Q2 2023 Callon Petroleum Company Earnings Call

Ladies and gentlemen, welcome to D.

Yeah.

Ladies and gentlemen, and welcome to the Cowen Petroleum's second quarter 2023.

Conference call currently all participants are in a listen only mode. After the company's prepared remarks, there will be question and answer session.

Please note that each caller will be line limited to one call. One question and one follow up question. Just a reminder, today's conference call is being recorded if you would like to ask a question. During this time simply press the star and the number one on your telephone keypad, if you would like.

To withdraw your question again press the star and the number one.

I will now turn the call over to columns head of Investor Relations Kevin Smith.

Good.

Good morning.

Good morning, everyone and thanks for dialing in today I'm joined by our CEO , Joe Gatto, Our CFO Russell Parker and our CFO , Kevin Haggard during our prepared remarks, we will reference our second quarter earnings release, and our supplemental slides both of which are available on our website at www Dot Cowen Dot com.

Today's call will include forward looking statements that refer to estimates and plans actual results could differ materially due to risk factors noted in our presentation and our SEC filings.

We will also refer to some non-GAAP financial measures, which we believe help facilitate comparisons across periods and with our peers for any non-GAAP measures referenced we provide a reconciliation to the nearest corresponding GAAP measure in the appendix to our slide deck and in our earnings press release, both of which are available on our website. Following R. R.

<unk> prepared remarks, we will open the call up for Q&A I will now turn the call over to Joe got it.

Thank you Kevin.

Good morning, everyone before we get started I'd like to formally introduce Russell Parker, our new Chief operating officer Russell brings more than 20 years of operations and strategic leadership experienced talent.

For the oil and gas industry.

Most recently served as the president and CEO of EP energy.

We're off to a great start since he joined in June I know that you will enjoy working with them now.

Now turning to the quarter, we posted strong operational results as production came in above the midpoint of our guidance increasing sequentially by 7% while capital spending came in at the low end of guidance.

We're also progressing initiatives to reduce our cost structure with LOE and <unk> per Boe, both coming in below guidance.

Later in our prepared remarks, Russell, who will discuss some of his key operational priorities, which includes steps we plan to take to further reduce costs and increase margins and free cash flow.

In July we closed on a compelling bolt on acquisition in the Delaware Basin, and a simultaneous divestiture of our Eagle Ford asset position we're.

We're now focused solely on our Permian footprint, almost a 150000 net acres with core areas of established expertise in both the Delaware and Midland basins.

These transactions also enabled us to improve our balance sheet, putting us in a position to watch the shareholder return program.

To summarize a few key highlights from this call.

Executing extremely well, our second quarter financial and operating results were in line or better across all key metrics.

We are drilling faster.

More completion stages per day, and realizing the benefits of large scale co development projects and improved cycle times.

We now have a Permian focused organization and asset base.

We've added core long lateral inventory that is contiguous to our operations, which also increased our scale in the Permian basin.

The combination of having the right assets.

Plus the REIT operations team and knowledge base positions us to improve our cost structure and ultimately our conversion of field level cash flows into free cash flow.

Lastly, we have initiated a shareholder return program.

I am proud of delivering on our commitment to shareholders by launching a two year $300 million stock buyback program.

Supposed to say we are eager to start this program this quarter given our current valuation in the market buying back our shares is one of the most economically attractive uses of our cash flow.

As part of our Delaware program, we had another successful well targeting the third bone spring formation.

Spanning the aerial extent of our development of this zone as shown on slide six.

That was outperforming expectations and is our best third bone spring shale well to date.

Our third bone spring wells are delivering similar oil EUR per foot as our Wolfcamp a results.

So we are not only adding incremental core inventory as we expand the play but also improving the economics of the inventory that we are currently carrying in the zone.

In sum the third bone spring continues to elevate its contribution to our development plans across an expanding portion of our Delaware footprint.

Operationally, we delivered improvements in both drilling and completions in the Delaware, we have lowered our time from spud to rig release by 14% due to improved bid design consistency of operations.

On the completion side, we posted substantial gains and stages completed per day across the Permian.

One of the drivers of the gains and reduced downtime from optimized scheduling. This will only improve moving forward with a singular focus on Permian operations.

These D&C improvements combined with simultaneous operations on our large projects are also benefiting cycle times.

I'll now turn the call over to Russell for some early thoughts on opportunities <unk> account.

Thank you Joe I'm very happy to have joined the team at Cowen.

Permian Basin routes and I feel right at home and walking around the oilfields in West Texas for those of you familiar with me you know that the majority of my career has been with private operators, we're optimizing free cash flow per barrel is not only the key for the culture, but necessary for survival as such my constant focus as efficiency lifting and development cost per barrel.

Free cash flow per barrel and innovation to increase inventory.

This is an exciting time in the company's history, the work that Joe and the rest of the team have done to build this asset base and strong inventory position. While also deleveraging the company puts us in a unique competitive advantage compared to our peers I joined Cowen to further build on our advantages my near term priorities are focused on <unk>.

Proving the capital efficiency of the Boe's, we produce and increasing our margins through cost reductions and further innovation. In addition, we will leverage previous infrastructure investments and the natural evolution of our life of field co development model to further improve capital efficiency, we look to minimize well downtime as we continue to optimize artificial.

Lift systems and improve overall well performance, while also reducing all in cost per barrel.

Perhaps what I'm. Most excited about is our ability to now focus on a singular area. The Permian basin streamlining our operations unleashing the full potential of our team combined with an increased adoption of technology will help draw provide improved real time responses and drive increased ownership of results. These steps will provide us the tools need.

To drive down costs increase margins and ultimately help deliver increased free cash flow, while I'm not ready to discuss the exact numbers on cost savings at this point I know it will be meaningful.

As Joe mentioned, we are also we are focused on adding to our peer leading inventory position by innovation through the drill bit we're blessed in the Permian basin with many hydrocarbon bearing formations and we have a tremendous opportunity to increase our financial performance well performance improve our recoveries and organically increase our inventory position I'm excited.

Good to be here and look forward to meeting with you and updating you in the future quarters about the progress I know, we will make on these priorities with that ill now turn it back over to Joe Joe. Thanks, Russell I'll pick up with a discussion of the second half of the year. After integrating the recent acquisition and transitioning to a new optimized development program. We are currently operating six.

<unk> plan to release the rig this month, maintaining a five rig program for the remainder of the year end.

In total we expect to bring approximately 50 wells online in the second half of the year after setting the stage with our first half capital spend.

One of our more notable projects the 15, well project in our Delaware West area that is targeting full development of the Wolfcamp zone is just coming online as we enter August we had another example, the scaled application of our co development model. In addition to our Delaware Basin acquisition, we acquired five wells were drilled by the previous operator and Wilco.

Develop three zones, including the third bone spring.

I also wanted to bring you up to date on our production cadence in the second half following the optimization of our D&C program in the Permian with an expanded asset base and singular focus.

As a starting point the Eagle Ford produced just over 3000 Boe per day more than the acquired assets in the second quarter with a similar oil cut of 70% at three new Eagle Ford Wells brought online in April .

As shown on slide eight we are now scheduled to bring the five acquired Ducks online in October which is later than the next round of Eagle Ford Wells that were part of the previous 2023 plants as.

As a result, our new production profile will now be a bit more weighted to the fourth quarter. In addition, given the net lateral length advantage from acquired long lateral inventory relative to our Eagle Ford Wells.

We will be completing a similar amount of net lateral feet in the second half despite the lower well count.

Also as part of our production guidance for the third quarter. We have included the impact of an extended force majeure event, the large gas processing facility with base and that lasted for two weeks, reducing both oil and gas volumes to a lesser extent our range incorporates weather related disruptions related to a third party.

Pete per day.

In terms of our capital spending in the oilfield service market, we are seeing prices soften on items like sand steel casing chemicals and other service equipment spin.

Specifically spot market items like steel casing of sand are being price down between 15%, 20%. We're also starting to realize price relief and items like chemicals as another data point, we recently re contracted two drilling rigs at rates that were below our previous rates.

Overall, we expect to realize an incremental $15 million in savings in the second half both from service cost and the early impacts of structural design modifications. These.

So while we have not formally reduced our capital expenditures estimate for the year due to this increase in activity relative to our previous plans.

In closing we've made a tremendous amount of progress over the last six months, both operationally and financially operationally we are delivering improvements in D&C times in our life of field Codevelopment model continues to drive production results that are meeting or exceeding expectations.

We achieved our initial debt milestone ahead of schedule and are looking forward to starting our share buyback program.

I am excited about unlocking the full potential of our focused Permian basin asset base.

And look to for further updates regarding our progress, we're making on capital efficiency gains and further cost improvements under Russell's leadership.

This concludes our prepared remarks and happy to take questions operator, I'll turn it back to you.

Okay.

At this time I would like to remind everyone in order to ask a question press star and the number one on your telephone keypad.

We will pause for a moment questions Palti Q&A roster.

Your first question comes from Derrick Whitfield with Stifel.

Your line is open.

Okay.

Sir.

He is no longer there next question comes from Sac.

<unk> with J P. Morgan.

Hey, guys. Thanks for taking my question.

I guess first just on cash return.

Free cash flow is going to accelerate in the second half of the year as capex move slower and youre going to be starting a new buyback program. I know you said in the past you wouldn't really be formulaic would that program, but any color on how we should be thinking about the split between buybacks and debt reduction in the second half.

Yes.

This is Kevin I'll take this I know many of you on the call I'd like to know the formula here I might as well get all the additional information into a single answer here. So first a couple of guide rails that we've talked about in other forums, we don't intend to use more than 50% of free cash flow in any one quarter to repurchase shares and second we're going to use those repurchase programs.

To help support the Cowen share price and hopefully take some volatility out of the stock.

After the quarter closes.

Regarding a price limit or target the share repurchase decision starts with a view of our NAV under planning price assumptions at cost.

For Cowen we see a significant disconnect in our current market valuation.

Now to your other point about.

How we tend to split that between debt and equity we do want to remind you that we intend to do the 300 million repurchase program hand in hand, with the additional $400 million of debt pay down. So we want to accomplish both of them over that same eight quarter period of time, so hopefully that answered more than you wanted but it gives all the answers surrounding the repurchase.

Graham in one answer.

Thanks, Kevin.

Absolutely Yeah, no specifics yet I do think the cost reductions will be meaningful over time, but the good news is we've invested a lot over the last several years and infrastructure that we can now start leveraging.

Which will reduce our total DCF, especially on the upside.

Taking a clean fresh approach all things artificial lift all things field infrastructure.

And also just innovation where are we landing our wells how are we completing our wells how are we spacing our wells just a new fresh approach to that that will help to that's going to help improve both our F&B in our lifting costs in our base production over time too early to give you exact numbers on all of that but.

Telling you I'm very confident in that opportunity set.

Thanks.

Your next call comes from Eric Your next call comes from Eric with still with Stifel.

Line is open.

Hey, good morning on sorry about earlier.

Good to hear thanks Derek.

Perhaps a high level for the first question in light of your portfolio transformation and the improving capital efficiency is shown on slide five could you speak to a range of maintenance capital cost scenarios for 2024, assuming current cost and perhaps also the benefit of deflation.

Yeah.

This is Joe I think it's a bit premature I mean going back to Russell's last answer hopefully you brought back online for that but.

We've got a lot of things moving real time.

On the cost side of the equation not just the service cost, but real structural design costs as he.

<unk> are going to be impactful.

I can say that we expect that capital efficiency will improve whether it be on a capex per Boe basis, or free cash flow conversion of EBITDA, but right now it's a little bit premature on 24 will let Russell gate and the C. For another month before we start pin them down on things like that.

Alright, Russell you are up in Q3 as my.

And that's my follow up referencing slide six.

Could you comment on the change in your completion approach with the third bone spring shale, that's leading to productivity similar to that of the Wolfcamp a.

So we've tried a few different techniques. This one was more intense in terms of both sand loading and fluid loading.

And we are seeing reduced or less drawdown to produce the same amount of Boe.

<unk> seen on some of the other wells I would say, we still have more work to do here. Both in just figuring out what the ultimate inventory looks like and what the ultimate economics will be but I'm encouraged to see that improvement already.

And I would say look for not only in just this interval, but but as the company progresses, where youre going to see more and more.

<unk> and optimization and design experimentation to help us improve our our.

Our cash flow per barrel.

And one clarification Russell if I could so with respect to co development view, the third bone spring shale as part of the same pressure tank as the Wolfcamp a.

I don't think you can make that blanket answer across the area and it also depends on whether you're talking about the third bone shale or bone sand.

Both the third bound by certain operators, but.

Folks take the top of different places, so theres not one blanket answer to that.

Great Great update guys. Thanks for your time.

Thanks, Eric.

Your next question comes from the line of Neil <unk> with <unk> Securities. Your line is open.

Okay.

Good morning, guys, maybe I'll, just ask a little bit on that third bone shale differ.

When just wondering now answer the access there I'm just trying to when I look at your mats, how long Genuity and now do you have confidence that that shouldn't be a perspective in that area. It seems to be a very nice and im just wondering how large it is.

Can we start to run with on that.

Yes. This is Joe.

The work that's been done there not only by us.

By others, and I think Thats, where were focused right now and I will say that we can expand this down further south.

But this is going to give you a good representation of things that are either in our current inventory.

Areas, where we think our near term ads, but we will continue to work on not only to the third bone here.

But theres other zones, we have talked about here today that certainly in process like the Wolfcamp C.

Something that we were doing some additional work on and co development as we speak and we'll be able to talk about that but give us a little bit more time to.

Get into year end and provides more inventory updates on phone and can talk a little bit about where we planned to go next but I think that answer. Your question. We think a substantial part of this this delaware position that we have.

Well, that's great to hear and then.

Just secondly on the Internet.

So the downtime that you talked about the Midland natural gas facilities and that sort of.

Weather related midstream disruptions I am just wondering one it sounds like all of that now his past.

I believe and then secondly on a go forward.

Anything else you can do more to mitigate that or is that just sort of sort of time for Titan.

Our new business out there.

Yes, Neal it's a good question.

It is over the situations has passed.

Long term, yes, we're looking at a variety of options.

Different one different off base, so that we have multiple parties to work with to.

To take the gas and also just different utilization of the gas on location.

And so between all of that in time that will just help us have a more robust base production and reduce downtime.

Awesome. Thanks, so much guys.

Thanks Neil.

Thank you. Thank you like to ask a question press the star.

The number one on your telephone keypad.

At this time there are no more questions.

I will turn the call back over to Joe Gatto.

Great. Thank you and again, thanks to everyone for joining.

Today.

A lot of good things to update you on and obviously some.

More updates to come on our next call again, we look forward to talking to you any additional questions. You have please feel free to give us call. Thank you.

This concludes today's conference call you can now disconnect.

You can now disconnect.

Yeah.