Chord Energy Corporation (NASDAQ:CHRD) Q1 2024 Earnings Call Transcript May 8, 2024
Chord Energy Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, ladies and gentlemen, and welcome to the Chord Energy First Quarter 2024 Earnings Call. [Operator Instructions]. 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: Thanks, Tina. 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; Darren 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.
Daniel Brown: 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 standalone outlook, and provide some updates on our pending combination with Enerplus before passing it over to Darren Henke. Darren 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 core team for demonstrating tremendous resiliency during the unusually cold weather that swept through North Dakota in January. While we experienced significant downtime, the core 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 wanted 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, will 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 non-public information associated with the pending combination with Enerplus, we declared a variable dividend of $1.69 per share. Additionally, last night, we had issued second-quarter and full-year guidance which reflects Chord on a standalone 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 plus 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 that time, the teams of both companies have been working to prepare for integration while still working as separate organizations. Upon close, we expect to issue abbreviated combined guidance for the second quarter, which will include one 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 two 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, core shareholder vote is scheduled for May 14, and Enerplus’s 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 a combination of these two 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 life inventory and where Chord expects to enhance returns by combining the best development and operating practices of the two companies.
To put it plainly, we believe that 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 roadmaps 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 standalone 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 efficiently 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 for Chord on a standalone 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: 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 continued 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 provided performance data on 3-mile wells in Painted Woods that were detailed 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 2-mile analogs. This mostly reflects facility constraints and managed flowback, which generally keep volumes in a certain band for the initial productivity period. However, over time, the 3-mile well production per lateral foot catches up with 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 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 TD 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 tills 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 TD 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, Bachan is a world class resource with strong economics. And 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 standalone. 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: Thanks, Darrin. A quick heads up. My comments regarding guidance will not include pro forma impacts of Internet Plus has will be incorporating a combined look post close in the first quarter, core generated adjusted free cash flow of 204 million. Looking at the puts-and-takes strong volumes, lower operating costs largely offset capital costs that were at the high end of the range, while natural gas realizations were below our February for cash projections, our volumes were strong in the first quarter, 2.6% of our midpoint guidance, while total volumes were about 1% above midpoint guidance. First quarter adjusted CapEx of $254 million, excluded 4 million of CapEx, which will be reimbursed in conjunction with sales of non-operated assets, as Danny mentioned, or program has accelerated a bit from what we have 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, $1.71 below WTI. Slide, the favorable the midpoint guidance as we look through the balance of 2020 for the first quarter, oil differential is expected to be wider than the rest of the year, with Balkan pricing expected to improve as the TMX pipeline begins operating for the full year, we expect crude crude realizations to reflect a modest discount to WTI. Ngl realizations as a percent 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 price. Because with gas prices trading at low levels, the fees deducted from our price resulted in lower realizations as a percent of the benchmark price. However, physicians should improve quickly in environments where gas prices rise. We have incorporated the current market conditions into our updated 2020 for guidance. Turning to costs, LOE was $10.39 per BOE in the first quarter was better than our original expectations, given strong volumes and lower workover cost. GPT. was $3.30 per BOE, which was towards the higher end of the range. We slightly adjusted our full year LOENGPT. guidance to account for the first quarter before once 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 really have reiterated our full year guidance. Cord 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 2020 14, we expect to pay 4% to 9% and 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 and projections and other factors.
In closing, I’d like to our team for their hard work and dedication to the company contribution shows up in our strong returns, sustainable free cash flow and peer-leading return of capital. That I’ll hand the call back over to Anna for questions.
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