our unmatched infrastructure and efficient operations.
<unk> best in class margins underpin, our strong free cash flow generation, leading to significant capital returns to shareholders both of which we have highlighted this morning.
Turning to the next slide.
Pioneer continues to offer a compelling investment case for shareholders, considering the combination of strong corporate returns and an inexpensive valuation.
As you can see our projected our oce continues to be one of the highest in the S&P 500 for the second consecutive year.
Believe our strong corporate return profile when paired with our discounted valuation provides a highly attractive opportunity for investors and with that I will turn things over to rich.
Thanks, Neal I'm going to start on slide 18, where you can see we continue our commitment to sustainable operations highlighted by our partnership with Nextera energy and joining <unk> in 2022.
Additional detail related to our sustainability efforts and their impacts on our business can be found in our 2022 sustainability report and climate risk report you can find these reports on our website.
Turning to slide 19 pioneers ongoing sustainability efforts continue to benefit our emissions intensities, which can be seen in the graph by pioneer's relative position globally pioneer continues to provide low emission barrels to the market producing some of the most sustainable barrels in the world behind only Norway on a cotwo tensity basis.
When combined with our low breakeven oil price.
Pioneer provides exceptionally resilient production that we expect will have a place in the global market for decades to come.
Concluding on slide 20, you can see pioneer's key characteristics, which support our commitment to creating value for our shareholders.
And with that Joe I'll will turn or open up the question or the call for questions.
Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press star followed by the one on your Touchtone phone, you'll hear three Tom prompt acknowledging your request and your questions will be pulled in the order. They are received should you wish to decline from the polling process. Please press star followed by two.
If you are using a speaker phone please lift the handset before pressing any keys one moment. Please for your first question.
Your first question comes from John Freeman with Raymond James. Please go ahead.
Good morning, guys.
Hey, John John .
First off congrats Scott on a very well earned pending.
Pending retirement and rich congrats as well on the.
The pending promotion.
First first thing is on the refined refinement to the shareholder return framework I'm, assuming there was.
A pretty aggressive sort of outreach with investors and the feedback from them as sort of drove that.
This decision maybe you could just kind of talk to that as well as maybe if theres going to be some sort of a.
I guess a.
A framework in place on when you all to determine whether it makes more sense to lean into buybacks versus dividend each quarter.
Yes, John Thanks for the question and thanks for the congrats to so much appreciated.
Really we had we have canvassed our shareholders we've talked about in previous earnings call over the last couple of months.
But really what kind of led to the change in the framework was one it really allows us to improve our financial flexibility and strengthen our balance sheet, while continuing to deliver peer leading returns of capital to shareholders.
And it also provides the flexibility to continue to allocate capital between variable dividends and opportunistic share repurchases.
So that was a big feature of what we wanted to accomplish two and then the third piece is really with the greater liquidity. It really supports our intention of reducing gross debt through time and provides the ability to repurchase incremental shares at times of major market dislocations like we saw in March. So we think it's a good refinement to the plan and really to your second question on.
What will be the distinguishing between.
Variable versus buybacks.
It's really a conversation that from those conversation that was clear the last few months that our investors do like the variable dividend and it remains an important part of our method through which we returned capital.
But we want to also be able to continue to repurchase shares on an opportunistic basis, when we see attractive value and so as you can imagine that's really based on many factors that we evaluate.
Identifying that opportunity, it's not formulaic in nature, but generally includes looking at our internal NAV at multiple different prices.
It takes a look at what's happening in the marketplace that you can imagine what's happening in the macro environment.
Really one of those things that we will assess taking all those factors into account to say, what's opportunistic at that time.
Hopefully that helps them.
It does thanks Rich and then just my last question.
<unk>.
A big efficiency gains you will continue to make.
In 2014, and I'm, just trying to get a sense.
During the quarter.
120.
Till that you all had or pops during the quarter sort of implies kind of a steady.
Cadence all year on Pops to get to kind of the midpoint of that till range and I'm. Just curious if kind of that's ahead of schedule. What you all saw in the first quarter you added the third simulcast fleet, if maybe we shouldn't assume that those efficiency gains keep maybe pushing the tills or pumps toward the.
The higher end of that range, obviously, a first class problem, but just trying to think about the cadence on the pumps for rest of the year.
Yes, I think the cadence is pretty flat quarter over quarter throughout the year. So I think you're exactly right. The 120.
The wells, we put on production as Youre going to see something similar for each of the quarters going forward so very much.
In accordance with plan and on schedule with the plan. So really just as we would've expected.
Thanks again rich.
You bet.
Your next question comes from Neil Mehta with Goldman Sachs. Please go ahead.
Yes, congratulations Scott and rich congratulations wish you well in that in the new role.
The first question is just there's been a lot of talk in consult around consolidation both around.
<unk> staff and potentially putting pioneer up for sale and I don't want to get down that path.
Rumor mongering, but I think for the investors on the call any color you can provide on how you guys think about value creation through M&A.
And.
And any update on your thinking around that.
Yeah, Neil I'll start with a general answer then let rich talk about his thoughts on M&A in the Permian Basin.
Obviously in regard to the.
Past stories that have been out in the media.
The board will always do what is in the best interest for shareholders.
It's obvious from our standpoint from myself and our board.
Let rich comment on what he thinks of M&A activity in the Permian Basin.
Scott I'd say.
<unk> talked about in our primary focus as you know is executing our development program and delivering strong results. So that's kind of priority number one but really on an ongoing basis as you've seen us do in the past, we will continue to add to our tier one acreage position through trades and through small acquisitions that provide the ability to increase our lateral lengths and provide.
Higher depth of inventory. So that's really the primary focus will continue to look at things that are contiguous around is just because we think that is key to adding efficiencies longer term, but thats really our focus is those type of bolt on things that add incremental inventory on lateral length.
And the follow up for me is just the rich.
As you take over the helm.
What are the two or three strategic priorities that you are really focused on here as you build pioneer fare for for the next liked.
Sure.
Yes, thanks Neil.
It's really consistent with what we've developed working over the last couple of years and we've put the strategy in place the plan in place and so our focus internally for the management team and really our 'twenty 100 employees is execution. So that's what we're focused on is developing our resources out there and returning significant cash flow to shareholder.
So that's really what we're focused on and we will continue to be focused on.
Thank you.
Your next question comes from Charles Meade with Johnson Rice. Please go ahead.
Good morning, Rich, Scott and Neil and.
I want to begin by Scott, saying.
We will Miss your your willingness to share your own bonus views on the wall markets.
Thank you for thanks for doing that over the last several years.
Yes.
I appreciate it.
Yeah, So rich going back to two I think the first question you had about your.
This is the framework and metrics.
Guys use on evaluating.
The attractiveness of the buyback I think I heard you say that you have.
Internal.
And if you look at it.
At various different prices is that.
I recognize that there's not going to be you already so it's not formulaic, but is that is that the framework that we should think about you guys using or are there other frameworks to metrics that come into play.
I'd say, that's the main one we assess it.
60, 70, 80, $90 price outlooks, and so but you have to take that obviously with what do you think the macro outlook is what do you think the long term view of supply and demand looks like and where do you see oil.
Oil prices going over time, so it's the combination of all of those things that really is the assessment that goes into that.
Got it thank you and then.
When I was looking at your results last night I noticed that it's it's been three quarters now that you guys have returned more than 100 more than 100% of your free cash flow to shareholders. Eventually if you go back to Q2. It was 95%. So I'm curious what is the.
Is that a street that we should expect will continue.
Or is there going to be more some mean reversion back to that that 75% number what's the.
What's the what's your expectation in the path and what's going to guide that.
Yes.
Great question, Charles and I think it's really as we talked about that framework of the 75% is that.
We're committing to return to shareholders, but the other 25%. We do think it's important to continue to improve the balance sheet overtime and thats not to say, we can't use effort opportunistic times like we saw in March that we can use the balance sheet to buy back more stock, but we think our long term framework for the company. The $75 25 is a good split and allows us to <unk>.
<unk> gross debt along the way.
Got it that's helpful insight thanks rich.
You bet.
Your next question comes from Scott Gruber with Citigroup. Please go ahead.
Yes, good morning Echo the congrats all around.
Thanks Scott.
Follow up question on your outlook for capital efficiency improvement you seem to be in.
Somewhat unique position in that over the next 12 months Youre well productivity.
Should be improving.
Well costs.
That should be deflated.
Should we think about overall, how much capital efficiency improvement you could see.
I'm thinking about it.
The improvement in well productivity on a percentage basis this year.
The potential improvement in well costs on a percentage basis that you could see over the next.
Six to 12 months, you know how large could do that.
Some deep.
Yeah, Great question Scott.
I would reiterate that we're very pleased with our first quarter performance and strong well performance and really the operational efficiency that we accomplished during the quarter.
The initial changes that we've made to the program are starting to materialize into our production. Obviously the most of that is still second half weighted as we talked about on prior calls so but excited about where we're seeing productivity go on the capital efficiency side, you know really hats off to our.
Our teams across the company that are working on improving efficiencies, adding the extra simulcast fleet doing more longer laterals.
Localized sand mines are water distribution all of those things that we've been working on for many years that is it going to help improve our capital efficiency. So.
Thanks to the hard work of all of those people, we've made significant progress and expect to make more progress over the course of the year.
So I think everybody is working hard to make that happen.
Got it got it I guess, just focusing on the well cost side, because obviously a number of initiatives you just mentioned, but we're also starting to see initial signs of.
Some deflation at the leading edge if service costs here.
I mean do you think.
These two combined can be pushing kind of.
10% deflation in well cost.
Kind of enter 2024, and all the contracts reset.
It won't be lack of trying on our part I can tell you that but.
On the inflation front, we're still seeing while things have moderated the pace of change is slowing so thats a positive we're not.
Seeing substantial decreases in a couple of items, we have seen some declines so it's still early to tell where that's going ahead I hopeful that we will see some deflation deflation over the course of the year.
But it's still too early to make any changes at this point, because we're kind of level of where we would have anticipated, but signs are starting to be positive on the inflation side. So hopefully that bodes well as we move into 2024 that we can see.
Both the work internally that we're doing from efficiency gains, but some a little deflation will help well cost as we move to 2024.
Got it we'll stay tuned I appreciate the color. Thank you. Thank you.
Your next question comes from Neal Dingmann with Truth Securities. Please go ahead.
Yes.
Good morning, guys.
Couple of follow up on that Scott, you're rich were talking about the vertical integration I'm just wondering.
Could you talk maybe a bit more about that are you going to try to contract more sand kind of maybe just hit on vertical integration.
There are certain procedures you could do there.
Sure the main thing from.
We've got our program fairly well locked in in terms of all the needs that we have for 2003, and we stagger our contracts like I've talked about in the past just from a supply chain standpoint to make sure youre not renewing anything on it.
Annual basis, but we're not we've got.
Adequate sand capacity, obviously, the localized sand mines are helping with that so that's been an pluses or cost savings <unk> savings about as I said $200000 per well the simulcast saves about $200000 per well as we've added that fleet. So all of those things that the teams are working on and plus we're lowering our emissions by.
Moving to more dual fuel those things are helping as well in terms of lowering our emissions and lowering costs.
The teams are really doing an excellent job of.
Making sure that we have the supplies that we need and improving upon them with efficiencies and then lowering cost as we can best we can in an inflationary environment.
Great answer and then just my follow up on the full stack development could you talk about just what the typical pad size is now in.
It seems like you are making really good progress on what you started late last year could we see some upside on that potentially later this year.
Like I said, we're very encouraged with how the first quarter has gone where you can see from second quarter guidance, we're continuing to see the benefit going forward. So.
We're real pleased no change in our guidance as we've talked about one quarter in.
But everything is moving well on that front. So we are we're happy about that.
Very good thank you all and all of our average pad sites on that.
<unk> basically around $5. If you look at that across our portfolio. It's about five wells per pad is the average.
Okay Youll stay on that are there others.
It asks are there some large pads ahead that we should think about that might cause a little bit of lumpiness or youll stick pretty much on that 5% LIBOR.
You are right there are some bigger pads here and there, but they are spread pretty evenly across the year. So you won't see too much lumpiness from that.
Very good thank you.
Youre welcome.
Your next question comes from Derrick Whitfield with Stifel. Please go ahead.
Thanks, Good morning, I'll offer my congrats to Scott and rich.
Thank you.
Referencing slide 19, I wanted to ask a bigger picture question on the value of low carbon intensity production in this environment with an ever increasing focus on de carbonization do you sense or could you envision a day, where your production would receive a downstream premium towards carbon intensity.
Profile apart from quality adjustments.
It's a great question and want to see how the market evolves on that front, yes, what I can tell you is the things that we are focused on is continuing to lower that emissions and then also we're in the process of putting methane centers.
Over 80% of our tank batteries that we should be done mid part of this year the things that we're doing with nextera on the wind farm.
We're working with our transmission providers to get Substations out there, where we can move more of our operations too.
Highline power in both drilling completions and facilities as we move into $2024 25 time period. So there is a lot of great work being done across the company that really helped lower those emissions either further going forward. So.
Whether that gets a premium value as a question, but we believe internally. It's just the right thing to do.
That makes sense and then with respect to your exploration budget could you, perhaps better detailed the results from your EUR last year and you're testing plans for this year.
Yes, it's still early I mean last year, we had one cycle test that was you gave us some positive indications, but we need to do more of those cycles and Thats what were doing this year and we're just kicking that.
Cycles off as we speak so it'll be later this year early next year before we have the results on that but so far things are encouraging, but we really need to do more cycles to understand what the full cycle economics will look like on that project.
So more to come.
Maybe just one clarification, how extensive is the area in which you're testing and what kind of spacing do you have with those patterns.
It's a historical area that we've done and so it is not a big area.
The three wells I think.
Two different zones is where it's being tested so still.
And early development of an area that we have.
100% ownership.
Perfect. Thanks, that's all for me.
Thank you.
Your next question comes from Scott Hanold with RBC capital markets. Please go ahead.
Thanks, Good morning, and again congrats to both of you all in on your next endeavors.
And maybe first start just just on the topic Scott just if you could give us a view of like why.
The succession plan kind of announce now do you feel confident in the trajectory of pioneer I know theres been a lot of volatility on the oil side as well as just a lot of I guess questions last year on an operational performance but.
The wells, but can you give us a sense of why you think now's the right time to step back.
Yes. Thanks.
When I came back I first started off with three.
Three year assignment.
To accomplish all of them on goals, including succession.
Working on succession back in March of 2019, when our first month I came back.
Obviously COVID-19 delayed things.
And then we got into a with our to consolidation in the Midland Basin with our two large acquisitions now.
The board last year.
I was really focused on this year.
It started last year and especially with.
Outperforming significantly first quarter.
With our production and our modifications that we made last year I have full confidence in the fact that we're going to have significant.
Uplift over the next several years.
It was used a good time, so I've been doing this for over about 35 years running.
The public company and his predecessor.
Almost 71, and so it's time to enjoy the rest of life. So as simple as that so nothing else involved.
Fair enough and it's well deserved.
Maybe kind of going back to the new shareholder return strategy I know that you all emphasize that there is the other 25% it sounds like the first priority is balance sheet, but then obviously opportunistic buybacks.
A little bit of commentary on that.
Sort of reducing gross debt would be helpful.
Obviously, if we use your.
Just go to your slides in terms of your five year free cash flows I mean, if we pick a $70 oil price I mean that would more than gets you the net debt zero.
Our direction negative net debt number.
Do you think long term that's in the cards, we get down to zero net debt or do you think there is an optimal level of leverage on the balance sheet.
Hey, Scott, it's Neil how are you.
As Youre thinking about I think the right way I mean, it's our goal and we've always said it we believe in a pristine balance sheet and one that provides us durability during the down cycle as well as provides us operational and financial flexibility during an up cycle. So it's our intention to continue to pay down gross debt as it comes due.
Do you think about gross debt versus net debt.
We're going to continue to drive down gross debt, but we have some long dated maturities that have a very low interest associated with them I think it's the $23 31, those will more likely than not remain outstanding but as our gross debt comes due would be our intention to pay it down.
Okay, and then just started curiosity if I if I could just tack on a half to that.
You all did issue that here recently, when you had the $750 coming due.
Why do you that is that was that more of a temporary bridge to.
Do you get a bigger quantum of free cash flow.
And I think that's I think that's the right way to think about it. So our intention is to reduce absolute gross debt through time as you know.
However, given our 2022 year end cash balance and then you saw the recent downtick in commodity prices during the first quarter. We thought it was prudent to finance the maturity. That's due here in may and so that's exactly the reason I view it more of a temporary bridge as we as we show up free cash on the balance sheet is a virtually to two earlier.
Maybe kind of going back to the new shareholder return strategy I know that you all emphasize that there is the other 25% it sounds like the first priority is balance sheet, but then obviously opportunistic buybacks just just a little bit of commentary on.
Thank you.
Of course.
Your next question comes from Bob Brackett with Bernstein Research. Please go ahead.
Good morning, and please pass my congratulations on as well in terms of self sourcing sand can you talk to the state of the art in sand in terms of green size moisture crush strength, what's sort of the leading edge of what industry is doing.
Good question I don't know if I have all the specific details on each of that but really we've been using west, Texas sand out there for really probably a bigger part of a maybe not a decade, yet, but it's been a long time and it's worked great.
Great. So really that's really what we're continue to using the localized sand mines are exactly the same as what we were getting further west.
And it's worked out for the whole industry.
Is there the capacity is pretty well spoken for today. That's why these localized and mines are are helping with providing incremental capacity but.
The best and cheapest source available as you know bringing.
White sand or other.
Yeah.
Resin coated sand or other proppant types and it is more expensive and this is.
Highly efficient and highly cost effective to use in the field.
Okay.
Very clear a quick follow up going back to the pad size of around five wells, how do I think about the geometry between zone development, which sort of intuitively seems would be larger pads versus that five well number.
Flat through the year, how do I think about that.
Yes.
Each of across the basin is the full stack development looks differently than you do in a half section development and so there may be.
It will look different by zone, it's typically as you've seen on most of the diagrams that we hadn't charges. If you wanted to kind of equate it looking.
Looking like a wine rack, that's how it's done and then we just.
We'll go from one pad to the next pad, but they may be.
We use this term like mow the lawn logistics sequential and so just think about that is how we are developing across the field and these significant areas because it really just helps from efficiency standpoint to keep rigs in one area.
Yeah, Okay, that's clear thanks.
Sure.
Ladies and gentlemen, as a reminder, should you have a question. Please press star followed by the one.
Your next question comes from Doug Leggate with Bank of America. Please go ahead.
Thank you guys.
Seem to not be able to get my queue. My queuing up appropriately. Thanks very much for getting me on.
Scott you spoke about 50, Scott you spoke about 50% since you came back congratulations you did lead.
That change in mindset for the market.
<unk>.
Armen.
Resin coated sand or other proppant types and it is more expensive and this is.
Same to you rich you've put up with my new ones questions. So that wouldn't surprise you that I've got a couple of new ones ones today. So congrats to you too.
Highly efficient and highly cost effective to use in the field.
My first question notice.
Okay.
Very clear a quick follow up going back to the pad size of around five wells, how do I think about the geometry between zone development, which sort of intuitively seems would be larger pads versus that five well number that's kind of flat through the year, how do we think about that.
Guys I want to go back to the Neal's question about M&A, but I wanted to be very specific about this.
Your partner has been not to comment on.
Market speculation, but you did with range you broke the precedent.
The language in the press release was very specific it said, we are not contemplating a significant business combination.
Yeah.
Each of across the basin is the full stack development looks differently than you do them in a half section type development and so there may be.
Should we assume from that then that would preclude any discussion with.
With Exxon Mobil.
Yeah.
Doug.
It will look different by zone, it's typically as you've seen on most of the diagrams that we hadn't charges. If you wanted to kind of equate it looking like a wine rack that's how it's done it and then we just.
The primary reason we responded to a.
And issued a press release on the range.
Due to the <unk>.
We'll go from one pad to the next pad, but they may be.
Obviously significant reaction that we got back from our shareholder base.
We use this term like mow the lawn logistics sequential and so just think about that is how we are developing it across the field and these significant areas because it really just helps from efficiency standpoint to keep rigs in one area.
Obviously, there was nothing going on.
And we reacted.
And so we saw our stock you're down to about 180.
So that's the reason.
Only reason, we went away from no comment.
Yeah, Okay, that's clear thanks.
Youre going to see us always use that no comment like every other company does in every other industry.
Sure.
Ladies and gentlemen, as a reminder, should you have a question. Please press star followed by the one.
And as I said before the.
The board will always do whats in the best interest for shareholders.
Your next question comes from Doug Leggate with Bank of America. Please go ahead.
Okay.
So you did not have discussions with a larger company or you did.
Thank you guys.
Seem to not be able to get my queue. My queuing up appropriately. Thanks very much for getting me on.
I've I've already answered the question Doug.
Scott you spoke about 50, Scott you spoke about 50% since you came back congratulations you did lead.
No I was referring to the not contemplating a significant business culmination, but I understand thanks scope for I know, it's a tough one to a tricky one to navigate my follow up is on the capital return framework.
That change in and mindset for the market.
<unk>.
Army.
Same to you rich you've put up with my new ones question. So it wouldn't surprise you that I've got a couple of new ones ones today. So congrats to you too.
Really want to get to the issue of volume because we all know the commodity is a key input.
My first question notice.
But once again you guys have talked about compelling valuation in number.
Guys I want to go back to the Neal's question about M&A, but I wanted to be very specific about this.
Context, you've also told US what your free cash flow guidance is $4 billion on with one of the best inventory depths in the industry.
Your pattern has been not to comment on.
Market speculation, but you did with range you broke the precedent.
<unk> is under your current market capitalization, so wanted to understand.
The language in the press release was very specific it said, we are not contemplating a significant business combination should.
How you define volume and more importantly, if you really believe that why wouldn't you forego the variable dividend and just focus on buybacks.
Should we assume from that then that would preclude any discussion with.
Hey, Doug, it's Neil I'll take that one earlier.
With Exxonmobil.
Art with off.
Look I've known you for close to 20 years I think you were always one of my first calls when I was on the buy side, we've had great discussions.
Doug.
The primary reason we responded to a.
And issued a press release on the range.
Oftentimes, we've had different opinions and different thoughts, which again is.
<unk> was due to the.
What makes the market.
Obviously significant reaction that we got back from our shareholder base.
I think we would describe value unlocking value multiple different ways I think it's more than just dividing the free cash flow by the weighted average by your WAC.
Obviously, there was nothing going on.
And we reacted.
I think many on this call the investors that look at our stock and assess the value of the stock assess the value of the overall market also look at it very differently and through multiple lenses not just one singular lens. So I'd say, that's one of the ways that we perceive value is not just by one but by multiple lenses and then the last slide is one of those views that we have when we look at <unk>.
And so we saw our stock it down to about 180.
So thats the reason.
The only reason we went away from no comment.
Youre going to see us always use at no comment like every other company does in every other industry.
And as I said before the.
The board will always do whats in the best interest for shareholders.
The commentary that we've gotten from our shareholders is look focus on return of capital employed your corporate returns and you can see that we're leading the sectors now when you look at that sector. The sector is when you look at the valuation of the sectors within the S&P 500, we see somewhat of a mismatch there and I think many would agree with that statement you can look at <unk>.
So you did not have discussions with a larger company or you did.
I've I've already answered the question Doug.
No I was referring to the not contemplating a significant business combination, but I understand thanks Coker I know, it's a tough one to a tricky one to navigate my follow up though is on the capital return framework.
<unk> relative valuations sector valuation. We also believe looking at the inventory duration of inventory the quality of inventory that also comes to bring to bear and looking at the margins all of that so I would say the valuation from our perspective and I think many on this call. It's more than just one singular metric, but encompasses more of a greater mosaic.
We want to get to the issue of volume because we all know that.
Commodity is a key input.
But once again you guys have talked about compelling valuation in number of different context, you've also told us what your free cash flow guidance is $4 billion.
And in terms of your question now the variable versus the buyback you've seen the the edited <unk>.
With one of your best inventory depths in the industry.
<unk> is under your current market capitalization, so we don't understand.
<unk> capital return framework and part of that now contemplates as rich alluded to share repurchases as well. So we see great value in our equity and it is now a defined part of our capital return framework.
How you define volume and more importantly, if you really believe thought why wouldn't you forego the variable dividend and just focus on buybacks.
So favorable imbalance to response, Neil and I do respect our relationship over the years. Thanks, so much.
Hey, Doug, it's Neil I'll take that one or at least I'll start with off.
Look I've known you for like close to 20 years I think you were always one of my first calls when I was on the buy side, we've had great discussions.
Of course, thanks, Doug I appreciate it.
There are no further questions at this time. Please proceed.
Oftentimes, we've had different opinions of different thoughts, which again is.
Again, thank you all very much look forward to seeing you in.
What makes the market.
I think we would ascribe value and look at value multiple different ways I think it's more than just dividing the free cash flow by the weighted average by your WAC.
And these <unk>.
Last calls so again thank you.
Again, congratulations to rich thank you. Thanks.
Thanks, everybody.
I think many on this call the investors that look at our stock and assess the value of the stock assess the value of the overall market also look at it very differently and through multiple lenses not just one singular lens. So I'd say, that's one of the ways that we perceive value is not just by one but by multiple lenses and then the last slide is one of those views that we have when we look at <unk>.
Sure.
Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and ask that you. Please disconnect your lines.
The commentary that we've gotten from our shareholders is look focus on your return of capital employed your corporate returns and you can see that we're leading the sectors now when you look at that sector. The sector is when you look at the valuation of the sectors within the S&P 500, we see somewhat of a mismatch there and I think many would agree with that statement you can look at <unk>.
<unk> relative valuations sector valuation. We also believe looking at the inventory durations with inventory the quality of inventory that also comes to bring to bear looking at the margins all of that so I would say valuation from our perspective and I think many on this call. It's more than just one singular metric, but encompasses more of a greater mosaic.
And in terms of your question now the variable versus the buyback you've seen the the edited the modified capital return framework and part of that now contemplates as rich alluded to share repurchases as well. So we see great value in our equity and it is now a defined part of our capital return framework.
So a fair bit imbalanced response, Neil and I do respect our relationship over the years. Thanks, so much.
Of course, thanks, Doug I appreciate it.
There are no further questions at this time. Please proceed.
Again, thank you all very much look forward to seeing you in.
In the.
Last calls so again, thank you again congratulations to rich. Thank you. Thanks.
Thanks, everybody.
Sure.
Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and ask that you. Please disconnect your lines.
Okay.
Yes.
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No.
We recorded.
Okay.
Okay.
Yeah.
[music].
Sure.
Okay.
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