Chord Energy Corporation (NASDAQ:CHRD) Q1 2023 Earnings Call Transcript May 4, 2023

Operator: Good morning, and welcome to the Chord Energy First Quarter 2023 Earnings Results Conference Call. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Michael Lou, Chief Financial Officer. Please go ahead.

Michael Lou: Thank you, Danielle. Good morning, everyone. Today, we are reporting our first quarter 2023 financial and operational results. We’re delighted to have you on our call. I’m joined today by Danny Brown, Chip Rimer, Richard Robuck, 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 others, matters that we have described in our earnings releases as well as in 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 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. With that, I’ll turn the call over to our CEO, Danny Brown.

Daniel Brown: Thanks, Michael. Good morning, everyone, and thanks for joining our call. Last evening, Chord reported our first quarter 2023 results and updated full year outlook. As you know, last year was a pivotal year for the organization as we announced the merger of equals transaction between Whiting and Oasis Petroleum, laid the groundwork for the integration and established how we would operate as a new organization. In 2023, we are focused on operational execution and driving the synergies from the merger. And as you read in our press release last night, we had a strong start to the year. In the first quarter, oil volumes were significantly above expectations due to continued strong well performance and a modest acceleration of activity.

As we discussed last call, January performance was negatively impacted by severe weather in late December. However, the team did a fantastic job restoring production and ramping up our drilling and completions activity quickly. We turned in line 15 wells in the quarter, which was at the upper end of our 11% to 15% range, with about half of those wells being 3-mile laterals. With the additional activity, capital was towards the high end of our range, but overall free cash generation exceeded expectations. Turning to return of capital. For the quarter, we declared a variable dividend of $1.97 per share with a base dividend, which remains unchanged at $1.25 per share. The aggregate variable payment of approximately $82 million is the difference between 75% of the $199 million of adjusted free cash flow generated in the first quarter minus the base dividend of about $52 million, minus $15 million of share repurchases.

As a reminder, the variable dividend is intended to make up any difference between our targeted free cash flow payout in the amount distributed through base dividends and share repurchases. Our capital return program is peer-leading and demonstrates our commitment to capital discipline and shareholder returns. Since we closed the merger last year and underpinned through strong operational performance, Chord has returned a significant amount of capital to shareholders through a mix of dividends and share repurchases. However, as with all aspects of our business, we are constantly seeking to improve. As we reflect on our shareholder return over the past 2 quarters, we recognize that the amount of share repurchases is lighter than we might desire, particularly considering our view on the intrinsic value of our equity when compared to market value.

Accordingly, as we look forward, we will continue to be opportunistic with share repurchases, but intend to be more balanced between dividends and buybacks in the future. Now turning to operations. We continue to be pleased with our underlying well performance, and as can be seen on Slide 10 of our updated investor presentation, our development program continues to deliver above expectations. This is partially attributed to our practice of wider well spacing, which we believe improves per well recoveries and reduces variability of performance across the asset and to our move to more 3-mile laterals. Chord began to bring on its first 3-mile laterals toward the end of 2022, and these are expected to comprise about 50% of the 2023 program. 3-mile laterals will be a key part of the go-forward program and are expected to deliver 50% — 40% to 50% more EUR for about 20% more D&C costs.

Just a quick note on the production profile of these wells. Part of the capital savings reflects similarly sized facilities versus a standard 2-mile pad. The result is 3-mile wells typically have similar IPs to 2-miles, but stay flat longer with shallower declines. Said another way, as 3-mile laterals become a larger share of wedge wells, very early time well production per lateral foot becomes less relevant and longer-dated cumulative production versus capital cost is a more appropriate performance metric. After the first quarter, Chord announced the sale of certain non-core properties outside the Williston Basin from the legacy Whiting Trust assets for proceeds of approximately $35 million. The specific divested assets consisted of multiple packages in various parts of the U.S. with total volumes of approximately 1,100 barrels of oil equivalent per day and oil volumes of roughly 900 barrels per day.

We expect all divestitures to close during the second quarter, and our guidance has been updated to reflect the sales. The divestitures decreased oil volumes by about 600 barrels of oil per day for the full year but Chord expects to replace all 600 barrels of oil per day given strong well performance and a modest acceleration of activity in the first quarter. Said another way, Chord is keeping its February full year oil guidance unchanged at 96,500 barrels of oil per day despite selling these non-core volumes. Gas and NGL volumes and realizations were also adjusted to reflect higher levels of ethane rejection and recent benchmark pricing. Finally, an update on ESG. Chord is still on track to resume publishing a full sustainability report in 2023, which will include robust disclosure on performance through 2022.

Chord continues to work towards improving disclosure and performance for its ESG initiatives. To sum things up, we’re off to a very strong start, and most material integration projects are complete. We’ve created a better company with a strong financial outlook capable of supporting high levels of sustainable free cash flow at prices much lower than current market benchmarks. With that, I’ll turn it over to Michael for some additional updates.

Michael Lou: Thanks, Danny. I’ll highlight a handful of key operating and financial items for the first quarter and discuss our updated 2023 guidance. As Danny mentioned, oil volumes were strong in the first quarter, about 2.3% over midpoint guidance. Total volumes also exceeded expectations with natural gas volumes above guidance and NGLs below. During the first quarter, Chord experienced higher levels of ethane rejection, which lowered NGL volumes, but increased natural gas volumes and realizations. Natural gas realizations also benefited by colder weather in January and February. Importantly, the net impact to revenue was favorable. Combined natural gas and NGL revenue totaled $115.2 million, which exceeded revenue implied by midpoint volume and differential guidance using actual first quarter ’23 benchmark pricing.

Our 2023 guidance has been updated to assume ethane rejection continues through the remainder of the year. Additionally, we lowered our Henry Hub assumption from $3.50 to $2.75 per MMBtu. Bakken crude pricing closely tracked WTI over the quarter and we expect to realize slight premiums to WTI through the remainder of the year. Our 2023 activity remains — schedule remains essentially unchanged from February. Completion activity remains concentrated in May and June and throughout third quarter of ’23 and oil production after adjusting for divestitures is expected to increase sequentially each quarter, with the fourth quarter of ’23 volumes, the highest of the year. Fourth quarter volumes stand to benefit from third quarter TILs as fourth quarter TILs will drop off considerably.

As Danny mentioned earlier, our full year oil production guidance has increased when adjusted for asset sales due to the strong performance of the asset base and the strong performance of our team. Turning to cash costs. LOE and GPT on a per unit basis were slightly above midpoint guidance driven by lower NGL volumes at certain midstream processors began rejecting ethane and left it in the residue stream. Otherwise, the total dollar spent was in line with expectations. We made some adjustments to the outlook to reflect the volume impact of the ethane rejection and of the divestitures. On an aggregate dollar basis, guidance is essentially unchanged for the Williston business. Production taxes were approximately 7.9% of oil and gas revenue, in line with guidance.

We now expect this to increase slightly over the course of 2023, which reflects lower natural gas prices. Said another way, oil is becoming a larger percentage of the revenue mix and is taxed at a higher rate than gas. Chord cash G&A expense was $18.2 million in the first quarter, which was in line with guidance and excludes $2.8 million of merger-related costs. Our 2023 cash G&A guidance remains unchanged at to $73 million. Chord paid no cash taxes during the first quarter and does not expect to make a payment in the second quarter either. In the second half of the year, Chord expects cash taxes to approximate 2% to 10% of second half EBITDA at oil prices between $70 and $90 per barrel. Our full year capital budget guidance remains unchanged at $825 million to $865 million.

As a reminder, we set our 2023 budget assuming year-end ’22 pricing levels holding flat through 2023. While equipment utilizations remain high, pricing has generally plateaued and remains around year-end ’22 levels. All this has led to a great quarter and significant free cash flow of $199 million. This, paired with our return of capital framework, results in another quarter of significant return to shareholders. Turning to liquidity. Chord recently redetermined its borrowing base, which was reduced from $2.75 billion to $2.5 billion due to lower bank commodity pricing assumptions. Elected commitments remained at $1 billion with nothing drawn as of March 31. Cash was approximately $592 million as of March 31 as well. In closing, the Chord team continues to execute well and drive strong returns, which supports our sustainable free cash flow profile as well as our peer-leading return of capital program.

We are incredibly proud to be a safe and responsible low-cost provider of energy, which fuels a better world. We’re also proud of the entire Chord team, which continues to show care for each other and for our communities and the courage to always do what is right. With that, I’ll hand the call over to Danielle for questions.

Q&A Session

Operator: [Operator Instructions]. The first question comes from Phillips Johnston of Capital One.

Operator: The next question comes from Derrick Whitfield of Stifel.

Operator: The next question comes from Scott Hanold of RBC Capital Markets.

Operator: Next question comes from Bertrand Donnes of Truist.

Operator: The next question comes from Oliver Huang of Tudor, Pickering, Holt.

Operator: [Operator Instructions]. The next question comes from John Abbott of Bank of America.

Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Danny Brown, Chief Executive Officer, for closing remarks.

Daniel Brown: All right. Thanks, Danielle. Well, to close out, I just want to thank all of the employees at Chord who through their commitment and dedication have put the company in a great position to succeed and to deliver value for our shareholders through disciplined capital allocation, efficient operations and maintaining a strong balance sheet while remaining committed to responsible operations. Thank you for joining our call.

Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.