Earthstone Energy Inc

F:BSC2

Earnings Call Transcript 2022-Q1

[Operator]

Good morning and welcome to Earthstone Energy’s Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. Joining us today from Earthstone are Robert Anderson, President and Chief Executive Officer; Mark Lumpkin, Executive Vice President and Chief Financial Officer; Steve Collins, Executive Vice President and Chief Operating Officer; and Scott Thelander, Vice President of Finance. Mr. Thelander, you may begin.

[Scott Thelander, Vice President, Finance]

Thank you and welcome to our first quarter 2022 conference call. Before we get started, I would like to remind you that today’s call will contain forward-looking statements within the meaning of federal securities laws. Although management believes these statements are based on reasonable expectations, they can give no assurance that they will prove to be correct. These statements are subject to certain material risks, uncertainties and assumptions as described in our annual report on Form 10-K for the year ended December 31, 2021, the first quarter 2022 earnings announcement and in our Form 10-Q for the first quarter that we filed yesterday. These documents can be found in the Investors section of our website, www.earthstoneenergy.com. Should one or more of these risks materialize or should underlying assumptions prove incorrect, actual results may vary materially.

This conference call also includes references to certain non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most directly comparable measure under GAAP are contained in our earnings announcement released issued yesterday. Also, please note information recorded on this call speaks only as of today, May 5, 2022. Therefore, any time-sensitive information may no longer be accurate at the time of any replay listening or transcript reading.

Today’s call will begin with comments from Robert Anderson, our President and CEO; followed by remarks from Steve Collins, our COO; and Mark Lumpkin, our CFO, and then we will have some closing comments from Robert.

I will now turn the call over to Robert.

[Robert Anderson, President and Chief Executive Officer]

Thanks, Scott and good morning everyone. We appreciate you joining us today for our first quarter call. It’s been a busy four months, but we are really pleased to talk about our strong results in the quarter, which reflect our ongoing transformation and significant positive momentum.

With the closing of the Big Horn acquisition after quarter end, we have realized a further step change in scale and efficiency. As a quick reminder, in 2022, we have closed on about $1.5 billion worth of asset acquisitions. We completed a high-yield notes offering for $550 million, and we raised $280 million in new equity. All of this activity, along with the 2021 acquisitions has created a more resilient and sustainable business with a much larger production and cash flow base and deeper high-quality drilling inventory with continued balance sheet strength. It’s amazing just how significant of a transformation we’ve undergone over the last 16 months. However, we are focused on the future and we believe there are numerous opportunities to continue driving significant value from our asset base.

We are focused on optimizing the development of our high-quality asset base while managing costs and reducing absolute debt. Our confidence is high that over the next several quarters, we will be able to drive value through improving capital and operational efficiencies. As we have done with all of our acquisitions, we will focus on reducing costs on these recently acquired assets where we can, even with the inflationary pressures. With the BigHorn asset literally next door to our existing assets, we see some operating synergies with personnel and systems that will help us improve our operating procedures, reduce downtime on wells and maximize margins. Our free cash flow is strong. The initial well results on our newly acquired Delaware Basin assets are meeting or exceeding expectations and our expanded operations are going smooth. Looking forward, I feel that we’re well positioned to execute on our operational plans and generate even more substantial free cash flow.

The Bighorn assets are generating large amounts of free cash, particularly given these high commodity prices. In fact, during the interim period between the effective date of January 1 and closing on April 14, the Bighorn assets generated such significant free cash flow that after preliminary purchase price adjustments, the consideration for the acquisition was reduced by about $145 million. We have been very pleased with our integration efforts so far. We believe that one of the most integral parts of integration is execution. We have integrated the accounting, land and financial reporting for the Chisholm acquisition in the Delaware Basin already and we are well along the way of doing the same for BigHorn. Continuity and consistency are key to operational efficiency.

As Steve will discuss further, we have identified a couple of areas to potentially reduce drilling days on the Delaware Basin assets. We are making sure we have the right people in the field, and we’ve been pleased with the smooth transition because of the personnel that have joined us. We have also added to our office staff by hiring across all disciplines, including experienced technical staff from both of the companies we acquired assets, which will allow us to keep that operational continuity, and we’ve been able to attract talented employees from the industry.

We are now approaching three months since closing on the Delaware Basin acquisition, and we’re pleased to share with you some of our early successes. Steve will highlight some of the drilling side. But on the completion side, we completed our first pad in the Delaware Basin since closing in February and brought on the 2-well minus pad targeting the third Bone Spring Harkey sand in April. These two wells, which are about 7,500 foot laterals located in Lea County, New Mexico has shown strong early production results, averaging about 1,600 BOE per day per well with about 87% oil cut over the first 24 days of production. With the current strong commodity prices, we estimate that these wells will reach payout approximately four months from first production date. After bringing on the minus pad, we brought on a second 2-well pad in Lea County targeting the Third Bone Spring, which are now flowing back. And while early, we are very pleased with the initial results, which further supports our view of the high-quality inventory we expected as we pursued this Delaware Basin acquisition.

Our capital spending for the quarter was about 16% below the midpoint of our guidance, but we do expect to see significant impacts from inflation going forward, and we are maintaining our guidance for the full year between $410 million and $440 million, and you’ll hear more about that. Our near-term focus continues to be on integrating these new assets and executing on our drilling plans. As free cash flow is generated, our plan for the remainder of the year is to pay down debt, but as you would expect, we’ll remain open to potential acquisition opportunities that could provide us with additional scale and high-quality production and inventory while still giving us the ability to maintain the strength of our balance sheet. And finally, after we get a few quarters of operating the larger business behind us, we expect to be in a better position to consider shareholder returns in 2023, but we do not expect to initiate any plans in 2022.

And with that, I’ll turn it over to Steve.

[Steve Collins]

Thanks, Robert. Good morning, everyone. We continue to operate 2 drilling rigs in the Midland Basin and two drilling rigs in the Northern Delaware Basin. Our first quarter average daily production was just over 35,500 BOE per day, which is up 17% from the fourth quarter of 2021. We have seen strong initial production results from the first two wells completed and brought online in the Delaware Basin since closing the Chisholm acquisition in February. We are optimistic that we will be able to improve capital efficiency on the Delaware Basin assets over time.

As Robert mentioned, we have identified an area or two on the drilling side related to presetting surface casing that we are working to incorporate that will allow us to reduce days drilling in many circumstances. We also recently completed six wells – in Upton County on our Benedum pad that have an average lateral length of 7,600 feet and were drilled and completed for a cost of approximately $800 a foot. While these wells are still cleaning up, early results are in line with our type curve with initial average daily production per well of 900 BOE per day, approximately 88% oil.

Let me provide an update on the operational integration of the assets acquired this year. With respect to the Delaware Basin assets, which closed in February, operation of the new assets is running smoothly. This is in part due to bringing on field personnel that were previously operating the assets and for the most part, executing their existing plans. As Robert mentioned, we also hired additional technical staff that are focused on production, completions and drilling engineering, geology and land exclusively for the Delaware Basin asset.

Despite having only closed on the BigHorn assets about 3 weeks ago, I can say that things are going as expected, and we do not foresee any material changes to the integration of the operation of these assets as we have retained a large majority of the field staff that have been operating these assets. Combining this with Earthstone’s approach to operating nearby assets, we expect to be able to implement some improvements over time to maximize production and minimize costs. With an active drilling and completion program in both areas, we find ourselves shedding wells in and working over wells before and after fracs in areas with existing production.

Although this frac prep work increases production downtime and workover expense, it is accounted for in our guidance. With respect to the Bighorn assets, we see some additional workover opportunities, which should enable us to reduce long-term operating expense, potentially reduce production downtime and increased production. This activity is under review with economics and operating efficiency driving these decisions. Our capital program calls for a continuation of our 4-rig program with two rigs operating in the Midland Basin and two in the Delaware Basin. Currently, we have the Midland Basin rigs in Reagan County and Irion County, while the 2 Delaware Basin rigs are in Lee County and Eddy County. We are completing wells in Reagan and Irion County as well.

As you can see by the first quarter capital expenditures being below guidance, the inflation pressure was not that impactful in the first quarter. However, we fully expect that over the course of the year, service costs will continue to rise. We have locked in casing deliveries for the next couple of quarters, and sand is also committed throughout the year for our two areas with a fixed price contract on the Midland volume.

Recapping costs, we completed a 10,000-foot lateral pad in December at $680 a foot. And as Robert pointed out, we just completed a 7,600-foot lateral pad at $800 per foot. Although hard to normalize due to the lateral length differences, you can see that the shorter laterals are less efficient, and we are beginning to see the influences of cost pressures. We are focused on efficiencies in order to drive down days on location, both drilling and completion activities. Now with a much larger production base, we expect to obtain some cost savings and lease operating expenses as well. Having a much larger operation will allow for greater purchasing power on everything from vehicles to chemicals and compression.

With that, I’ll turn it over to Mark.

[Mark Lumpkin]

Thank you, Steve and good morning everyone. As usual, I’m going to take this time to provide some additional details on some meaningful metrics and several key highlights. As you know, you can find a detailed breakdown of our results in our earnings release and in our 10-Q. I would also say you can find the additional information on our recent debt and equity financings and our April 14 press release. While we’ve had a lot going on since the beginning of the year related to our balance sheet.

So I will start with an update as of quarter end and then I will give you a more current update as well. As of March 31, 2022, we had a borrowing base on our revolving credit facility of $825 million. With borrowings of $624 million at quarter end, we had approximately $201 million undrawn capacity on our revolver. In April, we completed a $550 million notes offering and a 200-mile pipe offering, and we used these proceeds in part to close on the Bighorn acquisition in mid-April, and also to pay the $70 million of deferred cash consideration from the Chisholm acquisition, which closed earlier in the year. Also in conjunction with the closing of Big Horn in mid-April, the bar based on our credit facility was increased from the $825 million level at quarter end to $1.325 billion in conjunction with the closing of Bighorn and we elected to reduce the commitments on the revolver from the $825 million at quarter end, down to $800 million.

So beginning with our quarter-end debt and cash balance, but adjusting for all this activity in April, here’s what it would have looked like on that basis. We would have had total outstanding debt of approximately $1.013 billion, which would have been comprised of $550 million of senior unsecured notes and $463 million of debt outstanding under our credit facility, leaving $337 million of undrawn availability on the $800 million of total commitments on the credit facility. Given all the recent activity, I think it’s also important to break down our outstanding share count.

As you will see in our 10-Q, we had approximately 113.4 million total common shares outstanding as of April 28, which includes both our Class A common and Class B common shares. This does not include the impact of the expected conversion of the $280 million of convertible preferred equity that was issued in the pipe in April. Upon the expected conversion of these shares into Class A common stock, our total common share count will increase by 25.2 million shares grant our total outstanding common share count to $138.6 million.

Now going back to the results for the quarter, our first quarter EBITDAX of $123 million was a 44% increase quarter-over-quarter, which was largely attributable to the incremental production from about half the quarter of the Delaware Basin assets and also from higher commodity prices. We also generated $36 million of free cash flow in the first quarter, which marks our eighth consecutive quarter of positive free cash flow. With the first quarter only including Delaware Basin assets for about half the quarter and not including the Bitcoin assets at all, we are excited about realizing much higher production and cash flow in the second quarter than what we saw in the first quarter, which will include the Delaware Basin asset for the full quarter and the Bighorn assets for about 83% of the quarter. We expect to have very significant amounts of free cash flow for the balance of 2022, which is earmarked for repayment of debt under our credit facility. From a leverage standpoint, we’re really in a better position today than where we expected to be in early January when we announced the Bighorn acquisition.

The combination of a significantly larger downward adjustment in the purchase price of the Bighorn acquisition, as Robert mentioned, and then just generally higher EBITDAX levels in the first quarter and expected going forward, really have improved our position and outlook. As you might recall, we originally were targeting getting down to 1.0x debt-to-EBITDAX by the end of the year on an annualized fourth quarter basis. And if you look at what we did in the first quarter, and of course, this is before Bighorn closed and has the result of Chisholm Shisai, we are actually right around 1.0x debt to EBITDAX in the first quarter. When you take our quarter end balances on the debt side, plus Earthstone’s EBITDAX for the quarter and just to add the Chisholm EBITDAX from the period for the first part of the quarter before we own the assets.

So that really puts us in a much better position than we anticipated. And from this 1.0x leverage that we are at on the first quarter adjusted on that basis, we expect to continue to tick down lower throughout the year and finish the year well below the 1.0x debt to EBITDAX on a fourth quarter annualized basis. Looking at the first quarter relative to our guidance, we were largely around the middle of our guidance for all guided metrics, except for CapEx, which as already mentioned, was about 6% below the midpoint of our guidance. From a production standpoint, we produced an average of 35,500 BOE per day in the first quarter, and that was comprised of 44% oil, 29% natural gas and 26% natural gas liquids.

To reiterate what we mentioned last quarter, we expect to produce approximately 70,000 to 74,000 BOE per day with about a 41% oil component in the second quarter, which again, factors in a full quarter of the Delaware Basin assets we acquired in February and about 75 days of the Bighorn assets, which we acquired in mid-April. Further, for the second half of the year, we expect production to be somewhere between 76,000 and 80,000 BOE per day, with the oil component again being about 41%. And this, of course, includes the full contribution from both the Delaware Basin assets and from the Bighorn assets. So on a full year basis, no changes to our guidance on production, but to build up results in production somewhere between 64,250 and 67,750 BOE per day, and it comprises about 41% oil, 33% natural gas and 26% natural gas liquids. Total cash G&A for the first quarter came in right about where we expected and was at $6.5 million compared to $6.3 million in the fourth quarter.

Of course, we added more volumes in the second – in the first quarter compared to the fourth quarter of last year. So on a per BOE basis, our cash G&A went down by about $0.22 per BOE quarter-over-quarter from $2.25 in the fourth quarter to $2.03 in the first quarter. And we still expect full year 2022 cash G&A to be between the $31 million and $34 million range we put out earlier this year. And that would be about $135 per BOE based on the midpoints of both our production and G&A guidance.

Moving over to LOE. In the first quarter, we recorded LOE per BOE of $6.77. As we guided last quarter, we expect LOE per BOE to be elevated compared to the Earthstone LOE per BOE prior to closing on these two acquisitions. And we’re maintaining our full year guidance for LOE of $7.25 to $7.75. We are monitoring both inflationary pressures and potential need for some higher workover activity on the recently acquired assets. But at the same time, we’re hopeful that some of the operational synergies we think we can achieve will offset that a bit. And we’re excited about that as we’ve now just gotten our hands on both sets of assets here in the past 30 to 90 days, respectively.

Turning over to the capital expenditure side. We did spend $82 million in the first quarter, which was about 16% below the midpoint of our guidance of $95 million to $100 million. And this was largely driven by the impact of the timing of inflation – and really what happened is we – there was less realized inflation in the first quarter than what we expect to see going forward. And I would say in hindsight, we probably baked in too much inflationary cushion in the first quarter. At the same time, we do absolutely expect to see more significant impacts from the second quarter going forward.

On that basis, we are maintaining our guidance of $410 million to $400 million for the full year. And I would say that we’d probably lean towards the high end of that. Obviously, none of us can perfectly predict how inflation plays out for the end of the year, but we’re certainly expecting more pressure throughout the year. On the hedging front, we are not really all that different from where we were when we reported our 2021 results in March, which is right about 55% to 60% hedged for the remainder of the year with the mix of swaps and collars.

With that, I will turn it back over to Robert for closing comments.

[Robert Anderson, President and Chief Executive Officer]

Thanks, Mark. Today’s higher commodity prices, combined with our acquisition of accretive and well-located assets that generate meaningfully high cash margin production has significantly strengthened our free cash flow profile. As we look ahead to the rest of 2022 and as you have heard from us, we remain focused on continuing to integrate these assets, executing our operating plans and generating high levels of free cash flow, which we expect to use to pay down debt. As Mark mentioned, we believe we’re on track to significantly reduce our credit facility debt balances by the end of the year and stay well below our onetime debt-to-EBITDAX target. Strong cash flow and a strong balance sheet helps to support our more robust drilling program compared to the past as we focus on demonstrating our ability to optimize our larger asset base. And we are very optimistic that this will be a record-setting year for Earthstone.

Over the last 1.5 years, we’ve acquired a complementary mix of assets that have dramatically increased current production as well as provided exciting new drilling opportunities. We have both enhanced our acreage position adjacent to our legacy assets in the Midland Basin as well as expanded into the Delaware Basin. We feel really well positioned to execute a successful drilling program as we have demonstrated recently, and we believe that our high-quality asset base, exceptional operations team and consistent track record of operational excellence will allow us to optimize our future free cash flow generation.

Now with that, operator, we will be glad to take a few questions.

[Operator]

Thank you. [Operator Instructions] Your first question comes from Charles Meade with Johnson Rice. Please proceed with your question.

[Austin Aucoin, Johnson Rice]

Hi, good morning, Robert and team. This is Austin filling in for Charles.

[Robert Anderson, President and Chief Executive Officer]

Hey, good morning, Austin.

[Austin Aucoin, Johnson Rice]

Now that Chisholm and Bighorn acquisitions are complete, is there so still in the A&D market? Or is 2022 more of a year of execution and debt reduction? And as a follow-up, how is the current state of the A&D market?

[Robert Anderson, President and Chief Executive Officer]

I don’t think they are mutually exclusive. I think we, as a team, both management and staff can continue to look for opportunities that make sense. We can be a little bit more picky on what we’re looking for, perhaps. And at the same time, we are, as you’ve heard, very focused on executing on our plans for this year. So we will continue to look at opportunities in the market. There is a pipeline full of opportunities as you could guess at $100 oil. There is lots of people lining up to sell. It’s just – is there going to be a bid-ask spread between where the buyers and what kind of price deck they want to use versus what the sellers want to get paid at. So I think that’s what’s going to impact the A&D market this year or at least in the near-term.

[Austin Aucoin, Johnson Rice]

Thank you for the color. And I understand that in the near-term, you plan to run a two-rig program in the Delaware. But after a couple of quarters of execution, could we see an additional rig in the 2023 program?

[Robert Anderson, President and Chief Executive Officer]

Yes. We’re doing a lot of planning right now. And as you’re aware, it does take a lot of preplanning more so in the Delaware where you have federal acreage and you need to have long lead time for permitting. But we’re going through that exercise now to try and figure out what we could do if it makes sense to increase our activities on the New Mexico side. And the economics being strong, like we see right now, we’d love to have more activity out there. But we’re going to walk before we run and make sure that Steve and our guys are executing as well as we can before we decide we’re going to jump into another rig out there.

[Austin Aucoin, Johnson Rice]

I appreciate it. That’s all for me.

[Operator]

Your next question comes from John White with ROTH Capital. Please proceed with your question.

[John White, ROTH Capital]

Good morning, guys and many congratulations on all that you’ve gotten done over the past 12 months.

[Robert Anderson, President and Chief Executive Officer]

Thanks, John.

[John White, ROTH Capital]

So again, on the Delaware, your first couple of wells look really good, and you provided us with some additional color on the payback, but it is a new basin and it’s New Mexico, not Texas. Are you seeing anything or experiencing anything now that it’s your property that maybe you didn’t anticipate before you closed on it?

[Robert Anderson, President and Chief Executive Officer]

Not really. I mean there is always a few surprises, both positive and negative. There is some low-hanging fruit that I think the operations team will be able to create some good efficiencies and improve the cost structure. I mean it’s tough in an inflationary environment, but at the same time, I think there is some things we can do both on the production and the drilling side. And then it’s just a matter of getting your arms around what the prior operator was doing and what we need to change and dealing with the local situation, which is federal permitting and new landowners and different purchasers and things like that. So there is nothing that surprised us negatively. It’s just – we’ve just got to continue to execute and find ways to drive down the cost structure if we can.

[John White, ROTH Capital]

Okay, well, I am sure you execute very well. That’s what you guys did. So, thanks for that additional detail and I will pass it on.

[Operator]

Your next question comes from Subash Chandra with Benchmark. Please proceed with your question.

[Subash Chandra, Benchmark]

Hi, thanks. So it looks like you’re layering in hedges there in Waha basis hedges and thinking about how ‘22 and then probably more so ‘23 progresses. How do you think about additional opportunities to protect your flow assurance out there and your netbacks and what the market might look like at the moment?

[Mark Lumpkin]

Yes, Subash, it’s Mark here. I’ll try to address that one. From the standpoint of the financial hedges, we actually put all of those Waha hedges in ‘23 and ‘24 on the week or 2 after we announced Bighorn. And we have sort of seen that coming. I would have loved to have announced Bighorn two weeks prior and been able to put those hedges on 2 weeks before because they did really start moving upward in terms of the swap rates and futures contracts on the Waha kind of in mid to late January. That’s sort of the financial piece of it, and that’s sort of roughly half of our gas hedged based on kind of what this year looks like. That gives us some financial protection.

From the standpoint of flow assurance, we’re very focused on that. We’ve never, as I think you know, really been one to go buy a bunch of firm transport. For us, we are exploring that. And I think we mentioned that in March and continue to explore that. But we’re also coordinating with our main gas processors. At the end of the day, we’re going to do everything we can within reason to make sure we have flow assurance. And there is multiple different ways to sort of tackle that. And I assure you, we’re focused on that. And we don’t have all the solutions right this moment, but we are working on that and feel good about the ability to do that.

[Subash Chandra, Benchmark]

Yes. Also, Mark, I guess, put another way, are there opportunities and – or did you take opportunities to further hedge the basis there?

[Mark Lumpkin]

No. All the Waha hedges we have in place in ‘23 and ‘24 were put in I mean, definitely in February, maybe some even in late January, and we’ve not added to that since then.

[Subash Chandra, Benchmark]

Yes. So curious sort of why not have they become unfavorable? Or do you feel pretty comfortable at this point?

[Mark Lumpkin]

Sort of it – I guess our philosophy on hedging would it be great to completely take that risk out Yes. And we obviously felt there was more risk there than we did on underlying Henry Hub or WTI because we hedge more basis there. I mean, we’re trying to get a chuck of it covered, not completely get it done. And I’m not saying we might not add more hedges. I’d say, generally speaking, the hedges we put in place on the Waha look pretty good in the money for ‘23 and maybe a little out of the money in ‘24, and that’s just a function of how the markets responded as we’ve heard about different pipes, adding compression or in a case or two, working on plans to potentially build a new pipe. We’re monitoring that if not daily, weekly. And it’s something that we want to be relatively well protected, but we’re also not going to go hedge 100% of it.

[Subash Chandra, Benchmark]

Okay. Got it. And then on the Delaware results, could you sort of put that in context of what may be prior results have been in that particular interval?

[Robert Anderson, President and Chief Executive Officer]

Subash, this is Robert. This is the first time that either Chisholm or us completed Harken wells. So it’s not a new interval. Other operators are completing them, and we’re really pleased with the results and they are probably a little ahead of our type curve. But it’s something we identified and along with the Chisholm team that we should go tackle these two wells in the zone.

[Subash Chandra, Benchmark]

Okay. Got it. Okay. And then finally, could you just kind of review sort of the lockup status of lockups out there? And if there is any sort of imminent lockups that expire?

[Robert Anderson, President and Chief Executive Officer]

The Chisholm acquisitions group is still locked up, except small shareholders like management – some of the management folks who got shares. And that will expire generally in June. The Bighorn shares are locked up, I think for 60 days and then 120 days, I am going off memory. So, we have got a couple of months in the first round and then a couple more months after that before the other remaining shares come out of the lockup.

[Mark Lumpkin]

But to add to that, Subash, those shares aren’t registered yet. So, even the shares that are out of lockup on Chisholm aren’t trading yet until the registration statement gets filed and gets effective in and they are not locked up, they practically can’t sell them.

[Subash Chandra, Benchmark]

Got it. Okay. Thanks guys.

[Operator]

Your next question comes from Jeffrey Campbell with Alliance Global Partners. Please proceed with your question.

[Jeffrey Campbell, Alliance Global Partners]

Thank you. First, I believe your high-yield debt is not callable for 2 years. So, I just thought I would ask and you talked about reducing the revolver debt. Just longer term, what’s your plan regarding balancing higher coupon unsecured debt versus lower coupon secured debt in the credit facility?

[Mark Lumpkin]

Maybe let me hit the first part of that, and Robert might kind of add on the longer term. One, obviously, today is a static point in time just like April 14th was when we closed on Bighorn and did the pipe of the bond. I mean it looks like we are going to pay down the large majority of what’s on the revolver balance by year-end if we do nothing else this year. And really, like you are probably looking at sort of the static case over running four rigs over the course of this year and four or maybe five next year. And there is a bunch of free cash flow, and we should get to a point where we are building cash because to your point, the high-end bonds are callable for at least a couple of years. We think that having a chunk of the high yield in place takes away some of the risk of sort of bank capacity being reduced over time. And that was one of the big drivers of doing the bond in the first place, so we would have a mix of termed out fixed rate debt versus the revolving floating rate debt that can change in capacity. And honestly, from a go-forward basis, setting aside what do we do with the cash if we start building cash. We think we are in a really good spot as we look at acquisitions to be able to more easily finance acquisitions. So, that’s a positive for us. And part of what gives us that ability is the fact that we just don’t have that much drawn on the revolver relative to what the borrowing base or even the electric commitments are. Robert, do you want to pick up on maybe more strategic uses of cash?

[Robert Anderson, President and Chief Executive Officer]

Yes. I think Mark hit it right. I mean our focus is going to be paying down the debt and then after the revolvers paid off, what do we do with that cash and definitely look for more opportunities to spend that cash through acquisitions. Maybe we increase our capital plan a little bit next year, but it’s still going to be significant free cash flow. But first quarter would be to try and find more opportunities to grow our business. And then we will see what happens towards the end of this year and other opportunities and consider some kind of shareholder return program in 2023.

[Jeffrey Campbell, Alliance Global Partners]

Okay. Great. That was good color. I appreciate it. I thought it was interesting to see drilling in Eddy County. This occurred maybe I was mistaken, but it occurred earlier than I would have expected. So, I just wondered, could you add some color on your activities there and perhaps how the assets there or the select assets that are competing with places like Tracker and Reagan County and other parts of your portfolio?

[Robert Anderson, President and Chief Executive Officer]

Yes. Good question and good observation. We are drilling a couple of wells now on our bigger block in Eddy County. We have got a couple of other wells planned for later in the year. And we will probably stay on track just because of the difficulty of changing your plans midstream when you have got Federal permit timelines you have got to deal with. So, they are good economics, and we wanted to go test out our ability to go execute on those areas. Some historical wells had been under-completed, we will call it, lower intensity fracs. We have got the infrastructure there. So, that cost is sort of already embedded in it. So, we are going to go test this out, see what kind of results we get. Maybe we come back with a more fulsome program next year, who knows. It does make a little bit more gas in certain areas in Eddy County. So, that’s good, while gas prices are $7 or $8. Similar to Irion County, we like the economics there. It’s a little cheaper drilling both in Irion and Eddy. They are similar compared to other places in their two respective basins where they are a little bit cheaper. And it drives some economics that are favorable. So, with gas prices where they are, we are on track with our five-well pad in Irion County. Hopefully, we can get those on quickly, and we will see what kind of results we get before we decide whether we are going to expand our program in either of those two places.

[Jeffrey Campbell, Alliance Global Partners]

Okay. And then my last question, regarding additional acquisitions, would more exposure to Delaware Basin be a priority due to the additional personnel that you have hired and the improving operations that you are seeing?

[Robert Anderson, President and Chief Executive Officer]

We are definitely focused at looking at deals in the Delaware Basin. But we are also still looking at stuff in the Midland Basin. So, some of it is driven by opportunities and seller/buyer either agreeing on a price deck to use or a disagreement and you are too far apart, and you are not going to get a deal done. So, it’s opportunity driven in both places. And we definitely want to increase our footprint on the New Mexico side. And that’s why we have increased our team. So, I am not going to rule out either one of them, though.

[Jeffrey Campbell, Alliance Global Partners]

Okay. That’s fair. Thanks very much. I appreciate it.

[Operator]

Your next question comes from Neal Dingmann with Truist. Please proceed with your question.

[Neal Dingmann, Truist]

Hi. Good morning guys. Thanks for the details. Robert, for you or Mark, my question is on shareholder return. Yours is a little unique given you look forward and one, you have got a kind of free cash flow coming. Two, your shares, at least based on our estimates, look to be a notable discount to most of your peers out there, especially some of a bit larger ones. And then three, though, we obviously have a unique situation when it comes to float and with the lockup that was mentioning. So, given all those things that are coming, how do you all think about that, because I guess where I am going with that is, is it just purely – I don’t think there is a need at this point to do deals. So, I don’t think investors want that. So, I am just wondering – and your debt is going to be at a fantastic level very soon. So, if you take those two things off, is it truly looking at shareholder return if it makes sense and where the value of those are versus where you are seeing deals, or – and then if so, on that shareholder return, you would just work with those larger investors, or I am just wondering how you think about that because, again, you guys are in a bit of a unique situation there?

[Robert Anderson, President and Chief Executive Officer]

Yes. And again, Neal, I don’t think there are exclusive decisions. I think you could have a shareholder return plan as well as continuing to look at M&A opportunities. And there is ways as long as you have things that are flexible in your return program, there is ways to do both. And until we get a couple of quarters behind us and sit down towards the end of the year and kind of see what the future looks like. We are not – we are going to be flexible in the way we think about it. You hit it, I mean we have increased our float tremendously over the last year, and we love that. That was our goal for the past several years, and it’s helped by selling or buying deals where some of the selling parties either were locked up or weren’t locked up and they sold some shares and helped to create some additional flow, and we hope to continue that in the future as well. So, there is a lot on the table and there is nothing that we have made any decisions on just yet.

[Neal Dingmann, Truist]

Okay. And I guess what I am looking at is knowing that, I mean obviously, they are not exclusive, but if looking at your share value, your shares are trading at, I don’t pick a number, PV-10, PV-15 and you see deals out there that are, whatever, PV-8 to PV-10, wouldn’t it make sense just to strictly focus on share returns versus further deals if your shares are certainly cheaper than what deals up in the market are?

[Robert Anderson, President and Chief Executive Officer]

Yes. I mean I get that, but we are also trying to continue the scale building process, right. And maybe as we continue to get bigger, the multiple expands, if you look at it from a different aspect and the multiple expands and we gain that. So, maybe we have to take a step backwards to be able to take two steps forward. We have done that in the past 16 months. We could argue all along in the first deal we did at $4 to the selling group was quite dilutive when you think about $14 stock today. So, I don’t really worry about that. Let us see what the opportunity is. Let’s see it how it fits into our development growth and then we will figure out whether that makes sense or not.

[Neal Dingmann, Truist]

No, great point. I should do that to the multiple, certainly. And then just lastly on OFS inflation and logistics, I am wondering, does assume that we are seeing that you are having much issues or you are not any more than anybody else. I am just wondering, is that largely due is the new increased scale and size? Is that helping kind of on a go forward? And then how do you get comfort that going forward with the rigs that you are running now, the frac crews that you are running, you continue to have adequate amount of casing tubulars, etcetera.

[Robert Anderson, President and Chief Executive Officer]

Well, some of it’s been pre-bought, we will call it, like we have ordered pipe for the next six months or thereabouts. And we have worked with vendors for a really long time. And that relationship building process Steve has developed over years, not just in the last 3 years. And it’s – these vendors have been very supportive of our growth, and we have been supportive of their growth needs. And together, we are trying to make this work. And there are a lot of problems. I mean I heard a whole slew of them from Steve this morning. But we have been able to navigate around those and we have got great relationships with our vendors, and that does create a difference when the vendors want to come work for us.

[Neal Dingmann, Truist]

Great. Nice job. Thank you.

[Operator]

Your next question comes from Jeff Robertson with Water Tower Research. Please proceed with your question.

[Jeff Robertson, Water Tower Research]

Thanks. Good morning. Robert or Steve, can you talk about the permit situation in the Delaware Basin? If I recall correctly, you had a couple of years worth of permits to support the two-rig program when you acquired Chisholm. I am just wondering now that you have owned the assets for a couple of months, where you are as far as stretching that inventory out? And how long does it take to get a permit right now?

[Robert Anderson, President and Chief Executive Officer]

Do you want to answer it?

[Steve Collins]

Well, I think we are still in the 10 months to a year to get a permit. I think we are well positioned with our permits to keep the two-rig program moving along. But somebody asked the question earlier about surprises in operating. And we really haven’t seen a lot of surprises in operating when it comes to drilling and completing a well, but the planning side is a challenge. So, if we change that plan, and we are looking at that for next year, we have got to ramp up our permitting schedule a little bit. But it’s not going to keep us from doing what we want to do.

[Jeff Robertson, Water Tower Research]

Robert, on a high level around corporate strategy, the Bighorn assets bring a lot of free cash flow. Chisholm assets bring a lot of inventory in the Delaware Basin. So, I think you all talk about having roughly a 13-year inventory at your current rig pace. But with the amount of deleveraging you can do and your free cash flow outlook for 2023, how do you think about the asset base and acquisitions as far as one to that cash flow like Bighorn, or do you said you can generate a lot of cash flow? Do you need ones with more inventory to develop and maybe be able to expand the drilling program like the Chisholm assets provide?

[Robert Anderson, President and Chief Executive Officer]

Yes. I think we like things that – or opportunities that provide both of that, some good strong cash flow but inventory. And if you can find them in two different deals and you kind of do them about the same time or close to it like we did with Chisholm and Bighorn, that’s a double win or whatever you want to call it, a home run. And we continue to look for opportunities. We are not going to be as focused on a pure PDP deal unless there is some bolt-on reason to do it, right. It’s sitting right next door, and we know we can operate it for half of what the existing operator has it for. And we can see some large upside there. But our ability to be a little bit pickier on what we spend our time on is aided by the size of the business we have today. So, hopefully, that gets you your answer.

[Jeff Robertson, Water Tower Research]

That’s helpful. Thank you.

[Operator]

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Mr. Robert Anderson for closing remarks.

[Robert Anderson, President and Chief Executive Officer]

Thanks everybody. We appreciate your time. I know it’s a busy day, but we will talk to you next quarter. And if you – in the interim, if you have questions, you know how to get a hold of us. Thanks a lot.

[Operator]

This concludes today’s conference. You may disconnect your lines at this time. Thank you all for your participation.