Chord Energy Corporation (NASDAQ:CHRD) Q3 2023 Earnings Call Transcript

Chord Energy Corporation (NASDAQ:CHRD) Q3 2023 Earnings Call Transcript November 2, 2023

Operator: Good morning, and welcome to the Chord Energy’s Third Quarter 2023 Earnings Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Michael Lou, Chief Financial Officer. Please go ahead.

Michael Lou: Thank you, Laura. Good morning everyone. Today, we are reporting our third quarter 2023 financial and operational results. We’re delighted to have you on our call. I’m joined today by Danny Brown, Chip Rimer, Richard Robuck, and other members of the team. Please be advised that our remarks, including the answers to your questions, include statements that we believe to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks and uncertainties that could cause actual results to be materially different from those currently disclosed in our earnings releases and conference 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-K and our quarterly reports on Form 10-Q.

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 our earnings releases and on our website. We may also reference our current investor presentation, which you can find on our website. With that, I’ll turn the call over to our CEO, Danny Brown.

Daniel Brown: Thank you, 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 third quarter performance and touch on some of our key organizational initiatives before passing the call on to Michael Lou. He’ll give a little more detail on the financials, some additional color on a few other topics, and a small preview of our thoughts for 2024. We’ll then open it up to Q&A. So, with that, yesterday evening, Chord reported third quarter 2023 results and raised our full year production outlook. I’m pleased to announce that third quarter volume significantly exceeded original expectations, driven by both schedule acceleration and continued strong well performance.

The entire Chord team worked together to bring 45 wells online in the third quarter, which was ahead of our original expectations and higher than the 37 wells brought online in the entire first half of the year. This accomplishment is even more impressive when evaluating on a on a two-mile equivalent basis, which amounts to a 42% increase in well delivery in half the time team. So, to our team, I’d like to say thank you. And I’m very proud of all the hard work that went into executing the program. Underpinned by the strong production, Chord’s quarterly financial performance supported robust free cash flow and high shareholder returns. We generated $207 million of adjusted free cash flow during the quarter and in accordance with our return of capital framework, we’ll return 75% of this free cash flow to shareholders.

To that end, given our base dividend of a $1.25 per share and our share repurchases of $52 million as part of our recurring return of capital program, we declared a variable dividend of $1.25 per share. As a reminder, the variable is designed to make up any difference between our targeted free cash flow payout in the amount distributed through base dividends and share repurchases. Finally, with respect to share repurchases, you may note that the aggregate value of share repurchases associated with our return of capital program is up nearly 70% as compared to the second quarter. In addition, we saw incremental repurchases occurring in the quarter sourced from proceeds received through warrant exercises and I’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 both capital discipline, and shareholder returns, and to the investment opportunity that Chord represents. Accordingly, we have announced a new $750 million share repurchase authorization, which replaces the old $300 million program and gives Chord 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 guide reflecting the strong third quarter volume performance and modest schedule acceleration I previously discussed. Full year capital is expected to be at the high end of our $850 million to $880 million guidance range, reflecting the acceleration of activity and also higher 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 three-mile laterals. Over half the wells we brought online in the third quarter were three-milers. In total, we’ve executed about 50 to-date and the performance is meeting our expectations. You can clearly see contribution from the furthest portions of the lateral and we’re observing an uplift over time versus two-mile analog wells in each development area. You can find additional details on slides 9 and 10 of our updated investor presentation where we provided performance data on Chord wells in Fort Worth Old and Foreman Butte. And in both of these areas, you can see a meaningful uplift in three-mile cumulative production versus the two-mile analogs. In Foreman Butte, specifically, early time production from three-mile wells was affected by the tracer study we discussed on Slide 10.

Once the tow portion of the lateral was cleaned out in the three-mile wells, they began to outperform the two-mile wells, and we expected that degree of outperformance to increase as the wells continue to produce. Chord 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 three-mile wells over the past year to approximately 11 days per well, representing an improvement of over 25% in drilling times as compared to the third quarter of 2022. On the clean out side, we’ve also made steady improvement and have generally been able to stimulate and access the vast majority of the third mile in our most recent wells.

During the third quarter, we achieved full TD on substantially all of the three-mile wells we brought online. As a reminder, for three-mile wells, we are assuming a 40% EUR uplift for 50% longer lateral and about 20% more drilling and completion cost. Said another way, we’re assuming the third mile is only 80% as productive as the first two miles. However, with effective completion and clean out practices, we believe the volume response could be nearly proportional to the percentage of the third mile that’s cleaned out. And finally, Chord published its first full sustainability report as a combined company in September, which reflects our commitment to delivering affordable and reliable energy in a sustainable and responsible manner. Thank you to the team for putting this together as it does a great job providing transparency onto our business and highlighting our efforts on emissions reduction, workforce health, 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 Chord and the communities we serve. To sum things up, we executed well in the third quarter, which sets us up nicely deliver strong free cash flow and high shareholder returns for the remainder of the year. Our asset bases meeting or exceeding expectations and we will work to drive further improvements going forward. I’ll now turn the call over to Michael.

Michael Lou: Thanks Danny. I’ll highlight a handful of key operating and financial items for the third quarter and discuss our updated 2023 guidance. As Danny mentioned, oil volumes were strong in the third quarter about 4.5% over midpoint guidance. Total volumes were about 3.8% above midpoint guidance. Our fourth quarter midpoint oil guidance of 103,500 barrels per day is in line with our August expectations on a full year basis, we increased oil production guidance by over a 1,000 barrels per day. I want to echo Danny’s comments on the extraordinary achievement by the Chord team in the third quarter. This was an exceptional amount of effort, and I’m really proud of everyone involved. Oil realizations remained strong at a modest premium to WTI and we’re slightly better than our midpoint guidance.

Looking to the fourth quarter, we expect Bakken oil pricing to weaken slightly due to higher basin production and an unexpected refinery turnaround. The pricing is still expected to remain a slight premium to WTI. NGL realizations as a percent of WTI were in line with 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 fourth quarter. Turning to operating costs. LOE was $10.94 per BOE in the third quarter, and GPT was $3.16 per BOE. Both were within our guidance expectations, but LOE trended towards the high end, mostly due to higher workover expense. We view workover expense is 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 third quarter and we expect a similar rate in the fourth quarter. Chord cash G&A expense was $13.7 million in the third quarter and we lowered our full year guidance slightly to reflect our latest forecast. At this point the merger integration is substantially complete and we don’t expect significant merger-related costs going forward. DD&A averaged $9.90 per BOE in the third quarter, an increase of almost $1 sequentially. The increase to DD&A reflects the July 1st closing of the XTO bolt-on acquisition, as well as midyear reserve changes mostly due to lower SEC pricing.

Chord paid no cash taxes during the third quarter and in the fourth quarter, Chord expects cash taxes to be approximately, 0 to 10% of the fourth quarter EBITDA and oil prices between $70 and $90 per barrel. Danny mentioned that we expect capital to be towards the high end of the full year guidance of about $850 million to $880 million given a couple items. First, improved cycle-times have led to incremental lateral feet drilled during the year versus original expectations. Second, working interest is slightly above expectations and these working interest increases accounts for approximately $10 million 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 third quarter, Chord repurchased $112 million of stock, including $52 million related to third quarter return of capital with the remainder funded by cash proceeds from warrant exercises. We received approximately $73 million of cash from warrant exercises in the third quarter and we’re able to use roughly $60 million of this for incremental third quarter repurchases and with the remaining $13 million of repurchases, that were at the beginning of the fourth quarter. This $60 million and $13 million in the third and fourth quarters, respectively, are not included in the calculations for return of capital. Going forward in a similar fashion, we generally expect to use cash received from warrants to offset dilution. Turning to liquidity.

Chord recently completed its fall borrowing base redetermination. The borrowing base and elected commitment remains unchanged at $2.5 billion and $1 billion respectively. As of September 30th, there was nothing drawn and cash was approximately $265 million. Finally, turning our attention briefly to 2024. Given the strong growth in oil production in the second half of 2023, as we look into 2024, our corporate annual decline rate increases slightly. As we start to see the benefits of the shallower declines associated with our growing proportion of producing three-mile wells, we expect this increase in decline to reverse towards the end of 2024 and into 2025. Overall, for 2024, we’re expecting a maintenance capital program with full year volumes flat to 2023.

On a pro forma basis, this is around, 99,000 barrels of oil per day with expected capital a little over $900 million. Additionally, activity is expected to remain concentrated in the spring summer months next year. 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 Chord 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.

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Q&A Session

Operator: [Operator Instructions] And our first question will come from Scott Hanold of RBC Capital Markets.

Scott Hanold: Yes. Thanks. Good morning all. Danny, you were talking about seeing some good things coming out of that last mile on the three-mile wells. And can you give us a sense of where your confidence level is seeing to see the that you’re going to get the full contribution on an EOR basis? Like, how much more information do you need? And is that kind of performance applicable across different parts of your acreage?

Daniel Brown: So, maybe I’ll start with the second part first, Scott, and then I’ll flip it over to [Technical Difficulty] any real differences in one area of the field versus another with respect to much we’re expecting to see in that third 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 that’s obviously going to require production over time. And so like any of these unconventional wells, you — we produce flat for some period of time as we were making facility strain, we go on decline. And then that decline, we go through our B factor and we turn and we level out at a sort of a terminal decline rate. And so it’s — just it’s hard to know exactly what you’re going to get until you go through that process and get through that B factor, and hit that terminal decline rate to know what your ultimate recovery is going to be.

What I will say is we are very encouraged with where we’re at right now with the, with the wells we have, both that we’ve done and the wells we’ve seen across the basin. That our underwriting at 40% is, we feel very confident with that, but we’re having growing confidence that we’re going 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. This 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.

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

Charles Rimer: Yes. Scott, Thanks for the question and good morning. Just a couple other things. The team has done a fabulous job of cleaning out these three milers. We were probably in the 25% in the first half, and now we’re close to 95%, 90% clean out. And so they’re doing a fabulous job cleaning up the wellbore. As Danny said, I expect that that we’re going to see the contribution complete to the back half the last mile or so. Also, we’re about five or six different areas throughout the basin. So, we’re testing that now. So, I would assume sometime in the first quarter, 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 and the way the team’s cleaning out. So, really proud of what they’ve done.

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

Daniel Brown: I think two to three years is probably a little long. I don’t think we need that long, but with where we’re at right now, call it may be a year plus of data and you start to really get past that factor, and we get a much better idea.

Scott Hanold: Got it. Thanks. My follow-up on is on M&A. I mean, obviously, a lot going on here over the last several months in on the M&A side. And, look, you guys have obviously participated in that over the last number of years. Can you give us your thoughts on as you look forward? What do you — how does M&A fit into the Chord strategy? And if you can give some context around in-basin, out of basin, being a consolidator or a consolidatee?