Chord Energy Q3 2023 Earnings Call Transcript

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November 2, 2023

There are 6 speakers on the call.

Operator

And welcome to the Chord Energy Third Quarter 2023 Earnings Results Conference Call. All participants will be in listen only mode. Please note this event is being recorded. Would now like to turn the conference over to Michael Liu, Chief Financial Officer. Please go ahead, sir.

Speaker 1

Thank you, Laura. Good morning, everyone. Today, we are reporting our Q3 2023 financial and operational results. We are delighted to have you on our call. I'm joined today by Danny Brown, Chip Rimer, Richard Robuck and other members of the team.

Speaker 1

Please be advised that our remarks, Including the answers to your questions include statements that we believe to be forward looking statements within the meaning of the Private Securities Litigation Reform Act. These forward looking statements are subject to risks and uncertainties that could cause actual results to be materially different from those Currently disclosed in our earnings releases and conference calls. Those risks include, among others, matters that we have described in our earnings releases as well as in our filings with the Securities and Exchange Commission, including our annual report on Form 10 ks 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.

Speaker 1

You 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.

Speaker 2

Thanks, Michael. Good morning, everyone, and thanks for joining our call. I know this is a very busy morning, and in that vein, I plan to briefly recap our Q3 performance And touch on some of our key organizational initiatives before passing the call on to Michael Liu. He'll give a little more detail on the financials, some additional color on a few other topics results and raised our full year production outlook. I'm pleased to announce that 3rd quarter volume significantly exceeded original driven by both schedule acceleration and continued strong well performance.

Speaker 2

The entire Korn team worked together to bring 45 wells online in the 3rd 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 Even more impressive when evaluating on a 2 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 this strong production, Chord's Quarterly financial performance supported robust free cash flow and high shareholder returns. We generated $207,000,000 of adjusted free cash flow during the quarter And in accordance with our return of capital framework, we'll return 75% of this free cash flow to shareholders.

Speaker 2

To that end, Given our base dividend of $1.25 per share and our share repurchases of $52,000,000 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 This is designed to make up any difference between our targeted free cash flow payout 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 It's up nearly 70% as compared to the Q2. In addition, we saw incremental repurchases occurring in the quarter sourced from proceeds received through warrant And I've asked Michael to discuss that topic more in a few moments. As I said before, we believe our capital return program is peer leading and demonstrates our commitment to to both capital discipline and shareholder returns and to the investment opportunity that Cord represents.

Speaker 2

Accordingly, We have announced a new $750,000,000 share repurchase authorization, which replaces the old $300,000,000 program and gives Cord 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 Q3 volume performance and modest schedule acceleration I previously discussed. Full year Capital is expected to be at the high end of our $850,000,000 to $880,000,000 guidance range, reflecting the acceleration of activity And also higher working interest we're seeing from some of the wells in our program. Operationally, we continue to be encouraged by the progress we're making on 3 mile laterals. Over half the wells we brought online in the Q3 were 3 milers.

Speaker 2

In total, we've executed about 50 to date and the performance is meeting our expectations. You can clearly see contribution from the furthest portions of the lateral and we're observing an uplift over time versus 2 mile analog wells in each development area. You You can find additional details on Slides 9 and 10 of our updated investor presentation where we provided performance data on core wells in Fort Worthhold and Foreman Butte. In both of these areas, you can see a meaningful uplift in 3 mile cumulative production versus the 2 mile analogs. In Foreman Butte specifically, early time production from 3 mile wells was affected by the TRACER study we discuss on Slide 10.

Speaker 2

Once the tow portion of the lateral was cleaned out in the 3 mile wells, they began to outperform the 2 mile wells and we expected that degree of outperformance to increase as the wells continue to produce. Cord also continues to make good progress with respect to our operational performance, drilling, completing and cleaning out these wells. As Slide 9 of our presentation shows, we have materially reduced drilling times for 3 mile wells over the past year to approximately 11 days per well, representing an improvement of over 35% in drilling times as compared to the Q3 of 2022. On the cleanout We've also made steady improvement and have generally been able to stimulate and access the vast majority of the 3rd mile in our most recent wells. During the Q3, we achieved full TD on substantially all of the 3 mile wells we brought online.

Speaker 2

As a reminder, for Said another way, we're assuming the 3rd mile is only 80% as productive as the first two miles. However, with effective completion and clean up practices, We believe the volume response could be nearly proportional to the percentage of the 3rd mile that's cleaned out. And finally, Core published its first full sustainability report 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 Cord and the communities we serve. To sum things up, we executed well in the 3rd quarter, which sets Nicely to deliver strong free cash flow and high shareholder returns for the remainder of the year.

Speaker 2

Our asset base is meeting or exceeding expectations and we will work I'll now turn the call over to Michael.

Speaker 1

Thanks, Danny. I'll highlight a handful of key operating and financial items for the Q3 and discuss our updated 2023 guidance. As Danny mentioned, oil volumes were Strong in the Q3 about 4.5 percent over midpoint guidance. Total volumes were about 3.8% above midpoint guidance. Our 4th quarter midpoint oil guidance of 103,500 barrels per day is in line with our August expectations.

Speaker 1

And on a full year basis, we increased oil production guidance by over 1,000 barrels per day. I want to echo Danny's comments on the extraordinary achievement by the core team in the Q3. This was an exceptional amount of effort and I'm really proud of everyone involved. Oil realizations remain strong at a modest premium to WTI and were slightly better than our midpoint guidance. Looking to the Q4, we expect Bakken oil pricing to weaken slightly due to higher basin production and an unexpected refinery turnaround.

Speaker 1

The pricing is still expected to remain a slight premium to WTI. NGL realizations as a percent of WTI were in line Our midpoint guidance, while residue gas pricing as a percent of Henry Hub was a touch below midpoint. We expect pricing for both NGLs and Residue Gas to improve modestly in the 4th quarter. Turning to operating costs. LOE was $10.94 Per BOE in the Q3 and GPT was $3.16 per BOE.

Speaker 1

Both were within our guidance expectations, LOE 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 8.6% in the 3rd quarter and we expect a similar rate in the 4th quarter. Cord cash G and A expense was $13,700,000 in the 3rd quarter and we lowered our full year guidance slightly to reflect our latest At this point, the merger integration is substantially complete and we don't expect significant merger related costs going forward.

Speaker 1

DD and A averaged $9.90 per BOE in the 3rd quarter, an increase of almost $1 sequentially. The increase to DD and A reflects the July 1 closing of the XTO bolt on acquisition as well as mid year reserve changes mostly due to lower SEC Cord paid no cash taxes during the Q3. And in the Q4, Cord expects cash taxes to be approximately 0% to 10% of the 4th quarter EBITDA at oil prices between $70 $90 per barrel. Danny mentioned that we expect capital to be towards the high end of the full year guidance of $850,000,000 to 880,000,000 given a couple of items. 1st, improved cycle times have led to incremental lateral feet drilled during the year versus original expectations.

Speaker 1

2nd, working interest is slightly above expectations and these working interest increases accounts for approximately $10,000,000 of incremental capital. Danny discussed our return of capital for the quarter and wanted to give you a few more details on our share repurchases. During the Q3, Cord repurchased $112,000,000 of stock, including $52,000,000 related to 3rd quarter return of capital, With the remainder funded by cash proceeds from warrant exercises. We received approximately $73,000,000 Cash from warrant exercises in the 3rd quarter and we're able to use roughly $60,000,000 of this for incremental third quarter repurchases. And with the remaining $13,000,000 of repurchases that were at the beginning of the 4th quarter.

Speaker 1

This $60,000,000 $13,000,000 in 3rd and 4th quarters respectively are not included in the calculations for return of capital. Going forward in a similar fashion, 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 $2,500,000,000 $1,000,000,000 respectively.

Speaker 1

As of September 30, there was nothing drawn and cash was approximately $265,000,000 Finally, turning our attention briefly to 2024. Given the strong growth in oil production in the second half of twenty twenty three, 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 3 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 form a basis, this is around 99,000 barrels of oil per day with expected capital a little over $900,000,000 Additionally, activity is expected to remain concentrated in the spring summer months next year.

Speaker 1

This means that TILs will be focused towards the second half of the year and that 2024 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.

Operator

And our first question will come from Scott Hanold of RBC Capital Markets.

Speaker 3

Yes. Thanks. Good morning all. Danny, you were talking about seeing Some good things coming out of that last mile on the 3 mile wells. And can you give us a sense of where your confidence level is seeing To see that you're going to get the full contribution on an EUR basis, like how much more information do you need?

Speaker 3

And is that kind of Performance applicable across different parts of your acreage.

Speaker 2

So maybe I'll start with the second part first Scott and then I'll flip it over to Chip who may Any real differences in one area of the field versus another with respect to How much we're expecting to see in that 3rd mile. So we do think it's 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 remain facility 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. 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 hit that terminal decline rate to know what your ultimate recovery is going to be.

Speaker 2

What I will say is we are very encouraged with where we're at right now with the wells we have both that we've done and the wells we've seen across the basin That our underwriting at 40% is we feel very confident with that, but we're having growing We're going to see more than that, but we need to see we just need to see the production data over time. The pressures look good. The production looks good. Is all giving us strong we know we're seeing contribution from the very furthest 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 It's all growing level of confidence that we're going to be something above this sort of 80% efficiency in the last mile.

Speaker 2

I think Too soon to know exactly what that's going to be, but we're really pleased with what we're seeing. Chip, I don't know what incremental comments you have.

Speaker 4

Yes. Scott, thanks Thanks for the question and good morning. Just a couple of other things. The team has done a fabulous job of cleaning out these 3 milers. We were probably in the 25% in the first half and now we're close to 95%, 90% clean out.

Speaker 4

And so they're doing a fabulous job cleaning up the wellbores. As Danny said, I expect that We're going to see the contribution completely, the back half of the last mile or so. Also, we're at about 5 or 6 different areas So we're testing that right now. So I would assume sometime in the Q1 we'll have a lot more data to be able to tell you. But I'm feeling real strong about where we are, the operations, the way the team is cleaning out.

Speaker 4

So really proud of what they've done.

Speaker 3

Great. And Danny, just to maybe pin you down a little bit here, you talked about waiting to see the get more into the terminal decline past the B factor. Like generally how would you define that? Is that more of a kind of post 2 to 3 year type timeframe?

Speaker 2

I think 2 to 3 years is probably a little long. I don't think we need that long. But with where we're at right now, call it maybe A year plus of data and you start to really get past that factor and we get a much better idea.

Speaker 3

Got it. Thanks. My follow-up on is on M and A. I mean, obviously, a lot going on here over the last several months on the M and A side. And look, you guys have obviously participated in that over the last number of years.

Speaker 3

Can you give us your thoughts on as you look forward, what do you how does M and A fit into the cord strategy? And if you can give some context around in basin, out of basin being a consolidator or a consolidadee?

Speaker 2

Yes. I think maybe I'd sum it up broadly, Scott, by saying we're believers in consolidation. We're a product of consolidation. That's how Cord was formed. We will we plan to participate in consolidation as we move forward and whether that means we are the consolidator or the consolidatee, Either way is okay.

Speaker 2

We believe in being part of a larger equity store and we'll look for sensible opportunities to do that. I think along those veins as we think about Participating in consolidation, we're consolidating, I think, in basin consolidation is 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 a 1,000,000 acre position we've got. So lots of synergies from an operational standpoint and from a whether it be sort of Our subsurface knowledge, our operational capability, the routes we run, just converting DSUs from 2 mile to 3 mile In basin consolidation makes a lot of sense.

Speaker 2

We are also we are open and have 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. So it's just a higher bar to out of basin consolidation versus in basin. And so but thematically, big believers in consolidation. And When you're in a commodity business, I think that's just an important thing for us to recognize and be focused on.

Speaker 3

Yes. And then if I could just ask a little tweak to that question too. Like When you look at in basin opportunities, how have like these higher interest rates impacted like some of the PE players, the smaller players To be willing sellers and the price to pay, does that have an influence? Are you seeing any kind of impact from the higher interest rates?

Speaker 2

Yes. I think maybe too early to say specifically on that topic as you got to have a number of transactions to see what kind of effect you're seeing etcetera. But Generally speaking, I'd say, if you're thinking about cash based deals or debts on the backside, higher interest rates probably aren't Very helpful to that. And I'd say big swings in commodity price are also aren't very helpful to M and A in general. And We'll see where that goes.

Speaker 2

Michael, I'll invite you to make any further comments.

Speaker 1

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 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 would say, with that higher interest cost and how they think about

Speaker 3

Yes. No, I appreciate that. And yes, that's exactly what I was pointing to is more the latter part of that answer where a seller is more motivated and if you have cash, You're in a better position as a potential buyer.

Speaker 1

That's right. Yes. Totally agree with that.

Operator

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

Speaker 5

Hey, good morning. Thank you for taking our questions on a it's a busy morning.

Speaker 1

Good morning, John. Thanks. Yes.

Speaker 5

So, recognize it's still early with the TRASER test and you're looking at 3 mile laterals.

Speaker 2

What do

Speaker 5

you think the implications could potentially be for 4 miles? I mean, are you ever thinking are you considering actually testing a 4 mile lateral with a sort of similar test?

Speaker 2

I think the short answer to that, John, is yes. We've seen 4 miles in other basins. We have There's certain lease geometries we've got that would really lend themselves to doing 4 mile laterals. You're right. It is early from a 3 mile standpoint.

Speaker 2

I'll tell you if you sort of rewind the clock and we would have thought at some Moving into 3 mile laterals was a big step into the unknown and we would have had lots of concerns about it. But certainly the 3 mile program to date we think has been very successful. We're Excited about it moving forward and I think the opportunity for 4 mile laterals is absolutely out there and something we're investigating.

Speaker 5

Thank you, Danny. And then for our follow-up question, you gave Some color in 2024, you talked about your current underlying decline rate is a little bit elevated at this point in time. You You suggested that could reverse by the end of next year. You indicated that for 2024 that CapEx Could be roughly around in the low $900,000,000 range. So when you think about that potential reversal In the underlying decline rate at the end of 2024, when you think about your 2,000 your spend in 2024, do you think about the potential implications to 2025 CapEx given the change in the underlying decline rate versus the 900,000,000 for 2024?

Speaker 2

Yes. Well, I think with as you'd expect with a lower decline rate, it should be helpful from a reinvestment rate And so if we're running a maintenance program, all else being equal, you'd expect lower CapEx needed to maintain whatever production you're trying to hold. And so I think it's nothing but beneficial as we see the contribution of these as these 3 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 forward in maintaining a production base for Better capital efficiency, if you want to look at it that way, but certainly a lower CapEx Maintain or achieve any sort of production level.

Speaker 5

So I think I'll squeeze a quick one in there. So what do you think long term maintenance CapEx for you At this moment, if you think about that sort of reduction, that change in your underlying decline rate?

Speaker 2

Yes. I think if you think we're thinking it's going to be something in the low 900s Next year, we should reverse off of that a little bit. Of course, lots of things can change between here and there with service costs, Etcetera. 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, you would expect to be Something more capital efficient than the anticipated 2024 program, and so probably trending back towards what we saw this year.

Speaker 5

All right. Thank you very much.

Operator

And showing no further questions. That will conclude our question and answer session. I would like to turn the I'll turn it back over to Danny Brown, Chief Executive Officer, for any closing remarks.

Speaker 2

Thanks, Laura. Well, to close out, I just want to thank the employees of 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 note, we all have a relentless drive to improve, so we'll continue to work as a team to make Chord an even stronger company for all of our stakeholders. We're proud of a great Q3, excited about the setup for the remainder of 2023 and plans for 2024 and beyond.

Speaker 2

And with that, thanks to everyone for joining our call.

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Key Takeaways

  • Chord brought 45 wells online in Q3—42% more on a two-mile equivalent basis—driving volumes ~3.8% above midpoint guidance and generating $207 million of adjusted free cash flow.
  • Under its return of capital framework, Chord will distribute 75% of free cash flow via a $1.25 base dividend, a $1.25 variable dividend and $52 million of share repurchases, and has authorized a new $750 million buyback.
  • More than half of Q3 wells were 3-mile laterals—over 50 drilled to date—showing meaningful uplift versus 2-mile analogs, with drilling times down >35% year-over-year and ~95% cleanup on recent wells.
  • Chord raised full-year production guidance after schedule acceleration and higher working interests, expecting CapEx at the high end of the $850–$880 million range and Q4 oil volumes of ~103,500 bbl/day.
  • For 2024, Chord plans a maintenance capital program of ~\$900 million to hold ~99,000 bbl/day, with activity weighted to H2 and shallower declines from 3-mile wells improving long-term capital efficiency.
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Earnings Conference Call
Chord Energy Q3 2023
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