Coterra Energy Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 23, 2024

Key Takeaways

  • Q4 and full-year outperformance: Coterra exceeded guidance on oil, gas and BOE production in Q4 2023, delivered 5% BOE and 10% oil volume growth for the year, stayed within capex guidance and achieved strong financial returns while progressing on emissions reduction.
  • 2024 capital allocation: Total capex of $1.75–$1.95 billion (≈60% of projected cash flow) shifts investment to the Permian and Anadarko basins, cuts Marcellus spending by over $400 million and anticipates a 6% drop in Marcellus gas volumes with a contingency to reaccelerate if prices recover.
  • Three-year outlook (2024–2026): With annual capex of $1.75–$1.95 billion, Coterra targets low-single-digit BOE growth and 5%+ oil growth, leveraging deep inventory, improving capital efficiency and retaining flexibility to reallocate capital across assets.
  • Shareholder returns commitment: The base dividend was raised 5% to $0.84 per share, Coterra repurchased $418 million of stock in 2023, returned 77% of free cash flow and plans to continue returning at least 50% of annual free cash flow via dividends and buybacks.
  • Operational excellence and cost efficiency: Ongoing well-performance gains include record-efficient drilling and completions in the Permian (e.g., 51-well Wyndham Row with electric simul-frac) plus improved drilling times and water handling in the Anadarko and Marcellus, underpinning lower unit costs.
AI Generated. May Contain Errors.
Earnings Conference Call
Coterra Energy Q4 2023
00:00 / 00:00

There are 13 speakers on the call.

Operator

Hello and thank you for standing by. My name is Regina and I will be your conference operator today. At this time, I would like to welcome everyone to the Coterra Energy 4th Quarter 2023 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.

Operator

I would now like to turn the conference over to Dan Guffey, Vice President, Finance, Planning and Investor Relations. Please go ahead.

Speaker 1

Thank you, operator. Good morning and thank you for joining CoTERRA Energy's Q4 and full year 2023 earnings and 2024 outlook conference call. Today's prepared remarks will include an overview from Tom Jordan, Chairman, CEO and President Shane Young, Executive Vice President and CFO and Blake Sergo, Senior Vice President of Operations. Following our prepared remarks, we will take your questions during our Q and A session. As a reminder, on today's call, we will make forward looking statements based on our current expectations.

Speaker 1

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 were provided in our earnings release and updated investor presentation, both of which can be found on our website. With that, I'll turn the call over to Tom.

Speaker 2

Thank you, Dan, and welcome to all of you who are joining us on the call. Coterra had an excellent Q4 as shown by the results that we released last night. Shane will walk you through the specifics here, which include coming in above the high end of our guidance on oil, natural gas and BOE or barrels of oil equivalent and below our capital guide. For full year 2023, we finished the year with 5% year over year growth in BOE and 10% year over year growth in oil volumes, while hitting the midpoint of our capital guide. More importantly, we generated excellent returns.

Speaker 2

We also made great progress on emissions reduction and continue to push the envelope on our environmental initiatives. As we look ahead to 2024, total capital is projected to be between 1.75 $1,950,000,000 Given the outlook for commodity prices and commensurate revenue, we think that this is a prudent level of investment as it invests approximately 60% of our projected cash flow. We will grow our investments in the Permian and the Anadarko Basins and retrench in the Marcellus. We are reducing our Marcellus investments by over $400,000,000 in 2024 compared to 2023. Mark Twain said that a man learns something by carrying a cat by the tail that he can learn in no other way.

Speaker 2

Through the commodity cycles, we have learned that although downswings typically do not last long, they also do not come pre labeled with how long they will last. We have learned to be disciplined and patient. Experience tells us that our focus should always be on returns and never on production or activity. In this case, that means throttling back on our Marcellus program. We remain highly optimistic on the 12 to 18 month outlook for the gas macro.

Speaker 2

The impact of new LNG export capacity coming online at the end of 2024 and early 2025, coupled with the possibility of cold weather, provides reasonable hope for significant price recovery in natural gas. However, experience tells us that although we will underwrite our hopes with the future strip price, we should never underwrite our capital program with it. We will be patient and watch for recovery in the gas macro. Missing a few months of the recovery is much better than fully participating in the downside. We project that this slowdown in the Marcellus will result in our natural gas volumes shrinking 6 percent in the Marcellus in 2024.

Speaker 2

If we see signs of recovery in natural gas, our 2024 capital range includes a contingency plan to accelerate our Marcellus program in the latter half of the year, which would reposition us for significant growth in our gas volumes in 20252026. We will watch and be ready to act. In the meantime, we will pivot to our deep inventory in the Anadarko and Permian where our returns are excellent. We have a tremendous program ahead of us in 2024 and we are excited to be increasing activity in both the Permian and Anadarko. All three business units, however, are poised and ready for out year acceleration should conditions warrant.

Speaker 2

This ability to redirect or reposition activity around premier assets is one of the differentiating strengths of Coterra. We also provided an update on our 3 year outlook. Our new 2024 to 2026 outlook has Coterra with an average annual CapEx of 1.75 dollars to $1,950,000,000 which is expected to generate annual growth in the low single digits for BOE and 5% plus for oil growth. This plan leverages our deep high quality inventory, demonstrates improving capital efficiency and clearly displays the confidence we have in our ability to continue a cadence of operational excellence. This is an achievable outlook under current conditions.

Speaker 2

As always, we continuously adjust our plans with changing conditions. As we have previously said, planning at Coterra is a guided missile, not a rocket. In closing, I want to acknowledge our remarkable field organization. They set the pace for operational excellence. They work in hostile environments with dedication, perseverance and an unwavering commitment to safety.

Speaker 2

They serve as an example to all of us. The Coterra brand stands for operational excellence, leading edge technology and innovation, best in class development of outstanding assets and the ability to adapt nimbly to changing market conditions. We want to be known for a pristine balance sheet, investment discipline and rigorous economic decision analysis. We are not perfect. However, having a great organization, great assets and a great balance sheet allows us to learn from our mistakes, make continuous progress and always push ourselves farther and harder.

Speaker 2

With that, I will turn the call over to Shane.

Speaker 3

So thank you, Tom, and thank you everyone for joining us on today's call. This morning, I'll focus on 4 areas. 1st, I'll discuss highlights for our Q4 and full year 2023 results. Then I'll provide production and capital guidance for the Q1 and full year 2024. Next, I will provide a new and updated 3 year production and capital outlook for 2024 through 2026.

Speaker 3

Finally, I'll discuss our shareholder return program and our debt maturity later this year. Turning to our strong performance during the Q4. 4th quarter total production averaged 6.97 MBOE per day with oil averaging 104.7 MBO per day and natural gas averaging 2.97 Bcf per day. All production streams came in above the high end of guidance driven by well performance and acceleration of till timing during the quarter. Specifically, turn in lines during the quarter totaled 40 net wells, including 28 in the Permian, near the high end of guidance and 12 in the Marcellus, slightly above the midpoint of guidance.

Speaker 3

During the Q4, pre hedge revenues were approximately $1,500,000,000 of which 61% were generated by oil and NGL sales. In the quarter, we reported net income of $416,000,000 or $0.55 per share and adjusted net income of $387,000,000 or $0.52 per share. Total cash costs during the quarter, including LOE, workover, transportation, production taxes and G and A totaled $8.41 per BOE, near the midpoint of our annual guidance range of $7.30 to $9.40 per BOE. Cash hedge gains during the quarter totaled $46,000,000 Incurred capital expenditures in the 4th quarter totaled $457,000,000 just below the low end of our guidance range. Discretionary cash flow was $881,000,000 and free cash flow was $413,000,000 after cash capital expenditures was $468,000,000 For the full year 2023, Coterra produced outstanding results.

Speaker 3

Total equivalent production exceeded the high end of our initial February guidance coming in at 667 MBOE per day. This outperformance was driven by a combination of better than expected well timing and beats on expected well productivity. Oil production for the year was 96.2 NBO per day, exceeding the high end of initial guidance by over 4%. Capital costs were right at the midpoint of our guidance range coming in at $2,100,000,000 as a result of relentless focus on capital by our teams in each of our business units. Cash operating cost per unit totaled $8.37 per BOE for the year, slightly below our initial guidance midpoint.

Speaker 3

Looking ahead to 2024. During the Q1 of 2024, we expect total production to average between 6 60,690 MBOE per day, oil to be between 95 MBOE and 99 MBO per day and natural gas to be between 2.85 Bcf per day. We anticipate 1st quarter oil production to have the lowest average for any quarter during 2024, primarily as a result of tilt timing that pulled some volume forward and into the Q4 of 2023. Regarding investment, we expect incurred capital in the Q1 to be between $460,000,000 $540,000,000 For the full year 2024, we expect incurred capital to be between $1,750,000,000 $1,950,000,000 or 12% lower at the midpoint than our 2023 capital spend. Our 2024 program will modestly increase capital allocation to the liquids rich Permian and Anadarko Basins and significantly decrease capital by more than 50% in the Marcellus.

Speaker 3

We expect total production for the year to average between 6.35 and 6.75 MBOE per day and oil to be between 99 MBO105 MBO per day or 6% higher at the midpoint than oil was in 2023. Natural gas is expected to be between 2.65 Bcf2.8 Bcf per day, approximately 5.5% lower at the midpoint than gas production was in 2023. It is important to note that we have incorporated efficiency gains achieved in 2023 into our 2024 guidance. Reflecting on our new 3 year outlook. As we did this time last year, yesterday we announced our new 3 year outlook for 2024 through 2026.

Speaker 3

We believe this is a robust capital efficient plan that delivers consistent profitable growth for our shareholders. We anticipate that our project inventory can deliver 5% plus oil volume growth over this period with 0% to 5% BOE growth by investing between 1.75 $1,950,000,000 of capital per year. This reflects increased capital efficiency and is designed to afford Coterra the flexibility to reallocate capital between our business units as market conditions change. This outlook incorporates an appropriate level of reinvestment and delivers meaningful free cash flow to underpin shareholder returns. Moving on to shareholder returns.

Speaker 3

Last night, we announced a $0.21 per share base dividend for the 4th quarter, increasing our annual base dividend by 5% to $0.84 per share. This remains one of highest yielding base dividends in the industry at well over 3%. Management and the Board remain committed to responsibly increasing the base dividend on an annual cadence. During 2023, despite relatively lower commodity prices and cash flow, Coterra continued to execute on its shareholder return program by repurchasing 17,000,000 shares for $418,000,000 at an average price of approximately $25 per share. In total, we returned 77% of free cash flow during the year or just over $1,000,000,000 We remain committed to our strategy of returning 50% or more of our annual free cash flow to shareholders through a combination of a healthy base dividend and our share repurchase program.

Speaker 3

Onto our 2024 notes. We have continued to monitor and analyze opportunities regarding our $575,000,000 maturity coming this September. With low leverage at 0.3x, we believe we have strong access to the active refinancing markets. At the same time, we had approximately $2,500,000,000 of liquidity between cash and our undrawn credit facility at year end, affording us many options with regard to our 2024 maturity. In summary, Coterra's team delivered another quarter of high quality results, both operationally and financially.

Speaker 3

We are poised for a strong first quarter 2024, which we believe will set a solid foundation for the full year 2024 and beyond. With that, I will hand the call over to Blake to provide additional color and detail on our operations. Blake?

Speaker 4

Thanks, Shane. This morning, I will discuss our capital expenditures and provide an operational update. 4th quarter accrued capital expenditures totaled $457,000,000 coming in just below the low end of our guidance. The lower CapEx was driven by efficiency and cost gains, reduced infrastructure spend, lower than expected non operated capital and shuffling of the timing on a few projects. As noted, strong execution in the field pulled a few Q1 TILs into Q4, which contributed to the Q4 2023 production beat.

Speaker 4

Coterra finished the year at $2,104,000,000 of total CapEx at our midpoint of our annual guide. This quarter marks the 10th quarter in Coterra's and 10 straight quarters of delivering on our oil guidance. This was accomplished thanks to our operations teams across our business unit who strive for operational excellence. At Coterra, operational excellence means operating safely and with integrity, while always looking for ways to accomplish more or less. We do not tolerate sacred cows and we are always on the hunt for new ideas, even if they are not our own.

Speaker 4

As we enter 2024, we are delivering a plan that continues to do more for less. In the Permian, we are planning to turn in line 75 to 90 wells in 2024, which is down 13% over 2023. These wells will have a dollar per foot of 10.75 dollars down approximately 10% year over year. In the Permian, we are currently running 2 frac crews and 8 drilling rigs, which are performing at or near all time efficiency records. Our frac efficiencies are coupled with new contracts that offer increased cost savings to Coterra as we gain in efficiency.

Speaker 4

Across our Permian footprint, we are taking advantage of our large contiguous assets to bring economies of scale to bear. This is highlighted by our Wyndham Row project in Culberson County, where we are prosecuting a 51 well row development across 6 drill spacing units, with each well targeting the Upper Wolfcamp. By concentrating activity at this scale, we are able to minimize rig and frac modes, commingle facilities and maximize time off. Combine this with our 1st grid powered electric simul frac and we expect to deliver these wells at 5% to 15% lower cost than our historical program. Our Permian asset is an engine of capital efficiency and that engine continues to find a new gear.

Speaker 4

In the Marcellus, we are currently running 2 rigs and 1 frac crew with plans to go to 1 rig and lower our frac activity. Our Marcellus ops teams worked diligently in 2023 to lower our cost structure through increased frac efficiencies, improved water handling and lower facility costs. We are also pushing new limits on lateral length with 3 and 4 mile laterals now part of our program. These cost gains help us to minimize our D and C spend as we go into 2024 and throttle down our activity. Our 2024 Marcellus program remains flexible and includes multiple on ramps and offerings, which will allow us to adjust to changing macro conditions if warranted.

Speaker 4

In the Anadarko, we are currently running 2 rigs and 1 frac crew. Our Anadarko team had a great year executing with improved drilling times and frac efficiencies. Our 2024 program includes 20 to 25 turn in lines across 5 projects focused on our liquids rich assets, which we expect will continue to yield strong returns. Consistency of execution paired with strong well results have made our Anadarko assets a stout competitor for capital allocation at Cotera. Our unrelenting focus on operational excellence continued to bear fruit in 2023 and we expect the team to seek out and execute incremental efficiencies in 2024.

Speaker 4

And with that, I'll turn it back to Tom.

Speaker 2

Thank you, Shane and Blake. We are pleased with our continued execution in 2023 and expect to deliver on our goals outlined in our 2024 plans. We appreciate your interest in Cokera and look forward to discussing our results and outlook. We'll now be open for questions.

Operator

Our first question will come from the line of Nitin Kumar with Mizuho Securities. Please go ahead.

Speaker 5

Thanks. Good morning, Tom, Shane and Blake. Thanks for taking my question. Congrats on a strong year that really showcases the idea that was behind Gotera. I guess I want to start at just a capital allocation.

Speaker 5

You're cutting activity in the Marcellus in response to gas prices. But a lot of people think of the Anadarko Basin as a gas basin and you're allocating some incremental capital there. Could you walk us through kind of the thought process there?

Speaker 2

Thanks, Denton. I'll probably disappoint with my answer because it's pretty simple. I'll say upfront, I know a lot of people think of Anadarko in a lot of ways, and I'd like them to keep thinking that way because we think the Anadarko is a tremendous patient with great opportunity. One of the things that was a challenge for Anadarko team was just showing repeatability. I've talked at length about capital allocation being a function of return on capital and repeatability in addition to how much windage do you have in the price file.

Speaker 2

And our team showed great repeatability on some outstanding projects in 2023. And so the increased allocation is really a function of letting them just continue their activity level. Had we done anything other than that, we would have throttled back or pulled the plug on their continuing activity. The returns are outstanding. I'll just say that.

Speaker 2

And so we're reallocating a little under $300,000,000 between the Permian and Anadarko. And that's just it was challenging because we have great returns everywhere. I'll also say that one of the things that we see in Anadarko coming forward is we have some peers that are also moving forward with increased activity. And so we expect a larger outside operated call on our capital in the Anadarko and some of that is embedded in that allocation. So really, it's a problem that we love to have and we're very pleased with our allocation decision.

Speaker 5

Great. Thanks for the color. And then Tom, industry consolidation continues at a pretty frantic pace

Speaker 6

as you

Speaker 5

look around the lease lines, your new neighbors or maybe the same neighbor around you. Your thoughts on scale M and A for Coterra from here on out, you certainly have a plethora of organic opportunities, but I'd love to hear your thoughts on M and A going forward.

Speaker 2

Nitin, thank you for that. Our criteria is very simple. When we look at potential combinations, we ask ourselves, would we rather own a share of Cotera or a share of the combined reformulated company? And there are of course a lot of elements to that, but 1st and foremost, it must create value for our owners. And look, I think The Wall Street Journal should have a weekend breaking story that says flash everybody looking at everybody else in the E and P space because that's what we have.

Speaker 2

So there haven't been any opportunities that we really have browbeat ourselves on that have come and gone. We remain deeply curious about what consolidation could offer for Coterra owners, But if bar is very, very high, I'll just leave it at that.

Operator

Your next question will come from the line of Jayaram with JPMorgan. Please go ahead.

Speaker 7

Yes. Good morning, gentlemen. I was wondering, I'm looking at Slide 15 in your deck, where you're highlighting your expectations for well productivity in the Delaware Basin relative to peers and the results from Coterra from 2021 to 2023. I was wondering if you could maybe provide some color around expectations on productivity in 2024, if we could kind of compare that to what you did last year?

Speaker 4

Yes, Arun, this is Blake. I'll take that. That's really why we kind of give that range on that slide. As we've talked about in the past, our Permian program is really a rotation throughout our assets and that's driven by a lot of different things. The mix can vary somewhat year to year, but over a multi year timeframe, it's pretty consistent.

Speaker 4

And so I just say we'd expect 2024 to fall well within that band, deliver another good year on productivity.

Speaker 7

And just thoughts on comparison to what you delivered in 2023? Just trying to understand how you think year over year productivity could trend on a per foot basis?

Speaker 4

I would say very similar. There's definitely some room for upside there with some of the allocations, but I'd expect another strong year.

Operator

Your next question comes from the line of Doug Leggate with Bank of America. Please go ahead.

Speaker 8

Hey, good morning guys. This is actually Clay on for Doug. So thank you very much for taking my question. The first thing I want to hit is the Marcellus where you're adapting activity in response to price. Sorry.

Speaker 8

So I guess I'm trying to understand the scenario analysis. Is the Marcellus free cash flow breakeven on 24 strip and assuming basis is static, at what hub price does activity begin to shift higher?

Speaker 2

Clay, this is Tom. We've been debating that internally. I can't give you a firm number. But I will say that we look really carefully at receipt price. And I know we talk about weighted average sales price, but we really look at the price received by the next molecule, which is really a function of what would be a basis price less our fixed cost.

Speaker 2

I would say we would really like to see a price close to or above $3 I think before it would really meet a criteria that shifts a lot of capital. But it's also a function of the oil to gas ratio. And we'd really like to see a sustained ratio that's somewhere in the neighborhood of 20:one oil to gas. And we're really optimistic we're going to see that when the market resets with LNG exports, but that's kind of what we're looking for.

Speaker 8

I appreciate that, Tom. My follow-up is on the Anadarko. I think to remember that the geology there being quite complex. So wondering if you can expand on what the team accomplished last year to give you more confidence to reengage in the capital program?

Speaker 2

Well, geology is complex across our portfolio. And if you don't, I have to catch myself or I'll spend the rest of the call talking about geology. But what's most important is that we've tested this section. We've got a lot of calibration and we understand the stratigraphic variation. We understand the oil gas complex ratio variation.

Speaker 2

We understand the pressure and drilling challenges. So I think we're highly calibrated. So look, complex geology is a bigger issue at the early phases of development than when you've got that calibration. And we feel really confident that we understand the geological overprint.

Operator

Your next question comes from the line of David Deckelbaum with TD Cowen. Please go ahead.

Speaker 9

Thanks for taking my questions everyone. I was curious just if you could go into just obviously the program this year is shifting more or I guess it's high grading a bit more on the lower Marcellus. I think in your multiyear outlook, you sort of assume that Marcellus production comes back up, I guess, about $100,000,000 a day and I guess is averaging in that 2.2 range versus 2.3 last year. Can you talk about the considerations of inventory management and how that mix of lower versus upper is looking over time? Is this seems like there's a multiyear shifts now where you're going to be emphasizing the lower a bit more in the lower price environment.

Speaker 9

But just wondering if there's more nuance to it and if your thoughts have changed on the inventory management side there?

Speaker 2

Our thoughts really haven't changed. As we were I would just repeat what we've said in the past. We've talked about a reduced inventory in the lower Marcellus. I think if we were heavy on the lower Marcellus, we'd probably be talking about a 3 to 5 year inventory at this point, 3 to 6 maybe depending on how our level of activity. Our inventory is longer than that now as we've lowered our investment.

Speaker 2

But it's really a function of what's available to us and that's the function of our gathering system where we think we have additional capacity. But there's also a area of this field that's opened up to us that we're out exploiting and we're really glad to be there and getting after some of that really, really productive rock. So we'll be drilling in the Lower Marcellus for a long, long time. So when we quote inventory numbers, it's really strongly overprint by which formation we're drilling in. But the lower is going to be a significant part of our program for a number of years.

Speaker 9

Thanks for the color there. Social Security the Permian, embedded in this multiyear 5 plus percent oil growth outlook through 'twenty six. So how many sort of projects similar to the size of Wyndham Row are you baking in, I guess, per year? I know that there was an expectation that we would see sort of a large scale project every year, year and a half. Is that still kind of the cadence like the multi year guide or are there some early learnings from 1 in Monroe that are kind of iterating that process now?

Speaker 4

Yes, David, this is Blake. I'll take that one. Right now, we really expect to do a row project almost every single year. And I know that it's kind of scary to talk about a 51 well development, but I think it's important to remember these are 6 distinct drill spacing units that we have chosen to develop in a row to maximize efficiencies. These units are our standard Culberson 2 Mile Upper Wolfcamp units with designs from 7 to 10 wells per section.

Speaker 4

This is just really our bread and butter. I mean, we've developed many of these over the years. We're just stringing them together. Our ops teams work really hard to kind of war game these projects and these rows to think of all the execution risks that could go on. That's why we picked up our 8th rig sooner to get a good DUC build in front of the frac crew.

Speaker 4

These projects have large multi well pads. That means if we have any well trouble, our frac crew can pivot while we deal with the well trouble. Our simul frac part of this project, we've modeled really conservative completion timing and that's because it's our first application of this in Culberson, but we don't really expect our electric crew to operate any less efficient than it has in the past. We work through a lot of sand and water logistics to make sure everything has abundant sourcing. We own and operate our SWB system out there.

Speaker 4

That means we have plenty of water on demand at all time. It allows us to keep it in the pipe, we're not building any produced water pits with this project. This is just part of our operation now and I'd expect many more row developments for years to come.

Operator

Your next question comes from the line of Neal Dingmann with Truist. Please go ahead.

Speaker 7

Good morning, guys. Thanks for the time. My first question is just on the flat spend and the 0% to 5% BOE CAGR. I'm just wondering, did these assumptions include, I'm just wondering, do you assume with those on a go forward years, does that ensue well productivity, improve well productivity and lower well costs or maybe just help me on what's involved in those assumptions?

Speaker 2

We don't project future advancements in advance of having achieved them. I think we will achieve them, but we don't we like to calibrate results. I mean, hopefully, that's not a surprise to anybody on this call. We'd much rather talk about results than promises. And I would just want to say one more time, we don't manage our multiyear outlook by that production number.

Speaker 2

We look at projections of what we think is our assumed cash flow. We say how much of that cash flow do we want to invest and that's typically in a fair way. I'm going to give a wide one of 40% to 70%, and that allows us to achieve our shareholder returns that we've promised. And then with that, we say, okay, here's the capital, where's the best place to put it? And the very last part of that process is what production does it generate.

Speaker 2

We don't get over our skis on that. We try to push our teams to model the most recent operational efficiencies. And then we drive them crazy trying to get better. But production is not the input, it's the output of good solid capital allocation.

Speaker 7

Great point, Tom. And maybe just maybe my second along that same line, I'm just wondering, look at the slide that talks about the gas production. I'm just wondering, is it fair to say that you maybe have seen peak production? Or is it just what you're forecasting that are just a basis of what's going on with prices and that's going to be an ultimate driver?

Speaker 2

Yes. It would not be fair to assume anything from our projection other than it's our current look at an uncertain future. We say that we have contingency plans. If gas prices really recover, as we hope they will, within our capital guide, we have plans to get back to work this year and set ourselves up for nice growth over the next 2 years. That's not a plan, but it's on the shelf ready to go.

Operator

Our next question will come from the line of Michael Scialla with Stephens. Please go ahead.

Speaker 7

Hi, good morning everybody. Just wanted to ask about your return of capital, obviously way above your target for the year. But even with the bump in the dividend in the 4th quarter, it looks like you slowed that a little bit. I wanted to ask about that and then also the decision to bump the base dividend when you had been leaning more toward the share buybacks when you pull back on the variable dividend, why they bump in the base dividend rather than buying back more shares?

Speaker 3

Yes. Hey, Mike, Shane here. I'll take those two questions. On the buyback, we remained active in the market during the quarter, but we were a little bit cautious. We were trying to kind of get a gauge whether winter and weather would materialize.

Speaker 3

And I think as it didn't, we decided to carry some of that cash over into year end. So that's why you saw the cash balance build up to around $1,000,000,000 which really puts us in good shape in what looks like it could be a soft gas market in 2024 to be a bit more aggressive on the buyback. So there was a little bit of a timing element to that, I would say. On the base dividend, listen, in addition to the commitment to deliver 50% plus of our free cash flow to shareholders on an annual basis, We also remain committed to increasing the annual dividend responsibly on an annual cadence, 5% feels like a pretty good lift, but not overly excessive. So we're happy with the 5% bump and then we get into next year, we'll evaluate it again if it makes sense to do it.

Speaker 3

We would expect to continue to do it on an annual cadence.

Operator

Your next question comes from the line of Scott Gruber with Citigroup. Please go ahead.

Speaker 10

Yes, good morning. Through your development program, you've been able to push down your Delaware cost to sub-eleven hundred a foot. As you're reengaging Anadarko, do you think you'd be able work down the cost structure in play? Are you thinking about pad size or electrifying operations or any other actions to meaningfully push down that $1300 figure?

Speaker 4

Yes, this is Blake. I'm happy to take that one. Yes, we think there's always room to push our efficiencies further and we do share a lot of our learnings across basins.

Speaker 2

But at

Speaker 4

the same time, the Anadarko is a different basin than the Permian. So it's deeper, it's higher pressure. The drilling can be more difficult. And really what we've seen from our Anadarko team is we ran a real consistent program in 2023, so consistent drilling activity. And our crews did what they always do, they got better at it.

Speaker 4

And we saw our costs come down and get more in line. They're already taking advantage a lot of the same pad efficiencies we see in the Permian. But if we saw opportunities to enlarge projects and get more economies of scale, we'll absolutely take advantage of those.

Speaker 10

Got it. And you guys have stuck with an estimate of about 5% deflation and service costs and material costs. But we're now seeing several operators obviously take actions to reduce activity in the Marcellus. Do you think you'll be able to see additional service cost savings on top of that 5%, especially in the Marcellus and the remaining activity?

Speaker 4

I mean, I sure hope so. We'll see how the market plays out. They're typically when more services become available, it does drive pricing down. We've been very strategic how we've gone into 'twenty four with our contracts. We're very, very lightly contracted and that's by design.

Speaker 4

So we can take advantage of any downswings. But at the same time, who we work with and making sure we have premium service providers that share our safety culture and our drive for if there's continued movement in the

Speaker 5

market, we'll be there to take advantage of it.

Speaker 4

Thank you. Thank you. Thank you. If there's continued movement in the market, we'll be there to take advantage of it.

Speaker 2

But I don't want that point to be lost. One of the reasons we have such flexibility in our capital allocation is because we've worked really hard over the last couple of years to have a great set of vendor partners and a very light amount of long term commitments. So we really do have a lot of flexibility in both our drilling and completion services to pivot from one basin to another.

Operator

Your next question comes from the line of Kevin McCurdy with Pickering Energy Partners. Please go ahead.

Speaker 11

Good morning. First, I want to say we appreciate the 3 year outlook. I think you're one of the few companies in your peer group with the confidence in your inventory to provide a detailed multiyear outlook. My first question is on that outlook. Are you assuming a similar capital allocation in 20252026 as in 2024?

Speaker 11

And under that scenario, when and at what levels does the Marcellus start to flatten out?

Speaker 2

Yes, the answer, Kevin, is no, we're not assuming a similar level of allocation. That said, it's a fluid, but the model that underpins that is a reallocated number.

Speaker 11

Okay. And under that 3 year scenario, what happens if we have a bullish gas market in 20252026? Do you reallocate capital from the Permian and Anadarko back to the Marcellus? Or do you increase your overall CapEx? I know you spoke about a contingency plan in 2024,

Speaker 9

but just thinking about how you would think about that over the long term?

Speaker 2

Well, you've left a very nice wide opening for me with that question because I say it's always our best look at current conditions. So if we had significant recovery in the gas macro, which we hope and expect, our cash flow goes way up and within that investment fairway, I said 40% to 70%, we probably would have the flexibility to look at increasing our capital. But none of that is enshrined in our current outlook because we don't as there's no hope in any of the outlooks around here, but we'll react when conditions change.

Speaker 9

Great. Thanks for the detail.

Operator

Our next question will come from the line of Adi Modak with Goldman Sachs. Please go

Speaker 6

ahead. Hi, good morning team. Just curious how you view the macro setup for the gas markets here. What's the risk of surprise in associated gas in the Permian and how do we work our way through that? Are you seeing sufficient signs of supplier rationalization to suggest that we're in a better environment for 2025?

Speaker 3

Yes. Hey, it's Shane here. I'll start off on that. Look, it's very challenging today. And as we look at the storage numbers and the weather picture as it's played out, winter to date and the way the outlook is for the next several weeks.

Speaker 3

Look, we could sort of end the winter at a pretty high spot on a historical basis. Basis. Production on the other side has been incredibly resilient, probably more so than many of us have expected. It's great to see here some discipline in the marketplace, but it's unclear that it's enough and it's unclear that it's sort of broad based enough at this point. So we're cautious on gas and you see that in our 2024 planning and budgeting.

Speaker 3

You see that in the way we manage our balance sheets. But if it does turn and when it does turn, we'll certainly be prepared to react.

Speaker 6

Great. And then you talked about this a little bit, but maybe I can approach this in a different way. Your 3 year outlook on growth is on relatively stable annual CapEx. Curious what factors you've baked into that growth outlook in terms of the incremental efficiency gains? What should we expect to hear from you on that front over this time period?

Speaker 4

We don't bake in any incremental efficiency gains. So we take all our most recent gains in our program. We kind of stress test those by going through them extensively to make sure they're real and part of our program and then we build them into our forecasting. And so while our

Operator

Our final question will come from the line of Charles Meade with Johnson Rice. Please go ahead.

Speaker 12

Good morning, Tom, to you and your whole team there. Good morning. I had two questions on the Marcellus and you've addressed some of this, but I just want to make one more run at it. If we look at the decrement of $435,000,000 in CapEx in 2024 versus 2023. And you look at that versus you went from 2 rigs to 1 rig and 1 frac crew to maybe a half frac crew.

Speaker 12

It seems like the decrement in activity is smaller than the decrement in CapEx. And so what are the other pieces that complete that picture?

Speaker 2

Well, one of the things that we see is we will finish the year with 4 pads waiting to be completed. So a lot of what we're doing in 2024 is setting up 2025. So it's not always showing up in the 1st year CapEx. With projects have cycle times like ours and like everybody else's, you really have to have a multiyear outlook on any plan. So a lot of that is benefit of what we did last year that's currently being completed.

Speaker 2

And what happens next year is a function of what we do this year. So the annual snapshot on capital versus production is interesting, but fairly incomplete.

Speaker 12

Right. That makes sense. And then maybe one other question. You have on your slide, I believe it's Slide 6, you showed that 10% decline in Marcellus production for 2024, but then you and actually a slight incline for 2025. What's the underlying price assumption for natural gas in that scenario where you grow again at 25?

Speaker 2

Well, we have lots of price assumptions. I would say we have strip. We run a $55,000,000 $275,000,000 we run a $75,000,000 $250,000,000 I mean we have we run a $75,000,000 $375,000,000 looking at models now. I mean, we have a smorgasbord of price files that really set our kind of define the fairway of our economic analysis. But I would say this is probably based on the strip as a foundational forecast and then we run permutations from there.

Operator

I'll now turn the call back over to Tom Jordan for any closing remarks.

Speaker 2

Well, thank you very much for joining us. We look forward to continuing to deliver as I hope you've learned from Cokera. We really appreciate your interest and love talking about results and intend to deliver them. So thank you so much.

Operator

Everyone, this does conclude our conference call for today. Thank you all for joining. You may now

Speaker 5

disconnect.

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