Pioneer Natural Resources Company (NYSE:PXD) Q1 2023 Earnings Call Transcript

Pioneer Natural Resources Company (NYSE:PXD) Q1 2023 Earnings Call Transcript April 27, 2023

Pioneer Natural Resources Company beats earnings expectations. Reported EPS is $5.21, expectations were $4.91.

Operator: Welcome to Pioneer Natural Resources First Quarter Earnings Conference Call. Joining us today will be Scott Sheffield, Chief Executive Officer; Rich Daly, President and Chief Operating Officer; and Neal Shah, Senior Vice President and Chief Financial Officer. Pioneer has prepared presentation slides to supplement comments made today. These slides are available on the Internet @www.pxd.com. Again, the Internet website to access slides presented in today’s call is www.pxd.com. Navigate to the Investors tab found at the top of the web page and then select Quarterly Results. Today’s call is being recorded. A replay of the call will be archived on the www.pxd.com through May 27, 2023. The company’s comments today will include forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

These statements and the business prospects of Pioneer are subject to a number of risks and uncertainties that may cause actual results and future periods to differ materially from the forward-looking statements. These risks and uncertainties are described in Pioneer’s news release on Page two of the slide presentation and in Pioneer’s public filings made with Securities and Exchange Commission. At this time, for opening remarks, I would like to turn the call over to Pioneer’s Senior Vice President and Chief Financial Officer, Neal Shah. Please go ahead, sir.

Neal Shah: Thank you, Joel. Good morning, everyone, and thank you for joining us for Pioneer’s first quarter earnings call. Today, we will be discussing our excellent first quarter results, driven by our strong oil production and fortified capital return strategy. In addition, we will discuss the resilience of our free cash flow generation at various oil prices, which is underpinned by our best-in-class margins and unmatched high-return assets in the Midland Basin. We will then open up the call for your questions. With that, I will turn it over to Scott.

Scott Sheffield: Thank you, Neal. Good morning. As you all saw in the news, I announced yesterday that I will retire as CEO of Pioneer beginning January 2024. Our President and Chief Operating Officer, Rich Dealy, will assume the role of CEO at that time. Rich has been with Pioneer and our predecessor company for over 30 years from a $500 million company to over a $50 billion company and has served in various executive leadership roles and is uniquely positioned to lead Pioneer forward. I’m proud of the success that Pioneer has achieved in his 26-year history as well as key accomplishments over the previous several years. With consistent focus on the Permian Basin, we have formed the largest contiguous acreage position in the Midland Basin, supported by successful integration of two acquisitions during 2021 and have full confidence in our modifications we made last year as we were seeing early indication of great results with our first quarter results.

Our methodical approach and highly efficient development program has positioned Pioneer as the most active driller and largest oil producer in the state of Texas. I’m especially proud to have led the independent transition to a free cash flow model that focuses on return of capital to shareholders and further strengthens our balance sheet. I’ve taken great pride in leading the efforts to reduce flaring in testings and methane and CO2 emissions in the Permian Basin and its contribution to more sustainable practices throughout our industry. Building on this foundation, we are one of the first U.S. operators to join OGMP, the Oil and Gas Methane Partnership, 2.0, demonstrating our ongoing commitment to sustainable operations. I’m excited for Rich has continued leadership of Pioneer as CEO in 2024.

I will now discuss our first quarter results going to Slide number four. During the first quarter, Pioneer generated approximately $950 million in free cash flow, contributing to a base plus variable dividend $3.34 per share and $500 million in share repurchases completed during the quarter. This strong return of capital was supported by efficient operations and oil production near the top end of our first quarter guidance range. Fortifying our return on capital, we increased our quarterly base dividend by 14% and refreshed our repurchase program with a new $4 billion authorization. Going to Slide number five. First quarter results, as we discussed on the previous slide, Pioneer delivered strong first quarter production with both oil and total production near the top end of first quarter guidance at 361,000 barrels of oil per day and 680 million barrels of oil equivalent per day.

We continue to focus on efficient operations, maintain low horizontal lifting costs that support our top-tier margins and significant free cash flow generation. Now over to Rich.

Richard Dealy: Thanks, Scott, and good morning, everybody. I’m going to turn and start on Slide six, where you can see the development of our high-return assets compared with our peer-leading margins is expected to generate approximately $27 billion of free cash flow over the next five years at $80 WTI. As Scott mentioned, we are modifying how we return free cash flow to improve our financial flexibility and balance sheet while also maintaining significant return of capital to shareholders. The modified framework provides the flexibility to allocate capital returns after the base dividend between variable dividends and share repurchases based on what provides the best value for shareholders. Under the refined capital framework, 75% of our quarterly free cash flow, starting with the second quarter, will return to shareholders through a combination of base dividends, variable dividends and opportunistic share repurchases.

A strong and growing base dividend remains our highest return of capital priority. In total, 75% of our quarterly cash flow will be directed towards capital returns, while the remaining 25% will be used to increase financial flexibility and further strengthen our balance sheet. As you can see from the slide, we expect to return a significant amount of free cash flow to investors over the next five years. Turning to Slide seven. We are further strengthening the foundation of our capital return strategy by increasing our quarterly base dividend by 14% to $1.25 per share or $5 per share on an annualized basis. This increase is incorporated into this quarter’s base plus variable dividend that will be paid in June and reflects the — or sixth consecutive years of base dividend increases.

With this increase, our base dividend yield of greater than 2% surpasses the average S&P 500 dividend yield. Turning to Slide eight. During the first quarter, Pioneer repurchased $500 million of stock at an average price of $206 per share, demonstrating our willingness to step into the market during dislocations such as we saw in March. In total, Pioneer has repurchased $2.1 billion in equity since the beginning of 2022, reducing shares outstanding by approximately 4%, which has benefited long-term shareholder returns and per share metrics. Further enhancing our strong shareholder returns, the Board of Directors has approved a new $4 billion share repurchase authorization, providing additional capacity to return capital through opportunistic share repurchases.

This replaces the previous authorization, which had $1.9 billion remaining. Turning to Slide 9. Pioneer’s return of capital framework, which returns at least 75% of quarterly free cash flow remains amongst the strongest when compared to peers as illustrated by the graph on the left. Our modified framework provides the flexibility to allocate capital returns after our strong base dividend between variable dividends and share repurchase based on what provides the best value for shareholders. This peer-leading return capital strategy is sustained by our disciplined reinvestment rate and our deep inventory of high rate of return wells. Turning to Slide 10. The graphic on the right illustrates the compelling free cash flow generation that our program is expected to produce over the next five years at various oil prices.

The combination of our world-class assets top-tier margins and moderate oil growth generates cumulative free cash flow of approximately $27 billion through 2027, assuming an $80 WTI oil price. As you can see, our return of capital framework is expected to return about approximately 40% of our current market cap to shareholders during the same time frame also at $80. Even at $60 WTI, our program is expected to generate approximately $13 billion in cumulative free cash flow over the next five years, demonstrating the durability of our program even at lower oil prices. Our robust and durable free cash flow generation paired with our commitments to substantial capital returns delivers compelling value to shareholders through cycle. Turning to Slide 11.

You can see here that we are reiterating our 2023 outlook with full year production and capital guidance remaining unchanged. The company plans to deliver 2023 full year oil production ranging from 357,000 to 372,000 barrels of oil per day and total production ranging from 670,000 to 700,000 barrels of oil equivalent per day, resulting in moderate production growth consistent with our investment framework. Both our drilling, completions and facilities capital budget of $4.45 billion to $4.75 billion, and our exploration, environmental and other capital budget of $150 million to $200 million are unchanged. As we’ve discussed previously, key projects within the exploration, environmental and other category includes exploration drilling of four wells targeting the Barnett and Woodford formations in the Midland Basin as well as continued appraisal of our enhanced oil recovery project.

Based on the midpoints of our capital and production ranges, at strip pricing, we expect to generate greater than $4 billion of free cash flow in 2023 from approximately $9 billion of projected operating cash flow. Turning to Slide 12. You can see it provides additional detail on our 2023 capital program. During 2023, we expect to operate between 24 and 26 drilling rigs and placed between 500 and 530 wells on production. Our 2023 drilling and completion activity continues to be distributed across our large and contiguous Midland Basin acreage position with approximately three drilling rigs operating in our joint venture area in the South. This unmatched acreage position provides a scalable operational advantages such as drilling, completing our 15,000-plus foot laterals with greater than 100 of these wells expected to be placed on production throughout the year.

We also benefit from the continued utilization of simul frac operations as well as localized sand mines, which both reduce costs and provide incremental operational efficiencies. Additionally, our significant water infrastructure provides a diversified disposal and reuse network that spans across most of our acreage position. Turning to Slide 13. As previously discussed, we are continuing to realize improved return, strong productivity from drilling our 15,000-foot lateral wells. Developing these long laterals drive significant efficiency gains to reduce capital costs with drilling and completion savings of approximately 15% per lateral foot. The combination of these savings and strong productivity drive increased returns with IRRs increasing by more than 20 percentage points when compared to a 10,000-foot lateral.

To date, we have identified more than 1,000 locations for long lateral development, supported by our highly contiguous acreage position and expect more than 100 of these wells we placed on production in 2023. Turning to Slide 14 and looking at the chart on the left, you can see Pioneer’s peer-leading completions efficiencies and multiyear track record of efficiency improvements. We are now operating three full-time simulfrac fleets with which continues to be a major contributor to our high efficiencies and cost savings. Additionally, during the second quarter of 2023, Pioneer will add its second localized sand mine for completions operations. The use of localized sand is providing average savings of approximately $200,000 per well, principally due to reduced trucking costs resulting from the mine’s close proximity to our wells.

Pioneer expects 100% of our completions place to be either electric or dual fuel powered by the second half of 2023, both reducing emissions and capturing cost savings opportunities based on fuel prices. Turning to Slide 15 on the left, Pioneer has the deepest inventory of high-return Permian drilling locations when compared to peers. This third-party analysis presents Pioneer as a premier independent oil and gas operator across North America with decades of high-quality inventory in the core of the Midland Basin at breakeven oil price of less than $50 WTI. With that, I’ll turn it over to Neal.

Neal Shah: Thank you, Rich. Now starting on Slide 16. The combination of our low cash costs and strong realizations generated peer-leading cash margins for the full year of 2022. While our strong price realizations were driven by our oil-weighted production, our low operating costs are a function of our unmatched infrastructure and efficient operations. These best-in-class margins underpin our strong free cash flow generation leading to significant capital returns to shareholders, both of which we have highlighted this morning. Turning to the next slide. Pioneer continues to offer a compelling investment case for shareholders, considering the combination of strong corporate returns and an inexpensive valuation. As you can see, our projected ROCE continues to be one of the highest in the S&P 500 for the second consecutive year.

We believe our strong corporate return profile when paired with our discounted valuation provides a highly attractive opportunity for investors. And with that, I will turn things over to Rich.

Richard Dealy: Thanks, Neal. I’m going to start on Slide 18, where you can see we continue our commitment to sustainable operations, highlighted by our partnership with NextEra Energy and joining OGMP 2.0 in 2022. Additional detail related to our sustainability efforts and their impacts on our business can be found in our 2022 sustainability report and climate risk report. You can find these reports on our website. Turning to Slide 19. Pioneer’s ongoing sustainability efforts continue to benefit our emissions intensities which can be seen in the graph by Pioneer’s relative position globally. Pioneer continues to provide low-emission barrels to the market, producing some of the most sustainable barrels in the world behind only Norway on a CO2 intensity basis.

When combined with our low breakeven oil price, Pioneer provides exceptionally resilient production that we expect to have a place in the global market for decades to come. Concluding on Slide 20, you can see Pioneer’s key characteristics, which support our commitment to creating value for our shareholders. And with that, Joe will open up to question or the call for questions.

Q&A Session

Operator: Your first question comes from John Freeman with Raymond James.

John Freeman : First off, congrats, Scott, on a very well-earned pending retirement. Rich, congrats as well on the pending promotion. First thing is on the refinement to the shareholder return framework. I’m assuming there was a pretty aggressive sort of outreach with investors and the feedback from them sort of drove this decision. Maybe you could just kind of talk to that as well as maybe if there’s going to be some sort of, I guess, a framework in place on when you all determine whether it makes more sense to lean into buybacks versus dividends each quarter?

Richard Dealy: Yes, John, thanks for the question, and thanks for the congrats, too. So I much appreciate it. Yes, really, we had — we have canvassed our shareholders, as we’ve talked about in previous earnings calls over the last couple of months, but really what kind of led to the change in the framework was, one, it really allows us to improve our financial flexibility and strengthen our balance sheet, while continuing to deliver peer-leading returns of capital to shareholders. And it also provides the flexibility to continue to allocate capital between variable dividends and opportunistic share repurchases. So that was a big feature of what we wanted to accomplish, too. And then the third piece is really with the greater liquidity, it really supports our intention of reducing gross debt through time and provides the ability repurchase incremental shares at times of major market dislocations like we saw in March.

So we think it’s a good refinement to the plan. And really, to your second question on what will be the distinguishment between variable versus buybacks. It’s really a conversation from those conversations that was clear that in the last few months that our investors do like the variable dividend, and it remains an important part of our method to which we return capital, but we want to also be able to continue to repurchase shares on an opportunistic basis when we see attractive value. And so as you can imagine, that’s really based on many factors that we evaluate when identifying that opportunity. It’s not formulaic in nature, but generally includes looking at our internal NAV at multiple different prices. It takes a look at what’s happening in the marketplace, you can imagine what’s happening in the macro environment.

So it’s really one of those things that we will assess taking all those factors into account to say what’s opportunistic at that time. So hopefully, that helps.

John Freeman : It does. And then just my last question. You detailed the big efficiency gains I’ll continue to make on Slide 14, and I’m just trying to get a sense of the — during the quarter, the 120 TIs that you all had or during the quarter sort of implies kind of a steady cadence all year on POPs to get to kind of the midpoint of that TI range. And I’m just curious if kind of that’s ahead of schedule that you all saw in the first quarter, you added the third simulfrac fleet if maybe we should assume that those efficiency gains keep maybe pushing the or pops toward the higher end of that range. Obviously, a first-class problem, but just trying to think about the cadence on the pops the rest of the year.

Richard Dealy: Yes. I think the cadence is pretty flat quarter-over-quarter throughout the year. So I think you’re exactly right. The 120 wells we put on production is you’re going to see something similar for each of the quarters going forward. So very much in accord to plan and on schedule with the plan. So really just as we would have expected it.

Operator: Your next question comes from Neil Mehta with Goldman Sachs.

Neil Mehta : Congratulations, Scott. And Rich, congratulations to in the new role. The first question is just there’s been a lot of talk around consolidation both around buying stuff and potentially putting Pioneer up for sale. And I don’t want to get down the path of rumor monitoring. But I think for the investors on the call, any color you can provide on how you guys think about value creation through M&A and any updates on your thinking around this?

Scott Sheffield: Yes, Neil, I’ll start with the general answer and then let Rich talk about his thoughts on M&A in the Permian Basin. Obviously, in regard to the past stories that have been out in the media. The Board will always do what is in the best interest for shareholders. I think that’s obvious from our standpoint from myself and our Board. I’ll let Rich comment on what he thinks of M&A activity in the Permian Basin.

Richard Dealy: Yes. Thanks, Scott. I’d say, as we’ve talked about, our primary focus, as you know, is executing our development program and delivering strong results. So that’s kind of priority number one. But really, on an ongoing basis, as you’ve seen us do in the past, we will continue to add to our Tier 1 acreage position through trades and through small acquisitions that provide the ability to increase our lateral lengths and provide higher depth of inventory. So that’s really the primary focus. We’ll continue to look at things that are contiguous around us just because we think that is key to adding efficiencies longer term. But that’s really — our focus is those type of bolt-on things that add incremental inventory and lateral length.

Neil Mehta : And a follow-up for me is just, Rich, as you take over the helm. And what are the 2 or 3 strategic priorities that you’re really focused on here as you build Pioneer for the next leg of the future?

Richard Dealy: Yes. Thanks, Neil. It’s really consistent with what we’ve developed working over the last couple of years. We put the strategy in place, the plan in place. And so our focus internally for the management team and really our 2,100 employees is execution. So that’s what we’re focused on is developing our resource out there and returning significant cash flow to shareholders. So that’s really what we’re focused on and we’ll continue to be focused on.

Operator: Your next question comes from Charles Meade with Johnson Rice.

Charles Meade : I want to begin by Scott saying, I will miss your willingness to share your unvarnished views on the oil markets and thank you for for doing that over the last several years.

Scott Sheffield: I appreciate it, thanks.

Charles Meade : Yes. So Rich, going back to, I think, the first question you had about your — this is the framework and metrics you guys use on evaluating the attractiveness of the buyback. I think I heard you say that you have an internal NAV that you look at at various different prices. Is that not — I recognize that there’s not going to be — you already said it’s not formulaic, but is that the framework that we should think about you guys using? Or are there other frameworks or metrics that come into play?

Richard Dealy: I’d say that’s the main one. I mean we assess NAV at $60, $70, $80, $90 price outlook. And so you have to take that obviously with what do you think the macro outlook is? What do you think the long-term view of supply and demand looks like? And where do you see the oil prices going over time? So it’s the combination of all those things that really is the assessment that goes into that.

Charles Meade : Got it. And then when I was looking at your results last night, I noticed that it’s been 3 quarters now that you guys have returned more than 100% of your free cash flow to shareholders. And actually, if you go back to 2Q ’22, it was 95%. So I’m curious, what is the — is that a street that we should expect will continue? Or is there going to be more some mean reversion back to that 75% number. What’s the — what’s your expectation on the path and what’s going to guide that?

Richard Dealy: Yes. Great question, Charles. I think it’s really, as we talked about, that framework of the 75% is that we’re committing to return to shareholders. But the other 25%, we do think it’s important to continue to improve the balance sheet over time. And that’s not to say we can’t use that for opportunistic times. I think we saw in March that we can use the balance sheet to buy back more stock. But we think a long-term framework for the company, the 75-25 is a good split and allows us to reduce gross debt along the way.

Operator: Your next question comes from Scott Gruber with Citigroup.

Scott Gruber : Yes. congrats all around. So a question on your outlook for capital efficiency improvement. You seem to be in a somewhat unique position in that over the next 12 months, your well productivity should be improving while your well cost, is actually deflating. How should we think about overall how much capital efficiency improvement you could see and think about if you stack the improvement in well productivity on a percentage basis this year, on top of the potential improvement in well cost on a percentage basis that you could see over the next six to 12 months. How large can that from be?

Richard Dealy: Yes. great question, Scott. And I think we’d reiterate that we’re very pleased with our first quarter performance and strong well performance and really the operational efficiency that we accomplished during the quarter. The initial changes that we’ve made to the program are starting to materialize in our production. Obviously, the most of that is still second half weighted as we talked about on prior calls, but excited about where we’re seeing productivity go. On the capital efficiency side, it really hats off to our teams across the company that are working on improving efficiencies. So adding the extra simulfrac fleet, doing more longer laterals the localized sand mines, our water distribution, all those things that we’ve been working on for many years that is going to help improve our capital efficiency.

So thanks to the hard work of all those people, we’ve made significant progress and expect to make more progress over the course of the year. So I think everybody is working hard to make that happen.

Scott Gruber : Got it. Got it. And just focusing on the well cost side because obviously, a number of initiatives you just mentioned, but we’re also starting to see initial signs of some deflation at the leading edge of service costs here. I mean do you think those two combined could be pushing kind of 10% deflation in well cost as we kind of enter 2024 and all the contracts reset?

Richard Dealy: It won’t be lack of trying on our part. I can tell you that. But on the inflation front, we’re still seeing a lot of things that moderated. The pace of change is slowing. So that’s a positive we’re not seeing substantial decreases in a couple of items. We’ve seen some declines. So it’s still early to tell where that’s going to head. I’m hopeful that we’ll see some deflation over the course of the year, but it’s still too early to make any changes at this point because we’re kind of level of where we would have anticipated. But signs are starting to look positive on the inflation side. So hopefully, that bodes well as we move into 2024 that we can see both the work internally that we’re doing from efficiency gains, but some a little deflation will help well costs as we move to 2024.

Operator: Your next question comes from Neal Dingmann with Truist Securities.

Neal Dingmann : Just a couple to follow up on that. Scott, you or Rich were talking about the vertical integration. I’m just wondering, could you talk maybe a bit more about that? Are you going to try to contract more sand kind of maybe just on vertical integration, if there’s other sort of procedures you could do there?

Richard Dealy: Sure. The main thing from — we’ve got our program fairly well locked in, in terms of all the needs that we have for 2023, and we stagger our contracts, like I’ve talked about in the past, just from a supply chain standpoint to make sure you’re not renewing anything on an annual basis. But we’re not — we’ve got adequate sand capacity. Obviously, the localized sand mines are helping with that. So that’s been — and plus it’s a cost savings and savings about, as I said, $200,000 per well, the simulfrac saves about $200,000 per well as we’ve added that fleet. So all those things that teams are working on and plus we’re lowering our emissions by moving to more dual fuel. Those things are helping as well in terms of lowering our emissions and lowering costs.

So the teams are really doing an excellent job of making sure that we have the supplies that we need and improving upon them with efficiencies and then lowering costs as we can — best we can in an inflationary environment.

Neal Dingmann : Great answer. And then just my follow-up on the full stack development. Could you talk about just what the typical pad size is now? And it seems like you’re making really good progress on what you started late last year. Could we see some upside on that potentially later this year?

Richard Dealy: Like I said, we’re very encouraged about how the first quarter has gone. You can see from second quarter guidance, we’re continuing to see the benefit going forward. So we’re real pleased. No change in our guidance, as we’ve talked about 1 quarter and — but everything is moving well on that front, so we’re happy about that. And on our average pad size, sorry I forgot that part, it is basically around — if you look at that across our portfolio, it’s about five wells per pad is the average.

Neal Dingmann : Okay. You’ll stay on that. There some — I guess, I should ask, are there some real large pads ahead that we should think about that might cause a little bit of lumpiness or you’ll stick up pretty much on that five or —

Richard Dealy: You’re right. There are some bigger pads here and there, but they’re spread pretty evenly across the year, so you won’t see too much lumpiness from that.

Operator: Your next question comes from Derrick Whitfield with Stifel.

Derrick Whitfield : Referencing Slide 19, I wanted to ask a bigger picture question on the value of low carbon intensity production. In this environment with an ever-increasing focus on decarbonization, do you sense or could you envision a day where your production would receive a downstream premium for its carbon intensity profile apart from quality adjustments?

Richard Dealy: It’s a great question and we want to see how the market evolves on that front. What I can tell you is the things that we are focused on is continue to lower that emissions. And then also, we’re in the process of putting methane sensors across over 80% of our tank batteries that should be done mid- part of this year. The things that we’re doing with NextEra on the wind farm, we’re working with our transmission providers to get substations out there where we can move more of our operations to high line power, both drilling completions and facilities as we move into 2024, ’25 time period. So there’s a lot of great work being done across the company that really help lower those emissions either further going forward. So — whether that gets a premium value is a question, but we believe internally, it’s just the right thing to do.

Derrick Whitfield : That makes sense. And then with respect to your exploration budget, could you perhaps better detail the results from your EOR power last year in your testing plans for this year?

Richard Dealy: Yes, it’s still early. I mean last year, we had 1 cycle test that was — gave us some positive indications, but we need to do more of those cycles, and that’s what we’re doing this year, and we’re just kicking that cycles off as we speak. So it will be later this year, early next year before we have the results on that. But so far, things are encouraging, but we really need to do more cycles to understand what the full cycle economics will look like on that project. So more to come.

Derrick Whitfield : Maybe just one clarification. How extensive is the area in which you’re testing and what kind of spacing do you have with those patterns?

Richard Dealy: It’s a historical area that we’ve done and so it’s not a big area. It’s three wells, I think, in two different zones is where it’s being tested. So still an early development of an area that we have 100% ownership.

Operator: Your next question comes from Scott Hanold with RBC Capital Markets.

Scott Hanold : Again, congrats to both of you all on your next endeavors. And maybe first to start just on the topic, Scott, just if you could give us a view of like why the succession plan kind of announced now? Do you feel confident in the trajectory of Pioneer. I know there’s been a lot of volatility on the oil side as well as just a lot of, I guess, questions last year on operational performance, but — of the wells. But can you give us a sense of why you think now is the right time to step back?

Scott Sheffield: Yes. Thanks. When I came back, I first started off with a three-year assignment to accomplish all of my goals, including succession, started working on succession back in March of 2019 when I first month came back. Obviously, COVID delayed things. And then we got into with our consolidation in the Midland Basin with our two large acquisitions. And I told the Board last year that I was really focused on this year. So it started last year. And especially with outperforming significantly first quarter with our production and our modifications that we made last year, I have full confidence in the fact that we’re going to have significant uplift over the next several years. It was just a good time. So I’ve been doing this for over about 35 years running the public company and its predecessor, almost 71. And so it’s time to enjoy the rest of life. So as simple as that. So nothing else involved.

Scott Hanold : Fair enough. And it’s well deserved. Maybe kind of going back to the new shareholder return strategy. I know that you all emphasized that there’s the other 25%. It sounds like the first priority is balance sheet, but then obviously, opportunistic buybacks, just a little bit of commentary on the sort of reducing gross debt would be helpful. Obviously, if we use your — and just going to your slides in terms of your 5-year free cash flows. I mean if we pick a $70 oil price, I mean that would more than get you to net debt 0 or actually a negative net debt number. Do you think long term that’s in the cards where you get down to 0 net debt? Or do you think there’s an optimal level of leverage on the balance sheet?

Neal Shah: Scott, it’s Neal. You’re thinking about, I think, the right way. I mean it’s our goal, and we’ve always said it, we believe in a pristine balance sheet and 1 that provides us durability during the down cycle as well as provides us operational and financial flexibility during an up cycle. So it’s our intention to continue to pay down gross debt as it comes due. Now if you think about gross debt versus net debt. We’re going to continue to drive down gross debt, but now we have some long-dated maturities that have a very low interest associated with them. I think it’s the 2030, ’31. Those will more likely not remain outstanding. But as our gross debt comes due, it would be our intention to pay it down.

Scott Hanold : Okay. And then just out of curiosity, if I could stack on the half to that. you all did issue debt here recently when you had the 750 note coming due. Why do that? Is that — was that more of a temporary bridge to you get a bigger quantum of free cash flow?

Neal Shah: No, I think that’s the right way to think about it. So our intention is to reduce absolute gross debt through time. However, given our 2022 year-end cash balance and then you saw the recent downtick in commodity prices during the first quarter, we thought it was prudent to finance the maturity that’s due here in May. And so that’s exactly the reason I view it more of a temporary bridge as we shore up free cash on the balance sheet, as Rich alluded to earlier.

Operator: Your next question comes from Bob Brackett with Bernstein Research.

Bob Brackett : Pass my congratulations on as well. In terms of self-sourcing sand, can you talk to the state of the art in sand in terms of grain size, moisture, crush strength. What’s sort of the leading edge of what the industry is doing?

Richard Dealy: Good question. I don’t know I have all the specific details on each of that. But really, we’ve been using West Texas sand out there for really probably a bigger part of maybe not a decade yet, but it’s been a long time, and it’s worked great. So really, that’s really what we’re continuing to use in the localized sand mines are exactly the same as what we were getting further West. And it’s worked out for the whole industry. I mean is there the capacity is pretty well spoken for today. That’s why these localized sand mines are helping provide incremental capacity, but it’s the best and cheapest source available, as you know, bringing white sand or other — resin-coated sand or other proppant type and it is more expensive. And this is highly efficient and highly cost effective to use in the field.

Bob Brackett : Very clear. A quick follow-up. Going back to the pad size of around five wells, how do I think about the geometry between zone development, which sort of intuitively seems would be larger pads versus that 5-well number that’s kind of flat through the year. How do I think about that?

Richard Dealy: Yes. Each of across the basin is the full stack development looks differently and you do them in a half section type development. And so there may be — it will look different by zone. It’s typically, as you’ve seen on most of the diagrams that we had in charges, if you want to kind of equate it to looking like a wine rack, that’s how it’s done. And then we just — we’ll go from 1 pad to the next pad, but they may be — we use this term like — logistic sequential. And so just think about that’s how we’re developing it across the field in these significant areas because it really just helps from an efficiency standpoint to keep rigs in one area.

Operator: Your next question comes from Doug Leggate with Bank of America.

Douglas Leggate : Scott, your stock is up 50% since you came back, Congratulations. You did lead that change in mindset to the market and longest retirement. Same to you, Rich, you put up with my nuanced question. So it won’t surprise you that I’ve got a couple of nuance ones today. So congrats to you, too. My first question is this. I want to go back to the Neil’s question about M&A, but I want to be very specific about this. Your pattern has been not to comment on market speculation, but you did with range, you broke the precedent. The language in that press release was very specific. It said, we are not contemplating a significant business combination. Should we assume from that then that, that would preclude any discussion with ExxonMobil.

Scott Sheffield: Doug, the primary reason we responded to a — and issued a press release on the range was due to the obviously significant reaction that we got back from our shareholder base. Obviously, there was nothing going on, and we reacted — and so we saw our stock get down to about 180. So that’s the reason — the only reason we went away from no comment. You’re going to see us always use that no comment like every other company does in every other industry. And as I said before, the Board will always do what’s in the best interest for shareholders.

Douglas Leggate : So you did not have discussions with a larger company or you did?

Scott Sheffield: I’ve already answered the question, Doug.

Douglas Leggate : Yes. No, I was referring to the not contemplating a significant business combination, but I understand. Thanks, Scott. I know it’s a tough one to tricky one to navigate. My follow-up, though, is on the capital return framework. And I really want to get to the issue of value because we all know that the commodity is a key input. But once again, you guys have talked about compelling valuation in a number of different contexts. You’ve also told us what your free cash flow guidance is $4 billion and with one of the best inventory debts in the industry, that, it’s under your current market capitalization. So I want to understand how you define value. And more importantly, if you really believe that, why wouldn’t you forego the variable dividend and just focus on buybacks.

Neal Shah: Doug, it’s Neal. I’ll take that one. I’ll start with off. Look, I’ve known you for what, close to 20 years. I think you were always on my first call when I was on the buy side. We’ve had great discussions. Oftentimes, we’ve had different opinions and different thoughts, which again was what makes the market. I think we would describe value and look at value in multiple different ways. I think it’s more than just dividing the free cash flow by the weighted average and buy your WACC. I think many on this call, the investors that look at our stock and assess the value and assess the value of the overall market. I’ll also look at it very differently and through multiple lenses, not just 1 singular lens. So I’d say that’s the ways that we perceive value is not just by one, but by multiple lenses.

And then the last slide is one of those views that we have. We look at ROCE, the commentary that we’ve gotten from our shareholders is look, focus on your return of capital employed, your corporate returns. And you can see that we’re leading the sectors. Now you look at that sector — the sector and you look at the valuation of the sectors within the S&P 500, we see somewhat of a mismatch there. And I think many would agree with that statement. You can look at valuation, relative valuations, sector valuation. We also believe looking at the inventory, duration of inventory, the quality of inventory, that also comes to bring to bear. Looking at the margins, all that. So I would say valuation — from our perspective, and I think many on this call, it’s more than just one singular metric, but encompasses more of a greater mosaic.

So in terms of your question now, the variable versus the buyback, you’ve seen the edited the modified capital return framework. And part of that now contemplates, as Rich alluded to, share repurchases as well. So we see great value in our equity and it is now a defined part of our capital return framework.

Douglas Leggate : So a fair bit and balanced response to that and I do respect our relationship with the years.

Operator: There are no further questions at this time. Please proceed.

Scott Sheffield: Again, thank you all very much. I look forward to seeing you in these last calls. So again, thank you. Again, congratulations to Rich. Thank you.

Richard Dealy: Thanks, everybody.

Operator: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.