Q2 2023 Chord Energy Corporation Earnings Call

August 3, 2023

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I would now like to turn the conference over to Michael Lou Chief Financial Officer. Please go ahead.

Thank you Megan.

Morning, everyone.

Today, we are reporting our second quarter 2023 financial and operational results. We're delighted to have you on our call.

I'm joined today by Danny Brown Chip Rimer and other members of the team.

Please be advised that our remarks, including the answers to your questions include statements that we believe to be forward looking statements within the meaning of the private Securities Litigation Reform Act.

These forward looking statements are subject to risks and uncertainties that could cause actual results to be materially different from those currently disclosed in our earnings releases and conference calls those risks include among others matters that we have described in our earnings releases as well as in our filings with the Securities and Exchange Commission.

Including our annual report on Form 10-K, and our quarterly reports on.

On Form 10-Q, we disclaim any obligation to update these forward looking statements.

During this conference call, we will make reference to non-GAAP measures and reconciliations to the applicable GAAP measures can be found in our earnings releases and on our website. We may also reference our current investor presentation, which you can find on our website.

With that I'll turn the call over to our CEO Danny Brown.

Thank you Michael and thank you to everyone, who is joining our call and what I know is a very busy morning.

So with that in addition to discussing our quarterly results and expectations for the balance of the year I would also like to briefly recognize what court has done over the past 12 months to integrate two premier Williston basin operators and form a new stronger and more resilient organization. While integration is never easy I am very proud of what the teams accomplished including fulfilling our commit.

To capitalize on the best practices of the two legacy organizations and using that to capture and expand significant financial and operating synergies. We've also been very focused on our shareholders. One year ago, we rolled out what we believe to be a peer leading return of capital program that showed our commitment to both the balance sheet and to delivering returns to our investors.

Year I'd also like to briefly recognize what court has done over the past 12 months to integrate two premier Williston basin operators and form a new stronger and more resilient organization. While integration is never easy I am very proud of what the teams accomplished including fulfilling our commitment to capitalize on the best practices of the two legacy organizations and using that.

For the 12 months from July one to July one 2022 to June 32023, we have returned $1 $1 billion in the form of dividends and another $198 million via share buybacks, including aggressively repurchasing steeply discounted shares shortly after the transaction closed we've also strengthened the portfolio.

To capture and expand significant financial and operating synergies. We've also been very focused on our shareholders. One year ago, we rolled out what we believe to be a peer leading return of capital program that showed our commitment to both the balance sheet and to delivering returns to our investors for the 12 months from July one to July one 2022 to June .

Including closing the XD a bolt on acquisition on the one year anniversary of close and selling noncore assets streamlining our operations and directing focused where we have scale and competitive advantages.

I am also very pleased to announce that we've added a key member to our executive team Shannon Kenny Shannon.

<unk> joins us as our executive Vice President and General Counsel and brings over 20 years of legal experience with her most recently from Conocophillips, where she was vice President Deputy General Counsel and corporate Secretary. We are absolutely thrilled to have seen in this part of the team and look forward to working with her and benefiting from her expertise as we move forward now.

<unk> 2023, we've returned $1 1 billion in the form of dividends and another $198 million via share buybacks, including aggressively repurchasing steeply discounted shares shortly after the transaction closed we've also strengthened the portfolio, including closing the XD or bolt on acquisition on the one year anniversary of close.

Now turning our attention to the quarter.

And selling non core assets streamlining our operations and directing focused where we have scale and competitive advantages.

The organization once again delivered strong operational performance, resulting in oil and total volumes above expectations. This volume delivery was underpinned by very solid performance from new wells, the underlying asset base and acceleration of turn in lines are tools early in the quarter.

I am also very pleased to announce that we've added a key member to our executive team Shannon Kenny Shannon.

While NGL and gas realizations were softer sequentially and Michael will provide more detail on this topic shortly.

<unk> and other items were generally right in line with expectations and guidance. So taking all of this into account we generated $116 million of adjusted free cash flow during the quarter, which is presented in our deck does include removal of around $11 million of capital booked from non operated well bores, which had been sold and which will be reimbursed to us.

Benefiting from her expertise as we move forward now.

Now turning our attention to the quarter.

And given this free cash flow generation and in keeping with our return on capital framework, we declared a variable dividend of <unk> 11 per share with a base dividend, which remains unchanged at $1 25 per share as a reminder, the aggregate variable payment of approximately $5 million is the difference between 75% of the $160 million of adjusted free cash.

While NGL and gas realizations were softer sequentially and Michael will provide more detail on this topic shortly.

<unk> and other items were generally right in line with expectations and guidance. So taking all of this into account we generated $116 million of adjusted free cash flow during the quarter, which is presented in our deck does include the removal of around $11 million of capital booked from non operated well bores, which had been sold and which will be reimbursed to us.

Flow generated in the second quarter minus the base dividend of approximately $52 million minus.

Minus $31 million of second quarter share repurchases in other words, the variable dividend is designed to make up any difference between our targeted free cash flow payout and the amount distributed through base dividends and share repurchases.

And given this free cash flow generation and in keeping with our return of capital framework, we declared a variable dividend of <unk> 11 per share with a base dividend, which remains unchanged at $1 25 per share as a reminder, the aggregate variable payment of approximately $5 million is the difference between 75% of the $116 million of adjusted free cash.

As I've said before we believe our capital return program as pure leading and demonstrates our commitment to both capital discipline and shareholder returns and as we noted last quarter, we aimed to increase share repurchases as a percentage of returned capital and recognition of the discount that we believe core trades at relative to peers and our intrinsic value accordingly in the second quarter.

Flow generated in the second quarter minus the base dividend of approximately $52 million minus $31 million of second quarter share repurchases in other words. The variable dividend is designed to make up any difference between our targeted free cash flow payout and the amount distributed through base dividends and share repurchases.

Share repurchases accounted for almost 90% of capital returned after our base dividend as we look forward, we will continue to be opportunistic with share repurchases and return and return capital through a mix of base dividends share repurchases and variable dividends.

As I've said before we believe our capital return program its peer leading and demonstrates our commitment to both capital discipline and shareholder returns and as we noted last quarter, we aimed to increase share repurchases as a percentage of returned capital and recognition of the discount that we believe core trades at relative to peers and our intrinsic value accordingly in the second quarter.

Now shifting topics to development.

As most of those on the call know three mile laterals are an important part of our program in 2023 and beyond so I want to spend a little time discussing our latest performance and what we're expecting going forward.

Year to date, we've killed around 13th remodel laterals and when combined with the 17 wells from 2022 I am encouraged by the performance we've seen so far more.

More specifically, we are seeing improving performance on well delivery and are clearly seeing a strong contribution from our furthest portions of the lateral once that rocket stimulated and cleaned out.

Now shifting topics to development.

At slide nine of our presentation shows we have materially reduced drilling times for three mile wells over the past year and are now running a little ahead of schedule on the clean outside we've also made steady improvements and have generally been able to stimulate and access the vast majority of the third model as a reminder for three mile Wells, we are assuming a 40% EUR uplift.

Year to date, we've killed around 13, three mile laterals and when combined with the 17 wells from 2022 I'm encouraged by the performance we've seen so far more.

For 50% longer lateral and about 20% more drilling and completion costs said another way, we're assuming the third mile is only 80% as productive as the first two miles.

More specifically, we are seeing improving performance on well delivery and are clearly seeing a strong contribution from a further portions of the lateral once that rocket stimulated and cleaned out at.

In practice, what we're seeing is a volume response proportional to the percentage of the third mild it's cleaned out so a 50% longer well that was cleaned out all the way to the toe is generally delivering an approximate 50% uplift in EUR.

Slide nine of our presentation shows we have materially reduced drilling times for three mile wells over the past year and are now running a little ahead of schedule.

On the clean outside we've also made steady improvements and have generally been able to stimulate and access the vast majority of the third model as a reminder, for three mile Wells, we are assuming a 40% EUR uplift for 50% longer lateral and about 20% more drilling and completion costs set another way, we're assuming the third mile is only 80% is.

In some instances we have been unable to clean out of a small portion of the tow and that can lead to a reduction in productivity for the last mile. But once again, we've anticipated this with our 80% production assumption I just discussed.

We provided more performance analysis on slide nine of our Investor presentation, which shows the three mile Wells are clearly outperforming two mile wells in the same area. Additionally, as you can see on the left side of Slide 10, we performed a study using tracer to determine which portions of the lateral or contributing to production.

Productive as the first two miles and.

At specific points in time for this test initially the total well was intentionally not cleaned out and we observed a strong production response from the stages that were cleaned out plus only one or two stages further in a lateral despite using dissolvable plugs. We came back to the well 10 weeks later to clean out the toe stages and subsequently saw a strong production response.

In some instances we have been unable to clean out a small portion of the tow and that can lead to a reduction in productivity for the last mile. But once again, we've anticipated this with our 80% production assumption I just discussed.

From the previously unclaimed portion of the Wellbore.

Given the large number of potential three mile laterals. The court has and the improved capital efficiency opportunity. These lateral these laterals represent the results. We're seeing are exciting and that our execution performance has been improving and we believe spending a little more time to ensure that our coil tubing drill outs, which is a very low cost operation our effective all the way to the toe could allow us to.

Increase the 80% efficiency number for the third model, the lateral which would obviously enhance our capital efficiency even further.

Finally on slide 11, you can see that in aggregate, our well performance is running slightly favorable to expectations. This can be attributed to the effectiveness of the three mile laterals, we just discussed as well as our practice of wider well spacing both of which we believe improve per well recoveries increased capital efficiency and reduce variability of performance across the asset.

From the previously unclaimed portion of the Wellbore.

Moving on from development concurrent with second quarter results Court announced the sale of additional non core properties for proceeds of approximately $29 million.

<unk>, the 80% efficiency number for the third model with the lateral which would obviously enhanced our capital efficiency even further.

This includes approximately $11 million of capital reimbursement for non operated spending we had not budgeted for 2023 <unk>.

Given this capital will be reimbursed and was not part of our original guidance, we excluded it from adjusted free cash flow and Capex for the purposes of the second quarter capital return as you can see in our deck.

Oil volumes associated with these noncore sales approximate 500 barrels of oil per day and for clarity. The 500 barrels of oil per day are not associated with the non op wellbore sales, but are associated with scattered legacy wells outside the Williston basin year to date quarters announced over $64 million of noncore asset sales.

Moving on from development concurrent with second quarter results Court announced the sale of additional non core properties for proceeds of approximately $29 million. This.

This includes approximately $11 million of capital reimbursement for non operated spending we had not budgeted for 2023 <unk>.

We've updated our full year guidance to reflect these asset sales and production gain from the <unk> bolt on acquisition, which is contributing approximately 3000 barrels a day per day of oil in the second half of 2023. This bolt on with an excellent supplement to our core inventory and demonstrates natural synergies from our scale position in the Bakken, which is now.

Over 1 million acres.

We added approximately 123 net locations and importantly, we were also able to convert six cord <unk> use into three mile Psus as further enhance the economics of the deal which is immediately accretive to cash flow free cash flow and our return metrics.

In light of the above we have updated our full year capital forecast to a range of $850 million to $880 million, excluding the $11 million of reimbursed non operated capital at the midpoint of annual Capex investment increased approximately $20 million largely due to additional drilling and completions activity associated with maintaining a larger production base moves.

We're 1 million acres.

We added approximately 123 net locations and importantly, we were also able to convert six cord to <unk> us into three <unk> use. This further enhance the economics of the deal which is immediately accretive to cash flow free cash flow and our return metrics.

Forward.

And finally, a brief update on ESG.

<unk> expects to publish its first sustainability report as a combined company in the third quarter of this year my thanks to the team for putting together a great piece of work and it will we will highlight our continued focus on improving safety and emissions and our commitment to continuous improvement in other aspects of sustainable operations, while proudly delivering the energy the world needs.

In light of the above we have updated our full year capital forecast to a range of $850 million to $880 million.

The $11 million of reimbursed non operated capital at the midpoint of annual Capex investment increased approximately $20 million largely due to additional drilling and completions activity associated with maintaining a larger production base moving forward.

To sum things up the assets are performing well, we are substantially through merger integration and have become a stronger organization that either legacy company. We have a compelling financial outlook and are keenly focused on continuing to deliver and support high levels of sustainable free cash flow as we move forward.

And finally, a brief update on ESG.

<unk> expects to publish its first sustainability report as a combined company in the third quarter of this year.

I'll now turn it over to Michael for some additional updates.

Thanks to the team for putting together a great piece of work and it will we will highlight our continued focus on improving safety and emissions and our commitment to continuous improvement in other aspects of sustainable operations, while proudly delivering the energy the world needs to.

Thanks, Danny I'll highlight a handful of key operating and financial items for the second quarter and discuss our updated 2023 guidance.

As Danny mentioned oil volumes were strong in the second quarter about one 5% over mid point guidance.

To sum things up.

The assets are performing well, we are substantially through merger integration and have become a stronger organization that either legacy company. We have a compelling financial outlook and are keenly focused on continuing to deliver and support high levels of sustainable free cash flow as we move forward.

Total volumes were above the high end of guidance driven by NGL volumes as we saw Bakken midstream providers pivot from ethane rejection in the first quarter to ethane recovery in the second quarter.

This led to a higher NGL volumes, but weaker realizations ethane became a larger portion of our overall NGL barrel.

I'll now turn it over to Michael for some additional updates.

Thanks, Danny I'll highlight a handful of key operating and financial items for the second quarter.

In addition, NGL realizations were impacted by a combination of lower Conway prices and impacts associated with her.

And discuss our updated 2023 guidance.

As Danny mentioned oil volumes were strong in the second quarter about one 5% over mid point guidance.

TNF fees.

<unk> are allocated based on the percent of gas and NGL revenues with weaker residue gas prices in the second quarter NGL realizations were disproportionately impacted quarter over quarter.

Total volumes were above the high end of guidance driven by NGL volumes as we saw Bakken midstream providers pivot from ethane rejection in the first quarter to ethane recovery in the second quarter.

We have updated realization guidance to reflect recent market conditions.

This led to a higher NGL volumes, but weaker realizations ethane became a larger portion of our overall NGL barrel.

It does seem like NGL prices hit a bottom in late second quarter, and our improving into the third quarter, along with higher Henry hub gas prices.

In addition, NGL realizations were impacted by a combination of lower Conway prices and impacts associated with her.

Clearly the Bakken has a bit higher gathering and processing fees versus other basins.

TNF fees.

This drives higher operating leverage, which hurts realizations for both Ngls and gas and times of weaker pricing.

<unk> are allocated based on the percent of gas and NGL revenues with weaker residue gas prices in the second quarter NGL realizations were disproportionately impacted quarter over quarter.

It should improve quickly as prices recover.

Our 2023 activity schedule is similar to what we expected earlier in the year til activity is concentrated in the second and third quarters, leading to sequential production increases in the third and fourth quarters.

We have updated realization guidance to reflect recent market conditions.

It does seem like NGL prices hit a bottom in late second quarter, and our improving into the third quarter, along with higher Henry hub gas prices.

As Danny mentioned, we added some frac activity to the fourth quarter. However, most of the wells will not be cleaned out until until early 2024. So there is no volume impact in 2023.

Clearly the Bakken has a bit higher gathering and processing fees versus other basins.

This drives higher operating leverage, which hurts realizations for both Ngls and gas and times of weaker pricing.

Turning to cash costs low <unk> was a little below midpoint guidance, while GPT was above on GPT beginning in the second quarter, we converted our crude oil marketing contract from a sales contract to a transportation contract.

It should improve quickly as prices recover.

From an operating profit standpoint, the result of this change is neutral.

As Danny mentioned, we added some frac activity to the fourth quarter. However, most of the wells will not be cleaned out until until early 2024. So there is no volume impact in 2023.

But it does result in higher GPT, but also higher crude oil realizations, we've updated our guidance to reflect this change going forward.

Production taxes were eight 4% of oil and gas revenue, which was at the higher end of our guidance range.

In North Dakota production taxes on gas are volume based.

So better than expected gas production, coupled with weaker prices resulted in a higher reported production tax as a percentage of revenue.

From an operating profit standpoint, the result of this change is neutral.

As gas prices recover.

But it does result in higher GPT, but also higher crude oil realizations, we've updated our guidance to reflect this change going forward.

It will drive a lower percentage of.

Revenues.

In addition oil continues to become a larger portion of revenue and is taxed at a higher and higher rates than gas and Ngls.

Production taxes were eight 4% of oil and gas revenue, which was at the higher end of our guidance range.

Our forward guidance reflects oil higher contribution to revenue as well as an escalation in North Dakota gas extraction tax in July .

In North Dakota production taxes on gas are volume based.

So better than expected gas production, coupled with weaker prices resulted in a higher reported production tax as a percentage of revenue.

Cord cash G&A expense was $17 $7 million in the second quarter, which was within the guidance range.

As gas prices recover.

Our 2023, G&A guidance remains unchanged at 63% to $73 million.

It will drive a lower percentage of.

Revenues.

Sure.

In addition oil continues to become a larger portion of revenue and is taxed at a higher and higher rates than gas and Ngls.

Core paid no cash taxes during the second quarter and in the second half of the year <unk> expects.

Cash taxes to approximate between zero and 10% of second half EBITDA at oil prices between 70 and $90 per barrel.

Our forward guidance reflects oil higher contribution to revenue as well as an escalation in North Dakota gas extraction tax in July .

Our full year capital budget guidance was increased about $20 million at midpoint, mostly reflecting higher fourth quarter frac activity associated with the <unk> bolt on.

Core cash G&A expense was $17 $7 million in the second quarter, which was within the guidance range.

Our 2023, G&A guidance remains unchanged at 63% to $73 million.

Turning to liquidity cords borrowing base remains $2 $5 billion.

Core paid no cash taxes during the second quarter and in the second half of the year <unk> expects.

I would like to commitments remain at $1 billion with nothing drawn as of June 30.

Cash taxes to approximate between zero and 10% of second half EBITDA at oil prices between 70 and $90 per barrel.

Cash was approximately $215 million at as of June 30, which is net of the final cash payment made to <unk> for the bolt on deal that closed on June 30.

Our full year capital budget guidance was increased about $20 million at midpoint, mostly reflecting higher fourth quarter frac activity associated with the Sto bolt on.

In closing the core team continues to execute well and drive strong returns, which supports our sustainable free cash flow profile as well as our peer leading return of capital program.

Turning to liquidity <unk> borrowing base remains $2 5 billion electric.

Our team continues to drive a more capital efficient program in the Bakken and this has led to our superior returns for our shareholders.

Elected commitments remain at $1 billion with nothing drawn as of June 30.

Cash was approximately $215 million at as of June 30, which is net of the final cash payment made to <unk> for the bolt on deal that closed on June 30.

As a result, we have returned about $28 of cash per share to shareholders in the last 12 months, along with a $200 million of share buybacks.

And this has driven a total shareholder return of approximately 57% since the merger closed last July .

In closing the core team continues to execute well and drive strong returns, which supports our sustainable free cash flow profile as well as our peer leading return of capital program.

We are incredibly proud to be a safe and reliable low cost provider of energy, which feels a better world.

Our team continues to drive a more capital efficient program in the Bakken and this has led to our superior returns for our shareholders.

We're also proud of the entire <unk> team, who continues to show care for each other and for our communities and encouraged to always do what is right.

As a result, we have returned about $28 of cash per share to shareholders in the last 12 months, along with a $200 million of share buybacks.

With that I'll hand, the call back over to Megan for questions.

We will now begin the question and answer session.

And this has driven a total shareholder return of approximately 57% since the merger closed last July .

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We are using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.

We are incredibly proud to be a safe and reliable low cost provider of energy, which feels a better world.

We're also proud of the entire <unk> team, who continues to show care for each other and for our communities and encouraged to always do what is right.

The first question comes from Scott Hanold with RBC capital markets. Please go ahead.

With that I'll hand, the call back over to Meghan for questions.

Thanks, and good morning all.

I was wondering Dan you gave some kind of more details on on cleaning up the total three mile wells just out of curiosity.

We will now begin the question and answer session.

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Can you give us some sense like when you do that is does it take longer as a more cost too to make sure it's properly cleaned out.

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And when you do get that contribution typically does that influence IP rate is it more of a shallower decline.

The first question comes from Scott Hanold with RBC capital markets. Please go ahead.

It ultimately leads to the higher EUR.

Thanks, and good morning all.

Thanks for the question, Scott, So I'm going to I'm going to take a stab at this and then I'll ask chipped away in for additional color, if we need to but.

I was wondering Dan you gave some kind of more details on on cleaning out the two of those three mile wells just out of curiosity.

To to go with the second part of your question first I think as we think about three mile laterals and in general the early IP rates and that early time production really isn't too different from what we see with two miles we're not we're not really designing larger facilities. We just we end up running that production flat for a longer period of time with a three mile two mile.

Can you give us some sense like when you do that is does it take longer as or more cost too to make sure it's properly cleaned out.

And when you do get that contribution typically does that influence IP rate is it more of a shallower decline that ultimately leads to the higher EUR.

And then ultimately the decline is shallower on a three mile than a two mile. Because you just have more reservoir feeding in overtime and so generally not a big uplift in <unk>.

Thanks for the question, Scott, So I'm going to I'm going to take a stab at this and then I'll ask chipped away in for additional color, if we need to but.

On two models versus three miles, but a lot better EUR and clearly much more capital efficient from a from a clean outs perspective, that's actually one of the really exciting things to meet the the part of the operation that is involved in and getting out to the toe of the coil tubing operations as one of the lowest cost portions of the operation and so spending a little time.

To to go with the second part of your question first I think as we think about three mile laterals and in general the early IP rates and that early time production really isn't too different from what we see with two miles we're not we're not really designing larger facilities. We just we ended up running that production flat for a longer period of time with a three mile two mile.

Getting further making sure that we get cleaned out all the way to the yen is actually it doesn't cost us very much at all but it can deliver some some significantly improved volume contribution from that from that.

And then ultimately the decline is shallower on a three mile than a two mile. Because you just have more reservoir feeding in overtime and so generally not a big uplift in IP.

On two models versus three miles, but a lot better EUR and clearly much more capital efficient from a from a clean outs perspective, that's actually one of the really exciting things to meet the the part of the operation that is involved in and getting out to the toll of the coil tubing operations as one of the lowest cost portions of the operation and so spending a little time.

And portion of the well so yes, not a whole lot of incremental cost.

There may be.

And any operations there will be times, where maybe we don't get 100% of it cleaned out, but the spending a little longer to get to get essentially the entire that entire lateral cleaned out has a big opportunity for us to move that 80% contribution from the third mile up closer to a 100% contribution of the <unk> mine, which will be fantastic. So I'll, let chip chip land.

<unk>.

Getting further making sure that we get cleaned out all the way to the yen is actually doesn't cost us very much at all but it can deliver some some significantly.

Well, yes.

Scott This is chip.

Proved volume contribution from that from that.

Yes, I would agree a 100% with Danny said flatter for longer of course versus the Ips and then.

Portion of the well so yes, not a whole lot of incremental cost there.

We want to run the test to see what the Dissolvable plugs. We're doing we're actually resolving do we have a clean wellbore or not so we ran that tested and be able to look at those tracers and see what's going on so identifying and be able to knock out that last little bit Danny indicated very small amount of dollars. When its all said and done but we have a lot better understanding of what the contributions across the wellbore. So really excited.

There may be.

And any operations there will be times, where maybe we don't get 100% of it cleaned out, but that's putting a little longer to get to get essentially the entire that entire lateral cleaned out has a big opportunity for us to move that 80% contribution from the third mile up closer to a 100% contribution in the third model, which will be fantastic. So I'll, let chip chip land.

I'm really excited I want to thank the teams are really finding ways to get certain fluid certain designs to make sure. They are not in this thing out as quickly as possible, but for a very small amount of time additional weekend, hopefully 50% of the wellbore for supporting.

Well, yes.

Yes, Scott this is chip.

Yes, I'd agree a 100% with Danny said flatter for longer of course versus the Ips and then.

We want to run the test to see what the Dissolvable plugs. We're doing we're actually resolving do we have a clean wellbore or not so we ran that test in and be able to look at those tracers and see what's going on so identifying available to knock out that last little bit Danny indicated very small amount of dollars. When its all said and done but we have a lot better understanding of what the contributions across the wellbore. So really excited.

Well it sounds that sounds good and then I guess a question that leads me into next is.

As you think about getting more of these three milers online and obviously with.

A little bit more I guess.

Back half early AC.

44 momentum because of those Ducks you mentioned.

Really excited I want to thank the teams are really finding ways to get certain fluid certain designs to make sure. They're knock on this thing out as quickly as possible, but for a very small amount of time additional weekend, hopefully 50% of the wellbore for supporting.

Where does that seed to the.

The capital efficiency of the program going into 2014 does it.

Should we be able to see a little bit of an improvement on that given those two factors in.

Well it sounds that sounds good.

And then I guess a question that leads me into next is.

That coupled with I guess <unk> cost reductions.

As you think about getting more of these three milers online and obviously with.

<unk> seems to be moving in your favor.

So Scott.

A little bit more I guess.

I think as we look forward clearly, we're trying to drive capital efficiency improved capital efficiency in all aspects of our business. So that's always the driver for us over here and.

Back half early AC guess 'twenty 'twenty four momentum because of those Ducks you mentioned.

What does that seed too.

This additional opportunity, we see with the three mile laterals.

The capital efficiency of the program going into 2014 does it.

Should we be able to see a little bit of an improvement on that given those two factors in.

Coil tubing drill outs that we just discussed obviously helps with that.

From a from a deflationary.

That coupled with I guess <unk> cost reductions.

Sort of environment in oilfield services I would say, we're certainly seeing some encouraging signs in that but I still think it's maybe a bit a bit early to two.

It seems to be moving in your favor.

So Scott.

I think as we look forward clearly, we're trying to drive capital efficiency improved capital efficiency in all aspects of our business. So that's always the driver for us over here and.

Really a roll forward with with that in our full planning process. We've got line items that are that are certainly lower but we also have some line items that are higher labor cost is generally stickier now that we've seen some recovery in oil prices, which were obviously very thankful for that's probably likely to provide some support to service.

This additional opportunity, we see with the three mile laterals.

Coil tubing drill outs that we just discussed obviously helps with that.

From a from a deflationary.

The service cost as well so I think the deflation that we're seeing encouraging signs I'm not ready to quite rolled at quite roll that through completely yet we're going to see a little further and with respect to 2024 I think will provide we're working to develop a plan that's essentially a maintenance level plan versus.

Sort of environment in oilfield services I would say, we're certainly seeing some encouraging signs in that but I still think it's maybe a bit a bit early to two.

Versus our current year.

We're going to we're going to do that and as capital efficient manner as possible and we will talk more about that later this year and probably come out with full specific guidance in early 2024.

Service cost as well so I think the deflation that we're seeing encouraging signs I'm not ready to quite rolled at quite roll that through completely yet we're going to see a little further and with respect to 2024 I think will provide we're working to develop a plan that's essentially a maintenance level plan versus.

Understood Thanks for that.

Thanks Scott.

Our next question comes from Derrick Whitfield with Stifel. Please go ahead.

Thanks, Good morning, Congrats on another strong start.

Another strong quarter.

Versus our current year.

Thanks, Eric.

So for my first question I wanted to build on Scotts question, given the proof of the tracer data that you show on slide 10 does that bias you to inch up the recovery assumptions for the last mile.

We're going to we're going to do that and as capital efficient manner as possible and we will talk more about that later this year and probably come out with full specific guidance in early 2024.

Understood Thanks for that.

Thanks Scott.

I'm, sorry, say that one more time here.

Our next question comes from Derrick Whitfield with Stifel. Please go ahead.

Sure given the proof of the tracer data on slide 10 of your presentation does that bias you to inch up your recovery assumptions for the last model of the lateral.

Thanks, Good morning, Congrats on another strong start to another strong quarter.

Yes, I think as we're able to see.

I think as we're able to get more data on this derrick that's the implication.

Thanks Derek.

So for my first question I wanted to build on Scotts question, given the proof of the tracer data that you show on slide 10 does that bias NGL recovery assumptions for the last mile.

That 80% recovery efficient for that last mile if were successful and getting all the way out to the toe. Okay. As we have been able to I think the last six wells, we've got essentially we've gotten the entire lateral cleaned out.

I'm, sorry, say that one more time here.

So we will see results coming through that and if it if that lines up with the early results. We've seen from the other laterals that we've done the implications as we can start moving that 80% recovery in the last mile up closer to 100% recovery for the last mile. So that's the that's the goal here.

Sure given the proof of the tracer data on slide 10 of your presentation does that bias you to inch up your recovery assumptions for the last model of the lateral.

Yes, I think as we are able to see.

I think as we're able to get more data on this derrick that's the implication.

Thanks, Danny and as my follow up I wanted to ask if you could speak to the A&D environment will present more specifically are you guys seeing greater deal flow now that oil has stabilized hiring private equity is seemingly turbulent.

That 80% recovery efficient for that last mile if were successful and getting all the way out to the toe pay as we have been able to I think the last six wells, we've got essentially as we've gotten the entire lateral cleaned out.

Yes, I would say from my perspective, there has always been sort of a little bit of.

Chatter and will extend across a whole variety of different assets from I'd say small asset positions from trades.

Private equity.

Private equity opportunities and so I don't know if ive seen a noticeable uptick in that I think it's just been it's been a bit steady and we evaluate a lot of things.

Thanks, Danny and as my follow up I wanted to ask if you could speak to the A&D environment will present more specifically are you guys seeing greater deal flow now that oil has stabilized.

That that come through some of them some of them transact.

In private equity is seemingly trimming in buildings.

Some of them don't transact.

Yes, I would say from.

And.

But we've got our gear to the ground.

From my perspective, there has always been sort of a little bit of.

With our position in the Williston.

Chatter and will extend across a whole variety of different assets from I'd say small asset positions from trades to.

It is we feel like we are a natural consolidator within that basin and so we pay attention to what's going on and as you saw with the <unk> acquisition, we think win.

Private equity private equity opportunities and so I don't know if ive seen a noticeable uptick in that I think it's just been it's been a bit steady and we evaluate a lot of things.

When it.

When we have opportunities out there that fit in well with what we're trying to accomplish at which that Sto acquisition did.

We can act and we think.

That come through some of them some of them transact.

We're really going to accrete to the value for the organization and for shareholders.

Some of them don't transact.

That's great. Thanks for your time.

But we've got our gear to the ground with our position in the Williston.

Our next thanks, Aaron comes from Neal Dingmann with true.

It is we feel like we are a natural consolidator within that basin and so we pay attention to what's going on and as you saw with the <unk> acquisition, we think win.

Please go ahead.

Good morning, guys could you tell me, what's driving you still see some remarkable results in Indian Hills and I'm. Just wondering is that from water spacing laterals efficiencies if you could just.

When it.

When we have opportunities out there that fit in well with what we're trying to accomplish at which that Sto acquisition did.

Pointed the details yet.

Yes, thanks Neil.

We can act and we think.

So again I'll lead off here and then ask chip to weigh in with some additional color commentary in Indian Hills I think one it's just it's a good spot in the basin.

We're really going to accrete to the value for the organization and for shareholders.

That's great. Thanks for your time.

We have spaced those wells out wider and we've moved more towards three mile laterals and so I really think it's a it's.

Our next thanks, Aaron comes from Neal Dingmann with true.

<unk> is a combination of subsurface quality of wider spacing and Av and a three mile laterals and so I think we've got a slide in the graphic in the deck that shows some of the variant contribution of that but it's really a combination of all of the all three of those things, but it's a it's a great portion of our asset and it's one where we're super happy with.

These go ahead.

Good morning, guys could you tell me, what's driving you still see some remarkable results in Indian Hills I'm. Just wondering is that water spacing laterals efficiencies if you could just.

Pointed the details yet.

Yes, thanks Neil.

So again I'll lead off here and then ask chip to weigh in with some additional color commentary in Indian Hills I think one it's just it's a good spot in the basin.

Tiffany Thank you Neil.

You're exactly right I think that slide on page nine I think.

Chose what's going on there.

We have spaced those wells out wider and we've moved more towards three mile laterals and so I really think it's a it is a combination of subsurface quality of wider spacing and of <unk> and a three mile laterals and so I think we've got a slide in the graphic in the deck that shows some of the varying contribution of that but it's really a combination of.

We're taking the same thoughts with spacing and longer laterals in other areas and going across the basin is this back half of this year youre going to season different spots in the basin. So I think we'll be able to have some results. Later next year for you early next year, probably before you can see how that's working but really excited about what we're seeing in Indian hills, and what that's going to do for the rest of the day.

All three of those things, but it's a it's a great portion of our asset and it's one where we're super happy with.

Yes.

Yes, it really seem to be working well guys and then just my second on shareholder return.

Tiffany.

No.

Can you kind of talked about this third remarks, but I just wanted to.

You are right I think that slide on page nine I think.

Does this mean, you'll kind of diverge from what you had in the store and we just think they go to more of a formulaic plan or I know you've talked about opportunistic buybacks I'm just wondering if theres any thoughts of maybe like a unique plan there.

Jos what's going on there.

We're taking the same thoughts with spacing and longer laterals in other areas and go on across the basin is this back half of this year youre going to season different spots in the basin. So I think we'll be able to have some results. Later next year for you early next year, probably before you can see how that's working but really excited about what we're seeing in Indian hills, and what that's going to do for the rest of the day.

No I think as we talked about last quarter. Neil the thought was we were just being too restrictive on how we were judging our performance.

Yes.

Particularly relative to others.

Yes, it really seem to be working well and then just my second on shareholder return.

We start from an intrinsic value standpoint, we were a pretty compelling opportunity in and as we've opened the aperture up there it's allowed us to do some more.

Can you kind of talked about this and prepared remarks, so I just wanted to.

Does this mean, you'll kind of diverge from what you had in the store and we just simply go to more of a formula rate plan or I know you've talked about opportunistic buybacks I'm just wondering if theres any thoughts of maybe like a unique plan there.

It allowed us to do some more share repurchases. So I think this is just in keeping with what we talked about last quarter.

A bit of a departure at least from a percentage standpoint, and what we did early in the capital return program, where we're being.

No I think as we talked about last quarter Neil the thought was as we were just being too restrictive on how we're judging our performance.

More focus on variable dividends again because of the framework. We were looking at this through so as we've opened that aperture up more fluid more was flowing toward share.

Particularly relative to others.

Share repurchases, but we'll continue to think about that opportunistically.

We start from an intrinsic value standpoint, we were a pretty compelling opportunity and as we've opened the aperture up there it's allowed us to do some more.

I think the great thing is is where we're committed to a very strong return.

Program, It's just part of the ethos of the organization and so we'll continue to do that and we think we were we are.

It allowed us to do some more share repurchases. So I think this is just in keeping with what we talked about last quarter.

Undervaluing versus RNA versus our intrinsic value and versus our peers and so those share repurchases made a lot of sense to us.

A bit of a departure at least from a percentage standpoint, and what we did early in the capital return program, where we're being.

It's great to have you guys are doing well with this thanksgiving. Thank.

More focused on variable dividends again because of the framework. We were looking at this through so as we've opened the aperture up more fluid more was flowing toward share.

Thanks Neil.

Okay.

Our next question comes from Phillips Johnston with capital one. Please go ahead.

Share repurchases, but we'll continue to think about that opportunistically.

Again thanks.

I think the great thing is is where we're committed to a very strong return.

Capex guidance implies that we'll see.

A fairly large reduction in spending in Q4 can you.

Program, It's just part of the ethos of the organization and so we'll continue to do that and we think we were we're undervalued versus our versus our intrinsic value and versus our peers and so those share repurchases made a lot of sense to us.

Maybe provide some context, there and how should we think about what that means sure.

Production momentum going into next year.

Yes, Thanks Phillips as we talked about early when we set when we set budget guidance for the year, we've really put a program together where.

It's great to have you guys are doing well at this point Jamie.

Thanks Neil.

We get.

Our next question comes from Phillips Johnston with capital one. Please go ahead.

We started the year with one Frac crew, we added a frac crew as we got out of winter and got into the warmer sort of easier months to operate in North Dakota and that last essentially through the end of the third quarter and so.

Again, thanks, your Capex guidance implies that we'll see a.

A fairly large reduction in spending in Q4 can you.

Maybe provide some context, there and how should we think about what that means sure.

Second quarter and third quarter, we ran two frac crews in the first quarter and fourth quarter will only run one and that's really predicated around just winter weather in North Dakota. So that really explains the capital drop off will drop that Frac crew and all the Missouri.

Production momentum going into next year.

Yes, Thanks Phillips as we talked about early when we set when we set budget guidance for the year, we've really put a program together, where we get.

Completion spending will fall away from the program. There now will continue to fill those wells as we get into as we get into the fourth quarter and a bit into the first quarter as well and then we will start resuming capital activity. So I recognize it does provide some.

We started the year with one Frac crew, we added a frac crew as we got out of winter and gone into the warmer sort of easier months to operate in North Dakota and that last essentially through the end of the third quarter and so the.

<unk>.

Second quarter and third quarter, we ran two frac crews in first quarter and fourth quarter will only run one and that's really predicated around just.

Some cyclicality in the production profile that that we produce but we think it's the more capital efficient way to run the program just to avoid some of that really.

Winter weather in North Dakota, So that really explains the capital drop off will drop that Frac crew and all the commiserate.

Harsh winter weather, where you can have some real difficulties from an operations perspective.

Yes, Okay that makes sense and then.

Completion spending will fall away from the program. There now will continue until those wells as we get into as we get into the fourth quarter and a bit into the first quarter as well and then we will start resuming capital activity. So I recognize it does provide some.

Looking out into next year, you mentioned the intention to kind of keep volumes relatively flat obviously, it's early but.

Directionally do you think about sort of a three five ish kind of rig program or so and then.

<unk>.

Some cyclicality in the production profile that that we produce but we think it's the more capital efficient way to run the program just to avoid some of that really harsh winter weather, where you can have some real difficulties from an operations perspective.

On the mix of three mile laterals do you think it will be kind of.

Similar to this year around 50% or so or do you think it will be significantly different next year.

I think the three mile lateral program, probably be pretty similar to this year, we're still working through the specific <unk> that will that will drill next year, but I think it should be should be relatively similar in from a.

Yes, Okay that makes sense and then.

Looking out into next year, you mentioned the intention to kind of keep volumes relatively flat obviously, it's early but.

From a drilling perspective, my anticipation is we will run at around a four rig program.

Directionally do you think about sort of three.

Next year.

Okay sounds good thank you.

Three five ish kind of rig program or so and then.

Thanks Phillips.

On the mix of three mile laterals do you think it will be kind of.

Our next question comes from Oliver Huang with T. P. H. Please go ahead.

Similar to this year around 50% or so or do you think it will be significantly different next year.

Good morning, Dani, Michael Chip and team thanks for taking my questions.

Good morning.

Just wanted to.

Kind of hit on the drilling side of things the improvements have been rather sizable over the last six months on the three mile laterals, just wondering how much more running room do you all see on this front or is the low hanging fruit already been captured and also how should we think about potential for DUC builds into year end, if the accelerated pace were to incur.

From a drilling perspective, my anticipation is we will run at around a four rig program next year.

Okay sounds good. Thank you. Thank you.

Thanks Phillips.

Our.

Next question comes from Oliver Huang with T. P. H. Please go ahead.

<unk> or continue and how might this helped our 2024 program.

Good morning, Dani, Michael Chip and team thanks for taking my questions.

Oliver This is chip rimer.

The question.

Good morning.

Yes, I'm really excited about what the team has done here I think Danny mentioned earlier in his script was we capitalize on the best practices. We looked at the best practices from both companies going forward. So you can see were prior to merger there probably averaged 17 days and do those best practices and it's not just one or two things. It's a lot of different things that the guys put together.

Just wanted to.

Kind of hit on the drilling side of things the improvements had been rather sizable over the last six months on the three mile laterals, just wondering how much more running room do you all see on this front or is the low hanging fruit already been captured and also how should we think about potential for DUC builds into year end, if the accelerated pace were to incur.

Other from different fluids to bit designs to BH bottom hole Assembly designs, just tweaking the system a little bit every time, so excited what they've been putting together.

<unk> or continue and how might this helped our 2024 program.

Yeah, Oliver this is chip rimer.

<unk> the question.

Finding the right rigs with the right people on board also and be able to move quicker and just be able to knock those prices down so.

Yes, I'm really excited about what the team has done here I think Danny mentioned earlier in his script was we capitalize on the best practices. We looked at the best practices from both companies going forward. So you can sue or prior to merger there probably averaged 17 days and through those best practices and it's not just one or two things. It's a lot of different things that the guys put together.

Am I going to say, they're going to do another three days.

Six months from now maybe harder to do but they continue to chase things down and make it more efficient. So that's the exciting piece about it so we'll keep doing it.

And then we'll play by ear by the DUC count, but right now this is.

Other from different fluids to bit designs to BH bottom hole Assembly designs, just tweaking the system a little bit every time, so excited what they've been putting together.

Really excited what our teams do on the drilling side and I think it's across the whole organization from the completion side to the facility size, it's cradle to grave so really excited what theyre doing.

Finding the right rigs with the right people on board also and be able to move quicker and just be able to knock those prices down so.

I appreciate the color there and just wanted to kind of follow up on the three mile laterals, but just on the facility side of things as you all start to just do more activity in areas like Red Bank painted woods and Foreman Butte, just trying to understand is the facility side in pretty good shape there or.

Am I going to say, they're going to do another three days.

Six months from now maybe little harder to do but they continue to chase things down and make it more efficient. So that's the exciting piece about it so we'll keep doing it.

And then we'll play by ear by the DUC count, but right now this is.

Would we be looking at an increased level of constraints on the three mile lateral loans just given these are areas, where there's probably been a little bit less activity historically.

Really excited what our teams during the drilling side.

It's across the whole organization from the completion side to the facility size, it's cradle to grave so really excited what theyre doing.

So Oliver I think that's a great question as we as we put the development program together, we're cautious in where we're drilling to make sure that we do have the infrastructure.

Thanks, I appreciate the color there and just wanted to kind of follow up on the three mile laterals, but just on the facility side of things as you all start to just do more activity in areas like Red Bank painted woods and Foreman Butte, just trying to understand is the facility side in pretty good shape there or.

Have takeaway volumes, there whether that be through our gathering system through.

More long haul pipelines were through our local facilities and so that all kind of goes into where we plan on drilling over time, So I don't anticipate any significant.

Would we be looking at an increased level of constraints on the three mile lateral loans just given these are areas, where there's probably been a little bit less activity historically.

Constraints as a result of going into these other areas because we'll have the infrastructure sort of proceed us.

Proceed is there as we as we go in so that's how we will design the program.

So Oliver I think that that's a great question as we as we put the development program together, we're cautious in where we're drilling to make sure that we do have the infrastructure.

Oliver the nice thing is we have.

Strong inventory across a large portion of the acreage here in the Bakken. So we are drilling in different areas. They all have good capital efficiency and as we spread that out infrastructure constraints actually get minimized because you're spreading.

Takeaway volumes, there whether that be through our gathering system through.

More long haul pipelines were through our local facilities and so that all kind of goes into where we plan on drilling over time.

The program out over a larger area. So every pipeline is going to be a little bit better off because youre not concentrating into all in one area.

So I don't anticipate any any <unk>.

Significant constraints as a result of going into these other areas because we'll have the infrastructure sort of proceed us.

I think the other thing is the.

Although it's chip rimer, but it's also gas capture.

Proceed is there as we as we go in so that's how we will design the program.

And when could those gas capture numbers up high so youre not concentrated in one area.

And Oliver the nice thing is we have.

Awesome I appreciate the color and thanks for the time guys.

Oliver.

Again, if you have a question. Please press Star then one.

Our next question comes from John Abbott with Bank of America. Please go ahead.

The program out over a larger area. So every pipeline is going to be a little bit better off because youre not concentrating into all in one area.

Good morning, and thank you for taking our questions.

Hi, good morning, Jonathan.

I think the other thing is the.

The first question was on Jay P&C.

All of this is chip rimer, but it's also gas capture.

I understand that you are indeed, I understand the accounting change in that.

Those gas capture numbers up high so youre not concentrated in one area.

If there is no impact to margin.

Awesome I appreciate the color and thanks for the time guys.

But why make the change if theres no benefits. So what is the what is the benefit to you.

Oliver.

Again, if you have a question. Please press Star then one.

Switching from our sales.

To the transportation contract and could we see a better realization versus just assuming neutrality.

Our next question comes from John Abbott with Bank of America. Please go ahead.

Yes, it's a good question John .

Good morning, and thank you for taking our questions.

The contract is just kind of a form of how were we made some small changes in terms of how we're operating in.

Hi, good morning, gentlemen.

My first question is on Jay P&C.

I understand that you are indeed, I understand the accounting change in that.

And so I don't think it actually changes overall.

If there is no impact to margin.

Margins and so we kind of talked about that we realize that we have taken GPT up a little bit and we didn't make that same move on the realization side part of that is just overall realizations in the basin is still very very strong there's still a positive differential to ti, but they're just not quite as strong as.

But why make the change if there is no benefit to you. So what is the what is the benefit to you.

Switching from our sales.

To the transportation contract and could we see a better realization versus just assuming neutrality.

Yes, it's a good question John .

Where they were and so we didn't moved out that realisation side up in reality on that specific deal. It does take GPT up but it does take realizations up on that one contract.

The contract is just kind of a form of how were we made some small changes in terms of how we're operating in.

And so I don't think it actually changes overall.

That's very helpful. And then just quickly for Michael.

<unk> and so we kind of talked about that we realize that we have taken GPT up a little bit and we didn't make that same move on the realization side part of that is just overall realizations in the basin is still very very strong there's still a positive differential to ti, but they're just not quite as strong as where they were.

Okay.

Understanding the cash tax guidance for the second half of year zero to 5% to 10% of EBITDA.

Yes, whats your just your latest thoughts as you look to 2024 and beyond in terms of how that cash tax rate sort of trends.

Yes so.

So we didn't moved out that realisation side up in reality on that specific deal. It does take GPT up but it does take realizations up on that one contract.

Cash taxes later part of this year I kind of said zero to 10.

Percent and 7% to $90 oil price if you look at that kind of going forward.

Next year is in the same $70 to $90 range, probably 4% to 11% somewhere in that neighborhood.

That's very helpful. And then just quickly for Michael.

I assume so.

Understanding the cash tax guidance for the second half of year, two to 5% to 10% of EBITDA.

So we are going to be cash tax paying.

Going forward, but that's going to kind of be the range to be thinking about.

What's your just your latest thoughts as you look to 2024 and beyond in terms of how that cash tax rate.

Very helpful. Thank you for taking our questions.

John .

<unk>.

This concludes our question and answer session.

Yes so.

Cash taxes later part of this year I kind of said Youre in a 10% in the 70 to $90 oil price. If you look at that kind of going forward kind of think next year is.

I would like to turn the conference back over to Danny Brown, Chief Executive Officer for any closing remarks.

Thanks, Megan well to close out I just want to thank the employees of cord for their commitment and dedication to our organization last year was a <unk> a pivotal year for our company and I know the team worked hard to integrate two predecessor companies and put us in a great position to succeed going forward.

At the same 70 to $90 range, probably 4% to 11% somewhere in that neighborhood.

So we are going to be cash tax paying.

Going forward, but thats going to kind of be the range to be thinking about.

Very helpful. Thank you for taking our questions.

And to our investors I would say <unk> is positioned to deliver value for its shareholders through disciplined capital allocation efficient operations and maintaining a strong balance sheet, while remaining committed to responsible operations. Thanks, everyone for joining our call.

Thanks, John .

This concludes our question and answer session I would now.

To turn the conference back over to Danny Brown, Chief Executive Officer for any closing remarks.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

Thanks, Megan well to close out I just want to thank the employees of cord for their commitment and dedication to our organization last year was a pivotal a pivotal year for our company and I know the team worked hard to integrate two predecessor companies and put us in a great position to succeed going forward and to our investors I'd say <unk> is positioned to deliver value.

For its shareholders through disciplined capital allocation efficient operations and maintaining a strong balance sheet, while remaining committed to responsible operations. Thanks to everyone for joining our call.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

Q2 2023 Chord Energy Corporation Earnings Call

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