Chord Energy Corp Q4 FY2023 Earnings Call

Good afternoon, ladies and gentlemen, and welcome to the Chord Energy Analysis Combination with Enerplus Conference Call. This call is being recorded on Wednesday, February 21, 2024. I would now like to turn the conference over to Mr. Michael Lou. Please go ahead.

Thank you. Good evening, everyone. Thank you for joining the call. Today, we will be discussing the business combination between Chord Energy and Enerplus and also touching on fourth quarter 2023 financial and operational results. With me on the call are Danny Brown, President and Chief Executive Officer of Chord Energy; as well as Ian Dundas, President and Chief Executive Officer of Enerplus as well as other members of the team. Please be advised that our remarks, including the answers to your questions, include statements that we believe to be forward-looking statements and forward-looking information within the meaning of applicable laws. 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 joint press release announcing the transaction and Chord's earnings releases as well as in our filings with the Securities and Exchange Commission. 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 Chord's earnings releases and on its 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 Chord's CEO, Danny Brown.

Thanks, Michael, and thanks, everyone, for joining our call today on such short notice. We're very excited to announce that Chord Energy will combine with Enerplus to form a premier Williston Basin company. We view today's announcement as the next logical step for both companies as we create a stronger, more sustainable organization that we believe is positioned for continued performance and long-term growth. I plan to spend some time commenting on the merits of the deal before turning it over to Ian for some additional thoughts. To start, both Ian and I are proud of what our individual organizations have done over the years. Both companies have diligently worked to position their portfolios in one of the premier oil basins in North America, resulting in top-tier assets spread across the Williston Basin that are highly complementary. Both companies have generated significant free cash flow and have returned a large amount of capital to shareholders. And our teams did this while being good stewards of our environment and the communities in which we operate. Both Chord and Enerplus have talented, hard-working people that have accomplished a tremendous amount for which they should be extremely proud. Ian and I are certainly proud of them, and we look forward to getting the teams together to share best practices and drive continuous improvement. Slide 4 of our investor presentation gives a good summary of the merits of the deal. As you can see, this combination checks all the boxes between operating, financial, and strategic goals. It enhances scale and asset quality. Additionally, it delivers accretion on all key financial metrics, which is boosted by significant synergies that we'll get into. Additionally, the combination improves our financial strength and returns, which, of course, supports our peer-leading return of capital profile. Turning to Slide 5, you can see the terms of the combination. The merger consideration is structured as 90% stock and 10% cash. Each Enerplus common share will be exchanged for 0.10125 shares of Chord common stock and $1.84 per share in cash. At this exchange ratio and the respective share prices on February 20, 2024, the combined company would have an enterprise value of approximately $11 billion inclusive of Enerplus' net debt. Pro forma for this transaction, Chord shareholders will own approximately 67% and Enerplus shareholders will own approximately 33% of the combined company on a fully diluted basis. Following close of the transaction, the Board of Directors will increase to 11 members, which will consist of 7 representatives from Chord and 4 representatives from Enerplus. Ian will join the Board and serve as an adviser to the CEO. The Chord executive leadership team will continue to run the combined company. The combination has been unanimously approved by the Board of Directors of both companies. Currently, we are expecting to close by midyear 2024. Standard regulatory approvals are needed in both U.S. and Canada plus a shareholder vote, including HSR review. This is a deal that is good for our shareholders, good for consumers, as we should be able to access and ultimately produce more resource than either company would have otherwise been able to do stand-alone. And good for our communities, since as a larger organization, we'll be able to commit more time and resources to reducing our environmental footprint and focusing on the local communities. Turning to Slide 6. We believe this transaction creates a combined company with meaningful scale. The combined organization will have approximately 1.3 million net acres with 98% of that in the Williston Basin. Additionally, combined fourth quarter '23 production is 279,000 barrels of oil equivalent per day with over 90% of that in the Williston Basin. The transaction also combines high-quality inventory, which supports sustainable free cash flow through the different commodity cycles. We believe Chord and Enerplus have some of the best inventory in Bakken. To illustrate the point, since 2022, combined Chord and Enerplus have brought 30% of the top 100 wells online when looking at greater than 6 months of oil production, while bringing only 15% of the wells online over the same time frame. Our combined position represents approximately 10 years of low-cost development at the current pace with significant upside beyond that. While the stand-alone inventory of both companies have compelling returns, the combination expands our 3-mile lateral opportunity, and we will continue to pursue additional longer laterals given the success we've had over the past 2 years. This deflects this 3-mile opportunity out a little more. Over the course of 2023, Chord made significant progress in drilling, completing, and cleaning out 3-mile wells. Drilling times have been reduced by roughly 25% since the beginning of 2023, with it now only taking 10 to 11 days on average. On the cleanout side, we've made strong progress over the course of the year and reached TD in essentially all 30-plus 3-mile wells brought online in the second half. We get asked frequently if there could be upside to our implied 80% productivity assumption for the third mile. We believe this is a possibility, especially in light of our progress on cleanouts over the past year. However, it will take a little more time, likely until the end of this year to get sufficient production history to effectively analyze the 3-mile declines and determine whether we can increase our EUR uplift assumptions from 140% to 150%. The Enerplus team is in the early innings of pivoting the 3-mile laterals and already have over 10% of their inventory set. We see meaningful opportunity to increase this percentage in Enerplus' high-quality acreage, which supports better economics and more free cash flow. Additionally, we're continuing to evaluate 4-mile laterals, and we expect to drill our first 4-milers at the end of this year. If successful, these initiatives should further improve returns. On Slide 7, you can see our pro forma market cap is over $10 billion, significantly increasing our size, positioning the combined company nicely within our new large-cap peer group. The combined oil cut is high at 56% and positions us well given the current commodity backdrop. Slide 8 shows inventory quality and depth as estimated by an independent research firm, which tries to use similar modeling methods across each company represented. The key takeaway is their analysis shows the pro forma Chord right in the mix with large-cap names on inventory, debt, and quality. While we evaluate our inventory differently than Enverus, we believe that they are objective and try to be consistent. With this in mind, the scale of the combined company is competitive with large-cap peers. Moving to Slide 9. As we think about potential synergies, the opportunity is significant. The combined company expects to benefit from administrative, capital, and operating synergies up to $150 million per year. Administrative synergies are expected to begin immediately in 2024 and increase in 2025 up to $40 million. Capital synergies are expected to increase to up to $55 million during 2025, and operating synergies initiate in 2025 and are expected to increase up to $55 million in 2026. The combined company will leverage best practices to further advance efficiencies across the business. The after-tax present value of synergies is expected to exceed $750 million. As you are aware, this is a cross-border transaction. The team has evaluated the tax ramifications, and we do not expect there to be much tax leakage on a pro forma basis. To expand on this a bit, the Chord team has made great progress reducing downtime through the course of 2023. As a combined company, we see additional opportunity to make progress on improving downtime, which is important given base production is the vast majority of any year's volumes. Additionally, we'll be looking at ways to drive LOE down through field standardization, data analytics, lower failure rates, among other items. You can refer to the appendix for more detail on synergy potential. I should note, our respective teams have spent considerable time together and look forward to digging in on further synergies. We are confident we can deliver based on the capability and level of rigor from both teams. Now turning to Slide 10. We see our superior profitability. Our high oil cut of 56% underpins healthy cash margins. As we just discussed, we are focused on expanding margins further through a variety of initiatives. Additionally, the transaction is accretive to all financial metrics and increases income as a cost of financial strength. We maintain our best-in-class credit profile with net debt to EBITDA of 0.2x at close and minimal near-term maturities. With leverage well below peers, we have additional flexibility for strategic initiatives and return of capital. Turning to Slide 11. Chord has significantly outperformed our new large-cap peers over the past several years through a combination of mergers, acquisitions, and divestitures, focused on returns and returning significant capital to shareholders. All of this was done while maintaining a healthy balance sheet. Notably, Chord has paid $45 per share in dividends since 2021, while the underlying equity has appreciated significantly as well. So accretion is obviously important to shareholder returns. And as we discussed earlier, the outlook is strong on that front. The pro forma company expects approximately $1.2 billion of free cash flow and a reinvestment rate of approximately 51% in 2024 at $79 per barrel WTI and $2.50 per MMBtu NYMEX gas. Return of capital following closing is expected to remain at Chord's precombinations level of 75% plus of free cash flow given the strong balance sheet. Chord's base dividend remains unchanged at $5 per year. The base dividend will continue to be supplemented by share repurchases and variable dividends. Slide 12 shows our relative valuation and yield, which we view as attractive seeing as they are based on pro forma analyst consensus expectations and don't include the impact of synergies. And finally, Slide 13 summarizes the merits of the deal. And I think it's important to note that both Chord and Enerplus have maintained a disciplined approach to M&A. We're confident the combination is the right move and will result in significant value creation for both of our respective shareholders. Additionally, both Chord and Enerplus have a tremendous track record of being responsible corporate citizens and respecting all of our stakeholders. We remain committed to ESG and sustainability and capitalizing on combined best practices. We also remain committed to supporting the communities where we operate and look forward to building on each company's relationship with the MHA Nation and their leadership. To sum things up, the combined company is expected to generate significant free cash flow from its low-cost asset base, improve efficiencies and execute disciplined capital spending through business cycles. With that, I'll turn the call over to Ian to provide some thoughts on the combination.

Thanks, Danny. I believe the value-enhancing opportunities from this combination are compelling. This transaction represents a unique opportunity to drive meaningful cost and operational synergies, an improving profitability profile and will position the pro forma business to continue to deliver strong value creation on a sustainable basis over the long term. We are excited about the opportunities our combination creates for our shareholders, our people and all of our other stakeholders. The combined footprint is remarkable and Enerplus' core inventory is a strong complement to Chord's position. Building on the success Chord has had with 3-mile laterals across our position should drive further upside to our premier Williston position. We see significant opportunity to expand to longer laterals and believe the combined company is in a strong position to be the basin leader on this front. As Danny noted, we believe the transaction is very good for shareholders of both companies. It is an excellent strategic fit. It is accretive to key financial metrics while retaining a pristine balance sheet. The large stock component provides Enerplus shareholders with a strong near-term return on their investment and further upside from ownership in the combined entity. On the operational side, both companies have a strong execution track record. Over the last few years, drilling and completion times have improved for both companies and currently rank in the top tier for Williston operators. Additionally, the enhanced size and scale that comes with this combination supports more consistent activity, which lends itself to more efficient operations. You can see these benefits highlighted in the synergies announced. The Chord team has a proven track record of executing on integration and synergy capture as we saw with the integrations of QEP, Whiting Oasis and last year's XTO acquisition. On the Enerplus side, we've also been active in the A&D market in recent years and have a lot of integration experience to bring to bear. We look forward to working with the Chord team to capture these savings and make our combined business better to deliver more value to shareholders. And finally, on a personal note, it has been a privilege to lead Enerplus over these past 11 years. I want to thank our employees and their families for their dedication and all the hard work over the years that has allowed us to build such a great organization. We are now ready to get going on the integration with the goal of making an even stronger, more competitive company. Together, we will achieve things that neither company could on a stand-alone basis.

Thank you, Ian. So in closing, I just want to say that we are very excited and happy to announce this transaction and believe the combination of two companies, premier asset bases, operational abilities and technical acumen will drive further success and create a stronger, larger company positioned to deliver competitive returns and peer-leading shareholder distributions. Thanks for listening, and now we'll turn the call over to Q&A.

Your first question comes from the line of Derrick Whitfield from Stifel.

Congrats to you both on the transaction.

Thanks, Derrick.

For my first question, I wanted to lean in on operational synergies. Could you walk through some of the D&C synergy drivers on Page 16 in the cost per foot terms?

Thank you for the question, Derrick. As we consider our potential for improvement in drilling and completion, we are drawing on the experiences we've gained from Oasis Whiting, where we successfully combined best practices from both companies. We applied Oasis practices in some areas and Whiting practices in others. Through open communication, we were able to utilize different technology and casing profiles, which significantly enhanced our performance. Regarding the drilling and completion for this transaction, our teams have collaborated at a high level, although we've kept the involvement limited so far. Despite this brief period, we’ve identified up to $55 million in synergies. This includes expanding into 3-mile laterals and enhancing the overall processes that will improve our drilling and completion capabilities. I will now ask Darrin to elaborate further.

Yes. Thank you, Danny. I'm happy to expand further on that. If you look at Chord's performance in the first quarter, we drilled our fastest 2-mile well spud to rig release in 7.4 days. We're averaging 2-mile wells and 8.9 day spud rig release. Looking at 3-mile wells, we've drilled our fastest well in 9.5 days spud to rig release this quarter. And over the fourth quarter, we averaged 10.3 days spud rig release. Those in general are 1.5 days to 2 days faster than what we were seeing on the Enerplus. And so that will be a synergy that we can capture just almost immediately. The fact that we're drilling 70% to 75% of the Chord well this year were planned to be 3-mile laterals, and we're also going to expand what Enerplus had planned this year. And it will take time for us to do all the permitting work and regulatory work to make that happen. But clearly, Chord has demonstrated quite the ability on 3-mile wells, and you'll see us doing that going forward post-closing.

I want to highlight from a development and construction perspective that we have Canadian leadership in the basin due to our standardized modular facility approach. This method is significantly more cost-effective than traditional construction on-site, and it also provides greater safety and a reduced environmental impact. This is another aspect of the synergies that will positively influence our overall development and construction costs.

And then just my follow-up, with respect to the LOE synergy, could you talk to the delayed nature of implementation? I imagine in part, it's when you're going to change out lift, but any other color you could add would be greatly appreciated.

I believe you’re onto something, Derrick. Based on our experience from the recent transaction with Oasis Whiting, it took about a year for us to start seeing the operational synergies. For example, one of the legacy organizations from the previous transaction had different rod installation and material practices compared to the others, which resulted in longer run times on our rod pumps. As a result, we experienced a lower failure rate over time. When failure rates are lower, there’s less need for repair work, but it does take time before you notice the benefits. As we evaluate these operational practices, some focus on reducing future failure rates, which leads to fewer workovers and lower lease operating expenses rolling through. The delay in seeing these benefits is due to the time required to implement different operating practices before the advantages become apparent, and we definitely experienced this with Whiting Oasis.

And your next question comes from the line of Neal Dingmann from Truist Securities.

Congrats. Certainly seems to make a lot of sense. Danny, my first question. You've definitely listed now a long list of potential savings. I'm curious about potential marketing or OFS opportunities given you all now will be the dominant player in the basin?

Well, Neal, I would say that we won't be able to discuss marketing strategies until after the close. From the OFS perspective, both companies have solid contracts in the basin and both have strong programs. The real savings we might expect from this practice are not necessarily through savings on individual jobs, although that could happen, but rather from the operational efficiency gained through the program. For instance, you can visualize running one completion crew, but not throughout the entire year. If you're able to secure a longer contract due to this program being available all year, you will not only achieve savings through contracts, but your operations will become significantly more efficient as well. This means your costs per job decrease in two ways. That’s our perspective on it.

Makes sense. Can you remind us about the anticipated effective date and close, as well as any potential lockup periods?

So looking at the anticipated close of potentially by midyear.

Okay. Then any lock up on you guys?

No.

And your next question comes from the line of Oliver Huang from TPH.

Congrats on the deal. Just a quick question on the longer laterals. I know in the past, you all highlighted 55% to 60% of remaining inventory being conducive to 3-mile lateral development on a Chord stand-alone basis. And it looks like you all are highlighting greater than 40% of pro forma inventory in that bucket, which doesn't really imply to have many Enerplus locations falling into that 3-mile lateral bucket. So just kind of wondering how much of that Enerplus inventory could be developed at 3-mile laterals potentially? And if there are any sort of leasehold limitations that are preventing you all from doing so.

Yes. I think Enerplus has just begun looking into 3-mile laterals. As we mentioned in our prepared remarks, we are just over 10% set up for 3 miles. However, we haven't had the opportunity to conduct the detailed analysis needed to understand what that might look like on a pro forma basis when combined. Additionally, there is a significant amount of permitting work ahead. Therefore, we believe there is potential for the 40% figure we announced to increase. We chose to start conservatively to allow for upward adjustments over time.

Awesome. That's helpful. And just one other question on the completion side of things. I know you all have generally run more conservative spacing to maximize per well IRRs. Are you all planning to make any changes with respect to the type of spacing that Enerplus had previously been running on their asset base? I think they're probably running a few extra wells, including a couple in the Three Forks depending on where you are in the basin?

Yes. As we bring the teams together, we have a spacing philosophy that generally involves wider spacing and longer wells, partly due to the lease geometry with larger completions, which has been effective for us over time. We will assess on a DSU by DSU basis to determine the best development methodologies for each specific area. One thing we know is that we don't want to overcapitalize regions, but at the same time, we don’t want to space too wide and miss high-return opportunities within that DSU. You might see wider spacing as we progress, but we need to collaborate with the teams to share best practices and insights. This presents an opportunity for value enhancement as we consider this deal.

And your next question comes from the line of David Deckelbaum from TD Cowen.

I'm curious, you mentioned that you wouldn't provide pro forma guidance until the deal closes. However, could you give us an idea of the appropriate rig and frac crew program? Are you planning for a better balance of rigs versus completion crews? I believe you hinted at this in your last comments, Danny, regarding having a dedicated crew for a longer period. Is this what is driving the $55 million CapEx? Also, what does that balance look like between the two companies pro forma?

Yes. As we move ahead, it's important to note that there is a certain inertia within a development program. We need to obtain all necessary permits and establish our infrastructure first. Unfortunately, these processes do not move quickly, and we haven't yet assembled the teams to work out a detailed pro forma development plan. Additionally, there will be some restrictions on this until the deal closes. During the transition, we will create a combined development program. We have current assumptions in place, but we will refine them as we progress. After the deal closes, we will introduce a complete new development plan for the post-close organization. One of the benefits of this transition will be more continuous operations, allowing us to maintain a better balance in running operations without frequently starting and stopping crews throughout the year. The overall pro forma program will be larger, which should enhance our operational efficiency.

I appreciate the response. I'm curious about your future thoughts. With this deal, you both expand and strengthen your position in the basin, and there are significant synergies involved. Does this shift your perspective on the company's marketplace position moving forward? Or do you see this as the start of further consolidation in a basin that is already quite consolidated?

Well, I'd say it's hard to speculate on what happens moving forward. We're really kind of focused on this deal and what this deal does for both of our respective organizations.

Yes. I think another way to look at it, David, is that we have about 100 units of production per day on the Chord side. With Enerplus, we're increasing that to about 150 units per day. We're still only capturing about 12% to 13% of the Bakken. There are still many players in the market, and while the situation has become somewhat consolidated, there are still some major players in the basin. I believe this positions us well, and we will continue to explore further opportunities in the basin. Compared to other basins, there has been much more consolidation, so we see ongoing opportunities ahead and feel confident about our overall position.

Our next question comes from the line of John Abbott from Bank of America.

Going back to David's question about potential opportunities for further consolidation in the Bakken, you mentioned having a strong balance sheet after this deal, approximately 0.2x. Would you be open to acting on any available opportunities sooner rather than later, or would you prefer to wait and see the synergies from this transaction?

Again, John, I'd say it's kind of hard to speculate on sort of future hypothetical opportunities. I think the strong pro forma balance sheet we have is going to give us a lot of flexibility. And that could give us flexibility from a return on capital standpoint, to weather resiliency with commodity price fluctuations, or to pursue different growth opportunities. And so I think we'll take those things as we see them in the future.

But the #1 priority is going to be putting these companies together, really coming together to get the best out of both organizations. Both organizations have done an incredible job, and we can learn from each other and get better though. So that's going to be the first and foremost is we're going to get the most out of putting these 2 companies together.

Absolutely.

Looking at the pro forma portfolio, there is a position in Appalachia on the Enerplus side. Will there be opportunities for divestitures from this?

Yes. As we assess our position in Appalachia, it is in a strong location within the basin and is managed by a capable operator. It currently accounts for only about 2% of the pro forma EBITDA, making it a very minor part of the overall company. We will evaluate it like we do with all parts of our portfolio to determine if it should be retained or divested.

And your next question comes from the line of Kevin MacCurdy from Pickering Energy Partners.

Congratulations on potentially becoming the largest Williston producer. Just one question for me. We kind of expected you guys to have a mid-single-digit cash tax rate in 2024. Can you remind us where Enerplus is and what if any, you would expect there to be a change after this transaction?

So we've done a bunch of work on that cash tax side. The combined entity is going to have a very similar type of cash tax profile going forward. We don't think that there's a lot of tax leakage in the transaction overall. So we'll continue to give a little bit more guidance on that going forward, but it's in a similar neighborhood to where what we've been talking about on the Chord side.

Yes, maybe a hair less, but yes, it will be similar on a pro forma basis.

And is that going to continue out past 2024?

Correct. That will continue on past that.

There are no further questions at this time. Mr. Brown please proceed.

I'd just like to thank everybody for joining the call today. It's an exciting day for both Chord and Enerplus shareholders as we are able to announce this very important transaction and a combination that we think is really going to benefit both of our shareholders as we move forward. So thank you for giving us your time this afternoon and for joining our call.

Thank you. Ladies and gentlemen, this does conclude our conference for today. Thank you all for participating. You may all disconnect.