Earnings Call Transcript - PR Q1 2021

Operator, Operator

Good morning, and welcome to Centennial Resource Development's conference call to discuss its first quarter 2021 earnings. At this time, I will turn the call over to Hays Mabry, Centennial Director of Investor Relations, for some opening remarks. Please go ahead, sir.

Hays Mabry, Director of Investor Relations

Thank you, Tia. And thank you all for joining us on the company's first quarter earnings call. Presenting on the call today are Sean Smith, our Chief Executive Officer; George Glyphis, our Chief Financial Officer; and Matt Garrison, our Chief Operating Officer. Yesterday, May 4, we filed a Form 8-K with an earnings release, reporting first quarter earnings results for the company and operational results for our subsidiary, Centennial Resource Production, LLC. We also posted an earnings presentation to our website that we will reference during today's call.

Sean Smith, CEO

Thank you, Hays. Good morning, and welcome to Centennial's first quarter earnings call. This was another quarter of solid results, and I'm extremely proud of our team's performance in the field, particularly in light of the challenging operating environment associated with winter storm Yuri. On today's call, George will first discuss our quarterly financial results, recent convertible note offering, and capital structure. Matt will then provide an operational update, including recent initiatives and cost reductions, and then I'll follow with capital efficiency and cost gains to date and provide a high-level overview for the remainder of 2021. With that said, I'll turn it over to George to review our financial results.

George Glyphis, CFO

Thank you, Sean. I'll first review our Q1 financial results and then discuss the March convertible notes offering and the benefits associated with the transaction. Turning to our financials on Slide 13 of the earnings presentation, net oil production for the first quarter averaged approximately 28,240 barrels per day, which represents an approximate 6% decrease from Q4. Average net equivalent production totaled approximately 54,200 barrels per day, which was a 9% reduction from the fourth quarter. Q1 volumes were impacted by a lack of completion activity during the prior quarter as well as production downtime resulting from winter storm Yuri. We expect that Q1 levels will be a low point for the year as production rebounds in Q2. While production declined quarter-to-quarter as expected, revenues increased significantly as a result of higher oil, natural gas, and NGL prices.

Matt Garrison, COO

Thank you, George. As everyone is aware, winter storm Uri created some challenges in the field for operations across the Permian Basin. While George touched on the impacts of the storm, from a financial standpoint, I will touch on some of the notable highlights from the field. All told, we experienced minimal operational delays from the weather. Prior to the storm, our team prestaged diesel fuel on our drilling sites, empty tank batteries, and prepared to the best of our ability for the coming storm. Because of this, we were able to maintain drilling operations for most of the weather-related events, incurring only two to three days of delay in our D&C operations. This is a testament to our team's resiliency and work ethic. Moving on now for the quarter, we operated a 2-rig program with one frac fleet. Our engineers have been very focused on material improvements in our drilling, completions, and facilities costs, and I'm happy to provide some color on that work today. As you can see on Slide six, we reduced our spud to rig release times by 11% year-over-year to 17.3 days, while increasing our average lateral length for the same period by 17%. Our new three-string casing program in Reeves County has been working very well and is the backbone for our cost reductions in Texas.

Sean Smith, CEO

Thank you, Matt. Before we discuss our outlook for the remainder of the year, I feel it's important to recap some of our recent accomplishments, as can be seen on Slide five. Last August, I laid out a roadmap with certain goals associated with heightened capital efficiency and free cash flow generation. Specifically, these goals related to driving D&C structural improvements and efficiencies, improving cash margins through LOE optimization and corporate cost control, and proactively managing our balance sheet and liquidity. Over a relatively short amount of time, I'm pleased to say that our team continues to meet or exceed all the goals laid out last year. Through higher efficiencies and design changes, we have lowered our year-over-year well cost by almost 20%. Additionally, we've stripped out roughly $9 million of quarterly LOE compared to last year, primarily as a result of our electric substation and transition to gas lift. The lowered cost and solid well results have positioned the company to have substantial sustainable free cash flow. Through our recent convertible notes offering, we reduced annual interest expense and increased liquidity while extending our debt maturity profile. In essence, all of these actions and attributes are the hallmarks of Centennial 2.0 and have helped transition Centennial to a sustainable free cash flow generating company, as evidenced by the past three quarters. As a result of these operational and financial improvements, our game plan for the remainder of the year is quite simple. First, we remain committed to our 2-rig program for 2021. Having turned to this level of operations at the beginning of this year, we have now stabilized our production base and will continue the efficient development of our acreage position, which will be underpinned by multi-well pad co-development with extended laterals. We expect this to provide us with a steady base to continue our free cash flow generation, allowing us to further pay down debt and delever organically. More specifically, we anticipate a rather material reduction to our leverage, ending the year well below 2.5 times net debt to LTM EBITDAX, assuming current strip prices. Lastly, we will continue to evaluate potential opportunities to gain size and scale and further delever, but only if they are accretive to our financial metrics. In closing, on Slide 11, we continue to have high-quality assets in the premier U.S. oil basin and an extremely capable technical team. We look forward to continuing to execute on our game plan and building upon our improvements demonstrated over the past few quarters. Thanks for listening, and now we'll go to Q&A.

Operator, Operator

Your first question will come from Neal Dingmann with Truist Securities. Please go ahead.

Neal Dingmann, Analyst

Morning and thank you for all the details. Sean, my first question is about how you continue to reduce your drilling and completion costs effectively. Could you explain what primarily drives these improvements? I'm curious why some other companies have achieved similar results but through smaller fracturing jobs. I would like to hear more about your specific approach.

Sean Smith, CEO

Sure. In fact, I'll actually have Matt Garrison tackle that. He's been the champion for pushing down our D&C costs and increasing our efficiency. So maybe, Matt, why don't you talk a little bit about how we're doing that?

Matt Garrison, COO

Sure. We've been concentrating on reducing our flat time, which is a key focus. Our team is assessing every aspect of our drilling profiles. Alongside the casing program, we've managed to reduce the number of pipe strings in the hole and have made adjustments regarding bit size and selection. We've progressed significantly in our drilling efforts. On the completion side, we are consistently working to minimize our nonproductive time, ensuring we have favorable contracts for sand pricing and all essential elements to further decrease costs. It largely depends on our team, with many of our members actively seeking to eliminate flat time and identify small opportunities for improvement. I hope that clarifies things.

Neal Dingmann, Analyst

No, great details. And then just last, I don't know if you have too much going on, but I'm just wondering any thoughts on activity up in the Lea County area?

Sean Smith, CEO

Well, I mean, as we talked about before, we plan to spend about 70% of our capital this year in Lea and the remainder in Texas. Part of that is just a function of timing. Our Texas asset is a bit more mature. We had to spend some dollars last year and in the previous two years to get our New Mexico position up and running from an infrastructure perspective. Now that’s in place, we feel like it's the right time to accelerate New Mexico. So we're going to emphasize that a bit more this year.

Neal Dingmann, Analyst

Very good. Thanks guys.

Sean Smith, CEO

Thanks, Neal.

Operator, Operator

The next question will come from Leo Mariani with KeyBanc. Please go ahead.

Leo Mariani, Analyst

Hi guys, I wanted to just ask quickly here on kind of production cadence for the year. I know there was significant downtime in the first quarter. I was hoping you guys could maybe quantify that. And I guess I would expect that production would kind of move up quite a bit in the second quarter, is that eliminated? But then just kind of looking to the rest of the year, are you expecting some modest growth? It just appears to me high level to kind of get to the midpoint of guidance, you kind of have to have a little bit of growth in the second half. Can you maybe speak to all that?

Sean Smith, CEO

Sure. I'll touch on that and see if I can cover that question, Leo, and then if we need to follow up, we can. But obviously, the winter storm certainly impacted production. We did expect Q1 to be down relative to Q4. That's how we modeled it based on the timing of our rig activity. As we mentioned, we started a second rig up in December of last year, but it takes time to drill a pad and get those wells brought online. So we fully expected a decrease in production Q-over-Q related to just timing of additional activity. And on top of that, we had winter storm Uri, which, as Matt outlined, we did a great job of minimizing that downtime, but a portion of that lower production was due to that. If you think about how much we were down Q-over-Q, about half of that decrease was due to the winter storm and the other half was just normal decline based on our activity levels.

Leo Mariani, Analyst

Okay. That's helpful for sure. And I guess, maybe just a high-level question for you guys here. You certainly seem very committed to the 2-rig program here in 2021. Just trying to think maybe a little bit longer-term, if we continue to see this high commodity prices with oil prices in the mid-60s. As you kind of look to 2022, which could be just a much more balanced market as OPEC is likely to bring a lot of their volumes back on. It has so much their capacity. Is that a year where you potentially could put a little bit more growth in the business and maybe hedge some of that in order to kind of drive EBITDA higher next year?

Sean Smith, CEO

Sure. And let me touch on a second portion of your first question because it ties into that as well. You mentioned production cadence for the balance of the year. Q1, as George mentioned in his portion, will be our lowest producing quarter for the year. I think we have emphasized the midpoint of guidance for the year, which would suggest a significant increase into Q2 from Q1. I would say, as we are live and looking at well data, I'm excited about what's coming up in the next quarter and quarters. So I think we feel comfortable with our production going forward, if that's helpful. Regarding our activity for next year, obviously, we can't provide too many forward-looking comments. But I think we are very focused on generating free cash flow even in a slightly elevated commodity price environment. By sticking to our current 2-rig plan for this year, we believe we're going to generate more significantly than $100 million of free cash flow this year based on current commodity prices. This 2-rig program allows us to generate substantial free cash flow. The intention with these proceeds is to pay down debt and delever organically. So we feel good about the plan for this year. I'm not going to provide too many outlooks into 2022. We'll see how things develop, but we're optimistic about how we're delivering the company organically.

Leo Mariani, Analyst

Okay. Thank you.

Sean Smith, CEO

Thanks, Leo.

Operator, Operator

We do have a response from Chris Dendrinos with RBC Capital Markets. Please go ahead.

Chris Dendrinos, Analyst

Hi thank you. You commented that your target for this year for leverage reduction is about 2.5 times, and then long term, it's 1.5 times. Is debt reduction kind of the only use of free cash flow for the foreseeable future? I guess kind of what target leverage level would you like to get to before you consider increasing activity?

Sean Smith, CEO

Sure. Yes. I appreciate the question, Chris. As commodity prices have remained stable, and our efficiencies have continued to improve even since the quarter, I think that our deleveraging number is going to be well below 2.5 times by year-end based on current strip prices. We feel good that we're heading in the right direction organically. The next phase of that, we stated that we'd like to get below 1.5 times as we approach the end of 2022, and then sub-wood times as we approach 2023. So that's what we're targeting. The use of proceeds is primarily for debt reduction and to lower our leverage right now. We'll be targeting some of those lower leverage metrics before we discuss growth or distributions. So the use of proceeds is primarily focused on the balance sheet.

Chris Dendrinos, Analyst

Great. Thank you. And then I guess just kind of following up on Neal's question from earlier. In regards to D&C costs and efficiencies, you recently upgraded to these walking rigs. You mentioned that it's improving some cycle times. Can you kind of comment on where you see well costs may be progressing or going through the balance of the year? And any additional operational benefits that you think the upgrade to the walking rigs might have?

Matt Garrison, COO

Sure. I'll go ahead and take that one. Those walking rigs, what they really allow us to do is move around on the pad a lot faster. So if we have a multi-well pad, two to three to four wells per pad, the increased mobility of that rig enables us to significantly reduce the time spent moving from one rig to another. Additionally, the transport from one pad site to another is generally faster than our historical wells; we estimate somewhere around a day's time savings per well on those kinds of in-field moves. If everything operates on hourly and daily rates, those types of time savings add up, allowing us to trim costs. Furthermore, it allows us to run simultaneous operations. While we're moving to the next well, we can continue preparing the previous well for its next stage of the job. So we're capable of executing simultaneous operations at the drilling level in the field. This creates a compounding effect of continued savings, especially with multi-well pads.

Chris Dendrinos, Analyst

That's very helpful, thanks.

Operator, Operator

And I'm showing no questions at this time. I would like to turn the conference over to Sean Smith for any closing comments.

Sean Smith, CEO

I just want to thank everyone for listening to today's call. Hopefully, what you heard from Matt, George, and me was that we are very pleased with our Q1 performance. I think across the board, our numbers are very solid. We're all excited about what's coming ahead in the second quarter and beyond and look forward to reporting more on that. If there are follow-up questions, please reach out to us, and we'll answer any questions that may arise in the future. Appreciate your time, everyone.

Operator, Operator