Q3 2023 Chord Energy Corp Earnings Call

We're delighted to have you on our call I'm joined today by Danny Brown Chip Rimer, Richard Roebuck 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 call.

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 Form 10-Q.

We disclaim any obligation to update these forward looking statements. During this conference call. We may make reference to non-GAAP measures and reconciliations to the applicable GAAP measures can be found in our earnings releases and on our website.

It May also reference our current Investor presentation, which you can find also on our website.

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

Thanks, Michael and good morning, everyone and thanks for joining our call and I know this is a very busy morning and in that vein I plan to briefly recap our third quarter performance and touch on some of our key organizational initiatives before passing the call on to Michael Lew Hill.

You'll give a little more detail on the financials and some additional color on a few other topics and a small preview of our thoughts for 2024, well then open it up to Q&A.

So with that yesterday evening, CT reported third quarter 2023 results and raised our full year production outlook I'm pleased to announce the third quarter volumes significantly exceeded original expectations driven by both scheduled acceleration and continued strong well performance the entire corn team worked together to bring 45 wells online in the third quarter, which was ahead of.

Our original expectations and higher than the 37 wells brought online in the entire first half of the year. This accomplishment is even more impressive when evaluated on a two mile equivalent basis, which amounts to a 42% increase in well delivery and half the time, so to our team I'd like to say, thank you and I'm very proud of all the hard work that went into executing the program.

Underpinned by the strong production cords quarterly financial performance supported robust free cash flow and high shareholder returns, we generated 207 million of adjusted free cash flow during the quarter and in accordance with our return of capital framework. We returned 75% of this free cash flow to shareholders.

To that end, given our base dividend of $1 25 per share and our share repurchases of $52 million as part of our recurring return of capital program. We declared a variable dividend of $1 25 per share as a reminder, the variable dividend is designed to make up any difference between our targeted free cash flow.

And the amount distributed through base dividends and share repurchases.

Finally, with respect to share repurchases you may note that the aggregate value of share repurchases associated with our return of capital program is up nearly 70% as compared to the second quarter. In addition, we saw incremental repurchases occurring in the quarter sourced from proceeds received through warrant exercises and I'll ask Michael to discuss that topic more in a few moments.

As I've said before we believe our capital return program as peer leading and demonstrates our commitment to both capital discipline sure and shareholder returns and to the investment opportunity that core represents accordingly, we have announced a new $750 million share repurchase authorization, which replaces the old $300 million program.

And Gibbs CT additional flexibility to take advantage of our discount to peers and to intrinsic value.

Rotating from the quarter to the full year, we've increased production guidance, reflecting the strong third quarter volume performance and modest schedule acceleration I previously discussed full year capital is expected to be at the high end of our $850 million to $880 million guidance range, reflecting the acceleration of activity and also higher working interest we're seeing from <unk>.

Some of the wells in our program.

Operationally, we continue to be encouraged by the progress we're making on three mile laterals over half the wells we brought online in the third quarter were three milers in total we've executed about 50 to date and the performance is meeting our expectations you can clearly see contribution from the British portions of the ladder.

And we are observing an uplift over time versus two mile analog wells in each development area. You can find additional details on slides nine and 10 of our updated investor presentation, where we provided performance data on cored wells in Fort Berthold and Foreman Butte and both of these areas you can see a meaningful uplift in three mile cumulative production.

Versus the two mile analogs and Foreman Butte, specifically early time production from three mile Wells was affected by the tracer study we discussed on slide 10, once the top portion of the lateral was cleaned out in the three mile Wells. They began to outperform the two mile wells and we expected that degree of outperformance to increase as the wells continued to.

<unk>.

<unk> also continues to make good progress with respect to our operational performance drilling completing and cleaning out these wells as.

Slide nine of our presentation shows we have materially reduced drilling times for three mile wells over the past year to approximately 11 days per well, representing an improvement of over 35% and drilling times as compared to the third quarter of 2022.

On the clean outside we've also made steady improvement and have generally been able to stimulate and access the vast majority of the third mile and our most recent wells.

During the third quarter, we achieved full TD on substantially all of the three mile Wells, we brought online as.

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 cost said another way, we're assuming the third mile is only 80% as productive as the first two miles however, with effective completion and cleanup practices. We believe the volume response could be nearly <unk>.

A portion of it to the percentage of the third mile which cleaned out.

Finally core published its first full sustainability report as a combined company in September which reflects our commitment to delivering affordable and reliable energy in a sustainable and responsible manner. Thank you to the team for putting this together as it does a great job, providing transparency onto our business and highlighting our efforts on emissions reduction workforce.

Health and safety and corporate governance, among other things we welcome feedback from our stakeholders on our progress and look forward to building upon our ESG efforts to shape, an even stronger future for core and the communities we serve.

To sum things up we executed well in the third quarter, which sets us up nicely to deliver strong free cash flow and high shareholder returns for the remainder of the year, our asset base is meeting or exceeding expectations and we will work to drive further improvements going forward I will now turn the call over to Michael.

Thanks Danny.

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

Danny mentioned oil volumes were strong in the third quarter about four 5% over mid point guidance total volumes were about three 8% above midpoint guidance.

Our fourth quarter midpoint oil guidance of 103.5 thousand barrels per day is in line with our August expectations and on a full year basis, we increased oil production guidance by over 1000 barrels per day.

I want to Echo Dan's comments on the extraordinary achievement by the core team in the third quarter. This was an exceptional amount of effort and I'm really proud of everyone involved.

Oil realizations remained strong at a modest premium to WT I and were slightly better than our mid point guidance looking to the fourth quarter, we expect Bakken oil pricing to weakened slightly due to a higher base and production and an unexpected refinery turnaround and the pricing is still expected to remain at a slight premium to <unk>.

NGL realizations as a percent of W. T. I were in line with our mid point guidance, while residue gas pricing as a percent of Henry hub was a touch below midpoint, we expect pricing for both NGL and residue gas to improve modestly in the fourth quarter.

Turning to operating costs low.

LOE was $10 94 per BOE in the third quarter and GPT was a $3 16 per Boe.

Both were within our guidance expectations, but L. O. We trended towards the high end, mostly due to higher workover expense.

We view Workover expense as an important investment to reduce downtime and enhance revenue we've seen a meaningful improvement in that downtime over the course of 2023, and we remain focused on lowering the cost side to improve the efficiency of the program.

Production tax as a percent of revenue was eight 6% in the third quarter and we expect a similar rate in the fourth quarter.

Cord cash G&A expense was $13 7 million in the third quarter, and we lowered our full year guidance slightly to reflect our latest forecast.

At this point the merger integration is substantially complete and we don't expect significant merger related costs going forward.

DD&A averaged $9 90 per BOE in the third quarter, an increase of almost a dollar sequentially the.

The increase the DD&A reflects the July 1st closing of the X T O bolt on acquisition as well as mid year reserve changes, mostly due to lower SEC pricing.

CT paid no cash taxes during the third quarter and in the fourth quarter Court expect cash taxes to be approximately.

Zero to 10% of the fourth quarter EBITDA at oil prices between 70 and $90 per barrel.

Yeah.

Danny mentioned that we expect capital to be towards the high end of the full year guidance of $8 $850 million to $880 million given a couple of items first improved cycle times have led to incremental lateral feet drilled during the year versus original expectations second working interest is slightly above expectations.

Patients in these working interest increases accounts for approximately $10 million of incremental capital.

Danny discussed our return of capital for the fourth for the quarter and wanted to give you a few more details on our share repurchases.

During the third quarter core <unk> repurchased $112 million of stock <unk>.

Including $52 million related to third quarter return of capital with the remainder funded by cash proceeds from warrant exercises.

We received approximately $73 million of cash from warrant exercises in the third quarter.

We were able to use roughly $60 million of this for incremental third quarter repurchases.

And with the remaining $13 million of repurchases that were at the beginning of the fourth quarter.

This $60 million and $13 million in the third and fourth quarters, respectively are not included in the calculations for return of capital.

Going forward in a similar fashion that we generally expect to use cash received from warrants to offset dilution.

Turning to liquidity cord recently completed its fall borrowing base redetermination, the borrowing base and elected commitment remains unchanged at $2 5 billion and $1 billion respectively.

As of September 30th there was nothing drawn.

And cash was approximately $265 million.

Finally, turning our attention briefly to 2024, given the strong growth in oil production in the second half of 2023 as we look into 2024, our corporate annual decline rate increases slightly.

As we start to see the benefits of the shallower declines associated with our growing proportion of producing three mile Wells. We expect this increase in decline to reverse towards the end of 2024 and into 2025.

Overall for 2024, we're expecting a maintenance capital program with full year volumes flat to 2023.

On a pro forma basis. This is around a 99000 barrels of oil per day with expected capital a little over $900 million.

Additionally activity is expected to remain concentrated in the spring and summer months next year. This means that sales will be focused towards the second half of the year and that 2020 for volume should follow a similar pattern to 2023 with the second half of the year higher than the first half.

In closing the core team continues to drive to.

Strong performance with a focus on returns this directly leads to sustainable free cash flow profile and our peer leading return of capital program.

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

At this time, if you would like to ask a question you May Press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.

At this time, we will pause momentarily to assemble our roster.

Yeah.

And our first question will come from Scott Hanold of RBC capital markets.

Yeah. Thanks, good morning, all.

You know Dan to you're talking about are you.

Seeing some good things coming out of that last mile on on the three mile Wells.

And can you give us a sense of where your confidence level is seeing to see the debt you're going to get the full contribution on an EUR basis like how much more information do you need and is that kind of performance applicable across different parts of your acreage.

So maybe I'll start with the second part first Scott and then I'll flip it over to chip who may have.

Any real differences in one area of the field versus another with respect to how much we're expecting to see in that third mile. So we do think it's you know.

Applicable across the whole position from a confidence level standpoint, I think we're we've got growing confidence, but that's obviously going to require production over time and so like any of these unconventional wells.

We produce flat for some period of time as we were making facility constrained. We go on decline and then that decline we go through our B factor and we turn and we level out at a sort of a terminal decline rate and so it's just it's hard to know exactly what you're going to get until you go through that process and get through that B factor and and hit that terminal decline rate to know what your ultimate recovery.

Going to be what I will say is we are very encouraged with where we're at right now with the with the wells we have both that we've done and the wells we've seen across the basin that.

That are our underwriting at 40% is are we feel very confident with that but where we were having growing confidence that we're going to see more than that but.

But we need to we just need to see the production data over time the pressures look good the production looks good and says all giving a strong we know we're seeing a contribution from the very first part of the lateral because we have tracer data that shows us that we're seeing that.

And so I think all of these are you know, it's all growing growing level of confidence that we're going to be something above this sort of 80% efficiency in the last mile. I think it's too soon to know exactly what that's going to be but ER, but we're really really pleased with what we're seeing that chip I don't know what incremental costs you would have Scott. Thanks for the question and good morning.

Just a couple of things.

The team has done a fabulous job of cleaning out the three milers, we were probably in the 25% in the first half and now we're close to 90, 590% clean out and so they're doing a fabulous job cleaning up the wellbore. So as Danny said I expect that that we're going to see the contribution completely.

The back half the last mile or so also we're about five or six different areas throughout the basin. So we're testing that right now so I would assume sometime in the first quarter will have a lot more data to be able to tell you, but I feel real strong about where we are the operations and the way the teams cleaning out so really proud of what they've done.

Great and Danny just to maybe pin you down a little bit here, you talked about waiting to see that get more into the terminal decline passed the b factor like generally how would you define that is that more of a kind of post two to three year type time frame.

You know I think two to three years is probably a little long I don't think we need that long but.

With where we're at right now I'd call. It call. It maybe a year plus of data and you start to really get past that are past that factor and we'd get a much better idea.

Got it. Thanks My follow up on is on M&A I mean, obviously a lot going on here over the last several months and on the M&A side and and you know what do you guys have obviously participated.

And in that over the last number of years can you give us your thoughts on as you look forward. What do you you know how does M&A fit into the core strategy and if you can give some context around in basin out of basin being up.

Consolidator in that consolidate D.

Yeah, I think maybe I can sum it up.

Broadly Scott by saying we are believers in consolidation. We are we're a product of consolidation that's how God was formed we.

Will we plan to participate in consolidation as we move forward and whether that means we are the consolidate door or the consolidate T. Either eat away is okay. We believe in and being part of a larger equity story and we'll look for sensible opportunities to do that I think along those veins as we think about participating.

Participating in consolidation, where we're consolidating I think in basin consolidation is a obviously a very natural thing for us to look at we have a very significant acreage position in the Bakken, we really touch all aspects of the basin with that sort of slightly over $1 million million acre position. We've got so lots of synergies from an operational.

Endpoint.

And from a whether it be sort of our our subsurface knowledge our operational capability. The routes we run just <unk>.

Converting D S used from two mile to three mile in basin consolidation makes a lot of sense.

We are also we are open and have and and look at out of basin consolidation opportunities, but we're also very clear eyed and recognize that the risk associated with out of basin consolidation is higher than the risk associated with in basin consolidation due to all the factors I talked about a moment ago and so it's just a higher bar.

<unk> to add a base in consolidation versus versus in basin, and so, but it's a medically big believers in consolidation and when you're in a commodity business. I think that's just an important thing for us to to recognize it would be focused on.

Yeah, and then if I could just ask a little P. A little tweak to that question to it like when you look at in basin opportunities.

Like these higher interest rates impacted like some of the players the smaller players to be willing sellers and the price to pay does that does that have an influence or are you seeing any kind of impact from the higher interest rates.

Yeah, and I think may be too early to say specifically on that topic is you've got to have a number of transactions to see what kind of effect youre seeing et cetera, but the.

Generally speaking I'd say, you're thinking about cash based deals where debts on the backside higher interest rates probably aren't the are very helpful to that and I would say.

Big swings in commodity price are also arent very helpful to M&A in general and so.

We will see where that goes and Michael I'll invite you to make any further comments no I think that's exactly right I mean, obviously the capital markets the lending markets all of them are much tighter than they have been.

Across history, and so that financing cost obviously is is increasing for both the buyers and as well as maybe forcing sellers to think about exiting earlier, just because that financing cost is higher so.

It puts pressure on both sides. It also makes obviously buyers a little bit more disciplined I'd say with that higher interest costs and how they think about valuations yeah. No I appreciate that and yeah. That's exactly what I was pointing to as more of the the the latter part of that answer where sellers more motivated and if you have cash youre in a better position as us.

As a potential buyer.

Yeah totally agree with that.

And the next question comes from John Abbott of Bank of America.

Hey, good morning.

Thank you for taking our questions on Asia.

A busy morning.

Good morning, Josh.

Yeah, Hey.

I recognize it's still early with the tracer tests and Youre looking at three mile laterals.

But what do you think the implications could potentially be for four miles I mean are you ever thinking are you considering actually testing a four mile lateral.

But to sort of a similar test.

I think the short answer to that John is yes, we've seen four miles in other basins.

We have theres certain lease geometry, as we've got that would really lend themselves to doing four mile laterals.

Youre right. It is early from a three mile standpoint, I will tell you if you sort of rewind the rewind the clock in and we would've thought at some point moving into three mile laterals was a was a big step into the unknown and we would have had lots of concerns about it but certainly the three mile program.

To date as we think it's been very successful we're excited about moving forward and I think the opportunity for four mile laterals is absolutely out there and something we're investigating.

Thank you Danielle and for a follow up question you gave some color on 2024, you talked about.

You know your current underlying decline rate is a little bit elevated at this point in time.

You suggested that could reverse by the end of next year.

<unk> indicated that for 2024 that capex could be roughly around in the low $900 million range. So when you think about that potential reversal.

In the underlying decline rate at the end of 2024. When you think about your 2000 you spend in 2024, what do you think about the potential implications to 2025 capex given the change in the underlying decline rate versus the 900 mill for 2024.

Yeah, well I think with as you would expect with a lower decline rate. It should be helpful from a reinvestment rate perspective, and so if we're running a maintenance program all else being equal you would expect lower capex needed to maintain whatever production youre trying to hold.

And so I think it's it's nothing but beneficial as we see the contribution of these as these three mile laterals grow in proportion to our existing base and we see that contribution of the shallower decline, it's going to be helpful to us as we march toward our in maintaining maintaining our production base for.

Uh huh.

Better capital efficiency, if you want to look at it that way, but certainly a lower capex to maintain maintain maintain or achieve any sort of production level.

So if I can squeeze a quick one in there. So what do you think long term maintenance capex for your history. At this moment. If you take if you think about that sort of.

Deduction.

That change in your underlying decline rate.

Yeah, I think if you think of where we were thinking its going to be something in the.

Low nine hundreds next next year, what we should reverse off of that a little bit of course lots of things can change between here and there with service costs et cetera, and so we'll have to see when we get to that timeframe, but I think with where we're at right now what we've seen in 2023, and where we're going in 2024, and you would expect to be something something more capital efficient than the.

Then the anticipated 24 program and so probably trending back towards our.

Towards what we saw this year.

Alright, Thank you very much.

Again, if you would like to ask a question. Please press Star then one at this time.

And showing no further questions that will conclude our question and answer session I would like to turn the conference back over to Danny Brown, Chief Executive Officer for any closing remark.

Thanks.

Thanks, Laura well the closeout I just want to thank the employees of cord for their commitment and dedication to our company. It was a really strong quarter from an execution standpoint, and the team did a fantastic job and I know also know we all have a relentless drive to improve so we will continue to work as a team to make <unk>, an even stronger company for all of our stakeholders. We're proud of a great third quarter.

Excited about the setup for the remainder of 2023 and plans for 2024 and beyond and with that thanks to everyone for joining our call.

Yeah.

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