Apple Q1 2023 Earnings Call Transcript

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Provided by Quartr
May 5, 2023

There are 10 speakers on the call.

Operator

Morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the Coaterra Energy First Quarter 2023 Earnings Conference Call. There will be a question and answer session. Thank you.

Operator

Dan Guffey, Vice President, Finance, Planning, Analysis and Investor Relations, you may begin your conference.

Speaker 1

Thank you. Good morning, and thank you for joining Cotera Energy's Q1 2023 earnings conference call. Today's prepared remarks will include an overview from Tom Jordan, Chairman, CEO and President and Scott Schroeder, Executive Vice President and CFO. Call. Also on the call is Blake Sergo, Senior Vice President of Operations.

Speaker 1

Following our prepared remarks, we will take your questions during our Q and A session. Call. As a reminder, on today's call, we will make forward looking statements based on our current expectations. 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 call provided in our earnings release and updated investor presentation, both of which can be found on our website.

Speaker 1

With that, I'll turn the call over to Tom.

Speaker 2

Call. Thank you, Dan, and welcome to all of you who have joined us for our Q1 conference call. Coaterra had an excellent first quarter. Call. We delivered on all fronts, production at the high end of our guidance, capital within our targeted front loaded cadence and significant progress on our buyback.

Speaker 2

These results were driven by outstanding asset performance, a recurring trend you should expect from Coatera. Oil production exceeded the high end of our guidance, driven by strong performance in our Permian Wolfcamp and Harkey developments. Our Anadarko projects also continue to deliver above our expectations and set the stage for future activity increases. Call. In particular, part of our production beat was driven by continued outperformance of the Anadarko Miller Trust project, which was brought online last year.

Speaker 2

The Anadarko is an underappreciated gem within a strong portfolio. Finally, our Marcellus program outperformed in Q1 as we continue to develop a mix of lower and upper Marcellus targets. As we look ahead, we see continuing volatility in our underlying commodities. As of the close of business today, 12 month NYMEX gas strip had fallen to $2.90 per Mcf. The 12 month WTI oil strip stood at $67 per barrel.

Speaker 2

2 quarters ago, we were looking at a 2023 oil strip of $83 and Natural Gas Strip of $5.30 There are growing fears of a significant recession, call, which have been exacerbated by the ongoing banking challenges. Fortunately, we at Coatera have some experience with living through volatility and uncertainty. Our formula is simple: keep our debt low, strive for assets with a low cost of supply, stress test our investments with downside commodity price scenarios and make capital allocation decisions that optimize returns and preserve flexibility. Service costs appear to have crested and are trending modestly downward. Although we welcome service cost moderation, it does not substitute for our mandate to push forward call.

Speaker 2

With operational efficiencies, project architectures that maximize investment returns, occasion of best in class technology to leverage our efforts for value creation. We focus on things that are within our control. Call. We are on track with the 3 year plan outlined in our Q1 release. In line with our initial plan, we will reduce activity in the Marcellus in the coming weeks and expect to remain at 2 rigs and 1 frac crew during the second half of the year.

Speaker 2

If we were to hold this level of activity flat through 2025, future Marcellus CapEx would decrease significantly and yet hold our Northeast production flat, allowing us the option to redirect activity to the Permian and Anadarko. Both of these basins have opportunities at the ready that provide great returns. Furthermore, our Marcellus assets retain the flexibility to grow in the future should macro conditions and prices warrant increased investment. Looking forward, we retain maximum optionality to Point Capital to its best use. We also look forward to publishing our 2023 sustainability report later this year.

Speaker 2

We're making great progress in understanding methane monitoring, including the discrepancies between the various technologies available to the industry. Coatera is working with our vendors to improve the available technology, understand the limitations and choose the best solution for the problem at hand. Call. With the varying environmental conditions between the Permian, Anadarko and Marcellus, we have learned that there is no single scalable solution that can be successfully deployed across our portfolio. Instead, we will rely on multiple technologies to detect, measure and reduce our methane emissions.

Speaker 2

Coaterra will remain a leading company in innovative design and facility modification to reduce emissions. We also appreciate the collaboration with an outstanding set of competitor companies as we work together to solve this problem. This is an industry wide challenge and industry collaboration will be key to finding workable solutions. Our nation and the world depend upon. Call.

Speaker 2

With that, I will turn the call over to Scott to walk us through the particulars of a great Q1.

Speaker 1

Thanks, Tom. Today, I will discuss our Q1 'twenty three results, shareholder returns and updates to guidance. During the Q1, Coaterra reported net income of $677,000,000 discretionary cash flow of $1,039,000,000 accrued capital expenditures of $569,000,000 and free cash flow of $556,000,000 Despite natural gas and oil prices falling 30% 19%, respectively, versus 1Q 2022. Discretionary cash flow declined only 16% year over year. This was driven by an increase of the company's oil and NGL production, which caused Coatera's liquids production mix to increase 3% year over year to 28%.

Speaker 1

The company expects greater than 55% of its 2023 revenue come from oil and NGL sales. Also during the quarter, the company realized a cash hedge gain totaling $100,000,000 versus $172,000,000 loss in Q1 'twenty two. 1st quarter total production volumes averaged 635 MBOE per day with oil averaging 92.2 MBO per day and natural gas volumes at 2.76 Bcf per day. Oil and BOE finished 2.5% and 1.6% above the high end of guidance, respectively, and Natural Gas hit the high end. The strong performance was driven by a combination of positive well productivity trends and improved cycle times.

Speaker 1

Turn in lines during the quarter totaled 49 net wells above expectations. The incremental wells came online late in the quarter. Quarter accrued capital expenditures totaled $569,000,000 as I said before, but the cash capital expenditures quarterly $483,000,000 consistent with expectations. Turning to return of capital. We announced a $0.20 per share base dividend and remain one of the highest yielding base dividends in the industry.

Speaker 1

Management and the Board remain committed to responsibly increasing the base dividend on an annual cadence. During the Q1, Kotera followed through on its return priorities by repurchasing 11,000,000 shares for $268,000,000 strategic buybacks ahead of variable dividends. We have over $1,700,000,000 remaining on our $2,000,000,000 buyback authorization. We are reiterating our annual commitment to return 50% plus of free cash flow to shareholders. Quarter.

Speaker 1

Lastly, I will discuss the refinements to our 'twenty three guidance and activity outlook. We reiterated the company's capital estimate of $2,000,000,000 to $2,200,000,000 While we are seeing clear signs of cost softening, we have yet to realize meaningful savings and therefore have not built any future cost reductions into our forecast. We are increasing our full year oil guidance 1% to 87 2.93 MBO per day, driven by efficient operations and strong well performance in both the Permian and Anadarko Basins. Quarter. The total company well turning lines are unchanged from our original guidance.

Speaker 1

In the Marcellus, as Tom has stated in his remarks, We are finishing up a development this month and then plan to drop 1 of our 2 frac crews and hold a single crew for the balance of the year. We also plan to drop from 3 rigs to 2 rigs this summer as planned earlier this year. In the Anadarko, a late 'twenty three turn in line was pushed in 2020 4. This lowers our Anadarko turning lines to 7 wells down from our prior range of 10 to 15 wells. Call.

Speaker 1

We now intend to maintain 1 to 2 rigs in the basin for the remainder of 2023. In the Permian, we expect to continue to run 6 rigs for the remainder of the year and will pivot between 2 3 frac crews. Due to improved cycle times, we expect to bring on an additional 5 wells in the Permian during late 'twenty three, offsetting the lower turn in lines in Anadarko. Quarter. Turning to unit cost.

Speaker 1

The company's guidance remains unchanged at midpoint, but there was some moving pieces, primarily driven by reclassification between cost categories which occurred after completing our integration into a single accounting system earlier this year. We also reiterated our 3 year outlook, which assumes the company achieves a 3 year oil CAGR of 5%, BOE and natural gas CAGR of 0% to 5%, which is achievable with capital and activity that is flat to down relative to 2023. Call. In summary, despite commodity headwinds, Coatera's outlook remains strong. Driven by continued strong execution, we are well positioned to meet or exceed our 2023 targets.

Speaker 1

With that, I will turn it back to the operator for Q and A.

Operator

And your first question comes from the line of Arun Jayaram from JPMorgan. Your line is

Speaker 3

open. Good morning, Tom. Nice results from your team. I wanted to See if I could delve into your commentary around a potential activity in the Marcellus. You mentioned That your original plan was to go down to 2 rigs and 1 frac crew, but you also signaled that you may stay at this level for a certain amount of time Given the gas macro, I was wondering if you could give us a sense of do you think you could hold your Marcellus production relatively flat at Call that 2.1 Bcf a day.

Speaker 3

And what would that mean for CapEx, if you did go down to that level because I think this year's CapEx guide is around $835,000,000 at the midpoint.

Speaker 2

Well, Arun, we You just kind of repeated what I've said, so I'll try to give a little bit of detail there. We our What we what I said is if we were to stay at the 2 rig and 1 frac crew, that's not a plan. That's kind of a guide as to what would happen. We kind of as we look at the macro right now, we kind of like that and where it positions us. Our Marcellus team has done a really nice job of smoothing out their cadence and getting on to our regular program.

Speaker 2

So as we look ahead at that level of activity, we think we will be able to shave off significant capital in the Marcellus and have the opportunity to redeploy that elsewhere. We would hold our production flat or actually slightly grow. Within that range we've already telegraphed. And it's really a nice place to be right now, because strategically what we'd like to do is keep that Marcellus production flattish and be ready to go when the gas macro improves. And that's exactly the position that our really great team in Pittsburgh has put us in.

Speaker 2

So everything you said is true. I'm not sure what other color we can give, but one of the things we really like is the flexibility to pivot And we're maintaining that gas production. We don't want to see a decline. So it will indeed maintain if we were to hold those 2 rigs in 1 frac crew.

Speaker 3

Yes, Tom, I don't know if you could follow-up just one question with how much lower CapEx would it be if you went to that program?

Speaker 2

As we with current costs, we think few out years would probably be a couple of 100,000,000 below what we're currently spending in the Rosales.

Speaker 3

Call. That's super helpful. The second question perhaps for you and Scott, Tom, you have been handily surpassing the 50 plus percent minimum cash return threshold to shareholders. You're at 76% this year. I was wondering if you could get some color thoughts over the balance of the year.

Speaker 4

And I know

Speaker 3

that your framework Under your framework, you like to keep around $1,000,000,000 of cash on the balance sheet. You're essentially at that level at the end of March. So any thoughts on The ability to kind of sustain this mid-70s type of cash return over the balance of the year because you really don't have much debt due until a little bit into 2024, I believe.

Speaker 1

Yes, this is Scott. Great question. We want everything you said is exactly correct. We did reaffirm the 50 plus percent. We're very comfortable with that.

Speaker 1

That affords us call. Really, as we shared with our Board yesterday, the ability to be very opportunistic when you go back and look at the report card for the last five quarters, including this first one this year. We have surpassed the 50 plus percent. It is a floor. Depending on market conditions and where we want to be and what the commodity strip is doing, we will It's an investment decision with all three pieces playing into it.

Speaker 1

Do we want to lean in more on the buyback? Do we want to hold cash for some other strategic opportunity or do we just want to kind of stay on path and just rely more on the base dividend. We have all that optionality. I'm sorry to come across as a little coy, but we're very comfortable with that framework and we're set up tremendously for this year in terms of that optionality.

Speaker 2

Arun, if I could just follow-up on, I'll say this. Scott and his team have really been masterful in how they've executed our buyback, taking opportunities when the price dips. We're going to continue to be disciplined there. But the fact that we're reaffirming our 50 plus is non arbitrary. We really want to maintain flexibility in our balance sheet.

Speaker 2

And if we were to have a quarter In the future, when we returned exactly 50, we have nothing to apologize for. We want to be really clear with people that that's our intent and that we think that there may be alternate uses of cash. It could be I hope it's a constructive buyback program, but If we don't think that's the right way to go, we're just not going to embark in an arms race of cash return. We just don't think that's in the best interest of the Coatera owner and we have great opportunities within our portfolio And we're fairly constructive on commodity pricing going forward. So we're right where we want to be.

Speaker 3

Call. Sounds good. It does give you a lot of flexibility. Thanks a lot, Tom.

Operator

And your next question comes from the line of Umang Choudhary from Goldman Sachs. Your line is open.

Speaker 5

Hi, good morning and thank you for taking my questions. My first question was hey, good morning. My first question was just wanted to get your thoughts around the macro, both oil and gas. I mean, definitely a lot of concerns around demand for oil and the pace at which we reflect supply to balance the markets natural gas. And given these concerns, right, as we thing through your program.

Speaker 5

One of the goals has been to maintain consistent activity to maximize efficiency. Question. How do you what are the levers you can pull right to maximize your free cash flow outlook over the next 3 years?

Speaker 2

Well, Hmong, that's an excellent question. I think we've described it. The fact that we do have the optionality to liberate some capital out of our Marcellus program and redeploy it to more liquids rich opportunities would be a pivot to maximize our cash flow in the next few years. We have historically not done a really good job of predicting commodity swings. And as I said in my opening remarks, 6 months ago, the situation looked entirely different.

Speaker 2

It's changed and yet now we're all highly confident that we know what the future looks like. And so having that flexibility really allows us to get up every morning and make good long term decisions. We don't make those decisions based on the daily spot price. We make those decisions as we see macro trends. Right now, as we look forward, We are in the long run highly constructive on gas.

Speaker 2

Over the next year, we're going to be cautious. That's why we want to maintain our gas production, but not go nuts there. So, yes, we think our program does answer the question you've asked as far as maximizing our cash flow.

Speaker 5

Yes, that makes a lot of sense. And then I guess the follow-up on that would be the other way to ensure and manage risk would be around Hedging. So any thoughts around oil and gas hedging over the next for the next 1 or 2 years?

Speaker 1

Call. Yes. In terms of hedging, obviously, we haven't moved away from our strategy around organization and all the opportunities. We don't have to lean in on hedging. The last thing you want to do is lean in on hedging when prices History will show that, that always kind of comes back to bite you.

Speaker 1

We are looking at a more calculated, more refined way. We're in the early stages of that, more to come on it. But right now, we don't feel the need to lean in, in either oil or gas to protect the downside. We're pretty comfortable with where we're at. Show some optimism on both products or at least particularly on the gas side going out farther.

Speaker 1

So we'll stay on path right now, but we are open to looking at disconnects farther out of the curve. One dynamic that may you may see in place with the team we're working with is maybe we look a little further out than just the 12 months that we've been doing historically. Call. And I think that behooves us to really open our minds to be more open minded to how we hedge going forward.

Speaker 5

Call. Thank you. Thank you for the color.

Operator

And your next question comes from the line of Doug Leggate from Bank of America. Your line is open.

Speaker 4

Hey, good morning, guys. This is actually Clay on for Doug. So thanks for taking my question. My first question is on inflation. So as the commodity has pulled back a bit, activity seems to be softening.

Speaker 4

What are you guys seeing on leading edge pricing at the moment? And how are you guys positioned to respond to it?

Speaker 6

Yes. Clay, this is Blake. I'll take that one. We are seeing the softening across the whole market. It's been slight, but it's starting to pick up some steam.

Speaker 6

I'll start with OCTG. We've seen pipe prices roll over. Question. The way we order pipe that really won't impact us to Q3 or Q4, but we estimate that could impact our program $15 to $20 per foot, We realize all that. On the frac side, we talked about last time how our contracts work for the year.

Speaker 6

We have quarterly renegotiation points and semiannual renegotiation points on our frac crews. We saw some very slight reductions from Q1 going into Q2, but it was a reduction. And right now, we're having the conversations to Q2 to Q3, and they're different conversations than we were having just a quarter ago. So We'll see how those progress. On the rig side, we're really in really good shape.

Speaker 6

Most of our long term contracts are actually falling off within Q2. By the end of Q2, only 20% of our rig fleet will be under any type of long term contract. We're seeing movement there. We are seeing some deflation. We're in discussion with all those folks right now.

Speaker 6

Question. We have really long term service partners, folks we've been through a lot of cycles with and their productive discussions. I think everyone understands the market we're in today is not the market we're in here.

Speaker 4

I guess to press a little bit, if you were to renegotiate some of those contracts. Is that more of a benefit to the back half of 'twenty three's capital budget or is this more of a 'twenty four consideration?

Speaker 6

I would think of it more as it would impact second half twenty twenty three and kind of set up a run rate going into twenty twenty four.

Speaker 4

Thank you. I appreciate that. My next question is on the revised oil guidance. You guys raised it by 1,000 barrels per day. Call.

Speaker 4

And I guess I'm wondering if you can really call it with that much accuracy or the intention here is to send a signal. And if it is to send a signal, what are you trying to convey about the performance that you're seeing so far? If it sort of continues at this pace, do you see further upside risk guidance as we go through the year.

Speaker 1

Clay, this is

Speaker 2

I think it speaks for itself. We're seeing A great performance on these projects. We are optimistic. We try to guide as we see it. Yes, we don't sandbag, but we're really seeing some surprises to the upside.

Speaker 2

Call. And I think that we would love to see further surprises to the upside, but we really try to call it as we see it.

Speaker 4

I guess if you raised the guidance, is it based on what you saw in 1Q continuing? Question or is it sort of assuming that you get back to a more normal level or what does it say about the expectations for the balance of the year? Call.

Speaker 2

Well, it says that we're seeing increasing results that recalibrate our analysis. And as we look at the projects coming forward, We think that's appropriate recalibration. We learn along the way call. And we love to learn on the upside, but you know what, every now and then, you go the other way. But right now, our oil assets are really, really performing well.

Speaker 4

Call. Great. I appreciate those comments, Tom. Thank you.

Operator

Your next question comes from the line of Michael Scialla from Stephens. Your line is

Speaker 7

open. Hi, good morning everybody. Tom, you talked about being ready to grow year Marcellus production when the market signals you should. I want to get your view on constraints on pipelines or I guess Blake talked about the rig and crew situation softening, but any potential constraints on getting rigs or crews back When you decide to pivot back to growth mode.

Speaker 2

Well, I'll tee it up and turn it over to Blake. We do have some available capacity to grow. It's not unlimited. It's not without boundaries, but over a few year time period, we've got A lot of availability on that market takeaway. Blake, why don't you?

Speaker 6

Yes. Just to echo, Tom, we do have options to grow our gas volumes there. There is the pipeline phase. It might come with a little higher cost than our current differentials. So that would be something that would have to go into the discussion.

Speaker 6

As far as rig and fracs, you just got to stay ahead of it. It's not something we could knee jerk, but we could get the crews and rigs as long as we plan out in time.

Speaker 7

Appreciate that. And I wanted to ask on the Upper Marcellus. You've talked about delineation there. When you look at your 529 Upper Marcellus locations that you had in inventory at the end of the year, If the delineation works, I guess, what would be the impact on the number? Are you talking about potentially like doubling the inventory or is it a modest increase.

Speaker 7

I'm just looking for some sense of what delineation could mean for the inventory.

Speaker 2

No, that inventory is really with our current acreage footprint. We are back to leasing in Marcellus and filling in that acreage footprint and our team in Pittsburgh has done a really nice job of that. But that is with our current model of spacing with our current acreage. So that's That's the number.

Speaker 7

Got it. Thank you.

Operator

Question. Your next question comes from the line of Neal Dingmann from Truist Securities. Your line is open.

Speaker 8

Mornell, thanks for taking my question. First, I guess, an M and A type question. Specifically, I'm just wondering, could you discuss opportunities to trade and block up your Delaware acreage, specifically in New Mexico, where it looks like you have a little bit more scattered position there.

Speaker 2

Well, New Mexico is a tough area to block up. The ownership is like a quilt work patch. There are some assets on the market that we've looked at, but even at today's prices, it's being Assets are marketed at full retail. And we're going to be very cautious on M and A. We would with our balance sheet In our organizational capacity, we would love to find a transaction that adds value to our owners and increases our opportunity for operations.

Speaker 2

Call. Quite frankly, a lot of the assets out there have peaked production. They've really drilled to increase production over the short run and have rather short inventory behind that. And that doesn't do much for us. We've also traded and done a lot of swaps to increase our ability to block up our drilling spacing units long laterals.

Speaker 2

There's a lot of that type of activity. That's the benefit of us and the operators we trade with. But We look at everything. We're very active in that market, but we're going to be really cautious and preserve value for our shareholders.

Speaker 8

Yes, like your strategic nature, Tom, it's always paid dividends. My second question, maybe just sticking with Adele. Could you give me an idea of quarter. I know you mentioned or you Scott mentioned 6 rigs likely to continue active in the Dell this year. Could you remind me kind of what area that will focus?

Speaker 8

And as a result, Really any notable change in the GOR this year versus last?

Speaker 2

No. That tends to move around depending on the nature of the program, where we're permitted. This year, looking ahead, we're heavily in Reeves, we're heavy in Culberson. Eddie is a lower share, Lee County is still very active. It's in our deck, our breakdown of where Yes.

Speaker 2

But it does tend to ebb and flow, but you're probably going to see the majority of it on any given year being REED's or Culberson. Just because of their state of Texas, the timeline between project inception and moving dirt is pretty short, whereas you get into Mexico, you have state and federal permit constraints and it's just not as nimble, call. But it's going to flow.

Speaker 8

Very good. Thank you, Tom.

Operator

Your next question comes from the line of David Deckelbaum from TD Cowen. Your line is open.

Speaker 9

Good morning, Tom and Scott. Thanks for your time today. I was just curious I I wanted to ask a bit, I don't know if my eyes are just playing tricks on me, but when I look at presentations, are you including greater activity at this point for the Harkie zones. And I guess you didn't touch on that specifically, I guess, with this presentation. But can you update us on how the hearty performance is relative to sort of the other programs in Culberson and how you're thinking about that zone and perhaps the more challenged commodity environment today.

Speaker 2

Well, we love the Harkie. I'll say, the Harte, like so many, is highly variable. It's not a one size fits all. So around the basin, it's going to vary. But in a lot of our position, it's highly and competes very nicely with Wolfcamp.

Speaker 2

We're Very active in the hierarchy, as you can look at our Slide 12, we've got a lot of hierarchy in our program. I think we'll continue with that. And it's it depends on where you are. There's places where it's right on top of the Wolfcamp. There's places where And so a little lower than the Wolfcamp, but it's one of the best landings zones in the basin, I'll say that flat out.

Speaker 9

I appreciate the color there. It doesn't sound like necessarily a composition has shifted from quarter to quarter per se though. No. No. Okay.

Speaker 9

Shifting just to the Marcellus briefly, just to revisit lateral length progression over the next several years. The upper obviously has a greater weight, I think, and I think you all said in the 'twenty three program versus what you expect to do in 'twenty four, 'twenty five. Question. Should we expect that future upper wells that are in the program in 2024, 2025 are still in that, call it, 11,500 foot range? Or how do you think about the average lateral length for the upper versus the lower in the next few years?

Speaker 2

Well, the average lateral length in the upper is Going to be on the longer end of that. The upper is fairly wide open. So I think you're looking at average lateral lengths that are going to be 10000 to 15000 feet, probably closer to the lower end of that depending on what our units look like. So a lot of the average lateral length of the Marcellus program call. It's really a combination or a function of the upper versus lower mix.

Speaker 2

As we fill out the lower, we're going to have shorter lateral lengths because we're filling in islands that are undeveloped. Hopefully, that answers your question. Call.

Speaker 9

Yes. I appreciate that. Thanks, Tom.

Operator

And there are no further questions at this time, Mr. Tom Jordan. I will now turn the call back over to you for some final closing remarks.

Speaker 2

Thank you all for joining us. It's nice to generate and discuss great results. We've always been a team that likes to talk about results more than promises and look forward to continuing to talk about results as time marches on. Thank you very much.

Operator

This concludes today's conference call. Thank you for your participation. You may now disconnect.

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