Q3 2023 Coterra Energy Inc Earnings Call
Ladies and gentlemen, thank you for standing by.
My name is Sharon and that'll be a conference operator today.
At this time I would like to welcome everyone to the fifth Terra energy three Q twenty-three earnings conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session.
If you would like to ask a question during this time.
Press, one I'm, sorry, simply press star followed by the number one when your telephone keypad. If he would like to withdraw your question Press Star one again. Thank you.
I'd now like to turn the call over to Dan Guffey, Vice President of Finance planning and Investor Relations.
Please go ahead.
Thank you operator, good morning, and thank you for joining <unk> Energy's third quarter 2023 earnings Conference call. Today's prepared remarks will include an overview from Tom Jorden, Chairman, CEO and President Shane Young Executive Vice President and Chief.
Po and Blake <unk> senior Vice President of operations.
We in our prepared remarks, we will take your questions during our Q&A session.
As a reminder, on today's call we will make forward looking statements based on our current expectations. Additionally, some of our comments will reference non-GAAP financial measures forward looking.
Statements and other disclaimers as well as reconciliations to the most directly comparable GAAP financial measures prepared in our earnings release and updated investor presentation, both of which can be found on our website.
I'll turn the call over to Tom.
Thank you Dan and thank you all for joining us this morning.
<unk> had an excellent third quarter exceeding expectations across the board.
This was the result of several factors, including outstanding performance from our top tier assets and excellent operational performance from our organization.
Wanted to particularly acknowledge our field employees and vendors who are the driving force behind our outstanding results.
Although we are pleased to announce these results quite frankly, it's what you should expect a cold Terra and what we expect of ourselves we are not interested in being average.
These results are best understood within the framework of the core thesis of coach Tara.
With top tier oil and natural gas assets co chair can flexibly allocate capital to take advantage of changing commodity prices changing.
<unk> and changing field conditions.
Work for our shareholders and we believe that there are best served by a disciplined approach that generates consistent profitable growth.
We do not manage the company around production targets, we manage the company to maximize the financial productivity of our assets we.
We seek to grow our per share profitability throughout the cycles, which is best achieved through a combination of prudent investments and direct shareholder returns in the form of dividends and buybacks.
We are a problem solvers.
Albert Einstein said, it's not that I'm. So smart, it's just that I stay with problems longer.
As coach era, we stay with problems longer staying with problems longer means that we do not simply adopt workable solutions we.
We demand perseverance and finding optimal solutions.
This is true with our technical challenges as well as our financial challenges.
We do not adopt an a priori zero growth posture and operational planning.
No more or no less than we assumed a priori answers to technical problems before engaging in rigorous analysis.
A key focus of our organization is iterative operational and financial planning.
We engage an exhaustive planning iterations in an ongoing effort to maximize our capital efficiency focusing both on asset productivity and cost optimization, which also allows us to analyze and model multiple options.
The Eisenhower said that and preparing for battle I have always found that plans are useless, but planning is indispensable.
At Ko Terre wood, he build annual capital plans that have on ramps and off ramps by eliminating our long term commitments, we retain the option dependent capital from one area to another as conditions warrant or.
Our history tells us that flexibility is crucial.
We cannot predict the future.
It's not the plans that are important it is the planning this planning process combined with the high energy innovative and curious organization is the core of <unk> strengths.
Would you don't intend to provide detail on our 2024 plans. During this call. However, we are highly confident that our results will continue to be top tier and our capital efficiency will continue to improve and that the quality and duration of our inventory and we will continue to be a parent.
As we have previously discussed we expect to enter the year holding our Marcellus gas production relatively flat as we monitor gas macro conditions baidu.
By doing so we can reduce Marcellus capital by at least $200 million versus 2023, while maintaining the optionality to pivot back to the Marcellus wet gas markets structurally rebound.
In February we will provide an updated three year outlook, we do not expect significant deviations from our current strategy of allocating capital to its most productive use to achieve moderate disciplined growth.
Under a moderate multi year growth strategy, our corporate breakeven defined as the ability to generate excess free cash flow after paying our healthy common dividend.
Will remain below $50 oil and $2 50 natural gas.
Before I turn the call over to Shane I wanted to close with our answer to the question why co chair.
<unk> as a new company and one that is unique in our space. We have top tier assets are top performing organization and robust revenue diversity.
We operate among a field of great competitors and we are here to compete co. Terra is designed to provide excellent financial and operational results through the cycles. Our goal is to make top tier results routine as I said. It is what you should expect of us because it's what.
We expect of ourselves with.
With that I will turn the call over to Shane.
Thank you Tom.
And thank you everyone for joining us on our call today.
This morning, I will focus on three areas.
First I'll discuss highlights from our third quarter 2023 results.
Then I'll provide production and capital guidance for the fourth quarter and update our full year 2023 guidance.
Finally, I'll review, where we are on our shareholder return program year to date.
Third quarter total production averaged 670 Boe per day.
Oil averaged 91, nine <unk> per day, and natural gas averaged just over $2 nine Bcf per day.
All production strains came in above the high end of our guidance driven by a combination of continued positive well productivity, coupled with faster cycle times that accelerated sales.
Vernon lines during the quarter totaled 46 net wells.
25 in the Permian at the high end of guidance.
<unk> in the Marcellus at the midpoint of guidance and seven in the Anadarko as our Evans project came on a few weeks earlier than expected.
Turning to our financial performance.
During the third quarter <unk> reported adjusted net income of $373 million or <unk> 50 per share and discretionary cash flow of $796 million.
Approximately 64% of our revenues for the quarter were generated by oil and NGL sales.
Accrued capital expenditures in the third quarter totaled $542 million at the low end of our $540 to $610 million guidance and free cash flow was $250 million after capital expenditures of $546 million.
Total cash costs during the quarter, including LOE Workover.
Workover transportation production taxes, and G&A totaled $7 99 per Boe.
Down from approximately $8 27 in the second quarter.
This was below the midpoint of our annual guidance range of $7 30 to $9 40 per Boe.
One note on our deferred tax guidance, beginning in 2022 and with greater impact in 2023, new requirements under the tax Reform Act of 2017 required so terra to capitalize section 174, R&D expenditures and amortize these expenditures over.
A five year period, rather than expensing them in the year in which they occur.
Our third quarter 2023 differed income tax ratio was negatively impacted by this new requirement.
As such we now expect 95% or more of our full year 2023 income tax expense to be paid during the current year.
This 5% to 10% change in our percent deferred will have a minor impact on 2023 discretionary cash flow, but we felt it was worth clarifying on this call.
Looking ahead, we estimate over the next few years, our percentage of income taxes to be current will be greater than 90%.
Looking ahead to the fourth quarter of 2023, we expect total production to average between 645 and 680 <unk> Boe per day.
Oil to be between 98, and 102 <unk> per day, and natural gas to be between $2 78, and two nine Bcf per day.
We expect crude capital in the fourth quarter to be between $460 and $530 million, which includes the impact of infrastructure and non operated activity shifting into the fourth quarter.
For the full year 2023 today, we are increasing our production guidance.
Our oil volumes are now expected to come in at $94 five to 95, five <unk> per day up 3% from our August guidance.
Our BLA in natural gas volumes are now expected to be $6 55 to 665 <unk> per day and.
And $2 84, and $2 87 Bcf per day up three and 1%, 1% respectively from our August guidance.
Relative to our initial February guidance <unk> full year 2023 production guide has increased 5% for Boe.
7% for oil and 3% for natural gas.
The incremental volumes were driven by an even split between better than anticipated well productivity and faster cycle times in the field.
Based on updated guidance and recent strip pricing, we now expect to generate full year discretionary cash flow of approximately $3 $5 billion.
With more than 50% of revenue driven by oil and NGL sales.
The company expects to invest approximately $2 1 billion or roughly 60% of cash flow and generate free cash flow totaling $1 $3 billion.
On to shareholder returns.
Last night, we announced a <unk> 20 per share base dividend for the third quarter.
Our annual base dividend of <unk> 80 per share remains one of the highest yielding base dividends in the industry at nearly 3%.
Management and the board remain committed to responsibly, increasing the base dividend on an annual cadence.
During the third quarter, despite relatively lower commodity prices and cash flow co Terra continued to execute.
Its return program by repurchasing $2 2 million shares for $60 million at an average price of approximately $27 per share.
In total.
Earned 84% of free cash flow during the quarter.
Year to date <unk>.
Including our base dividend and $385 million of share repurchases, we have returned $839 million or 91% of free cash flow to our shareholders.
Taking into account recent strip pricing.
Back activity completed year to date, and our expected base dividend for the year, we expect to return greater than 80% of our 2023 free cash flow to shareholders.
Well in excess of our 50% plus minimum commitment.
Moreover, since instituting the buyback program in 2022, so Terra has repurchased a total of 64 million shares or 7% of our shares outstanding for $1 6 billion at an average price of $25 72 per share.
In summary.
So tariffs team delivered another quarter of quality high quality results, both operationally and financially.
We look forward to a strong final quarter of 2023, which we believe should set a solid foundation for 2024 and beyond.
With that I'll hand, the call over to Blake to provide more color and detail on our operations Blake.
Thanks Shane.
This morning, I will discuss our capital expenditures and provide an operational update.
Third quarter accrued capital expenditures totaled $542 million coming in at the low end of our guidance of $540 to $610 million.
Primarily due to delayed infrastructure spend and lower non operated activity both of which we expect will move into the fourth quarter.
As such we are reiterating our full year 2023 capital of two to $2 2 billion and continued to trend, 1% to 2% above the midpoint.
Looking ahead to 2024, we continue to expect a 5% dollar per foot per foot decrease.
Based on leading edge service costs and contract re pricing.
Of note, we continue to see meaningful price decreases in our CTG rig rates and Frac spreads.
However, other cost categories, including labor and fuel costs remained resilient Lehigh.
As noted in our investor deck in the third quarter, our Permian and Marcellus Frac crews averaged 17 hours per day up 18% from a year ago and an all time record for our pumping efficiency.
The drivers of this improvement include larger project sizes increased wells per pad improved water sourcing and a focus on transition timing.
Over the last few years, our company has achieved improved capital efficiency through the execution of longer laterals commingling of surface facilities and sign ups.
Our operations teams in all three base continue to find creative and impactful ways to improve our capital efficiency.
These gains couldnt be achieved without the strong execution of our world class field staff.
We recently added a seventh rig in the Permian Basin, a few months ahead of schedule.
This was driven by our recent decision to sign more frac and de risk the timing of our largest 2024 project and Wyndham row in Culberson County.
Pamela fracking has the potential to decrease dollar per foot on this project by an incremental 5%.
The projects total estimated cost savings to 5% to 15% versus our current Culberson County average.
To our knowledge. This project will be the first all electric saimaa rack power directly from the grid.
Currently we are running 10 rigs Devin in the Permian two in the Marcellus one in the Anadarko and three Frac crews.
In the Permian and one in the Marcellus.
When looking ahead to 2024 co taro has fewer than 25% of its rigs and frac fleets under contract.
This provides significant optionality.
We are in the middle of negotiations on a number of contracts and will provide a detailed update in February.
Thank you Shane and Blake.
<unk> continues to bill we're generating consistent profitable growth the company remains well positioned to deliver on our stated goals. We appreciate your interest in culture and look forward to further discussing our results starting question answered.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
Please bear in mind, the one question and one follow up is allow for this Q&A session.
We will pause for just a moment to compile the Q&A roster.
Your first question comes from the line of Neil Kumar.
Your line is open.
Hey, good morning, Tom and team congratulations on a great quarter.
Tom I want to start with cash return Joe as much as your oil performance has been.
Impressive.
As Shane mentioned Youre on track to return, 80% of free cash flow this year.
Some of your peers have increased their commitment.
10 days that they promise to give back you're still at 50%.
If you could share some thoughts on how youre thinking about the cash return framework and could we see it evolve in 2024.
Well I'm going to let Shane carry this one over the finish line, but look I'm just going to say flat out we're not interested in getting into the arms race of provinces on cash return. Thank.
Thank you can look at what we've done that's nicely laid out in our deck that we have a history of being serious about returning cash to our shareholders.
But as you know that we really value flexibility and.
I just don't think it makes any sense to bank.
Quite frankly glorified promises, we'd rather be measured by our results.
Yes, Thanks, Tom I think Tom laid it out really really well, but I would just emphasize that you know for the third quarter. We returned 84% of our free cash flow for the year to date, we're well above that over 90% of our free cash flow and that 80% figure that I talked about earlier.
That's a number that sort of takes into account buybacks to date plus.
Plus dividends, including a in assumed all of the dividend in the fourth quarter.
Doesn't assume any incremental repurchases so that number could well go up higher by the time, we get to the year and if you look at the track record in the history. If you go back to the first quarter of 2022.
So to date, you'll see we've been anywhere from 70 to in excess of 100% of our shareholder returns as a percentage of free cash flow really averaging a bit over 80% over that time window. So I'd go back to what Tom says you know look at what we do.
Judges by those actions, but we are fully committed to returning capital in a good quantum to our shareholders.
Great. Thanks for the fulsome answer guys.
As my follow up obviously industry consolidation is on everybody's mind recently.
Tom you were very.
Systematic and disciplined.
At Cimarex when you are creating your Permian position.
Good day or a combination with Cabot in the formation of Cordero, you took a slightly different approach to building a different company. So just if you could give us your thoughts on the M&A market Bear you see kotara fitting in and what is your strategy around consolidation from here on out.
Well then thank you for that question.
<unk> is simple it's consistent profitable growth.
We wanted to generate financial returns through the cycles, we don't want to be.
Beholden to a particular commodity nor a particular geography.
We believe the operational excellence and think that being good at the business as a strong underpinning of any kind of financial runway.
We don't have a problem to solve.
I think the combination of <unk> and Cabot built one of the most resilient companies in our space and hopefully we are in the process of proving that.
To our viewers.
But as we look at the landscape, we would view M&A solely as a opportunity, but not a necessity. We don't have a strategic goal around any kind of M&A up quite.
Quite frankly.
We're cautious we're cautious because when you invest through the drill bit you can do that incrementally you can pivot and adjust as conditions change.
Mark M&A involves large episodic movements that tend to often catch you counter cyclically.
So you know we're opportunistic we're never going to say never to anything we look at it all but yeah, we're going to be disciplined Shane you or your thoughts on that.
I would just echo that.
The last month has seen some large scale M&A, but really 2023 has been an active year for M&A throughout.
All different shapes and sizes and we're always curious and if things are out there are always trying to figure out if there is an opportunity to.
For those things to help make us better over time, but clearly our year to date, we haven't seen anything that sort of checked.
All the right boxes, and so we're very comfortable with.
<unk> taken the business from where we sit today, yeah, Shane said it right, it's about getting better and.
I'm, particularly proud of the way this organization is performing.
Yes, very confident in saying, we intend to make a routine.
We would not put that at risk with Subtank debt.
Interrupted our momentum Terry.
Okay. Thanks for the answers guys.
Your next question comes from the line of email with Goldman Sachs.
Your line is open.
Hi, good morning, and thank you for taking my questions.
My first question was on the Wyndham row development.
Can you provide any details on the expectation from that from the program in any color you can provide on the regard and your plans to Derisk the project heading into 2024.
Yes, Martin this is Blake I'm happy to take that one.
You know as we've talked about the Wyndham rose really.
Our largest <unk> project to date, it's just taking all of our operational efficiencies and putting them in one place so.
It's several D. S use lined up together, it's not what you would consider one giant cube development, we're prosecuting the upper wolfcamp across one big section and buy one big row and by doing that we can concentrate our rigs or frac crews, we can co mingle our facilities and we can drop our.
Structure costs, so all of that adds up to some pretty big cost gains.
The decision to add a rig a little bit early with frankly, just to get ahead of getting the wells ready, we've decided to sign more fracs that ROE and so some will frac moves very quickly.
You got to have all the wells ready and we just wanted to make sure we had plenty of buffer there. So that that's really the main driver.
It's also the electric side more frac that required additional lead time for our partner.
I see it that's really helpful color. Thank you.
Sure.
I guess moving to your three year outlook, and we will wait for a fulsome update next year, but I wanted to get your high level thoughts.
This year or do you have shown strong performance oil growth is 9% year over year.
Closer to 9% year over year, and then on slide number 14, you highlighted continued expectation for strong productivity in the Delaware going forward, how should we think about the evolution.
For the company over the next three or four years any high level thoughts you can provide there.
Well I think you should think of it in terms of our.
History of behavior, we don't manage the company by production goals I think I was clear in my opening remarks on that we really seek to fund very robust projects that not only deliver outstanding returns, but have remarkable windage. If the commodity prices were to fall. So that we know that we're getting a good return on our cap.
<unk>.
Through the cycles as we can best predictor.
So you know we said you know so we decided how much.
Capital, we want our best what projects, we want to fund we do our very best job to come up with an estimate of what the production will be.
And then we challenge our organization to overshoot that.
And when they do we don't view that as a negative.
So.
That's the way, we're going to view, our three year plan, and we really hope to be providing better and better guidance, we always like to.
It will we aim for.
Higher LOE, we wanted to hit what we aim for and.
Although we're proud of our outperformance.
It means we need to go back to the drawing board and do better as estimation.
That's great answer thank you.
Your next question comes from the line of.
Iran diagram with Jpmorgan Your line is open.
Yeah good morning.
I was wondering if you could really appreciate the slide 17 on the Wyndham ROE, but I was wondering if you could give a sense of what youre doing to de risk.
Some of the project timing and development of that of that of that large row development.
In particular I wanted to see if you could give us some insights on some of the learning.
From the Mint Julep projects that you did this year, which may be may.
It helps to Derisk this larger project.
Yeah, Ryan This is Blake I'm happy to take that one.
We've learned as we've expanded these roes bigger and bigger.
Well it is a big pretty slide and a long row you need to remember. This is this is kind of what we do day in day out we drilled <unk> all over the Permian and we have to stay ahead of them no matter, where they are this is just putting them all in one big growth. So we can prosecute them as one project. There are lots of things we've learned along the way.
<unk> is probably the biggest one by far we built in a lot of timing estimates based on when we drill and then we Frac and then we drill out our plugs there.
There is a lot of timing scenarios, we use including what happens if something gets stack what happens if something goes wrong, we call him bail out wells, we have another well ready to go that we can shift the operation to while we work on that well.
And that's that's really how we approach it we built a lot of flexibility and of the row development.
And Blake just just as a quick follow up how many wells would you expect if timing.
It goes as planned to come online next year, because I think you've just started drilling the ROE and the.
Third quarter.
All of them it will be the full road will come online next year, which it is.
51 wells.
Oh go ahead.
Yes, sorry, and it won't be one big slug, it'll as we get further down the road is first of all available coming up yes.
Yes.
Yeah.
Okay and then my second question, Tom where do you stand in terms of the 200 million.
Capital.
That could be a reallocation.
Located from the Marcellus to your other two assets.
Assets and maybe just a quick update on how Dimock township.
No.
How that could impact or influence that decision.
Well I'll take that in reverse order, yes, we don't see <unk> being a material influence or one way or another.
We're very pleased to be returning there but.
It's not really a critical factor.
Any of our remarks.
And then as far as the 200 million in Iraq, We're still where we have been we have flexibility there.
Analyzing our options.
We've got every option in front of us.
Yes.
And I really look forward to discussing 24, we're ready to discuss that.
Sure.
We're still working on our plans.
Great. Thanks, a lot Tom.
Your next question comes from the line.
Doug Leggate with Bank of America, Doug Your line is open.
Thank you and good morning, everyone. Thanks for having me on.
Guys I wonder if I could ask about the Anadarko, where it sits in your thoughts on relative capital allocation for 2024, and I guess my my question is around the guidance suggests it north hills and three in the <unk>.
And yet we obviously saw the activity there. So I'm just curious if your thoughts on the competitiveness of the Anadarko is a stepped up a bit going into next year.
Well, thank you for that question Doug.
As you know, we love Anadarko It competes heads up.
It offers market flexibility.
It also is.
Really coming back to force with some new targets some new completion styles.
The fact that we turned some wells aligned to the third quarter is just the outperformance of our.
Execution.
But I think you could expect a healthy Anadarko program next year.
And it's not it started out of love or affection and sort of competing for capital.
Those projects are really competing for capital and then the one other thing they've done is they've.
Established repeatability.
We've got a few behind us that had been repeatable executed well gone like Clockwork and that's what we're looking for.
I guess my follow on is kind of related Tom Thanks for the answer, but so far if I think about.
The indications on where costs.
Costs are headed capital costs are headed and all the moving parts in there not just for yourselves, but from your peers.
And then I I also stick with.
The mantra that you're.
Capital program is really driven by efficiency and not by growth I look to 2024 and I have to.
Consider whether your capex guidance, either as low end of your current range or maybe how some downside risk.
I'm trying to understand would you rather take those efficiencies and redeploy the capital and keep the capital the same or are you trending lower and you're spending going into 'twenty for any early guidance well appreciate it.
Yeah.
I'm going to give you a very vague guidance here.
We'll take efficiencies every day, we can find and to the extent that efficiencies mean, we can do the same thing next year cheaper than we did this year all else being equal that's a wonderful outcome and we seek to find those outcomes everywhere we look.
But you know that that yeah, you can infer what you will with that 200 million what that means.
But it means we have more opportunities than we thought we would ever have because of efficiencies.
You know I I, yeah, we're not prepared to say, whether it will be flat up down sideways, but.
I will say this I think you can look for us to have a very strong 2024 based on the operational momentum and capital efficiency asset productivity and operational execution that we have.
We have going on it's got a flow right in the 24, and we will be able to do more with less.
I appreciate the answers thanks, so much.
Okay.
Your next question comes from the line of Scott Glover with Citigroup Scott Your line is open.
Yes, Thank you and good morning.
Good morning, So I wanted to.
I wanted to touch on the strategy with the row development you know it does differ a.
A bit from peers and that Youre generally focused on single zone development and are developing multiple benches can.
Can you just provide some more detail on.
What differs.
Geologic perspective on the eastern side of your acreage you mentioned on the eastern side co development isn't necessary.
Just any far less communication.
On the eastern side.
Or is it the strategy, mainly a call on really being able to leverage prior surface spending you know when you do develop as tier two zones down the road.
To offset the lower productivity.
Just some more color on the on the strategy.
Yeah, well I'm going to just say first and foremost as much as we talk about the Permian basin, it's highly variable.
A lot of things change depth pressure product type.
It's really not one single basin, but you have tremendous variation and stratigraphy and Geo mechanics, and how rocks respond for much not all but for much of our assets we have come to the inform conclusion.
Net.
Co development.
Vertical benches is not necessary, we can develop a particular bench and come back in and develop benches above and below.
That's that's a function of frac barriers, it's a function of reservoir performance, it's a function of timing.
But you know.
The fact that others see it differently, they're playing in different areas of the basin disliked.
Dislike me, telling you that Mexico is the wrong word for beer.
You get different answers, depending on where you are.
And.
Even even within the window grow youre going to see that the interference changes from east to West. So you know we're very confident in our approach I'll just leave you with that that sought to disagree or contradict anybody elses, but we have a lot of data that makes us firm in the statement that we can develop.
The single batch the wolfcamp without leaving behind resource above or below us. It's also highly efficient to our infrastructure, but that's a that's a that's a benefit not a driver.
Yeah, I'll, just add to that I would just add to that.
The row development does lay the groundwork for all future benches that we might develop the infrastructure is in place the tank batteries are in place.
Our team is already modeled all of those zones and how they can come on later and it will just drive down the dollar per foot on future projects, but but as Tom said, that's an outcome that's not the driver of why we're developing it.
Yes.
Do you have like a rough estimate in terms of savings on the the.
Subsequent developments with all the infrastructure and surface spenders, there's already sunk.
No I'd be I'd be nervous to quota percentage on that one because it's not in the immediate drill schedule, but it is significant it will move the needle.
Okay.
Got it thank you.
Thank you.
Your next question comes from the line of David <unk> with TD color. David Your line is open.
Thanks, Tom and team I. Appreciate you guys, taking my questions. This morning.
Morning, David.
I'm just curious if you all have have.
Demonstrated some some pretty impressive well productivity gains certainly over your base cases.
I'm curious as we progress into the back half or at the end of 'twenty three 'twenty four 'twenty five.
How would you contextualize midstream constraints I know, obviously you have large scale developments like windom broke coming online, but we.
We've heard by and large from many of the peers in the area.
That midstream is creating a pretty big overhang around near term productivity.
Could you contextualize I guess, what Youre seeing and you know how you feel about the midstream setup going into 'twenty, four and 'twenty five relative to your productivity.
Yeah, David This is Blake I'll take that one.
<unk> to the Wyndham ROE, but also all of our development in Culberson, and Reeves County, we own and operate our own midstream systems actually about 70% of our operated gas and our operated water goes through our co chair of the midstream assets. So we have tremendous control these are system.
We have developed over years.
Triple Crown for example in Culberson County is tied into over five different processors that we can shift to gas around two which gives us a ton of reliability. In addition, we have multiple natural gas residue outlets.
That just gives us a ton of flexibility and confidence and be ready for these big projects in new Mexico, where a third party on the majority of our assets that requires a lot of planning for all the reasons you alluded to earlier, but we have some pretty good service partners.
We have found as long as we stay far ahead of our projects they'll be ready for us.
I appreciate that.
And then maybe just so I better understand the comments around the Marcellus spend next year.
It seems like it's being phrases is always an option to spend $200 million less for that I guess is that the correct way to think about it or is it really you know a 100 million plus of efficiency gains and there are just program changes just from designing better plans into next year.
We will do what I said in my opening remarks. This is true throttle into the year. We're currently in a cadence where we would if we didnt change we would hold production flat and be able to realize those savings, but we also have on ramps and off ramps I talked about planning.
One of the things that I'm, most pleased about with our current program.
Whether we're talking about the Permian Anadarko or the Marcellus each one of those plans has places where we can accelerate or decelerate if conditions change. We thought ahead, we pre plan that we can react and so.
Yes, right now as we enter into 2024, we're going to be at a flattish Marcellus cadence and I would say you would probably see us.
Increase rather than decrease from that.
Conditions warranted.
Thank you Tom.
Yeah.
Your next question comes from the line of Josh Silverstein of UBS. Your line is open Josh.
Hey, Thanks, Good morning, guys, just sticking with the Marcellus the realizations have been pretty strong this year.
Even better than the corporate realizations I know some of this is from the Nymex and fixed price contracts that you guys have you outlined what you have for the rest of the year can you just provide us a little bit of insight as to what you guys have next year and any thoughts on kind of what you can do for lucky in strong basis relative to what the forward curve maybe thanks.
Yeah, Josh this is Blake I'll take that one.
We don't really see a change going from 23 to 24 in our portfolio, we're expecting to realize about 85% of Nymex. This year that is driven by a big portfolio. That's anchored to a lot of out of basin indexes that gives us exposure to a strong pricing in the winter.
And also a lot of Nymex pricing built in there. So we don't see a big change from 23 to 24 and how that portfolio is managed.
Great Stephen though the second and third quarter that realizations are low if you look year to date, that's right about where we are tracking year to date.
Alright, thanks for that and then.
Just on managing the cash balance I think Tom you said you wanted to have about $1 billion of cash on hand.
Can you just talk about the flexibility in this I think you still plan on paying down the.
Third quarter maturity next year with cash, but could this cash also be used to support shareholder returns potentially above 100% of free cash flow with crude oil and natural gas prices move lower.
Yeah, I'll jump in there Josh for a second here.
So look on the cash balance and again, if you look back over the last call it year and a half for seven quarters.
Between call it maybe a little over 600 million a little below a $1 billion in app. So we sort of gravitated around that $1 billion balance I think we do want to be able to be countercyclical with regards to shareowner return. So if we're in a period like the second quarter, where free cash flow.
It is a little bit tighter we can certainly go beyond what that in some cases well beyond that in order to continue to support if we think theres intrinsic value and doing that with the share repurchase program. So.
We certainly have that ability going forward. The other thing I would just touch on quickly is.
Our next fall's maturity the 2024.
And just to highlight no decisions have been made on that and so I think you've sort of indicated that are then we'd likely repurchase debt or pay that off for cash and thats certainly one of the options and we think we have a lot of different options, but I'll, just sort of temper that a bit and say no no final decisions made on that maturity.
Got it thanks.
The next question comes from the line of Derrick Whitfield with Stifel. Erik Your line is open.
Good morning, and congrats on a strong quarter and update.
Perhaps for perhaps for Tom or Blake.
One of the majors on the back of our recent acquisition talked about the potential to double or recovery with new tech as a technical forward leaning organization. That's been in the basin for quite some time are there any developments you are aware of that could drive that degree of improvement in recoveries.
Yeah, I'll start that and Blake may want to comment.
We followed that topic carefully it there are a couple of companies kind of talking about that.
And.
You know I wish I could tell you that we had some.
Back laboratory, where we have our own burst of it but we don't.
We're watching very carefully.
Certainly hope it's true.
But we.
We don't see evidence that it's been field tested yet in any meaningful way. So it's like you Wanna comment, yes, I'd just echo what Tom says, we're highly curious we asked about it all the time, but.
We haven't seen anything show up in the data that would show some technologies being widely used.
We will continue to pay attention.
Great and as my follow up referencing slide 17, I want to take it with really a different angle with my question.
As you think about the go no go decision on co development of hockey in the Western spacing units of the Wyndham row, what's the downside of co development from an upstream perspective as well level returns are largely consistent.
Yeah, I don't know that I see a downside other than midstream activity.
Yes.
We do have a certain amount of capital that we want to deploy.
If we were to co develop it would be increased capital.
You know, we we've looked at this pretty hard certainly within our assets there are areas where theres more.
Interference joined the Wolfcamp, a the harkey, there's areas, where there's so little observable airfares, even where we see a fair and so its harkey wells our landmark what else I mean anyway.
Even even if you say you know what you're going to drill the wolfcamp come back some time later and catch the harkey.
The returns on that harkey layer, even with depletion effects are outstanding.
Great color. Thanks for your time.
Okay.
Your next question comes from the line of Neal Dingmann maturing Securities. Your line is open now.
Good morning, all thanks for the time, telling my question.
Not asking the capital allocation a little differently.
You all previously had well above what I would call it.
Call it a year or two ago, but I always would deem is definitely well above average production growth and what I would probably call then probably average shareholder return and then obviously here in the recent quarters, you've kind of reverse that where you now have well above shareholder return with what I would call private average production growth I'm just wondering Tom for you. The gang is there a scenario.
Well, you would revert more back to that prior scenario.
Okay.
The prior surveying above average production growth is or what you're saying yes.
Yes, Sir in more back to the instead of a 90% payout on the shareholder return maybe back to I don't even know 50 60 or something.
So I think we like our current approach under current conditions, Joe I always wanted to say that look if the world changes. The last thing you want me to say as you know we're going to just keep doing what we're doing even though the world has changed all of our albums.
We have built co chair to be flexible, but under current conditions.
And you saw with our current approach change anything you want to say to that.
No I don't agree with it I mean, I'd only say Neil again, we have a lot of peers today that are probably more focused on just maintaining and keeping things flat. So I think in that regard. So terra is differentiated and that we can still generate consistent profitable growth in the current price environment that we sit down.
Okay, great great add on Shane I agree with that and then second question just on the cost reductions very noticeable on.
So you talked about the <unk> fracs, having potential for the 5% decrease in taking the Colbert said costs all the way down to up to 15% can you remind me.
Prior to this or.
A quarter or two ago.
Into deflation next year, where you'll just thinking kind of maybe a 5% deflation I'm just wondering kind of how youre looking at sort of total I don't know if you want to call. It deflation, Tom it's sort of all in lower cost next year versus maybe what expectations were a quarter or two ago.
Yes for the for the total program, we're still estimating about 5% deflation going into 'twenty four that's based on what we know today.
These simulcast savings would be in addition to that but that's just for this one project and we we have a big portfolio. So it's not an across the board savings were in the middle of negotiating.
Reagan Frac contracts for 24, right now and look forward to updating that when we put our playing out in February.
Thanks, guys great update.
The next question comes from the line of Mark or Taylor with <unk>. Your line is open.
Good morning, all Tom maybe a question on the Anadarko basin to follow up on Doug's question. It sounds like next year Youll have a relatively healthy level of activity, but I'm. Just curious may be looking into the medium term. It is an asset we still had about 240 locations that compete for capital and its also.
That seems to be well situated.
To meet some of the pull demand from an LNG perspective, just curious what you would need to see either from a cost perspective, our wealth productivity perspective, or maybe a macro change.
To see a healthy level of rig activity in the basin moving into the second half of the decade.
Well.
But I'd love to see as a long term LNG contract that guarantees us an uplift in price so that we'd be willing to get after it.
So I'm looking at Blake are getting have been working on that.
Yes, we do have an amazing asset in the Anadarko basin and it's ready to go.
When we look at the Permian the Marcellus Anadarko Cartera is very well positioned for exactly what was designed when we formed that we can we can react to.
Liquids prices or natural gas prices with a healthy inventory when I say healthy I mean, a deep.
Robust inventory.
I hope people are saying that in our asset base, but.
You know we would have that option I mean, that's the place you want to comment on that.
Yeah, just the Anadarko is very well positioned for LNG, it's gotten straight shot to the coast Theres lots of new facilities coming online, they're all of them intrigued us.
As Tom said, we'd love to find one that guarantees us a great tailwind to our cash flow, we haven't found that yet but.
We're focused on how do we do in LNG deal that minimizes our total cost, but also gives us some flexibility because we do like to move capital around and we would hate for the tail end up wagging the dog on that.
Perfect and then maybe just a follow up on gas specifically, Tom and team just curious how you all are feeling about the hedge book heading into 2024 still seems like it might be a bit of a transition year with some challenges on the inventory carryout from 23%.
So just wanted to see how you all are thinking about your hedge profile for next year, and then maybe longer term philosophy around hedging for natural gas.
Yes, Shane wants to take that yeah sure. So.
Course of the last quarter, we did add some hedges to the block and then again I think historically we.
Pretty consistent messaging, we want to be somewhere between 20% to 25% to upwards of 50% hedged in any sort of forward.
12 months 18 month window, and so we try to get back into that posture and I think as you look today, we are positioned that way you know plus or minus.
Around 25% to 30% on the gas side. If you include the physical hedges and the financial hedges.
In concert and we think that's a good place to be but we'll continue to monitor it.
As we go you'll also find if you just look at the shape of that hedge book is probably a little bit front half of the year weighted a little less second half not.
Not to any extreme but but there is a little bit of a slope to that profile.
Thank you.
Your next question comes from the line of Roger Read Wells Fargo. Mr. <unk>. Your line is open.
Yeah. Thanks, good morning.
Come back to some of the productivity questions. There's obviously a portion of it you've talked about that's above ground driven and there's a portion that's below ground driven thank the above ground, it's not too hard to understand from a logistic standpoint E Frac switchover.
The below ground, what have you been able to do there thats led to better performance per lateral foot.
Well, yeah, one of the one of the things we've done Roger over the last few years has really spent a tremendous amount of time studying the optimum development scheme for a drilling spacing unit.
Have a little different spacing assumption that others and I think we are as we apply that throughout our portfolio. We are seeing ongoing benefits from it.
We think that with fewer wells, we can extract the same amount of resource our machine learning team has been instrumental to co terror and that understanding.
And.
They continue to drive a lot of our thinking.
It's been a remarkable piece of technology to adopt internally and it's had a direct benefits and our capital efficiency.
As we think about wider spacing.
Factor in with.
Total total.
Alright.
Okay.
Adjustments to fair.
We've got enough of a run.
Youre not concerned over the next several years.
Yeah. You were you were breaking up there, but I believe your question is with wider spacing, how does that impact the duration of our resource.
We model that into everything you're saying our deck that's modeled in.
Yeah, we don't count number six on the map quite frankly.
Although you know everybody loves a high number there we look at I mean, if we can drill fewer wells and get better financial returns and not leave stranded resource.
That is the Holy Grail.
We're.
Whenever there, but we're moving into that direction in a very positive way and that's part of what's underwritten our results this quarter.
Alright, Thank you apologies for the breakout.
Your next question comes from the line of Leo Mariani with Roth.
Your line is open.
Yeah.
Yes, I just wanted to ask on the seventh Permian rig here.
Sounds like that was kind of always always part of the plan and perhaps you guys. Just accelerated so I just wanted to confirm that was something that was going to be in place kind of all year and in 2024. So I mean, it sounds like you're probably going to have a little bit more all in Permian activity next year.
Well I'll tell you if that was pre bag. There are a lot of people, though the whole way to have scars from us fighting over that.
But I'll, let Blake.
Yeah.
I'd say the real impetus was.
The Wyndham ROE like we've talked about that's a big project, we want to be well ahead of it to give us lots of timing.
The drilling cadence associated with that project only had is picking up the rig early in 'twenty four and we just decided to buy ourselves a little time to take it up early we're able to contract a great rig with one of our strong service providers. It was hot and ready to go so we jumped on it.
Okay. So I just wanted to get a sense I mean is that going to give you guys a little bit more Permian activity. Then just on average it sounds like you're running a little bit more equipment next year.
No. It really just accelerates the projected so it wasn't a big material shift.
We had plans to bring that rig yet next year anyway.
Okay understood and then I guess, Tom you talked about this a couple of times, but.
Yes, you got the multiyear guide you and update that early next year and it just sounds like clearly you've you've outpaced expectations in 2023.
It just seems like if we continue to see strong well results added <unk> you've got this guide of oil of kind of 5% plus if trends continue it seems like it could be a little bit more of a plus as opposed to the Fi as we roll into next year.
Well, we're currently at five plus and Yeah, we will look forward to discussing our plans for what we roll them out we're still having some iterations, but yes. We are we are seeing great asset productivity.
And.
Yes.
We expect any surprise to the upside now that said, we also operate in a world where things go wrong I mean.
Yeah.
We're not immune from train wrecks operationally.
We avoid them as best we can but I think if you look at our sector any kind of operational interruptions are always part of our business. So we like to promise what we think we can deliver.
Okay. Thanks.
Your next question comes from the line of Charles Meade with Johnson Rice Charles Your line is open.
Good morning, Tom to you and your team there and thanks for for going over the hour Mark here.
This perhaps dovetails with it with that last question on your on your outlook for 'twenty for it.
But I wanted to start specifically with your <unk> guide, which was stronger than many of us from the outside looking in were expecting so.
Perhaps this also fits with the earlier comments about.
Volumes or volume growth is really an output not a not a driver.
We look at your sequential.
Over the course of 'twenty, we can see that in at the old rate has ticked up and it's ticked back down and you're going to have a big pick up for Q4. So my question to bring it to a point is.
How would you encourage us to to look at this for Q4 Q volumes. As is this is this one of our big uptick that that's likely to mean revert or or is this more along the lines of a of a new baseline that you guys are that you guys are looking at that you're going to build on.
Well, we havent we havent.
As you know.
Specific plans for 'twenty, four but we carry a lot of operational momentum into 24 now that doesn't mean that you take the extra rate and just keep on going up to the right we talked about.
Growth, we're talking about annual numbers so.
But.
What we're what we're seeing with a lot of these projects that we've discussed such as Wyndham row as were seeing less she saw and that production profile and and we'll be working hard to maintain that in 24 had less she saw weeds.
We'd like to have smooth operational cadence and.
And kind of dampened the volatility in our production profile.
And I guess, maybe just for my follow up can you can you elaborate on what <unk> is.
Well, she shows up and down significantly quarter by quarter over quarter.
But again, we're not prepared to discuss anything specific about 24 on this call I think our three year guide of five years, plus or excuse me, 5% plus on oil is a reasonable expectation and that's kind of.
Yes.
Sure.
Studying kind of a starting point on any planning process.
Ladies and gentlemen, there would be no more further questions. At this time I would now like to turn the call back over to Tom Joyce for closing remarks.
Well I want to thank everybody for joining us this morning.
Again, we're very pleased to co chair to be delivering excellent results for the third quarter, but I'll finish where I started we expect this out of ourselves and we think you should expect from us. So look forward to delivering consistent performance over time. Thank you very much.
Ladies and gentlemen that concludes today's call you may now disconnect have a great day.
Okay.
[music].