Greetings, and welcome to the Mach Natural Resources Quarterly Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. At this time, I'd like to turn the call over to Daniel Reineke, Executive Vice President of Business Development. Thank you. You may begin.

Thank you, Daryl. Good morning, everyone. Thank you for joining our call today to discuss Mach Natural Resources third quarter financial and operational results. During this morning's call, we will be making forward-looking statements that cannot be confirmed by reference to existing information, including statements regarding expectations, projections, future performance and assumptions underlying such statements. Please note, a number of factors will cause actual results to differ materially from our forward-looking statements, including the factors identified and discussed in our press release yesterday and in other SEC filings. Please recognize that except as required by law, we undertake no duty to update any forward-looking statements and you should not place undue reliance on such statements. We may refer to some non-GAAP financial measures in today's discussion. For a reconciliation from non-GAAP financial measures to the most directly comparable GAAP measures, please reference our press release, which is available on our website and our 10-Q will be available on our website when filed. With me on the call today, Tom Ward, CEO; and Kevin White, CFO. Tom will give an introduction and overview and Kevin will discuss our financial results, and then we will open up the call for questions. With that, I'll turn it over to Tom.

Thank you, Daniel. Welcome to the Mach Natural Resources first earnings update. I will keep my remarks brief. However, I do want to emphasize and congratulate all the Mach employees on the successful offering of MNR. The public offering of Mach Natural Resource unit is the largest upstream energy IPO since 2017. We are appreciative of the efforts of our employees and the help of Stifel and Raymond James to make the offering a success. Mach was established in 2017 with the idea that there would be a time coming in the near future where cash flowing at producing assets would be in distress. We focused on the Anadarko Basin since there was a significant discount to buy producing assets because of past underperformance in drilling. Obviously, a producing asset should not carry the burden of a misguided drilling program, but that is exactly what has happened and continues today. Once capital left the area, it has been reluctant to return, thereby giving us the opportunity to acquire assets at a discount to PDP PV-10 in an area rich in hydrocarbon and midstream development with a long history of production. We did take advantage of the opportunity. With the acquisition of Paloma entities, we will have spent approximately $1.8 billion since early 2018. Our track record of accretive acquisition remains unequal during this time period. In fact, we paid more in distributions than the total of equity invested and have been able to simultaneously keep our leverage low. In fact, Mach has grown from scratch to what is post-Paloma, a company with nearly 85,000 BOE per day of production, more than 4,600 operated wells and over 1 million acres of HBP land. We achieved this success by abiding by four guiding principles. Number one, maximizing cash distributions to our equity holders. This strategy is designed to ensure all decisions company-wide result in accretion to our distributions. Number two, disciplined execution with accretive-only acquisitions. We are committed to executing only acquisitions that are accretive. The assets are purchased at a discount to PDP PV-10 and have meaningful upside in undrilled locations. Number three, maintaining financial strength through low leverage. We're focused on maintaining our financial strength through all commodity cycles by maintaining a low debt-to-EBITDA ratio of 1x or less. Disciplined reinvestment rate is number four, our disciplined reinvestment rate of less than 50% optimizes the distribution to unitholders. By following these guiding principles, we've been able to produce consistent results through all commodity cycles. Our goal is to maintain production and revenue while understanding that our distribution is variable. In other words, distributions will be better in times of higher prices and lower prices. However, we do not plan to repeat the mistakes of the past upstream MLPs by fixing distributions and amassing too much leverage. We also believe that properly hedging during times of having leverage closer to 1x to protect future cash flow is prudent with our business philosophy. Therefore, post-Paloma, you can expect us to be hedged 50% for the next 12 months on oil and natural gas. We also plan to hedge approximately 25% in months 13 through 24 until we pay down our debt to under half a turn of leverage. We will continue to focus on making acquisitions, which are accretive to our distribution as long as capital and opportunities are available. The Anadarko Basin remains one of the few places where both of these are available only to a small group of potential buyers. We believe we can acquire our fair share of the remaining billions of dollars of inventory that will be coming forward in the next few years while sticking to our guiding principles. If we cannot, we can lean more on our large drilling inventory for reinvestment purposes to maintain our distributions. With regard to the third quarter, MNR generated strong cash flow from better-than-expected production. We controlled our costs, which resulted in a cash reinvestment of less than 50% coupled with strong financial results. We look forward to the fourth quarter results along with closing the Paloma acquisition. I'll turn the call over to Kevin to discuss our financial results.

Thanks, Tom. I would like to highlight that the results that will be included in the third quarter 10-Q include only the results of Mach Natural Resources predecessor entity, BCE-Mach III. Since the IPO and the actual formation of Mach Natural Resources did not occur until the latter part of October, in the tables accompanying the press release, we have included the core financial statements for BCE-Mach III. However, our discussion on this call will focus on the pro forma third quarter results as if the combination of BCE-Mach I, II, and III had already occurred. Starting first with Page 9 of the release. The reported production volumes of 66,280 BOE a day were stronger than expected, as Tom mentioned, and that's stronger than expected at the time we prepared the S-1, and this beat was higher across all three product streams. Gas prices were slightly higher at $2.36 per Mcf. Oil prices at $80.88 and NGL prices at $23.47 were lower than the expectations at the time of the S filing. Including the $5.2 million largely non-cash mark-to-market hedge losses, total revenues for the pro forma entity were $217 million. With the exception of DD&A, which came in a little bit higher, our costs were per BOE seen on Page 10, came in actually lower than expectations at the time of filing the S-1. Jumping to Page 14, focusing on the right-hand column of the pro forma combined results, the EBITDA at $140 million, which is a little bit over 5% above the expectations, and the cash available for distribution calculation was almost 9% above the expectations included in the S-1. Pro forma cash at the end of the quarter was $93 million and pro forma debt was $174 million, with a reminder here that we used $104 million of the proceeds from the IPO to pay down that debt number. And with that quick overview, Daryl, we will turn it back to you for opening up the call to questions.

Thank you so much. We will now be conducting a question-and-answer session. Our first questions come from the line of Derrick Whitfield with Stifel.

Congrats on your strong first public quarter. With the understanding that you're planning to provide full 2024 guidance in February, could you speak to the degree that Paloma acquisition will be accretive to your cash flow and dividend profile on a normalized commodity deck?

Yes, Derrick, as you mentioned, we will not provide specific guidance until February. However, at a high level and considering a normalized commodity price environment, we do anticipate that distributions will be greater across all quarters compared to what they would have been without the Paloma acquisition. We will not distribute all of the cash generated by the Paloma acquisition, as part of it will be used to pay down our debt. As Tom noted, we are eager to reduce our debt to a level that aligns with being around half-turn leveraged. While I'm uncertain about the normalized commodity price environment you have in mind, based on the figures we used during the S-1 period, we expect to return to that leverage ratio sometime in late 2025 or early 2026.

And just staying on Paloma, you just articulated the plan to get leverage back down. When you think about the transaction, does it in any way limit your ability to pursue M&A if some of the West Anadarko asset packages you noted come to market?

No, I don't think it limits us. As long as the acquisition meets our specified criteria and follows the four guiding principles, we can buy PDP assets at discounts to PV-10 and keep our leverage under one turn. The key point is that if it adds value to our distributions, we will continue to seek out acquisition opportunities. We are always on the lookout, as there are usually assets for sale at any given time. As you know, most of the potential acquisitions we evaluate do not come to fruition. Paloma was exceptional in that, out of the 17 acquisitions we've made, only three involved rigs that could be directly utilized and generated very high returns. The Canadian County area, particularly Southern Canadian, features some of the best drilling in the mid-continent, comparable to any location in the country in terms of returns. We will focus on a couple of formations, specifically the Woodford in Mississippi and the two-mile laterals. Initially, we will likely start with some one-mile laterals to ensure smooth rig operations, while our team prepares to transition into Paloma assets. Paloma represented a significant acquisition for us, being the largest we've undertaken. The potential to acquire PDP assets still below PV-10 was very encouraging for us to proceed. So, to directly answer your question, no, I don't think it restricts our capabilities.

Our next questions come from the line of Charles Meade with Johnson Rice.

Tom, I think you should elaborate on the points you were just making. When I look at the Paloma assets and locations, they seem to differ from most of the drilling Mach has done. These are unconventional, yet they involve tight rock and large fracs, which seems contradictory. In the past, you’ve focused more on areas like Oswego, which has natural high porosity and high permeability rock. My question is, does this feel like a new direction for you internally, or is it just a natural extension of your existing work?

I think it's fair to say that this represents a new leg of our operations. I am quite confident in drilling conventional assets that have low costs and minimal capital expenditures, yet can provide a strong return through cost savings. Regarding Paloma, the deeper Anadarko drilling, especially in the volatile oil stage, is more challenging and costly. These wells will have a price tag of $8.5 million, and we plan to spend $88,000 for each stage of completion. Our team has substantial experience from several public companies I've worked with, and they're well-versed in drilling ultra-deep wells, whether vertical or horizontal, under high pressure and effectively accessing the formations. While this may be relatively new for us, since we previously concentrated on free cash flow from acquisitions instead of the drilling phase, we still rely on the free cash flow from our producing developed properties. However, with Paloma, the potential returns are substantial enough to justify proceeding with the drilling program. It's important to note that we only have one rig available, so we are not attempting to drill extensively or rapidly expand our reserves.

I would like to ask a follow-up question regarding the M&A and A&D landscape. While it's common to reference PV-10 in the industry, the reality is that debt currently costs more than 10%. Have you noticed a decline in price expectations as you evaluate the Anadarko, considering the relatively high cost of debt at this time?

Yes, I believe that during periods of higher prices, our focus shifts more towards drilling rather than acquisitions, where we haven't been as successful. However, if you have a longer-term perspective that gas prices will exceed the current strip price of around $3, then acquiring such an asset would be advantageous over the long run. We are noticing some softening in the market. When prices fluctuate downwards, it creates opportunities for us to pursue acquisitions. That said, our priority is to ensure that any acquisitions contribute positively to our distribution and that we maintain a careful watch on our leverage, keeping it below a certain level is crucial.

Our next questions come from the line of Michael Scialla with Stephens.

You had a nice production beat on the quarter. Just wanted to see if you could talk about the reason that came in a little bit higher than anticipated. And also, as you look into the fourth quarter, do you still anticipate a production decline from the third quarter level and maybe the cadence production next year, I assume the Paloma volumes are probably expected to come down some from I'd just call it an inflated sales mode level?

We had a good quarter, mainly because our results exceeded our expectations outlined in the S-1. Moving forward, we reduced our operations from three rigs at the end of the third quarter to two rigs in Oswego in the fourth quarter. Our production reflected this change, but we had already factored it into our models. Ultimately, the better results were simply due to encountering a series of wells that performed better than we had anticipated.

And then, Tom, as you look into next year, any help you could provide on the cadence of production there?

Yes, Michael, regarding production, we will be integrating the Paloma assets at the end of the year. We plan to add a third rig to boost production. Looking ahead to the remainder of next year, we anticipate some increased production from the acquisition, similar to what we experienced in Q3 when we operated more rigs in the Oswego earlier this year. Therefore, throughout 2024, with a three-rig program as we finish the year, we expect to reach a steady production rate.

Okay. And Daniel, would you anticipate kind of first quarter being the high watermark for production for the year? I realize you haven't given your '24 production guidance, you have just sort of looking for a general shape of the production profile.

Yes. I think that's fair to say that Q1 of next year will be the high water on production, just similar to Q3 being the high water without Paloma, Q3 of '23 being the high water, it will now be Q1 of '24.

And Tom, you mentioned you plan to hedge 50%. I think that was for the next 12 months on average. Where do you stand in that hedging process right now?

Yes, we're over two-thirds complete with hedging going forward. And you're right, it was 50% over the next 12 months and then 25% in 13 through 24. So yes, we have been actively hedging after we signed the Paloma acquisition and feel that's prudent with getting our leverage up closer to 1x.

Yes, Michael, you'll be able to find an update on our hedging with subsequent disclosures in the 10-Q.

Our next questions come from the line of Grant Adkins with Raymond James.

Congratulations on your impressive introductory quarter. I want to discuss how we should approach distribution moving forward. For the fourth quarter, can we assume that you'll be close to full distribution of your cash flow? And looking ahead to 2024, can you provide any guidelines on the minimum percentage of cash flow that will be distributed, or any insights that will help us assess the balance between debt and payouts?

Yes, we won't be updating guidance until February for the full year 2024. In the fourth quarter, we will distribute all of the free cash generated. After closing Paloma, we will have slightly higher debt servicing needs, but it's important to note that in 2024, the distribution will be entirely variable, depending on commodity prices. We plan to have a larger percentage hedged as we move into 2024, but the calculations for that year will fluctuate based on commodity prices and the amounts we need to allocate for servicing both the principal and interest on the new first lien term loan.

And then shifting gears kind of towards Paloma. How do your activity levels, I suppose, change? Like one rig on the Paloma assets as compared to one rig in the Oswego. I would presume you're drilling a little bit faster up there just given the kind of depths and challenges you face up there. But any color on that would be great.

Yes, I believe that's a reasonable evaluation. The drilling at Oswego is significantly quicker, but it involves less. When comparing a rig line at Oswego to one at Paloma, considering the different working interests, the annualized costs for both will be relatively similar on a net capital expenditure basis. We will provide more detailed guidance on this in February when we map out the locations.

If I could add one more thing regarding service costs, how do you feel about the current trends? It seems that the number of rigs in the U.S. has remained flat for some time. Do you believe this could provide a positive impact as we move into next year?

We are down. So just using the Oswego as an example. In 2021, it only costs $1.8 million to drill a one-mile Oswego well. That moved up to about $3.2 million by the end of '22 into the first part of '23, and that's back down now to $2.75 million to $2.8 million. We're not seeing tremendous changes lately. So, it's got to have been flattening. So, I'm not able to say that we see more disinflation really. There could be more steel is continually moving in the direction as we use up some of our inventory also. So, I think that we're fairly comfortable with where we're projecting the cost for an Oswego well today.

Thank you. We have reached the end of our question-and-answer session. I would now like to turn the floor back over to Daniel Reineke for any closing comments.

Thanks, everyone. We appreciate everybody's time and questions this morning. Look forward to talking to you again early next year. Have a good day.

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.