Earthstone Energy Inc. Q1 2023 Earnings Call

Good afternoon, and welcome to the <unk> Energy's conference call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation.

Anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.

As a reminder, this conference call is being recorded.

Joining us today from Arizona aren't 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 Thelander, Vice President of Finance I will turn the call to Clay Johnson director of Investor Relations. Thank you you may begin.

Yes.

Thank you and welcome to our first quarter 2023 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 assurance that they will prove to 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, 2020 to our quarterly report on Form 10-Q for the quarter ended March 31, 2023, and the first quarter of 2023 earnings announcement.

This document can be found in the Investor Relations section of our website Www Dot Earth 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 may 4th 2023, therefore, any time sensitive information may no longer be accurate at the time of any replay listening or transcript freezes.

Today's call will begin with comments from Robert Anderson, our President and CEO , 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 now turn the call over to Robert.

Thanks, Clay and welcome everyone. Thank you for taking the time to join US today after what I suspect it's been a really busy morning for you all.

Burrstone entered 2023 strategically advantaged with an enhanced and increased scale in the Premier Permian basin, with a deep and high quality inventory and a strengthened financial position. This strategically advantaged position, it's clearly apparent by the solid results we posted once again.

I'm pleased to say we are off to a great start this year with the strong results, forming a solid foundation to build upon during the remainder of 2023.

Slide five of our Investor presentation that has been posted on our website highlights the significant performance increases we have achieved compared to the first quarter of 2022.

<unk> operational excellence continued during the first quarter of 2023 with total production, surpassing our internal forecast and consensus estimates.

Our low decline stable production base and strong new well results drove our production outperformance for the quarter.

We reported first quarter production of 104450 Boe per day.

With oil over 46000 barrels per day.

We have now had two quarters in a row with production approaching 105000 Boe per day and continue to showcase the quality and productivity of our inventory Steve will highlight several wells that drove our strong quarterly outperformance.

The strength of our operational performance was also reflected in our strong financial results near record level production combined with our low cost structure led to adjusted EBITDAX for the quarter a $267 million.

This robust EBITDAX and rigorous capital investment discipline led to the generation of free cash flow of approximately $42 million in the quarter.

This free cash flow for the quarter allowed us to continue to execute our plan to reduce debt lowering our debt to just under $1 billion with a similar amount of liquidity, which mark will highlight further.

The strong overall performance, we posted for the first quarter clearly represent the merits of our focused proven acquisition strategy.

At Earth down we continuously focus on creating long term value for our shareholders, while fostering a culture of doing the right thing.

Public confidence and our reputation our valuable assets as such we placed critical focus on reducing our environmental impact and conducting business and interacting with our employees contractors landowners suppliers governmental entities, the public and the community.

<unk> in which we operate responsibly and ethically we.

We are also committed to providing our employees and contractors with safe working conditions in an environment conducive to creativity continuous improvement and mask maximizing job satisfaction we.

We believe providing ESG related information and metrics to our shareholders and other stakeholders is essential while communicating how we plan to progress over time.

Regulators have continued to increase the threshold by which we must operate and we are investing the necessary capital to do so.

In order to communicate with our stakeholders in a transparent and open manner. We are working on our inaugural ESG report, we expect to have a report published by sometime next quarter.

Now I'd like to turn the call over to Steve Collins to provide an update on operations.

Thanks, Robert Good morning, everyone first quarter was another outstanding quarter for the operations group, we maintained our rig count at five during the quarter with three in the Delaware Basin two in the Midland Basin drilling a total of 16 gross wells and 12 four net wells, we put on production a total of 15 gross and 12.8 net.

Operated wells.

As Robert mentioned, our operations team brought some great wells online during the quarter. We have shown the areas of results of these wells on page 12 of our updated corporate presentation, which is available on our website.

Let me highlight a couple of those pads, we completed the J 34, three fed pad, where we have approximately 52% interest on acreage acquired from Chisholm in the Northern Delaware Basin Lea County, New Mexico.

Wells targeted the first and second bone spring intervals. The four wells haven't had an average IP 30 rate of 1200, 40 Boe per day from laterals, averaging 9900 feet with an average oil percentage of 91%.

In Eddy County, New Mexico also acquired from Chisholm, We completed the Dark Canyon 15, 22 state Com two well pad that delivered an average peak IP 30 of 1400 and 22 Boe per day.

Which is approximately 69% oil the average lateral length of these two wells is about 7050 feet and we hold 100% working interest in these wells.

At our El can't be owned project in New Mexico, Texas State line, we recently drilled two of the six wells scheduled for the project.

And I have two additional wells slated to spud early may.

[noise] lateral links for the six wells will range from 9400 to 10000 feet. We have significant ownership interest in these wells and expect the first wells to start producing in August these.

These are the first wells drilled across new Mexico, Texas State line.

In early February in the Midland Basin. The W. T G. Five <unk> to 34, two well pad in Reagan County, let's put on production, we have 100% working interest in the Wolfcamp, a upper and lower B wells that have an average lateral length of approximately 90 850 feet.

The wells had an average peak IP 30 rate of 945 Boe per day, and the production stream was around 77% oil.

This project continues to highlight the strength of our Reagan County acreage.

And our stone given our efficiency mindset, we take pride in increasing value.

By improving the operations of acquired assets I want to highlight a new slide on page 13 of our investor presentation.

Since taking over operations of one of our recent acquisitions, we have improved drilling and completion efficiency significantly.

Our drilling practices have increased the feet drilled per day by 34% versus the previous operator.

We have also provided a case study for actual wells drilled by the previous operator, the other to buy our stuff.

The Anaconda 11, 14, two well pad had a total measured depth, averaging 21000 feet.

The two wells were drilled from spud to TD in about 32 days.

Our Pax East South federal two well pad had a total measured depth, averaging approximately 23000 feet and was drilled from spud to TD in only 18 days.

A decrease of 46%, while averaging an extra 2000 feet in length, a solid improvement from the previous operator's performance.

We've also improved efficiency significantly on the completion side, we have increased the frac stages pumped per day to 8.5 in the Delaware, which represents a 16% improvement over previous operator. This has allowed us to get wells on production sooner and lower completion costs.

We've also changed the completion design and flowback strategy since acquiring the northern Delaware assets.

The amount of sand pumped as increase while at the same time at the same time, reducing the amount of water used.

We've also modified our slow back flowback strategy.

The combined changes have yielded impressive results increasing.

Cumulative oil production by more than 30% over a seven month period.

These examples highlight our ability to integrate and make improvements to acquired assets, which are value drivers for shareholders.

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

<unk> for the quarter was higher than expected. This was due to a number of items, including higher compression costs increased labor cost and EHS regulatory and environmental initiatives throughout our operating areas.

We are focused on reversing this trend and have our team working through their specific areas of responsibility to achieve this.

Turning to service cost, we're starting to see some good news on that front rig.

Rig rates are showing signs of softening and we are beginning to benefit as our rig contracts come up for renewal.

We also see a softening for cementing services and the cost of production casing.

In short we're cautiously optimistic that service cost inflation is starting to abate, which we may see a little bit in the second quarter results, but more likely be realized in the second half of the year.

With that I'll turn it over to Mark.

Thank you Steve.

As usual I'll focus my comments today I'll provide some additional details on meaningful metrics and key highlights and leave the detailed breakdown for you to find in our earnings release, and our 10-Q, which were both distributed yesterday.

Turning to our financial results adjusted net income for the first quarter was $109 $1 million or <unk> 77 per share and adjusted EBITDAX was 269, $266 9 million free cash flow for the first quarter was $41 $8 million on March 31, we had $452 million outstanding under our.

Credit facility and total debt was just under $1 billion, our debt to last 12 months' adjusted EBITDAX ratio was 0.8 times in the near term we plan to continue to use free cash flow to reduce debt.

We are thankful for our long standing banking relationships and we welcomed three new banks that recently joined our bank group the $200 million increase in our electric commitments, which occurred in March took our elected commitments from $1 2 billion to $1 $4 billion, we really felt like the support underscores our bank groups recognition of the financial strength of Archstone and high quality.

City and sizable asset base, we have built over the past several years.

This increased our electric commitments provides us with significant financial flexibility and Optionality for the future was close to $1 billion of Undrawn revolver capacity.

From a production standpoint, we were pleased to significantly exceed our internal forecast and wall Street consensus estimates achieved production of 104450 barrels of oil equivalent per day, which was comprised of 44% oil, 30% natural gas and 26% natural gas liquids, we have guided towards 2023.

<unk> of 96000 to a 140000 barrels of oil equivalent per day from a cadence standpoint, notwithstanding what was a really strong first quarter. Our year is unfolding as expected and we do still anticipate a step down in production levels in the second quarter was the second quarter, most likely be in our lowest production rate for the full.

A year and also our lowest oil cut for the year, we expect production to pick back up by around mid year, what the second half of the year likely increasing from the second quarter daily production rate.

As Steve mentioned, our lease operating expense was a bit higher than expected with Ela. We commented at $9 36 for <unk> 36 per Boe for the quarter, which was about 74 cents per Boe above the midpoint of our guidance starting out behind the ear high relative to our guidance puts us in a position of working hard to get back within that in that range that our team is working.

Really hard to accomplish that goal from a cash G&A perspective, our first quarter expenses were just under $13 million, which is right in the range of our full year guidance on an annualized basis and represents a cost on a per BOE a average basis of one dollar and 38 cents, which compares very favorable to our peers.

Moving on to Capex, we invested $202 million in the first quarter, which is right in line with our plan and consistent with our expectation that capex would be slightly a bit more front half weighted than back half weighted for 2023, we still expect to invest between 725 million and $775 million of capital what the second quarter Capex.

We expect it to be somewhat similar to what we saw in the first quarter was slightly lower capex in the second half of the year.

Please see yesterday's earnings presentation for more detailed information on our 'twenty two 'twenty three guidance, which has not changed with that I'll turn it back to Robert for closing comments. Thanks, Mark looking ahead, we will continue to prioritize debt reduction with our expected substantial free cash flow, having said that we continue to believe scale matters in our business and.

We will look forward and look for accretive assets that will increase our size, while simultaneously, creating additional shareholder value we.

We believe we have built a company that offers an attractive value proposition to investors, including having a solid balance sheet with one of the highest free cash flow yields at one of the lowest enterprise values to EBITDA multiples in the E&P sector and a current valuation that is significantly below our total proved reserves, which Dan <unk>.

At $4 $6 billion and is $1 $7 billion higher than our current enterprise value, our deep inventory long history of operational excellence and consistent performance position Earth's down to continue outperforming for years. Our team has a long history of creating value for shareholders we will.

To work diligently to ensure that the long term value. We've created for our shareholders is ultimately recognized I'd now like to turn the call back over to the operator for the Q&A portion.

And at this time, we would like to.

You can D.

<unk> and answer session.

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One moment, please while we poll for questions.

And our first question comes from the line of Scott Hanold with RBC capital markets. Please proceed with your question.

Thanks Al.

You've had some pretty solid performance the last couple of quarters and obviously without.

I spoke a we'll call it the noise of of you know our acquisitions in the numbers. It looks at you know, it's really much more evident and it looks like the well performance you have you know really reinforces that in my question is ultimately as you take a look out over the next you know and I think you said about 10 years.

Inventory can you give us the sense of you know how are you how confident you feel in the quality and the depth of that relative to what you've drilled here recently.

Yeah. Thanks, guys. Great question, obviously, we have a portfolio of assets and we are maximizing the value of our co development or resources in the front part of you know a multiyear plan here of 10 years, so as we get out to year seven through 10, it probably looks a little different.

But definitely over the first few years of our plan, we expect that what we've been drilling will it have similar results for the next several years.

Okay, and you know I guess my follow up is as you know on on M&A. Obviously, you gave some pretty good color on on how you'd think about it but you know maybe more specifically you know what does the market look like right now do you find that you know.

[noise] bid ask spreads are reasonable and you know or are there more opportunities in the Delaware versus the Midland at this point.

Our at the market will always speak in deals always seem to get done so somehow the bid ask spread gets.

Overcome and we've seen deals here recently, where there's some kind of earn outs and things like that to help the buyer and seller mutually agree to get something done.

So it's always a problem that we as buyers have to negotiate around and we'll be creative as anybody to try and get deals done if that's what it takes theres a good pipeline of opportunities.

In both the Delaware and the Midland at the moment and I think that will stay true for the next 12 to 18 months as private equity backed.

Back teams as well as noncore assets.

I'll get you know pushed down the food chain, you might say our people need to monetize for whatever reason. So we're pleased with what we're seeing right now and our guys are pretty busy looking at a number of different opportunities.

And I would assume that you all are in pretty much every theater room or opportunity in just kind of curious there've been.

A couple of decent sized deals that have happened on both sides of the basin and and I would assume you looked at it just just at a high level without being too specific do you find that.

Price was sort of the reason that you all didn't come out on top on some of those or was it something else.

Uh huh.

Rice is probably the biggest driver in a lot of transactions now let's be honest here. We're not looking at deals that are three four or $5 billion right. I mean, there is a limitation to even though we like to look at those how much we could actually go out and do so.

In the deals that we look at usually it's price that's driving the answer and we're focused on adding value.

Creatively to this whole our stone business.

Business that we've created over the last two years and we don't want to.

Do something that's going to change our stripes.

Alright, thank you.

Okay.

And our next question comes from the line of.

Neal Dingmann with Truth Securities. Please proceed with your question.

Afternoon Robert.

I guess pretty strict ordinary given what you said about having a I believe that nearly are the lowest EBITDA multiple at highest free cash flow of the entire group, which you know our estimate our estimates would totally support and having the best balance sheet why not expedite the shareholder return versus kind of late.

Late in the year next year.

Yeah. Good question, Neil and it's something that we as a board and management team talk a lot about we just haven't made that.

Direct commitment yet because we're going to continue paying down debt, even though you know the balance sheet is in good shape and you know our leverages under one time and we're continuing to look at all these opportunities. So I want to make sure that the time is right. When we do that because it's a commitment that you make that you probably can't break and we're pretty good at.

Keeping our word, but we're going to do something and so we're just not ready a little bit of it could be our size to you know at $2 billion market cap is that the right size to initiate or institute something so you know I'd say keep watching sooner or later that probably is something that we are we come to.

Two our plan, but we're not ready to do it this quarter for sure.

No that's understood and you guys certainly always do what you're going to say so I appreciate that and then secondly, just.

And when you look at.

On service cost out there the way I want to ask that is it seems like you and others maybe are starting to see a little bit of softness if you get that and it's so you get end up you know some savings that you had mark don't have in the plan would you just.

Sort of stockpile those savings put them on the balance sheet or would you continue to keep the play out as active which would result in even higher.

Higher activity.

We're probably not ready to have higher activity, yeah, New Mexico is a great asset for US we've got three rigs running.

Steve might beg to differ some days, but I think it's working pretty efficiently.

We do have.

You always have something going on in the field, but we're walking pretty good now and at some point, we will get to the to a position where we can run and maybe we add activity, but again a lot of permitting timelines that you've got to rely on and.

The infrastructure all of those components needed you know fit together really nicely and right now we like the Optionality that we have running three rigs you go to a higher level of activity and that could.

Limit your Optionality in some cases, so right now we're going to stick with what we got deliver the free cash flow and if we get some extra will pay down some more debt and hopefully we'll be able to find some transactions, we can spend that money on.

I'm glad to hear it I appreciate both the financial and operational Optionality you have I think it's a lady characteristics.

Thanks Neil.

Yeah.

Our next question comes from the line of Michael Scania with Stephens Inc. Please proceed with your question.

Good morning, everybody.

Just wanted to follow up on the last.

Question on your activity.

You mentioned you know some of the constraints on the Delaware side.

When do you think you could.

Tilt more toward the Delaware is 24.

Possible to lean more on the Delaware versus Midland or is it further out than that.

It's possible like to do something in 'twenty four we're permitting wells for the middle of 'twenty four already it has to do with you know some capital we're spending this year on the infrastructure side, and just making sure that we've got all everything lined up that we need to plus again, it's going to be a ban.

Once between commodity prices and service costs and you know there's no reason.

To accelerate into you know a high service cost environment, if the commodity prices don't don't.

Arent beneficial to us so there's a lot of balls, we're juggling right now and it won't likely happen this year to accelerate activity out there, but it could in 2024.

Okay.

Just wanted to ask another question on <unk>.

Your acquisition strategy.

It sounds like Theres, a lot of things in the pipeline that youre looking at it.

It looks like you've been able to buy things in the past that are kind of PDP value.

If you don't get the right prices is there an opportunity now given you've got a pretty good sized footprint in both the Midland and Delaware.

I'm wondering if there's an opportunity to pick up like small interest around <unk>.

The area, where youre not necessarily buying these are.

Larger.

Marketed packages, but smaller pieces, where you could replace a lot of the drilling inventory that you're drilling up every year.

Yes, good question and we do focus on that as well as you know the larger packages, whether that's trying to do a trade with somebody so we can you know.

Bulk up in an area that we're planning to drill a year or two from now or just flat out buyout.

Either partners or.

Smaller operators or what have you. So every.

Rock is overturned for us to look at acquiring more assets in.

Within our footprint.

And maybe even expand our footprint a little bit.

But in both basins, where we're looking at all options to to increase our inventory.

Yeah.

Appreciate the answers thanks Robert.

Thanks, Mike.

Our next question comes from the line of Sebastian Charter with benchmark, particularly see what's your question.

Yes, Hi, Robert maybe Mark as well on this question can you just review the you know the nonrecurring Capex this year.

If it's changed at all I think on the infrastructure side, and and you know and would you hazard a guess as to what sort of deflation you might see.

In.

In 'twenty four.

Keeping the program slot.

Sure I'll try to hit that one <unk>. So first if you look at our guidance the midpoint of our total capex of $750 million and we sort of lay out what portion of that is D&C and both the Delaware and the Midland and then what non D&C is so if you back that out it's about 92 and a half million dollars.

Other stuff.

So of that.

The infrastructure.

A decent chunk of that and we are you know spend out spend that through the course of this year that is a bit elevated relative to what we would expect in 2024.

Don't think it's going to.

Track like 30 or $40 million.

Relative to next year.

From a deflation standpoint, I'm not sure that exactly think of it as deflation.

More so just a little less required activity I mean, there is stuff that we're doing in the Delaware in particular this year that is sort of one time events and I would say, that's probably $20 million, yeah of the 92 and a half.

Yeah.

Okay Mark so.

If I sort of understood that what what would be the sum total of the two and also when I think of you know do.

Do you think of these as sort of truly nonrecurring or is there sort of that nonrecurring under.

The recurring nonrecurring element that was sometimes well I think I think of the 92 and a half that is not directly Delaware Midland DNC, probably $20 million of that is truly nonrecurring. So if you Wanna say next year at <unk> 72, and a half versus 92 and a half this year I think thats directionally close.

But also there's a piece of non op drilling in your 92 and a half months right right. So take that out because it's a sort of a I mean, we have some identified and some view of what's happening on our non op development program, which is truly optional for us we don't have to spend that capital. We can you know go.

Go non consent on a visa or we could sell them so back that out as well and you know $30 $40 $50 million of sort of recurring.

Infrastructure or non D&C.

Got it okay, and I guess to the point on your.

Your non op.

And tying that to maybe some of the.

Service cost.

I'm not sure if it's deflation as you as you said, but.

The Permian has been in a bubble.

Do you think some of this looseness is Permian specific or do you think it's just some of that.

Dry gas.

Stuff, that's that's making its way to the Permian what are you sort of seeing in the non op activity.

I don't know that that has really any bearing on the non op activity being more or less if that's kind of where you're going with it or or whether it's.

Deflation or cost coming down or what have you, but it's definitely we're.

We're seeing some equipment move around a little bit and we're seeing you know service.

He has talk about spending more time in oily basins from gassy basins, and they're trying to keep all their people employed and all their equipment working right. So it makes sense that some of that is going to filter its way to a to the Permian.

Okay, Yeah, Robert I guess them.

Right I think thanks for that and.

How much do you think its Permian specific activity levels.

Dropping.

Well, there's some of that as private guys have sold two public companies and you've seen this multiple times over the last maybe 12 months, but at least the last nine months.

The privates are running multiple rigs and the public buys it and he's not going to run as many rigs on it so there's some of that.

My view is if they're high spec rigs that are being picked up by somebody in lower spec rigs are headed to the yard or lay down. So we're seeing definitely seeing some of that we're seeing some available availability of services that probably a year ago, Steve we more enabled to get on anybody's docket for a frac.

The company if we even if we wanted to for a period of time, but now I think that there is some alleviation going on in services.

We're upgrading some spots.

Definitely yeah.

Thanks for the color.

Thanks.

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

Good afternoon, Robert and Hello to the whole Earth stone team there.

I'd like to ask a question.

She goes to go into more detail on the L can't be on project and a couple of the a couple of things I'd curious if you'd share as well.

What zones, you're targeting with those six wells.

What whether you're you know what the spacing is and whether they're they're designed to test you know kind of inter and intra zone.

<unk> or intra or inter zone spacing and more generally.

My impression is that's one of the.

Most prolific areas of the Delaware basin. So this seems like it's a it seems like it'll be a big and important pad result for you guys, but do you see it the same way.

Oh, absolutely see it the same way we bought the tightest assets because of I mean, this was really the key driver to it as the inventory and.

And the rock quality there we're drilling wells in the first second third bone spring and Wolfcamp.

Upper Wolfcamp section. So we're drilling all of them are in and every one of those zones is has produced either on this acreage are directly offsetting it. So it's not like we're testing anything new here.

We're typically four wells per bench or target zone, sometimes that can be one more one less it depends on you know thickness directly on the location. It could also be whether we got an existing well and we need to back off spacing attach but really the pads are set up.

And the acreage is set up to do four wells are quite easily.

And that's what we're executing on.

Thank you Robert that's it for me.

Thanks Charles.

Our next question comes from the line of Julian Stewart with Goldentree. Please proceed with your question.

Hey, guys. Thanks for taking the question I guess first just just looking at the hedge book It looks like you guys didn't really layer on any incremental hedges I'm curious to get your latest thoughts on the strategy would have expected potentially Larry coming after the OPEC cut, but how should we be thinking about the hedge book going forward and when when do you start layering in hedges in 'twenty.

Sure and to the extent you can discuss the structure of those hedges.

Sure Jordan I'm happy to take that first of all let me just start with sort of where we were at the beginning of this year or around the end of next year, we were about 40% hedged on both oil and gas and I would expect by the time, we get into January we're probably somewhere close on both oil and gas we did actually layer in some 2020 for volume.

<unk> right. After the OPEC announcement, I think that was three weeks ago. If you see there's 2500 barrels a day of collars that we added actually second half of 2023 through full year 2024, that's our sort of start on the 2024 program.

I would expect by the time, we talk again in August we'll have labor some more hedges on I want to say last year August we were probably 15% to 20% hedged for 2023.

And I'm not committing to being 20% in August , but I do think you'd expect to see us having layered on some more hedges by then you know we have.

Have employed a variety of structures that give us downside protection, but also some upside and we've done some puts and in some cases in the past, we did colors and prices fell and we converted the collars and to and to put in some cases, we've bought puts though it's probably been close to a year since we did that and.

We've done swaps as well I think you can expect us to see Oh excuse the utilized a mix of that going forward on the gas side, it's a little bit situational last year, you can get such big upside on a color. We did almost exclusively callers are probably the back probably the last 12 months from now.

And that sort of Optionality isn't quite the same as it was so I'm not sure that we'll do swaps or collars there, but we are cognizant that the year is passing by and we tend to like to chip away. We do tend to put some volumes on volumes on when we see a jump.

We did a few weeks ago and again would expect that every quarter, we're adding some hedges for next year I mean candidly, we'd patent really planned on adding any more 2023 hedges, but when prices jump like they did we went ahead and added some oil hedges for the second half of this year as well, which actually helped the <unk>.

Price into 'twenty four as we got the benefit of the higher second half of 'twenty four 'twenty three applied toward kind of the full year trade if you will.

Great.

You mentioned at the top he started the year you were at 40% hedge the ultimate goal.

Starting in August working through the end of the year to get back to that level of hedging or how do you think about ultimately where you want to be.

Yeah, I mean, I wouldn't say, we're rigid on that.

And certainly like things could evolve, but I think I think that's generally fair way to think of kind of our strategy and intentions and I think everyone. In this room would be pretty surprised if we were so definitely more significant less hedge that about 40% by the time, we get into next year.

Great.

That's helpful. One more for me.

Made a comment on the Q2 production being the weakest in the year and the oil cut being the lowest just high level is that going to be like a single digit quarter over quarter decline or just helping us quantify a little bit more that cadence change in Europe , and the oil cut change would be really helpful.

Yeah, absolutely. So first of all that is largely driven by activity in the Delaware Basin.

And if you look at our daily production it almost seems like the data production knew when we went from March 31, or April 1st because right around there we had a pretty big step change downward and production and that is more oily that's all related to our frac schedule and timing of having to shut some wells and just the timing of turn in lines.

And that's going really exactly as planned.

I will tell you like right now I think were probably 5000 barrels a day of lower oil production.

In April than we were during the first quarter that is completely in line with our expectation in April should be the low months, we'll start to see some volumes pick up as some other wells come on line and some of the wells that were shut in start to return to production.

Like if you made me guess, yes, our guidance is a 100 is the midpoint plus or minus 4000, a day. We're obviously at the top end of that for the first quarter.

I think that we've got a good shot of being 100 for the day 100 per day for the year, but I would guess like the very best cases, where 100 barrels a day and call it 42 or 43% oil for <unk> and it may be a little bit lower than that or it could be a little higher but there is definitely a significant step down.

Down.

That we're going to see and I don't know that we're going to hit the same production levels. We hit in the first quarter and <unk> <unk> I mean, we've got a chance of that for sure.

But directionally there is a step change down like almost April one that youll see in this quarter's results, but we do expect that to.

Basically now through the end of the quarter start ticking up and get you know somewhere it's probably.

Get them North of a 100 south of 104 for the second half of the year.

Okay.

Cool.

That's helpful. And then one last one for me I know <unk> definitely is elevated this quarter, you said, you're working towards kind of getting back into that guidance range should we expect that.

Kind of manifest throughout the year and really materialize in the back half in Q2 should be pretty similar to Q1 or maybe any more detail there would be helpful.

Sure let me maybe try to answer that one too from a guidance standpoint.

Obviously, we didn't put out a number 825 to nine for the year and think we're going to be at 940 and change the first quarter.

That was high and Steve talked to some of those reasons.

And like we're seeing things that we can't improve I'm not necessarily expecting a step change in the second quarter. I mean, some of the same underlying challenges are there and they're not going to like disappear overnight.

So I think our hope is that we're back to where we are still within the range for the full year by the end of the year, but.

It's not like we're going to hit eight Bucks a barrel in <unk> and all of a sudden we're back in the middle of the range, while he probably honestly I really good goal would be if we were below nine for the <unk> and I don't know that that's going to happen I think thats, possibly a stretch goal.

But we also don't feel like there's no chance that we're going to end up within the range for the full year, but really like practically speaking, we're gonna be shooting just to get under 9% for the full year and thats not going happen in <unk>.

Great. That's really helpful color. Thanks, guys.

And as a reminder, if anyone has any questions you May press star one on your telephone keypad to join the question and answer queue.

Our next question comes from the line of Jeff Robertson with Watertown Research. Please proceed with your question.

Thank you our question Robert on equipment.

I think you all inherited three rigs in the Delaware basin from the prior operators.

Do you have an opportunity or a need to upgrade any of the rigs you have with maybe some of the equipment, that's moving into the Permian basin.

Okay.

Yes, Jeff just let me remind you a little bit when we took over Chisholm.

February of 'twenty, two we inherited two rigs and then we took over Titus They had three rigs running in total between Delaware, and Texas and New Mexico.

And we inherited zero rigs from them because they weren't running any any at the time, so we picked up.

A separate rig.

So we could have three running in new Mexico, and they they scattered out right, they're not necessarily on all Chisholm at one time or all in the same area at one time or even all in Titus at one time.

We did change out one of our rigs last fall.

And went to a higher spec rigs. So we were sort of ahead of the.

Market.

Just making some efficiency moves.

Last fall so we feel really good with what we've got going right now in terms of our rigs in.

And their quality.

Just a question on managing the business Robert and maybe this ties in with some of the production cadence that you all will experience in 2023.

How does the scale of the company today impact.

Maybe their willingness to tie up capital on bigger size pads for a longer period of time.

And therefore, you production is.

Create some lumpiness from that.

Yeah, and every the lifecycle of your business when we were smaller and we tied up capital for six wells. It made a difference and it was really lumpy. If you went back and looked at some of our 2019 for instance.

Quarterly.

Production numbers and how we were drilling wells and all of that.

Today, much bigger much more resilient lower decline.

Base production sure does help and allows us to go develop you know like we're doing at the Stateline area of Texas, and New Mexico, a much larger capital investment before well start coming back online. So we have that ability now and if a pad of three or four.

Four wells is a week or two late it probably doesn't have that much impact on our overall production guidance or performance right. So it scale does matter and things like that as well as a whole lot of other things we could talk about all day long in terms of being a bigger company.

Thank you.

Thanks, a lot.

Operator, we appreciate everybody's interest today, and we will be looking forward to speaking with you again after.

After the end of the second quarter, everybody have a great day. Thanks.

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

Yeah.

Okay.

Uh huh.

Uh huh.

Okay.

Yeah.

Yeah.

Okay.

Mhm.