Earnings Call Transcript - CHRD Q1 2024

Operator, Operator

Good morning, ladies and gentlemen, and welcome to the Chord Energy First Quarter 2024 Earnings Call. This call is being recorded on Wednesday, May 8, 2024. And I would now like to turn the conference over to Mr. Richard Robuck, Chief Financial Officer. Thank you. Please go ahead.

Richard Robuck, CFO

Thanks, Ina. Good morning, everyone. This is Richard Robuck. Today, we're reporting our first 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 Officer and Chief Commercial Officer; Darrin Henke, our COO; and 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 other things, matters that we have described in our earnings releases as well as 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 references 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. With that, I'll turn the call over to our CEO, Danny Brown.

Danny Brown, CEO

Thanks, Richard. Good morning, everyone. Thank you for joining our call. I know this is a very busy morning, so I'll get right to my comments. I plan to review our first quarter performance and return of capital, our full year stand-alone outlook and provide some updates on our pending combination with Enerplus before passing it over to Darrin Henke. Darrin will give some color on operations before passing it back to Richard for a little more detail on our financial results. We'll then open it up to Q&A. So in summary, what a great quarter. We announced a very important and impactful combination with Enerplus and delivered another quarter of strong operational performance. First quarter 2024 resulted in oil volumes above expectations, driven by strong well performance and accelerated activity due to cycle time improvements. And I want to take a moment to thank the Chord team for demonstrating tremendous resiliency during the unusually cold weather that swept through North Dakota in January. While we experienced significant downtime, the Chord team responded quickly and got production back online fast, and most importantly, safely. In fact, I believe we had some of the best performance in the basin on these items, and I just want to extend my personal gratitude to all those that made it happen. The strong production we saw in the first quarter has underpinned Chord's financial performance and led to robust free cash flow generation, which was above expectations. We generated $204 million of adjusted free cash flow during the quarter, and in accordance with our return of capital framework, we'll return 75% of this free cash flow to shareholders. To that end, given our base dividend of $1.25 per share and our share repurchases in the quarter of $30 million, which were limited given the possession of material nonpublic information associated with the pending combination with Enerplus, we declared a variable dividend of $1.69 per share. Additionally, last night, we issued second quarter and full year guidance, which reflects Chord on a stand-alone basis. Given the operational improvements I mentioned earlier, the development program is proceeding faster than originally anticipated, and second quarter oil volumes and capital are expected to be a little higher than what we were projecting at the beginning of the year. While we are running ahead of schedule, you'll notice we didn't change our full year oil volume or capital guidance from the February outlook. This reflects Chord's commitment to managing the business to maximize sustainable free cash flow with a flat+ program. Given our strong performance to date, including the 16% free cash flow beat in the first quarter, our plan has capital peaking in the second quarter with reduced activity relative to our original expectations in the second half of the year as we window out a frac crew and drilling rig. In addition to yielding a more stable production profile, this should help derisk the delivery of our previously announced annual program, allow us to assign more resources to integration and synergy capture, and position us well for a strong 2025. Speaking of integration, we were pleased to announce yesterday that we expect to close the Enerplus combination later this month on May 31. As a reminder, our review period under the Hart-Scott-Rodino Act expired on April 5. And since then, the teams of both companies have been working to prepare for integration while still operating in separate organizations. Upon close, we expect to issue abbreviated combined guidance for the second quarter, which will include 1 month of Enerplus as well as second half guidance for the pro forma enterprise, and we'll also work to fully integrate the development plans of the 2 companies. We intend to provide a more fulsome update on expectations for the combined asset base when we report second quarter results in August. As a reminder, Chord's shareholder vote is scheduled for May 14 and Enerplus' shareholder vote is scheduled for May 24. Chord has integrated multiple transactions over the past few years, including the XTO acquisition and the Oasis and Whiting merger. The team keeps getting better and applying the learnings from these integration efforts is expected to help ensure we realize and even exceed our announced synergies while maintaining strong operational performance of the underlying business. Before moving on, I'd like to spend a few moments reviewing the merits of the deal. The Chord team has long believed in the industrial logic of the combination of these 2 organizations. We remain extremely confident in the strategic and financial benefits of the transaction, and as we move through integration planning, our conviction level continues to grow. First, Enerplus brings top-tier assets in the core of the basin, which improves the quality of our long-lived inventory and where Chord expects to enhance returns by combining the best development and operating practices of the 2 companies. To put it plainly, we believe Enerplus has some of the best inventory and acreage in the basin. Second, by utilizing combined best practices at enhanced scale, we are very confident in achieving the $150 million in synergies previously noted and see potential upside to this number. Integration efforts are going very well, with both organizations working together to drive incremental value from the transaction. Through the process of building road maps for the future organization, we've learned that our cultures are very similar. And I want to let both organizations know how grateful I am for their positive attitudes and eagerness and excitement around the deal. To all the Chord employees involved in the integration efforts, you've done a great job driving the process forward while also putting up great results in our stand-alone business. Third, the combination drives accretion across all key per share metrics, including EBITDA, cash flow, and free cash flow. In addition, the structure of the deal allows us to maintain a peer-leading return of capital program and preserves a fortress balance sheet, giving the pro forma organization tremendous optionality as we move forward. To sum it up, the combination with Enerplus significantly accelerates Chord's beneficial rate of change as it relates to improving economic returns and value creation, and it is a very exciting time for our organization. And finally, because we remain committed to delivering affordable and reliable energy in a sustainable and responsible manner, just a few words on our sustainability progress before turning it over to Darrin. In 2023, Chord lowered its emissions intensity and officially endorsed the World Bank's Zero Routine Flaring by 2030 initiative. We also saw a dramatic improvement in our safety performance. I'd like to thank the team for their efforts on these important topics and encourage everyone to review our sustainability report on our website. After closing the Enerplus transaction, our preliminary plans for 2024 involve publishing a sustainability report, Chord on a stand-alone basis, and providing a summary of key ESG and sustainability metrics for Enerplus. In 2025, we expect to publish a full sustainability report reflecting the combined company. To sum things up, Chord had a great start to the year. We remain excited to close the pending transaction with Enerplus and look forward to driving forward progress through 2024 and beyond. And with that, I'll turn it over to Darrin.

Darrin Henke, COO

Thanks, Danny. We had a solid quarter as the team continues to execute with excellence. Our wedge production benefited from strong well performance and improving cycle times, while our base production rebounded quickly from the January weather disruptions. The Chord team has enhanced our facility design in recent years and has the equipment and processes in place to mitigate downtime and rebound quickly when there are outages. Operationally, we continue to be encouraged by the progress we're making on 3-mile laterals, of which we've executed about 80 to date. While it's still early days, on average, performance is meeting or exceeding our expectations and one can clearly observe contribution from the furthest portions of the lateral. We're also seeing an uplift compared to the 2-mile analog wells in each prospect area, which is increasing over time. You can find additional details on Slide 9 of our updated investor presentation, where we've provided performance data on 3-mile wells in Painted Woods that were drilled in the third quarter of last year. Additionally, we provided incremental details on the anticipated 3-mile production forecast over time and also the expected 40% uplift. It's important to understand that all else equal, production per lateral foot from 3-mile wells will initially be below the 2-mile analogs. This mostly reflects facility constraints and managed flowback, which generally keep volumes in a certain range for the initial productivity period. However, over time, the 3-mile well production per lateral foot catches up with the 2-mile wells given shallower declines, which ultimately leads to higher recovery. We expect 3-mile wells to deliver approximately 40% more EUR for about 20% more capital. This capital efficiency primarily comes from leveraging the vertical section of the wellbore as well as locations, roads, and infrastructure while using similar-sized facilities. Chord has made significant progress in drilling, completing and cleaning out our 3-mile wells. Drilling times declined by roughly 25% over 2023 and is now taking about 10 to 11 days on average to drill a 3-mile well. I should note, in the first quarter, Chord drilled a 3-mile well in 8.7 days spud to rig release, which set a new basin record. On the cleanout side, we have made strong progress and are essentially reaching total depth in all our 3-mile wells at this point. We frequently get asked if there could be upside to our implied 80% productivity assumption for the third mile. We believe this is a likely possibility, especially in light of Chord's progress on cleanouts over the past year. However, given that our 2023 3-mile total incremental laterals were back-end weighted, it will take until later this year to get sufficient production history to effectively analyze the declines and determine whether we can increase our EUR uplift assumptions. As I said, we are essentially reaching total depth on all our cleanouts, and we like what we see for production performance and well pressures. I give credit to the Chord team for embracing our culture of continuous improvement, which has significantly advanced our execution on the 3-mile laterals. So to sum things up, the Bakken is a world-class resource with strong economics. As the premier operator in the basin, we see additional running room to drive further efficiencies and lower breakeven pricing. The combination with Enerplus provides additional levers to advance our capabilities and will allow both Chord and Enerplus to create more value than either company could as a stand-alone. We expect to lower our supply costs while continuing to reduce our environmental footprint, all the while being good stewards in the communities where we operate. I'll now turn it back over to Richard.

Richard Robuck, CFO

Thanks, Darrin. A quick heads up, my comments regarding guidance will not include pro forma impacts of Enerplus, as we'll be incorporating a combined look post close. In the first quarter, Chord generated adjusted free cash flow of $204 million. Looking at the puts and takes, strong volumes and lower operating costs largely offset capital costs that were at the high end of the range, while natural gas realizations were below our February cash projections. Our volumes were strong in the first quarter, up 2.6% from our midpoint guidance, while total volumes were about 1% above midpoint guidance. First quarter adjusted capital expenditures of $254 million excluded $4 million of capital expenditures that will be reimbursed in conjunction with sales of non-operated assets. As Danny mentioned, our program has accelerated a bit from what we expected in February, which is reflected in our first quarter results and second quarter guidance. On a full year basis, there were no changes to oil volumes and capital spending guidance that we outlined in February. Oil realizations in the first quarter averaged $1.71 below WTI, slightly favorable to midpoint guidance. As we look through the balance of 2024, the first quarter oil differential is expected to be wider than the rest of the year, with Bakken pricing expected to improve as the TMX pipeline begins operating. For the full year, we expect crude realizations to reflect a modest discount to WTI. NGL realizations as a percentage of WTI were in line with midpoint guidance, while gas realizations fell below our guidance range. As a reminder, certain marketing fixed fees are deducted from our realized gas and NGL prices. This drives higher operating leverage, which hurts realizations for both NGLs and gas at times of weaker prices. With gas prices trading at low levels, the fees deducted from our price resulted in lower realizations as a percentage of the benchmark price. However, realizations should improve quickly in environments where gas prices rise. We have incorporated the current market conditions into our updated 2024 guidance. Turning to costs. Lease Operating Expense was $10.39 per BOE in the first quarter, which was better than our original expectations given strong volumes and lower workover costs. General and Administrative expense was $3.30 per BOE which was toward the higher end of the range. We slightly adjusted our full year Lease Operating Expense and General and Administrative guidance to account for the first quarter performance and our latest forecast. Cash G&A, excluding transaction costs, was $14.5 million in the first quarter and was better than original expectations due to timing of spending. Full year guidance remains unchanged. Production taxes averaged 8.5% of commodity sales in the first quarter, and we reiterated our full year guidance. Chord made no cash tax payments in the first quarter. For the second quarter, we expect to pay 1% to 8% of EBITDA which increases to 8% to 14% of EBITDA in the second half of the year. For the full year 2024, we expect to pay 4% to 9% of EBITDA, at WTI pricing ranging from $70 to $90 a barrel, which is in line with our initial expectations. In '24 and '25, we generally expect cash taxes to be higher in the back half of the year relative to the front half due to timing of deductions and other factors. In closing, I'd like to thank our team for their hard work and dedication to the company. Your contribution shows up in our strong returns, sustainable free cash flow, and peer-leading return of capital. With that, I'll hand the call back over to Ina for questions.

Operator, Operator

Your first question comes from the line of Neal Dingmann from Truist Securities.

Neal Dingmann, Analyst

Nice quarter. Danny, my first question is maybe on your post Enerplus D&C plans. I know you mentioned Chord has been running around 2 to 3 rigs, and Enerplus, 2. I'm just wondering, you mentioned some time in your prepared remarks that it seemed like you suggested that guidance would stay relatively the same, or you didn't want to raise guidance given your commitment to staying relatively flat. With that said, is it fair to assume potential downside to CapEx if these operational efficiencies that you and Darrin's team are continuing to see? If you're able to continue to do that.

Danny Brown, CEO

Thank you for the question, Neal. Yes, that's a fair assessment. Our organization is performing well, and we are seeing improvements in efficiencies and cycle times. We are not focused on increasing production to higher levels. We believe that maintaining a flat-plus program, which we have discussed frequently, is the best approach for our organization. Our views on this remain unchanged. As we achieve these efficiencies and extract more capital from the system, we plan to keep our activity levels similar to what they would have been otherwise, allowing for more free cash flow to circulate through the system.

Neal Dingmann, Analyst

Love to see that. Okay. And then just secondly, on future LOE specifically. I'm just wondering, you recently cut some workover rigs, but you've done a nice job just on that workover program. I'm just wondering, outside of weather, what I would call something abnormal, what do you all envision is your sort of a typical workover plan, maybe with or without Enerplus or any assumptions on a workover plan? I'm trying to get an idea if the plan will be about where it is today, would you ramp it back up? Or how should we think about that workover or rework plan going forward?

Danny Brown, CEO

I'll ask Darrin to provide some commentary here in a moment, but maybe just give my thoughts first. I think what you should expect, Neal, is we've got a significant workover rig program. There's probably some seasonality in it. So some quarters, it may be a little higher than others. We've been working really, really hard to try and optimize our cost emits. We recognize it's a big portion of our Lease Operating Expense and that, as we can get more efficiencies through the system and do the work better, we should be the beneficiaries of lower costs in that structure. That's certainly a focus for us, that could include reducing the number of rigs, moving to more tower rigs for more efficient operations and lots of different things. But from Enerplus's perspective, I’d say their workover program is sort of comparable to ours on a flowing barrel, on a well basis. I don't anticipate a huge amount of changes other than our focus on continuous improvement, but I'll ask Darrin to provide his thoughts.

Darrin Henke, COO

Yes, Neal, since the third quarter of last year, we have managed to lower our workover costs on repair jobs by about 15% by focusing on operational efficiency. We have also improved our run times, which means we don't require as many rigs as we did in the past. When comparing Enerplus to Chord, the run times this quarter are slightly longer than what Enerplus has been experiencing. I believe that by combining the two companies, we will be able to achieve additional efficiencies, longer run times, and a reduction in the overall workover program.

Operator, Operator

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

David Deckelbaum, Analyst

I wanted to ask a follow-up just on guidance for this year. Obviously, you left the full year unchanged. And just given a historical bias to producing more in the back half of the year, I was surprised that the implication is that you'd more or less be flattish from the second quarter. I know that there's obviously pretty even total incremental laterals throughout the first half and the back half of the year. But if we think about the summer seasonality and that uptick there, it would seem that you guys should have increased production in the back half of the year, unless I'm thinking about that incorrectly. I know that you guys talked about managing the program to fit within the capital budget. But is there something else that would be impacting the production side that would otherwise keep those volumes flat?

Danny Brown, CEO

Yes, thanks for the question, David. We expect to have fewer total incremental laterals in the second half of the year compared to the first half as we phase out a frac crew and a drilling rig. Our activity is actually anticipated to decrease as we enter the third quarter. Consequently, the total incremental laterals balance will be slightly more weighted toward the first half of the year rather than the second half. This change should lead to a more stable production profile quarter-on-quarter instead of a more cyclical one. As we continue to see strong performance, we are not looking to increase activity quickly. Instead, we will slow down our activity a bit to allow for more free cash flow to come in.

David Deckelbaum, Analyst

I appreciate that. And maybe you can revisit some of the commentary around potentially doing better on some of the synergies with Enerplus. I know it's probably too early to talk about some of those. But I know a lot of us are intrigued about the potential to kind of repermit some of their locations in the 3-mile laterals on a go-forward basis, and you've obviously had some increased success on your own program. Has the timeline of how you guys think about achieving that changed as you look at integrating some of these assets? Or is that something that's still likely not impactful until 2026?

Danny Brown, CEO

I believe that from a development program perspective, the impact of our new wells will likely be seen in 2025, not 2026. We have been operating as separate organizations until the closing, and we won't have a complete integrated development plan until after that. We've done as much integration planning as possible leading up to this point. After the close, we will finalize our integrated development plans, which I expect will take effect mainly in 2025. The benefits from a practice standpoint will also become apparent in 2025, with many of the synergy captures occurring that year. Regarding the repermitting and replatting process, that will take additional time as we need to consolidate the acreage and manage the replatting geometry. The transition from the currently planned 2-mile laterals to the future planned 3-mile laterals may occur later in the process. However, we should see synergy savings starting in early 2025, with the possibility of replatting into 3-mile laterals and integrating some of that into our development plan potentially happening later in the year.

Operator, Operator

And your next question comes from the line of John Annis from Stifel.

John Annis, Analyst

For my first one, staying on the synergies, Enerplus has been active on the simul-frac front. If I'm not mistaken, that's one area Chord hasn't really leaned into yet. Can you provide your thoughts on incorporating the simul-frac development program and the potential cost savings associated with it?

Darrin Henke, COO

Sure thing. Happy to do that. So you're exactly right. Enerplus has done a great job implementing simul-fracs, as well as recycling more produced water in their frac operations than we do. Those are some learnings that we intend to implement immediately, really midyear this year going forward. The savings, when you combine the recycling of water along with simul-fracking, is probably going to work out to around $100,000 per well in savings. Some other things that Enerplus has done really well is they use more vapor recovery units for capturing gas off of their facilities, and that's something that you'll see Chord implement as well to help with our gas capture going forward.

John Annis, Analyst

Are those savings already included in the $150 million synergy target?

Darrin Henke, COO

The savings I've talked about are part of those numbers.

John Annis, Analyst

With the 4-mile laterals planned for later this year, can you offer any preliminary expectations regarding potential cost savings and ultimate EUR, either from the subsurface work you have done or analogs across the basin?

Danny Brown, CEO

From a 4-mile lateral standpoint, obviously, it's sort of early days for us in that. We would anticipate, similar to how we underwrite a 4-mile lateral program, we'll obviously be looking at some incremental degradation on the fourth mile delivery, just like we've looked at incremental degradation of a 3-mile delivery as opposed to 2-mile. We're encouraged that maybe we've been a little too conservative on that from a 2- to 3-mile standpoint. Again, we'll provide some more clarity on that as we get a little more data in as we get toward the end of the year. As we increase our learnings through that 3-mile process, we'll apply that to 4-mile. From a drilling perspective, we're very confident that the 4-mile shouldn't provide too much of a technical challenge for us from a proppant placement standpoint; we feel confident we can place our proppant appropriately out to 4 miles. I think the cleanout is probably the technical challenge that we have most concerns about, just with existing coiled tubing cleanout. That will be quite a challenge for us in a longer lateral, and it probably will require some stick pipe. We do anticipate similar to moving from 2 to 3 miles, there's still huge advantages in leveraging the vertical section of the well, the facilities that you've got, and the roads that bring you to the pad. If you can imagine going from a 2-mile development program to a 4-mile development program, that provides a real opportunity. I'm not sure how much we're envisioning 4 miles replacing 3 miles, but where we've got geometry that doesn't lend itself to 3-mile development but really is conducive to 2-mile development. Certainly, a 4-mile well instead of a 2-mile well could be a significant uplift for us. That's what we're excited about.

Michael Lou, Chief Strategy Officer

And John, just to add to that a little bit. The 3-mile, on a Chord stand-alone, we've been talking about 60% of our inventory is in that 3-mile category, which means that 40% is open to being able to continue to extend on a combined basis; we're about 40% in the 3-mile identified category. So the 4-mile lateral will just give us more opportunities, as Danny mentioned, to have more shapes, if you will, to get a larger portion of that inventory into either 3 or 4 miles, thus increasing capital efficiency across the program. So there's a lot of opportunity left in the program, and we think the 4-mile will just add to that.

Operator, Operator

And your next question comes from the line of Sean Mitchell from Daniel Energy Partners.

Sean Mitchell, Analyst

You guys had impressive improvements on drill times year-over-year. Is this improvement due more to the size of the hammer or well design in the form of drilling fluids, drilling mud, et cetera?

Darrin Henke, COO

It's a great question. The team has done a fabulous job driving down our cycle times on the drilling front. It's a combination of working with our vendors on bit design and advancing our bit design; you hit the nail on the head with respect to the drilling mud that we use and the properties of that mud and how we're able to drill the wellbores really quickly, but also keep the laterals clean while we're doing that. Of course, having good laterals that we can get the pipe to bottom with no problem and cemented in place. It's not really any one individual area. It's just Chord's commitment to continuous improvement. We're never going to rest on what we've done historically. We have set the record for the fastest 3-mile well in the basin, but that doesn't mean we're going to sit back and be comfortable with those results. We'll continue to focus and look for additional wins to drive down those cycle times.

Sean Mitchell, Analyst

Got it. And maybe a follow-up, just several of your competitors or peers are talking about refracs in the Bakken and the Eagle Ford. How do you guys think about the refrac market? Do you think about it? I think Enerplus does some, but any color around that would be helpful.

Danny Brown, CEO

Yes. I think we're open to refracs. We think we've got some opportunity within our program to do those. Candidly, the greenfield development program we have right now is really compelling. But as we have opportunities to do refracs, particularly in areas where we see development in the area, we've already got wells shut in nearby. Those areas, doing refracs at that moment is challenging because there are expenses and costs associated with all of that. You'll see us focus on refracs in that manner as a stand-alone program for us. We are observing others. We're learning from our own practices, and we'll move forward. One of the reasons to conduct a refrac program is if the original wells were maybe understimulated, at least relative to modern expectations in the first place. We've got a few areas in the field that are like that. But generally speaking, I think the legacy organizations did a pretty good job up front. So maybe there's not much left to gain, but still an interesting program that we're looking at.

Operator, Operator

There are no further questions at this time. I will now hand the call back to Mr. Danny Brown, CEO, for closing remarks.

Danny Brown, CEO

Thanks, Ina. Well, to close out, we appreciate everyone's time today and interest in our company. I also want to thank our employees for their continued commitment and dedication because they really are the backbone of our success. We pride ourselves on being strong capital allocators and doing the right thing for shareholders. We remain more excited than ever about the merits of the combination with Enerplus, which will accelerate Chord's beneficial rate of change as it relates to improving returns and value creation. We look forward to updating the market on our progress as we move through that process. And with that, thanks to everyone for joining our call.

Operator, Operator

This concludes today's call. Thank you for participating. You may all disconnect.