Q4 2023 Chord Energy Corp Earnings Call
Following the presentation, we will conduct a question and answer session. If at any time. During this call you require immediate assistance. Please press star zero for the operator.
Call is being recorded on Wednesday February 21, 2024, and I would now like to turn the conference over to Mr. Michael Lou. Please go ahead.
Thank you good evening, everyone. Thank you for joining the call.
Today, we will be discussing the business combination between CT energy and enterprise and also touching on our fourth quarter 2023 financial and operational results.
With me on the call.
Our Danny Brown, President and Chief Executive Officer of CT energy as well as Ian Dundas, President and Chief Executive Officer of <unk> as well as 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 and forward looking information within the meaning of applicable laws.
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 joint press release announcing the transaction <unk> earnings releases as well as in our filings with the Securities and Exchange Commission.
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 <unk> earnings releases and on its website.
We may also reference our current Investor presentation, which you can also find on our website.
With that I'll turn the call over to <unk> CEO Danny Brown.
Thanks, Michael and thanks, everyone for joining our call today on such short notice, we're very excited to announce that CT energy and <unk>.
Which quarter will combine with <unk> to form a premier Williston Basin company. We view today's announcement is the next logical step for both companies as we create a stronger more sustainable organization that we believe is positioned for continued performance and long term growth.
Our plan to spend some time, commenting on the merits of the deal before turning it over to Ian for some additional thoughts to start both Ian and I are proud of what our individual organizations have done over the years. Both companies have diligently worked to position their portfolios and one of the premier oil basins in North America, resulting in top tier assets spread across the Williston basin that are highly complementary.
Both companies have generated significant free cash flow and have returned a large amount of capital to shareholders and our teams did this while being good stewards of our environment and the communities in which we operate both cord and inter plus have talented hard working people that have accomplished a tremendous amount for which they should be extremely proud Ian and I are certainly proud of them.
And we look forward to getting the teams together to share best practices and drive continuous improvement.
Slide four of our Investor presentation gives us gives a good summary of the merits of the deal.
As you can see this combination checks all the boxes between operating financial and strategic goals. It enhance the scale and asset quality. Additionally, it delivers accretion on all key financial metrics, which is boosted by significant synergies that will get into additionally, the combination improves our financial strength and returns which of course supports our peer.
Leading return of capital profile.
Turning to slide five you can see the terms of the combination.
The merger consideration is structured is 90% stock and 10% cash each <unk> common share will be exchanged for 0.10125 shares of cord common stock and $1 84 per share in cash at this exchange ratio and our respective share prices on February 22020 for the combined company would have.
An enterprise value of approximately $11 billion.
Inclusive of inter pluses net debt pro.
Pro forma for the transaction CT shareholders will own approximately 67% and <unk>.
<unk> shareholders will own approximately 33% of the combined company on a fully diluted basis.
Following close of the transaction the board of Directors will increase to 11 members, which will consist of seven representatives from cord and four representatives from inter plus Ian will join the board and serve as advisor to the CEO. The core executive leadership team will continue to run the combined company.
The combination has been unanimously approved by the board of directors of both companies. Currently we are expecting to close by mid year 2024 stack.
Standard regulatory approvals are needed in both U S and Canada, plus the shareholder vote, including HSR review.
This is a deal that is good for our shareholders. Good.
Good for consumers.
As we should be able to access and ultimately produce more resource than either company would have otherwise been able to do standalone and good for our communities since as a larger organization will be able to commit more time and resources to reducing our environmental footprint and focusing on local communities turning to slide six we believe this transaction creates a combined company with meaningful.
Scale. The combined organization will have approximately $1 3 million net acres with 98% of that in the Williston Basin. Additionally, combined fourth quarter 'twenty. Three production is 279000 barrels of oil equivalent per day with over 90% of that in the Williston Basin. The transaction also combines high quality inventory, which supports sustainable free cash flow.
Through the different commodity cycles, we believe coordinator plus have some of the best inventory in Bakken.
To illustrate the point since 2022 combined coordinator plus have brought 30% of the top 100 wells online when looking at greater than six months of oil production.
Bringing only 15% of the wells online over the same timeframe or.
Our combined position represents approximately 10 years of low cost development at the current pace with significant upside beyond that while.
While the Standalone inventory of both companies has compelling returns the combination expands our three mile lateral opportunity and we will continue to pursue additional long haul additional longer laterals given the success we've had over the past two years.
The flesh this three mile opportunity out a little more over the course of 2023 coordinates significant progress in drilling completing and cleaning out three mile wells drilling times have been reduced by roughly 25% since the beginning of 2023 with it now only taking 10 to 11 days on average on the clean outside we've made strong progress over the course of the year and reached TD and essentially.
All 30, plus three mile Wells brought online in the second half.
We get asked frequently if there could be upside to our implied 80% productivity assumption for the third mile and we believe this is a possibility, especially in light of our progress on clean outs over the past year. However, it will take a little more time likely until the end of this year to get sufficient production history to effectively analyze the three mile declines and determine whether we can increase our EUR uplift.
Assumptions from 140% to 150%.
The enterprise teams in the early innings of pivoting the three mile laterals and already have over 10% of their inventory set we see.
<unk> opportunity to increase this percentage and enter pluses high quality acreage, which supports better economics and more free cash flow. Additionally, we're continuing to evaluate four mile laterals and we expect to drill our first four milers at the end of this year if.
If successful these initiatives should further improve returns.
On slide seven you can see our pro forma market cap is over $10 billion significantly increasing our size positioning the combined company nicely within our new large cap peer group.
Combined oil cut is high at 56% and positions us well given the current commodity backdrop.
Slide eight shows inventory quality and depth as estimated by an independent research firm, which tries to use similar method modeling message across each company represented the key takeaway is their analysis shows the pro forma core right in the mix with large cap names on inventory depth and quality, while we evaluate our inventory differently than embarrass.
We believe that they are objective and try to be consistent with this in mind. The scale of the combined company is competitive with large cap peers.
Moving to slide nine as we think about potential synergies the opportunity is significant the combined company expects to benefit from administrative capital and operating synergies of up to $150 million per year administrative synergies are expected to begin immediately in 2024, an increase in 2025 up to $40 million capital synergies are expected to.
Increased to up to $55 million during 2025 and operating synergies initiate in 2025 and are expected to increase up to $55 million in 2026.
Mine company will leverage best practices to further advance efficiencies across the business. The after tax present value of synergies is expected to exceed $750 million.
As you are aware this is a cross border transaction the team has evaluated the tax.
Tax ramifications and we do not expect it to be much tax leakage on a pro forma basis.
To expand on this a bit the core team has made great progress reducing downtime through the course of 2023.
As a combined company, we see additional opportunity to make progress on improving downtime, which is important given based production is the vast majority of any year's volumes. Additionally, we'll be looking at ways to drive LOE down through field standardization data analytics lower failure rates among other items.
You can refer to the appendix for more detail on synergy potential I should note. Our respective teams have spent considerable time together and look forward to digging in on further synergies. We are confident we can deliver based on capability and level of rigor from both teams.
Now turning to slide 10, we see our superior profitability are higher high oil cut of 56% underpins healthy cash margins.
As we just discussed we are focused on expanding margins further through a variety of initiatives. Additionally, the transaction is accretive to all financial metrics and accretion didn't come at the cost of financial strength, we maintain our best in class credit profile with net debt to EBITDA of 0.2 times at close and minimal near term maturities with <unk>.
Average well below peers, we have additional flexibility for our strategic initiatives and return of capital.
Turning to slide 11 core has significantly outperformed our new large cap peers over the past several years through a combination of mergers acquisitions and divestitures focus on returns and returning significant capital to shareholders. All of this was done while maintaining a healthy balance sheet.
Notably cordage paid $45 per share in dividends since 2021, while the underlying equity has appreciated significantly as well.
So accretion is obviously important to shareholder returns and as we discussed earlier the outlook is strong on that front. The pro forma company expects approximately $1 2 billion of free cash flow and a reinvestment rate of approximately 51% in 2024 at $79 per barrel <unk> and $2 50 per M and Btu Nymex gas.
Return of capital. Following closing is expected to remain of course cords pre combination levels of 75% plus of free cash flow given the strong balance sheet.
Base dividend remains unchanged at $5 per year, the base dividend, we'll continue to be supplemented by share repurchases and variable dividends.
Slide 12 shows our relative valuation and yield, which we view as attractive seeing as they are based on pro forma analysts' consensus expectations and don't include the impact of synergies and finally slide 13 summarizes the merits of the deal and I think it is important to note that both CT and <unk> have maintained a disciplined approach to M&A. We're confident the combination is the right.
Move and will result in significant value creation.
Both of our respective shareholders.
Additionally, both coordinator plus have a tremendous track record of being responsible corporate citizens and respecting all of our stakeholders, we remain committed to ESG and sustainability and capitalizing on combined best practices. We also remain committed to supporting the communities, where we operate and look forward to building on on each company's relationship with the FHA nation and their leadership.
To sum things up the combined company is expected to generate significant free cash flow from its low cost asset base and improve efficiencies and execute disciplined capital spending through business cycles with that I'll turn the call over to Ian to provide some thoughts on the combination.
Thanks Danny.
I believe the value enhancing opportunities from this combination are compelling.
This transaction represents a unique opportunity to drive meaningful cost and operational synergies.
And improving profitability profile and will position the pro forma business to continue to deliver strong value creation on a sustainable basis over the long term.
We are excited about the opportunities are combination creates for our shareholders our people and all of our other stakeholders.
The combined footprint is remarkable.
And <unk> core inventory is a strong complement to <unk> position.
Building on the success <unk> had with three mile laterals across our position should drive further upside to the premier to our Premier Williston position.
We see significant opportunity to expand to longer laterals and believe the combined company is in a strong position to be the basin leader on this front.
As Dani noted we believe the transaction is very good for shareholders of both companies. It is an excellent strategic fit it.
It is accretive to key financial metrics, while retaining a pristine balance sheet.
The large stock component provides <unk> shareholders with a strong near term return on their investment and further upside from ownership in the combined entity.
On the operational side.
Both companies have a strong execution track record over the last few years drilling and completion times have improved for both companies and currently rank in the top tier for Williston operators.
Additionally, the enhanced size and scale that comes with this combination supports more consistent activity.
Which lends itself to more efficient operations.
You can see these benefits highlighted in the synergies announced.
The core team has a proven track record of executing on integration and synergy capture as we saw with the integrations of QEP waiting Oasis and last year's <unk> acquisition.
On the <unk> side, we've also been active in the A&D market in recent years and there are a lot of integration experience to bring to bear.
We look forward to working with core team to capture these savings and make our combined business better to deliver more value to shareholders.
And finally on a personal note it has been a privilege to lead <unk> over the past 11 years.
Want to thank our employees and their families for their dedication and all the hard work over the years that has allowed us to build such a great organization.
We are now ready to get going on the integration with the goal of making an even stronger more competitive company.
Together, we will achieve things that neither company could on a standalone basis.
That I will hand, it back over to Danny.
Thank you Ian so.
So in closing I, just want to say that we are very excited and happy to announce this transaction and believe the combination of the two companies premier asset basis operational abilities and technical acumen will drive further success and create a stronger larger company positioned to deliver competitive returns and peer leading shareholder distributions.
Thanks for listening and now we'll turn the call over to Q&A.
Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press the star followed by Don on your telephone keypad.
Hey, Don call technology with quest questions will be taken in the order received should you wish to cancel your request. Please press the star followed weighted to once again that is star and wanted to ask a question.
One moment. Please for your first question.
Your first question comes from the line of Derrick Whitfield from Stifel. Please go ahead.
Good afternoon, all and congrats to you both on the transaction.
Thanks Derek.
For my first question I wanted to lead them on operational synergies could you walk through some of the D&C synergies drivers on page 16 in cost per foot terms.
Thanks for the question Derik I think as we as we think about our opportunity to improve from D&C standpoint, we're leaning a little bit on some of the experience we had on with Oasis Whiting, where we were able to use some of the best combined practices of both organizations and so we used oasis practices in some areas we use widened.
Practices in other areas.
And really by having that open that open dialogue, we were able to just really glean and use different bit technology use different casing profiles and it really allowed us to get there.
To improve there so when we think about the D&C for this transaction we've had the teams together at a very high level, because we really haven't been able to involve to many people in this and this approach so far but even through that very short period of time, we've been able to identify up to $55 million of synergies associated with that.
So.
Some of this includes expanding into three mile laterals and some of it improves just the overall process that we think we'll be able to drill and complete that but I'm going to ask.
Darren maybe to expand on it just a little more.
Thank you Danny I'm happy to happy to expand further on that when you look at <unk> performance.
The first quarter, we drove our fastest two mile wells spud to rig release in seven four days.
Averaging two mile wells and $8 nine days spud to rig release looking at three mile Wells, we've drilled our fastest well at nine five days spud to rig release this quarter and over the fourth quarter. We averaged 10 three days spud to rig release those in general are one five days to two days faster than what.
We are seeing on the <unk> and so that will be.
Synergy that we can capture just almost immediately.
The.
The fact that we're drilling 70% to 75% of the cored wells. This year were planned to be three mile laterals and we're also going to expand what enter plus had planned this year and it will take time for us to do all the permitting work and regulatory work to make that happen, but clearly court has demonstrated quite ability on three mile wells and Youll see.
He is doing that going forward.
Post closing.
I think the other thing I mentioned on the DCE standpoint, Eric as we've also just from a facility's perspective, one thing that we really did.
Have I think are maybe lead the.
The basin and is the way we approach our facilities and doing a standardized modular facility approach and so these end up being much less expensive than stick building your facilities on location and it's also a lot.
Lot safer and has a better environmental footprint as well. So that's another part is sort of a synergy that will.
That will roll through into the overall D C any cost.
Thanks, guys and then as my follow up with respect to the <unk> synergy could you talk to the delayed nature of implementation.
I imagine in part its when youre going to change out lift, but any other color you could add would be would be greatly appreciated.
So I think you're hitting on it Derrick.
Our experience again, we're able to lean a little bit on the recent transaction with <unk> is wider than what we saw there is it took about a year before we saw the operational synergies roll through and part of that is and I'll give an example.
One of the legacy organizations in the previous transaction had a different.
Different rod installation practice in a different material practice than the other.
Which led to a much longer run times on our on our Rod pumps, and so we had lower fail rate failure rate over time. So when you have that lower failure rate you don't have to do the repair work, but that takes time.
To sort of bear fruit and so.
As we think about these operational practices some of it's about reducing future failure rate and it's the lack of future workovers and future low that really that really rolls through and so that's part of that delay is just you.
Implement different operating practices and then youll see the see the benefit of a later and that's certainly what we saw at Whiting without waiting on Oasis.
And congrats on the transaction.
Thanks, Eric.
Thank you and your next question comes from the line of Neil Digman from Julissa Qep's. Please go ahead.
Afternoon, guys. Congrats certainly seems to make a lot of sense, Dan My first question.
Definitely listed now a long list of potential savings I'm curious excuse.
Excuse me about potential marketing or Oss opportunities given you all that will be the dominant player in the basin.
Well I'd say, we probably won't get too much into marketing, we need to we won't get the teams together to start talking about any of that until sometime post close.
From an Oss perspective, I think both companies had good good.
Contracts with folks in the basin, both had premier programs I think the real savings, we may see from that sort of practice isn't so much through.
Per job savings, although we could see some of that but it's really about the operational efficiency, we're going to pick up through the program and so you can imagine have running one completion crew, but not being able to run it through the course of the year, if youre able to sign a longer contract because you've got that program through the entire course of the year youre going to do you're able to not only get contract.
The contract savings, but your operation is actually much more efficient as well so youre per job cost goes down on two fronts.
That's kind of how we're thinking about it.
Okay. It makes sense and then can you just.
I will say to what you are anticipating for effective date and assume close to that.
What types of if any lockup tobey.
So looking at looking at anticipated close of potentially by mid year.
Okay, and then any lockup on the desk.
No.
Thank you.
Thank you and your next question comes from the line of Oliver Huang from TBH. Please go ahead.
Good afternoon, all and congrats on the deal and thanks for taking my questions.
I'll just.
Quick question on the longer laterals I know in the past you all have highlighted 55% to 60% of remaining inventory being conducive to three mile lateral development on a <unk> standalone basis and it looks like you all are highlighting greater than 40% of pro forma inventory in that bucket, which doesn't really imply that many enter plus lower.
Patients falling into that three mile lateral bucket. So just kind of wondering how much of that and our plus inventory could be developed at three mile laterals potentially and if there are any sort of leasehold limitations that are preventing you from doing so.
Okay.
Yes.
Way to think about that is there.
<unk> started on an owned plus to start thinking about getting three mile laterals and so I think we mentioned in our prepared remarks for just over 10% set up for three miles, but we have not actually had.
The time to do the Tetris work.
To continue to figure out what that could look like on a pro forma basis combined and on top of that there's just a lot of permitting work that needs to be done. So we actually think there's more upside to the 40% number we announced we just wanted to start conservatively in order to.
Being able to move that up over time.
Awesome that's helpful and just one other question on the completion side of things I know you all have generally run more conservative spacing to maximize per well iron ores are you all planning to make any changes with respect to the type of spacing that enter plus.
Previously you've been running on their asset base.
We're probably running a few extra wells, including a couple in the three forks, depending on where you are in the basin.
Yes, I think as we get the teams together, we got our spacing philosophy. That's generally a little wider has wells that are a little longer some somewhat due to the lease geometry, we have with some larger completions and that's worked well for us over time.
I think as we get the teams together, we're going to evaluate on really on the <unk> and sort of <unk> basis, what's the appropriate development methodologies for that specific area and so we will one of the things. We know is that if we.
We don't want to overcapitalized areas, but by the same token what we don't want to do is space out too wide, so that where we're missing high return opportunities within that <unk>. So I think you may see spacing a little wider as we move forward, but its something we need to get the teams together and share best practice is to share learnings and it's one of the opportunities for actually value enhancement as we think about this deal.
Thanks for the details congrats again guys.
Thanks.
Thank you and your next question comes from the line of David <unk> from GE Cowen. Please go ahead.
Congrats on the deal everyone I appreciate the time Tonight.
Thanks, David.
I'm curious.
I know you said that you wouldnt issue pro forma guidance until the deal closes.
But I guess can you sort of give us a sense of.
The appropriate rig and Frac crew program or are you baking in a better balance of rigs versus completion crews I think you alluded to it in your last.
Common standing I'm, just having a dedicated.
<unk> crew for a longer duration time is that does that inherently what's driving that $55 million Capex I guess like what does the balance look like between the two companies' pro forma.
Yes, I think as we as we move forward, it's going to take as you can imagine so there's an inertia to a development program and so you've got to get all your permits done you've got you've got your infrastructure laid out and so.
Unfortunately, we can't they don't they don't move really quickly and so and we haven't been able to get the teams together to really work our pro forma development plan in detail and some of them will have some restrictions on doing that up until close.
So we will.
Through the transition process will develop a combined development program clearly we've got assumptions, we're using now, but we'll refine that as we move forward and then post close will will roll out a full new development plan for the for the post closed organization.
And in that process one of the advantages we will get with this is a more continuous operations.
And a better balance of being able to run operations continuously and when I say better balance just not the not the need to start and stop cruises as the year moves on because the overall pro forma program will be larger and we should be able to pick up some operational benefits as a result of that.
I appreciate the response.
Just curious how you're thinking going forward now with this deal you guys both scale up.
Youre staying in basin consolidating this area and there is obviously some ample synergies there.
Does this change how you think about the.
The companys position in the marketplace going forward.
Or do you anticipate this being sort of the beginning of.
A further consolidation in the basin thats been already fairly heavily consolidated.
Well I'd say, it's hard to speculate on whats.
What happens moving forward really kind of focused on on this deal and what this deal does for both of our respective organizations.
Yes, I think that another way to think about it David is like we've got about on the court side 100, a day of production.
Within our plus we're adding we're getting to about 150 day of production, we're still only about 12% 13% of the Bakken.
We have theres a lot of players still and I get it that it's somewhat consolidated we certainly have some big players in the basin I think this puts us in a really nice position now and we'll continue to look at what can further be done in the basin, but certainly other people in other basins have consolidated way more than where the Bakken.
And so we think there is still continued opportunities and we're just in a good position overall.
I.
The responses guys.
Dave.
Thank you once again should you have a question. Please press Star then the number one on your telephone keypad. Your next question comes from the line of John Abbott from Bank of America. Please go ahead.
Thank you very much for taking our questions.
Just to go back to David's question.
Just to go back to David's question that was just asked.
On the.
Looking at potential opportunities to further consolidate in the Bakken.
You did mention the fact that you don't have a strong balance sheet post this year roughly about 0.2 times.
Would you want some time.
Would you be willing to act on if it came available would you be willing to act on something Sue sooner versus later or do you want to do.
You want to see the synergies from this transaction.
Again, John I would say, it's kind of hard to speculate on on sort of future hypothetical hypothetical opportunities I think the strong pro forma balance sheet. We get we have is going to give us a lot of flexibility.
And that could give us flexibility from a return on capital standpoint to weather resiliency with commodity price fluctuated fluctuations.
Or to pursue different growth opportunities and so.
We will take those things as they as they as we see them in the future, but the number one priority is going to be putting these companies together really coming together to get the best out of both organizations. Both organizations have done an incredible job and.
And we can learn from each other and get better, though so that's going to be the first and foremost is we're going to get the most out of putting these two companies together absolutely.
And just looking at the pro forma portfolio I mean, there's a.
<unk> side, there is a position.
In Appalachia will there be opportunities for divestitures coming out of this.
Yes, I think as we look at the Appalachian position. It represents about it's a great. It's in a great spot in the basin core core position in the basin with a good operator, it represents only about 2% of the pro forma EBITDA. So I think as we it's a very small part of the overall.
The overall company and as we look at the levels, we're treated like other all aspects of our portfolio continuously continually evaluate sort of all aspects of our portfolio on should they stay in or should they not stay in.
Thank you very much for taking our questions.
John.
Thank you and your next question comes from the line of Kevin Mccarthy from Pickering Energy Partners. Please proceed.
Hey, good afternoon, and congratulations on potentially becoming the largest williston producer.
Just one question for me, we kind of expected you guys to have a mid single digit cash tax rate in 2024.
Can you remind us where enter pluses and.
Yes.
If any you would expect there to be a change after this transaction.
Yes, so we've done a bunch of work on that cash tax side.
The combined entity is going to have a very similar type type of cash tax profile going forward. We don't think that there is a lot of tax leakage in the transaction overall, so we'll continue.
Give a little bit more guidance on that going forward, but it's in a similar neighborhood to where what we've been talking about on the court side.
Yes, maybe a hair less but yes it.
It will be similar on a pro forma basis.
And is that going to continue.
<unk> 2024.
Correct.
Continuing on better.
Thanks, guys.
Thanks, Kevin.
Thank you once again that is time and one to ask a question.
There are no further question at this time Mr. Bolan. Please proceed.
Okay.
I'd just like to thank everybody for joining the call today is an exciting day for both <unk> and <unk> shareholders. As we are able to announce this very important transaction and in a combination that we think is really going to benefit both of our shareholders. As we move forward. So thank you for giving US your time this afternoon and for joining our call.
Thank you, ladies and gentlemen that does conclude our conference for today. Thank you all for participating you may all disconnect.
Please hold for the next available operator.
This is the governance et cetera, which conference you'd like to join.
Yes.
This is D C G governance, et cetera, which governance you'd like to join.
Colin can you hear me.