Chord Energy Corp Q2 FY2024 Earnings Call

Good morning, ladies and gentlemen, and welcome to the Chord Energy Second Quarter 2024 Earnings Conference Call. This call is being recorded on Thursday, August 8, 2024. I would now like to turn the conference over to Bob Bakanauskas, Managing Director of Investor Relations. Please go ahead.

Thanks, Matthew, and good morning, everyone. This is Bob Bakanauskas. We are reporting our second quarter 2024 financial and operating results. We're delighted to have you on our call. I'm joined today by Danny Brown, our CEO; Michael Lou, our Chief Strategy and Commercial Officer; Darren Henke, our COO; and Richard Robuck, our CFO, 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 within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks and uncertainties that could cause actual results to be materially different from those currently disclosed in our earnings releases and conference calls. Those risks include, among others, matters that we have described in our earnings releases and 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 call, we will make reference to non-GAAP measures, and reconciliations to the applicable GAAP measures can be found in our earnings releases and on our website. We may also reference our current investor presentation, which you can find on our website. And with that, I'll turn the call over to our CEO, Danny Brown.

Thanks, Bob. Good morning, everyone, and thank you for joining our call. I recognize it's a very busy morning, so I plan to provide a brief overview of our second quarter performance and our return of capital as well as updates on our full year outlook. Additionally, I'll give some color on our integration with Enerplus before passing it to Darrin. Darrin will give details on operations and synergies, before passing it to Richard for a little more on our financial results. We'll then open it up to Q&A. So in summary, Chord delivered another great quarter, which resulted in strong shareholder returns. Diving in, second quarter oil volumes were towards the top end of guidance, driven by strong well performance and less downtime. Capital was below expectations, reflecting some timing adjustments to the program, and lease operating expenses also came in favorable versus our expectations, reflecting less downtime and lower maintenance costs. Many thanks to our operating team for delivering favorable results across the board. Given the strong quarterly performance, free cash flow exceeded expectations, and on a pro forma basis, adjusted free cash flow was approximately $263 million. This includes a full quarter of Enerplus' results and excludes approximately $16 million of non-operated capital, which was not contemplated in original guidance and will be reimbursed through asset divestitures. In accordance with our return of capital framework, Chord will return 75% of this adjusted free cash flow to shareholders. Given our base dividend of $1.25 per share and our normal course share repurchases in the second quarter of $41 million, we declared a variable dividend of $1.27 per share. We issued third quarter and updated full year guidance last night. As we discussed in May, the development program went faster than expected in the first half of the year due to strong performance and a fairly mild winter. This resulted in volumes and capital above our original expectations early in the year. Chord is focused on efficient and sustainable free cash generation and will execute a maintenance plus program. We do not plan to increase capital this year even as we raise our full year oil guide by 500 barrels per day. Chord slowed frac activity and is currently down to one frac crew versus three pro forma earlier in the year, and this crew count will increase as we move into late summer and fall. Concurrently, Chord is increasing non-operated spending in the second half of the year as the team invests in attractive non-operated opportunities that we acquired in our transaction with XTO and our combination with Enerplus. Net of these offsetting impacts, full year capital guidance is unchanged. When looking at capital, you may notice that capital and LOE guidance reflects some accounting changes due to the Enerplus combination that Richard will discuss in more detail. In a nutshell, on an apples-to-apples basis, pro forma capital is unchanged versus our May outlook while LOE runs favorable versus our initial expectations. Lastly, we will be increasing our expected full year oil volumes by 500 barrels per day to account for good performance we've seen to date. Turning to Enerplus, the combination closed as expected on May 31. We remain extremely confident in the strategic and financial benefits of the transaction. As we move through integration, our conviction level continues to grow. Enerplus brings top-tier assets in the core of the basin, and we expect Chord can enhance returns on these assets by applying techniques developed over the past several years, including longer laterals, optimized spacing, and reducing downtime. The combined asset base supports efficient operations, strong returns, sustainable free cash flow, and a peer-leading return of capital program. Our integration efforts are progressing well, and by utilizing combined best practices and enhanced scale, we're confident in achieving over $200 million in synergies target, which is up from our original estimate of $150 million. I want to express my gratitude to the organization for their continued positive attitudes and dedication in driving effective integration and pushing to realize incremental value from the transaction. Importantly, no one has taken their eye off the ball, and Chord is currently delivering great operating results. In our updated presentation, you will see new material focused on helping investors understand the attractiveness of the Williston Basin. The Williston Basin is a phenomenal place to do business, and the core team is focused on making every aspect of the business better and continuing to improve our returns. Chord's culture revolves around continuous improvement, emphasizing performance across several key areas, including emissions and safety. We expect to publish a sustainability report later this year on a legacy Chord only basis, including a summary of key ESG and sustainability metrics for Enerplus. In 2025, we plan to publish a full sustainability report reflecting the combined company. To sum it up, Chord delivered a great start to the year that accelerated the production profile into the first half, resulting in high free cash flow and shareholder returns in the second half of the year. We're excited about the Enerplus transaction and look forward to executing in 2024 and beyond. I'll turn it to Darrin.

Thanks, Danny. We had a solid quarter on the operations front as the team continues to execute with excellence. Our wedge production benefited from robust well performance, while base production benefited from lower levels of downtime. I thought we'd spend a little time talking about Chord's asset base and how we are making great assets even better. First, most of you know that Chord is a leader in three-mile lateral development. The upper right chart shows Chord's longer lateral well productivity in the Williston Basin compared to peers. Since the second half of last year, we consistently reached total depth on post-frac cleanouts, and Chord is at the top of the pack. We see an opportunity to high-grade our new asset by applying Chord's technical expertise. Pro forma, Chord's inventory consists of approximately 40% longer laterals, and we believe we can increase that percentage materially in the next few years. While some outperformance is already being captured in our PDP base forecast, we currently model three-mile wedge wells delivering approximately 40% more EUR for 20% to 25% more capital. We expect to formally update the market on our third-mile productivity assumption in November as part of our third-quarter results. Across the portfolio, we like what we see in terms of productivity, decline rates, and flowing pressures. As we integrate the Enerplus assets, we think there is an opportunity to optimize spacing and enhance the economic returns of the overall development program. Wider spacing has been a key driver to improve Chord's capital efficiency in recent years. Just a couple of quick thoughts on synergies before passing it to Richard. As the teams dig deeper into the integration, we continue to like what we see. On Slide 11, we highlighted key items where we see considerable opportunity. Chord has improved drilling times in the Williston Basin, and by applying Chord's drilling techniques, we've already seen improvements in drilling performance on the Enerplus asset since closing just a couple of months ago. Additionally, Chord has increased completion efficiencies with its legacy zipper fracs. We expect to achieve further efficiency improvements with the same frac completions that Enerplus used extensively. Lastly, we wanted to highlight our progress in reducing downtime over the past 12 to 18 months. The Chord team has made significant improvements here, and we see a meaningful opportunity to lower downtime on the new areas of our expanded portfolio. To sum it up, Chord continues to execute proficiently, and I want to give credit to a team that pushes innovation and relentlessly strives for continuous improvement. It's an exciting time for the company, and we will further advance these top-notch assets jumping the S-curve by applying our technical and operational expertise. I'll now turn it over to Richard.

Thanks Darrin. I'll walk you through the second quarter results, which include contributions from Enerplus after the combination closed on May 31st. Guidance for the remainder of the year reflects a contribution from both companies. You'll notice a handful of key guidance items that look different than what you might have expected looking at Chord Enerplus standalone financials. Certain reclassifications have been made in the historical presentation of Enerplus' financial statements to conform to Chord's accounting policies and presentations. Enerplus expensed certain items through LOE that Chord will deduct through gas and NGL revenue or charge through capital. Additionally, Enerplus capitalized certain G&A charges that Chord will expense. The net impact of these changes relative to Enerplus' standalone reporting is lower LOE, lower gas and NGL revenues, and slightly higher capital and G&A expense. The impact of the accounting changes is neutral to adjusted free cash flow. Chord generated adjusted free cash flow of $263 million on a pro forma basis, supported by strong volumes and lower operating costs. Looking forward, we expect this to slightly increase in the back half of the year, reflecting workover timing. Our cash G&A, excluding merger-related costs, was $21.8 million in the second quarter. The merger costs were $54.7 million during the second quarter, which we expect to step down materially in the back half of the year. Our cash G&A guidance excludes the impact of merger-related items. Our production taxes averaged 8.8% of commodity sales in the second quarter and we expect this to come down in the second half. North Dakota recently lowered the production tax on natural gas, which is related to trailing gas prices. As of June 30, we had $575 million drawn on our $1.5 billion credit facility, with liquidity at about $1.1 billion, including $197 million in cash. Our net leverage was consistent with expectations set in May when we announced the transaction closing. I'd like to thank the entire team for their hard work and dedication to the company. Your efforts have placed the company in a strong position to succeed going forward. With that, I'll hand the call back over to Matthew for questions.

Ladies and gentlemen, we will now begin the question-and-answer session. Your first question comes from Scott Hanold of RBC. Please go ahead. Your line is open.

Hey, thanks everyone. I have a question regarding your confidence in the 3-mile EURs based on your latest update and how the strategy of wider spacing seems to be effective. As you consider your development strategy for 2025, could you clarify how much of that will focus on core legacy assets compared to Enerplus? Will you be able to quickly adjust the lateral length and spacing on some of the Enerplus acreage?

Thanks, Scott. We are currently putting together the 2025 full development plan. We will likely discuss this more at the end of the year. As mentioned previously, we have seen tremendous benefit from having some diversity in the geographic location of our various development programs, rigs, and crews. We do recognize the core nature of the Enerplus-acquired acreage, and we can look at drilling those wells a little longer and with a wider spacing than they were historically. We expect to see some positive incremental benefit from well delivery in those areas. So, we are looking at drilling those a little longer and a little wider and will require some respacing on that program. I suspect you'll see some benefit from that in 2025, but we are just putting that plan together now.

Okay. And you still feel good about your 3-mile pro forma for 150 to 155. Does that still make sense?

We've talked for a long time about getting about 140% of a 2-mile well with a 3-mile well. We started to see strong performance that we felt was conservative based on our initial estimates. In the next call, you will hear more definitively about what we've observed. We are pleased with all the contributions we are seeing from those 3-mile wells.

Thanks. And my follow-up question concerns the Enerplus asset. You have had the Enerplus asset for only a month now. Can you discuss what you are seeing in terms of improvement that you have observed already relative to prior Enerplus performance? What specific improvements have you adopted on the core assets thus far?

We have approached this with a mindset of leveraging the best practices from both legacy organizations. We are already seeing some benefits on the drilling and completion side. I'll ask Darrin to add more details.

The improvement we have seen involves 16% shorter cycle times on drilling since the acquisition closed on the Enerplus assets. We've had two rigs from the combination that continue to drill on that legacy Enerplus acreage. We expect to put 40% more barrels on the ground each day with our fracking rigs. We expect to achieve significant cost savings with our new facility design across all our acreage going forward.

Are these improvements already included in the $200 million in synergies you previously indicated?

All of these improvements are part of the $200 million basket, and we are confident we will exceed that number.

Thanks, Scott.

Your next question comes from Neal Dingmann. Please go ahead. Your line is open.

Good morning, everyone. Danny, you and Darrin mentioned some improvements, so I’m curious about the changes beyond the extended laterals. What other changes are you making to achieve these improvements?

The biggest improvements come from wider spacing and longer laterals, and we've continually improved our drilling and completion practices. We’ve optimized how to stay in formation while drilling, managed our completion efforts more efficiently, and reduced cycle times. We have some exciting opportunities to drill even longer laterals in the future, which should result in better capital efficiency.

What does your ongoing maintenance plan look like under the current capital expenditure environment?

At pro forma, early in the year, we had a combined rig count of around 6 and crew count of around 3. We've dialed back to one crew now to keep capital expenditures in check. We still expect to see strong volumes while reducing our capital. You'll see the crew count increase towards late summer and fall. On an ongoing basis, we aim to drive maintenance below the current numbers while being flexible.

Thanks, Darrin.

Thank you. Your next question comes from David Deckelbaum of TD Cowen. Please go ahead. Your line is open.

Hey, Danny, Michael, Richard. Thanks for taking my question today. I'm curious about the synergy slide. If you're getting improvements in downtime, is that already included in the capital cost synergies, or is that additional upside?

We have included those improvements in how we are thinking about synergies. We're confident we'll surpass the $200 million number.

We have proven strategies from our legacy programs that we believe can be applied similarly here, providing both capital synergies and operating synergies. Our strategies have yielded success in past transactions, and we expect the same with Enerplus.

Thank you for the color. Just a quick follow-up regarding your extended laterals. Considering that 40% of your acreage is suitable for extended laterals now, will that entail an increase in land spending?

It will be more about optimizing existing acreage and re-permitting to accommodate longer laterals rather than significant new land expenditures. We always review potential trade acreage as well, but we don't see a material change in land spending related to this new endeavor.

Thanks for the clarity, guys.

Your next question comes from John Abbott of Wolfe Research. Please go ahead. Your line is open.

When you look at the Enerplus assets that you now manage, what has been the biggest surprise for you since taking over these assets?

We didn't encounter any major surprises, as we know the basin well. We anticipated this would be a great asset based on our prior experience. The integration efforts and collaboration between teams have been impressively smooth.

Regarding the $700 million of synergies expected at the end of 2025, could you walk through the risks to achieving that target?

We categorize synergies into administrative, capital, and operating expenses. Capital synergies, starting in 2025, rely on a full integrated program instead of the two legacy programs in place. Operating synergies will occur in phases over time as improvements are effectively implemented.

Appreciate the clarification. Thank you.

Your next question comes from Phillips Johnston of Capital One. Please go ahead. Your line is open.

Can you give us a rough sense of what your annual maintenance capital is currently at the current low costs?

The combined maintenance capital is around $1.5 billion to maintain a delivery of about 150,000 barrels of oil equivalent per day.

Thanks, Richard. Also, as your mix of longer laterals increases over time, what kind of impact on corporate decline rate could we expect?

Currently, our corporate decline is in the low to mid-30% range. As we increase our longer lateral wells, we should see a moderation in our overall decline rate, resulting in small single-digit percentages in improvement.

Great, thank you very much.

Your next question comes from Paul Diamond of Citi. Please go ahead. Your line is open.

Can you talk about the variability you see regarding the upspacing in existing DSUs? Are you at the right number or is more tweaking needed?

We have observed that we are on the more conservative side with our spacing programs. As we look at the Enerplus practices, we want to ensure our strategies are optimized, taking feedback from new data and experiences.

When deciding on well spacing, we analyze every DSU in detail based on the latest production data to ensure optimal spacing and capitalize on improvements.

Understood. What is the right approach to the hedging strategy when planning for 2025 given current market conditions?

We aim to hedge a majority of our production while maintaining exposure to the commodity. We'll generally hedge around 20% to 40% of production using a systematic approach over eight quarters.

Appreciate the insights. I'll leave it there.

Your last question comes from Noah Hungness of Bank of America. Please go ahead. Your line is open.

I wanted to start on buybacks. How are you thinking about the variable dividend versus buybacks today?

We see room for both the variable dividend and share repurchases. Given the market conditions, we view this as a good opportunity for share repurchases in addition to maintaining strong dividends.

Thank you for that insight. Also, could you discuss the improvement in Clearbook differentials and whether it's captured in guidance?

Yes, we expect differentials to improve in the back half of the year, driven by several factors, including TMX coming online, and this is included in our guidance.

Awesome, I appreciate it.

Your last question comes from Oliver Wang of TPH. Please go ahead. Your line is open.

What specific changes or technologies have been adopted based on the initial learnings from the recent 3-mile laterals?

Our biggest advancements are improvements in cleanout practices, which have led to better recovery factors and oil production. We believe regular practice enhances our overall productivity significantly.

Our recent production was significantly higher than our peers due to better handling of well cleanouts post-frac, and we continue to lead the pack in performance.

It's exciting to see how our team has enhanced productivity within the last 18 months to the point that three-mile laterals have become the norm, and it's exciting to think about expanding that to four-mile laterals in the future.

Does the downtime improvement metrics capture synergies within the $200 million target or is that potentially incremental?

The downtime improvements are already included in the $200 million synergies targets. Some immediate actions will allow us to capture benefits in the short term.

Thank you. There are no further questions at this time. I'd like to turn the call back over to Danny Brown, CEO, for closing comments.

Thank you, Matthew. To close out, the Bakken is a world-class resource with strong economics, and Chord is a premier operator in the basin, creating a wide array of opportunities to drive efficiency and accelerate our rate of change related to economic returns and value creation. I want to thank all of our employees for their continued hard work and dedication. I appreciate everyone's interest, and thank you for joining our call.

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