Chord Energy Corp Q1 FY2021 Earnings Call

Good day, and welcome to the Oasis First Quarter 2021 Earnings Conference Call. All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Michael Lou, CFO. Please go ahead.

Thank you, Betsy. Good morning, everyone. This is Michael Lou. Today, we are going to discuss our first quarter 2021 financial and operational results and our acquisition announcement. We're delighted to have you on our call. I'm joined today by Danny Brown, Taylor Reid as well as other members of the team. Please be advised that our remarks on both Oasis Petroleum and Oasis Midstream Partners, 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 release 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 also find on our website. With that I'll turn the call over to Danny.

Thank you, Michael. Good morning to all, and thank you for joining our call. I'm Danny Brown, Chief Executive Officer for Oasis Petroleum. We sincerely appreciate your interest today and I think we have some exciting news to share. But before we start, I want to voice my appreciation to the entire Oasis team for being so welcoming to me, and for all their hard work, which has culminated in the news that we're sharing today. Thank you. I also want to pass on our appreciation for those of us here – from those of us here at Oasis to all the first responders, health care providers and leaders that have been working around the world to assist with the COVID-19 pandemic. You have our appreciation and support. Also, to our teams and vendors, we thank you for the same reasons. So, quickly a brief intro. I've met many of you through my prior roles, where I had a lot of opportunity to engage with the investor community. For those who may not be familiar with me just some quick background. I've been in the oil and gas industry for over 23 years, with much of that time at Anadarko Petroleum, where I was most recently Executive Vice President of US Onshore Operations. And while I say, I've spent most of my time on the operations side, I've had a good amount of exposure to the finance side as well. I've managed through various business and commodity cycles and have obviously had a lot of experience working as a company with a unique mixture of upstream and midstream assets. I plan to comment on our specific strategic initiatives in a moment, but as a general introductory thought, I'd like to emphasize the absolutely amazing progress this company has made year-to-date. As our Board Chair noted last call, Oasis is accomplishing things in months that it would take most years to do. I expect to build upon the great work management and the Board have accomplished so far and continue to aggressively pursue additional value creation. In the coming months, Oasis will be attending numerous conferences and roadshows and I look forward to meeting with you and engaging with you in a dialogue on our industry, our business, and on the actions we've taken thus far. And I say this because I just want to emphasize that the management team here, and I personally very much value your feedback. And as you probably already noticed, it's been very influential in setting our strategy priority and plans. We put in place major initiatives to ensure alignment with shareholders, with just one example being our industry-leading performance-based management compensation program. I took this role at Oasis because candidly, I saw it as a great opportunity to lead a company, not only with strong people and strong assets, but importantly, also one that was on the right path. Since joining on April 14, I've been thoroughly engaged with the teams, and I'm very impressed by the quality of the people here, and they're focused on making Oasis a better company. I just want to take a minute in thanking employees again for all their hard work. I know it's been a long road, and a lot of work over the past year, but you should be proud of what you've accomplished and understand Oasis is in an excellent position to succeed going forward. Given this is my first formal conference call with Oasis, I want to spend a little longer this morning than I normally would, reviewing some key points on our strategy, the progress we've made, and my vision for Oasis in the new energy paradigm. But before we do that, I wanted to talk about the very exciting announcement we made yesterday afternoon. As you've no doubt noticed, we've seen quite a few deals in the Bakken this year. The basin is maturing, and we think it's likely to consolidate further as activity levels moderate and companies rationalize their portfolios. The transaction we announced yesterday significantly increases our scale and is aligned with Oasis' core strategy. The company exercised capital discipline and prudent risk management with the purchase price almost entirely based on PDP value with very little value attributed to the development of top-tier inventory or potential synergies. That's not to say that we don't see opportunities to invest in the strong inventory this acquisition brings, because we do. And in fact, they compete favorably in our portfolio. But they play very little role in underpinning our price. Additionally, despite meaningful opportunity to improve operational efficiencies, we assume no synergies in the valuation. The transaction further decreases Oasis' E&P cash G&A, with our year-end 2021 exit-rate expected at approximately $1.25 to $1.35 per BOE and lowers our reinvestment rate to below 55%. We financed the deal prudently, using our strong balance sheet to drive accretion while keeping leverage below our targeted levels. And we see a clear path to delever further, with the strong free cash flow expected from the pro forma business. So pro forma for the deal, the combined asset base results in even higher free cash generation, supports an even lower reinvestment rate, and puts Oasis in an even stronger position to return capital to shareholders. To that end, we have also announced that we plan to increase our fixed quarterly dividend by 33% to $0.50 per share after the acquisition closes. I should also mention that Oasis has a strong operating track record, and we can tell you to demonstrate our commitment to our communities and environment by running the acquired assets in a sustainable manner, respectful of all of our stakeholders, including the three affiliated tribes on the Fort Berthold Indian Reservation. So with that exciting news, I'd like to return to my comments on Oasis' strategy and my vision for the organization. First, financial security and flexibility will remain a key strategic objective for Oasis. Pro forma for the acquisition we announced yesterday, we expect leverage to be at 0.8 times and to trend substantially lower as we use a portion of our cash flow to delever from that level. Given the inherent volatility of oil prices, having a strong balance sheet helps protect the capital program and gives us flexibility. Second, our new business model is returns focused. To be frank, we recognize that this industry has destroyed a lot of capital over the past decade and investors are right to demand improvements here. Our Capital Allocation Committee, which is led by the Board, oversees a new formal capital allocation process and has instituted a rigorous framework that tests every dollar of capital spending. The Board is updated regularly on our progress and monitors returns on every project we do. At a corporate level, we expect strong returns driven by our peer-leading reinvestment rate and stringent investment criteria. Third, following return on capital, return of capital is a key pillar to our strategy. As you've seen, we've worked hard to institute a fixed dividend sooner than many expected, in this quarter shared our plans to increase it after our announced acquisition closes. We feel having a sustainable dividend is important, as it demonstrates discipline and our commitment to shareholder returns. In addition, concurrent with our Midstream simplification, we initiated a $100 million share repurchase program, which provides another avenue for Oasis to return cash to shareholders. Many of you have noted our free cash flow outlook at current pricing exceeds our dividend obligations and the repurchase authorization. Management and the Board continue to assess our options here. And we will continue to act in the best interest of shareholders. Fourth, alignment between management and shareholders is extremely important. As you know, at the beginning of the year, Oasis instituted a peer-leading compensation program with 75% of incentive compensation tied to returns. Frankly, our personal upside is extremely limited if shareholders don't make money. Fifth, ESG remains a strong focus at Oasis. And we think each of these letters is important. We're dedicated to producing a cleaner, low-cost barrel, while being engaged with local communities and conscious of stakeholder interests. So just a couple of things to highlight here, on the environmental side, Oasis continues its peer-leading gas capture in the Williston Basin, and we're also capturing essentially all oil and water on pipeline as opposed to truck. And while I mentioned our leading governance structure earlier, I think it's important to note that the Board oversees our efforts here through the newly formed Nominating Environment, Social and Governance Committee. You're going to see us provide more disclosure around these important issues going forward. And I'd be remiss if I didn't share that we remain focused on the health and safety of our employees and communities in these unprecedented times. Sixth, the asset base here is very strong. And our recent acquisition is a great complement to our existing base. But we know that strong assets in and of themselves are not enough. We have to be a leader on cost. And we've made tremendous progress on that front. Oasis has dramatically reduced its capital, operating and overhead cost structure. And we expect we will see even more reduction through our work with a third party to achieve substantial process optimizations, which has and will result in material savings. Pro forma for the recent purchase our E&P cash G&A rate is exceptionally strong. Seventh, the organization has made important strides in improving enterprise risk identification and the systems and controls necessary to mitigate and manage these risks. Oasis has codified and is implementing a risk management system to ensure organizational reliability and protect against possible events, disruptions, and challenges to our environment, our people, our communities, and our stakeholders. Simply put, Oasis has implemented new systems to more effectively manage processes and mitigate risk. And finally, Oasis remains differentiated versus many of our peers given our large ownership in our midstream company Oasis Midstream Partners. During the quarter, the company took the important step of simplifying its ownership by selling our remaining interest in the Bobcat and Beartooth Development Companies to OMP. The transaction was accretive to both companies and strengthened Oasis' balance sheet while increasing its ownership in OMP. This has resulted in a business that is now more transparent and understandable. The investor feedback we've received on this has been positive, and we continue to evaluate additional actions we can take to unlock what we see as track value to shareholders. In closing, the energy industry is becoming more industrialized. And given it's a commodity business we need to strive towards increased scale to drive higher volumes over lower costs to enhance returns. We believe the opportunity set for consolidation is quite strong and Oasis plans to participate where it makes sense. We believe we're a logical consolidator in the basin given our extensive footprint, our low-cost structure, our operating track record, our midstream business, and our deep understanding of the subsurface, but ultimately whatever action we take will be guided by our desires to be prudent and maximize creation for shareholders. So with that, I'm going to turn it over to Taylor to give some operational color and talk a bit more about our recently acquired assets. I've spent some time outlining our recent progress and our strategic priorities going forward, and I hope I've made it clear that we are strongly aligned with you the shareholder, and we'll continue to pursue strategies to unlock value.

Thanks, Danny. As Danny mentioned, we are focused on reducing costs and driving efficiencies and the impact is showing up across our business and improved cost structure. On the well cost side, we've made tremendous progress over the past couple of years. In the Bakken our typical well is now AFE-ed in the mid $6 million range down about 17% from early 2020. And in the Delaware, we've made even more progress with our current AFE of about $7 million down about 20% since early last year. Service concessions have obviously helped here, but various improvements in engineering design have helped as well. Looking forward, we're not seeing significant pressures on well costs with the exception of a tighter steel market. Fortunately, we've locked in steel pricing for the remainder of the year and we're not expecting significant impacts on the 2021 capital budget at this time. Turning to our recent Williston acquisition. We're really excited about the opportunity to add scale in an accretive manner for our shareholders. The new assets include about 95,000 net acres with a current production rate of about 27,000 barrels equivalent per day. The acreage is largely held by production with an average working interest of around 84%. There are two main operating areas on the acreage: the South Antelope field and Fort Berthold. In addition to the producing assets, we've added about two to three years of drilling inventory at our current pace in the Williston. And this inventory meets our return threshold of a 15% rate of return loaded with G&A at or below a $45 WTI price. As you can see in our go-forward guidance, we estimate acquired areas have a similar cost structure to our legacy position. And we do see some opportunity to optimize and drive lease operating expenses lower over time. We also see opportunities for optimization on supply chain and marketing as well. The Oasis marketing team has consistently delivered very strong results and we'll integrate the newly acquired production into our existing programs. As we continue to focus on capital discipline, we plan really limited activity on the assets for the remainder of 2021. We will be deferring investment until the projects have been fully vetted so that we can maximize returns and free cash flow. The significant PDP component of this acquisition provides us additional free cash flow and provides the opportunity to increase investment in Oasis' legacy asset base while keeping a low reinvestment ratio allowing us to mitigate declines and support sustainable cash generation. As we move forward on this exciting addition to our portfolio, we look forward to working with the Three Affiliated Tribes on the Fort Berthold Indian Reservation and engaging new employees who currently operate these assets. We've updated our 2021 guidance for the integration of the acquired assets, which for modeling purposes we assume closes at the end of June. We'll adjust third quarter expectations based on when the deal actually closes. We're currently running one rig and we expect to complete 23 to 25 gross wells, most of which will come online in the second and third quarters. As a reminder, 2021 activity is focused on some of our strongest areas: Wild Basin and Indian Hills. And later in the year, we'll begin drilling our South Nesson project, which is adjacent to Wild Basin and is expected to generate similar well performance. In the Permian, we have a program focused primarily on the Bone Springs and Wolfcamp A. We'll bring on seven recently completed DUCs in June, and we'll initiate a drilling program later in the year. We've made significant progress in lowering our cost structure and reducing cycle times. We've also optimized our well spacing. And when you combine those two, it really bodes well for returns and free cash flow. As our guidance indicates, second quarter production is expected to decline slightly from Q1 levels, reflecting limited Q1 activity with well completions loaded at the back end of the quarter. As a result, third and fourth quarter volumes are expected to increase considerably even before considering the effects of our acquisition. Said another way, pre-acquisition volume guidance is unchanged from February. We've updated volume guidance to reflect the impact of the acquisition beginning July 1. We have no planned incremental D&C capital expenditures for 2021 and our full year capital budget is unchanged from February guidance other than about $5 million to $10 million in workover costs related to the new assets. To close, we have made tremendous progress on the operations side, lowering our operating and capital costs, improving efficiencies and making ourselves a more competitive company. Thanks to the Oasis team for all your hard work and dedication over the past 12 months. We've made tremendous progress that has positioned the company for success. Keep up the great work. With that, I'll now turn the call over to Michael.

Thanks, Taylor. As you read in our press release and we discussed earlier in this call, Oasis has agreed to acquire certain Williston Basin assets for total cash consideration of approximately $745 million pursuant to a purchase and sale agreement and subject to customary purchase price adjustments. The acquisition will be funded with cash on hand of approximately $106 million, revolver borrowings under our unfunded $500 million borrowing base, and a $500 million bridge to a high-yield offering. We expect closing of the acquisition to be in the third quarter. Oasis continues to do a good job managing LOE and minimizing downtime. E&P LOE averaged $9.92 per BOE for the first quarter, below expectations. E&P cash G&A expense was $14 million. However, adjusted for severance, as part of the company's cost reduction initiative and fresh start accounting costs, E&P cash G&A approximated $9.2 million, below guidance of $11 million to $12 million. As Danny mentioned, E&P cash G&A per BOE is expected to exit 2021 at $1.25 to $1.35 per BOE, so very strong progress there. Both crude and gas realizations were strong in the quarter as our marketing team continues to do a phenomenal job, maximizing revenues by getting our molecules to the best markets. Severe winter weather obviously influenced our strong gas realizations, but normalizing for that pricing was still solid in March. E&P CapEx was approximately $29 million in the first quarter, spending was a little below our original expectations as a portion spilled into the beginning of the second quarter. Our second quarter E&P CapEx expectation is $75 million to $90 million. During the second quarter, Oasis and Oasis Midstream Partners completed the simplification transaction, which was an accretive deal that improved the financial condition of both companies. Oasis received cash and additional limited partner units from OMP in exchange for its remaining interest in the Bobcat and Beartooth Development Companies as well as IDR interest. Oasis ownership in OMP increased to approximately 77% as a result of this transaction. Going forward essentially all midstream cash flows to Oasis can be accounted for through the distributions from OMP, which we're currently projecting over $20 million per quarter in those distributions from OMP. The simplification was a great first step in illuminating the value of our midstream business and optionality it brings to Oasis' shareholders. Additionally, Oasis declared its first quarter dividend of $0.375 per share and annual implied dividend of $1.50 per share. Based on the announced acquisition we expect significant accretion to cash flow per share and free cash flow per share. And we're highly focused on being great stewards of capital and return on and return of capital. Upon closing of the transaction, we expect to raise our normal fixed quarterly dividend from $0.375 per quarter to $0.50 per quarter or a 33% increase. The Oasis team is excited to announce this transaction as it supports our strategy of building more scale, increased free cash flow generation, and returns to shareholders. To sum things up, it was an eventful start to the year at Oasis where you saw progress across a variety of our strategic initiatives and an accretive acquisition, which improves the go-forward outlook. With that I'll hand the call back over to Betsy for questions.

We will now begin the question-and-answer session. Our first question comes from Derrick Whitfield with Stifel. Please go ahead.

Good morning. Congrats on the transaction. And Danny, congrats on your new role as well.

Thank you.

Starting with the acquisition while clearly early in the process, how do you envision integrating it into your 2022 development program? And could you help frame the potential for synergies as you see it today? I clearly asked the latter with the understanding that it was underwritten on PDP without synergies as noted in your prepared remarks?

Thank you, Derrick. I appreciate your question. Regarding how this fits into our 2022 plans, we are still assessing how to integrate it. The inventory is quite competitive within our portfolio, and we are pleased with it. However, we acknowledge that it will require some development and surface planning to enable drilling. Consequently, we might move a bit faster in the existing Oasis area. We'll need to work that out as the year progresses. This perspective may evolve as we refine our 2020 plans, but we anticipate a slight acceleration in the existing Oasis area while incorporating this inventory over time. Concerning synergies, we've conducted extensive work both internally and with an external party to enhance our operating efficiency. We believe we can implement some of those improvements. From a corporate perspective, there shouldn't be significant additional overhead with this. We aim to leverage the insights gained internally and apply them to the newly acquired assets, hoping to achieve some improvements in operational efficiency as well. We are optimistic about this. However, as you pointed out, none of this was included in the valuation.

Great. And as my follow-up, perhaps for Taylor with the undeveloped upside largely residing in the FBIR, could you speak to your comfort in operating on the reservation?

Yes. Derrick, as you mentioned, there's some nice inventory on Fort Berthold and we're excited about operating on the reservation. And I think as you know, we've always had a big focus on community involvement and we think that all the work we do on that side of our business on our operation is going to just naturally translate into a great relationship with the affiliated tribes. We actually have historically operated on the reservation in the past. We sold some properties. That was a good experience. And we look forward to engaging and doing that again.

All right. Great update guys, and congrats again on the transaction.

Thank you, Derrick.

Our next question comes from Scott Hanold with RBC Capital Markets. Please go ahead.

Thanks. Good morning and yeah congrats on the acquisition all that you've done so far this year. Maybe to drive in a little bit in terms of like what you see Oasis doing going forward. Obviously, you're going to take this asset in and assumably there's going to be very I guess little differentiation between old asset new asset type of kind of conversation. So without spending any capital on the acquired assets, I would assume that burns down to somewhere in the low 20s by year-end. And from there, I guess going forward with the point for Oasis as an entity as a whole is to keep production relatively flat. And if that's the case what's going to be the incremental amount of wells and capital needed to do that with this acquisition now included?

Thanks for the question, Scott. As we look ahead and integrate the new assets, the reinvestment rate will be at a level necessary to maintain flat production going forward, considering both the legacy Oasis assets and the new acquisition. If we aim to increase the production base by about one-third, we will also need to increase capital by roughly one-third to keep everything stable moving forward. This should lead us to a reinvestment rate of approximately 55%, which will help us maintain a consistent production level in the future.

Okay. Okay. So that's somewhere up around what $75 million $80 million when you include this asset. So that sounds about like 10 wells I guess on the margin. Is that right? Is my ballpark close?

That's correct, Scott. As Danny mentioned, our current asset stands at around $60 a day, and this asset is expected to decline somewhat to about $20 million. This gives us that one-third uplift you referenced. Our current CapEx is approximately $240 million, so one-third of that would be in the vicinity of $80 million. It's worth noting that the current decline rate of these assets is slightly below our existing decline rate, but by the year's end, they should actually be a bit lower. We might see some minor improvements in that regard, but that's generally how to think about it.

Got it. Understood. Moving to the midstream, the simplification has significantly enhanced the transparency and structure of that entity. Can you provide insight into the long-term plan? Is this the initial step of more to come? What is the vision for midstream moving forward, and what are your expectations?

I believe this is indeed the first step. As I mentioned in my prepared remarks, we see significant value in this direction. We are examining a variety of options to ensure that Oasis shareholders realize the full value. We are committed to exploring these different avenues. The simplification was a crucial step, but it’s just the beginning.

Yes. I mean, could you describe just in general what some of those other steps may look like or entail? Like what are some of the options you're looking at?

I think you can consider a wide range of options. We could think about monetizing some of the shares, possibly going for full divestitures of that position, or even consolidating with other entities to fall below the 50% threshold and deconsolidate, which we believe would be beneficial. So we are looking into all these possibilities.

Okay. Got it. And then if I could just sneak one more quickly. And I mean obviously, you made the acquisition, it sounds like you see the importance of gaining some scale and there may be some more opportunities. Like, can you frame the picture of us like from this point on given that there have been a number of transactions? Like what's left there to be? What's left in the Bakken at this point? And would that be your focus, or could you also look to be a consolidator in the Permian?

I believe there are still opportunities in the Bakken that we will evaluate on an individual basis to determine if they make sense for us. We need to consider our organizational position, how we have integrated new assets, and our leverage situation. It's important to assess the inherent value of any potential acquisition target and whether that value is appealing. We also need to consider how it would benefit us in terms of synergies and whether it would enhance our company. Our primary goal is to improve our company, rather than simply making it larger. Therefore, any acquisition must meet these criteria, and our decisions will also be influenced by other factors. While we see additional opportunities, we will approach them with caution. Ultimately, our decisions will be focused on maximizing shareholder value, regardless of whether they pertain to the Bakken or the Permian.

Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Daniel Brown for any closing remarks.

Thanks, Betsy. Well, I'd like to thank everybody for their time today. Management and the Board have been strongly engaged and have delivered a series of items this year, which put us in a great position to succeed going forward. Rest assured, while we've made tremendous progress to date, we're going to keep an aggressive stance, with a focus on delivering additional value. Thank you for joining our call.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.