Chord Energy Corp

NASDAQ:CHRD

Earnings Call Transcript 2022-Q1

[Operator]

Good day, and welcome to the Oasis Petroleum First Quarter 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, sir.

[Michael Lou, executive]

Thank you, Matt. Good morning, everyone. Today, we are reporting our first quarter 2022 financial and operational results. [Audio Gap] have you on our call. I'm joined today by Danny Brown and Taylor Reid as well as members of the team.

Please be advised that our remarks, including the answers to your 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 also find on our website.

With that, I'll turn the call over to Danny.

[Daniel Brown, executive]

Good morning, everyone, and thanks for joining our call. Today, we'll discuss our first quarter 2022 operating and financial results and give an update on our pending merger with Whiting Petroleum. But first, I'd like to take a moment to address and acknowledge our employees and also those of Whiting for their hard work and dedication. I've had the opportunity to visit with many of you over the course of the past 2 months and have been impressed across the board. We've got 2 strong organizations with talented people that will be stronger together. All the employees for both companies should be proud of their organization and accomplishments, which have made this merger possible. Your efforts are very much appreciated and have put the future combined company in an excellent position for continued success moving forward.

With that, turning back to the quarter. I'm pleased to report that the first quarter exhibited strong operational performance from both a volume and cost perspective. Volumes exceeded the high end of guidance by around 3%, reflecting good uptime as we've lowered the number of wells offline and strong performance from a group of Indian Hills wells that were brought online late last year. Simultaneously, price differentials were strong and most costs trended better than we modeled on both an absolute and per unit basis. As a result, we generated approximately $222 million of organic free cash flow over the first quarter. From a development standpoint, we completed 2 wells at the tail end of the first quarter, with 7 additional wells completed and expected to be cleaned out shortly.

These wells were in the South Nesson area between Wild Basin and South Antelope, and early performance is encouraging. As expected, our completion crew has departed, but is scheduled to return in June and work through the year-end to complete the remainder of our program, which is about 30 additional wells.

Turning our attention to the second quarter. I want to spend a moment discussing the severe winter storms, which have affected so many in North Dakota in mid- to late April. This truly was an extraordinary event. And unfortunately, along with the heavy snow and winds came significant damage to power infrastructure, which has hampered the recovery effort. As a result, we are adjusting our second quarter guidance to reflect this impact. but are not adjusting the full year as we believe our previous guidance appropriately reflects our expectations on a standalone basis. We're still in the process of bringing production back online and currently have about 65% of pre-storm volumes back up with the remainder of volumes expected to be online by the end of the month.

Again, our second half 2022 outlook is essentially unchanged from February. And excluding the impact of the storm, we have generally been trending at or better than planned. As we look forward, service pricing and availability do remain challenged. Fortunately, Oasis has been running a steady 2-rig program and proactively worked with our providers to secure equipment and consumables required to execute our plan. As a reminder, Oasis budgeted for 15% inflation from the first quarter to the fourth quarter of 2022.

Frankly, at the time, we believed this was likely a conservative estimate, but as you heard from other E&Ps, inflation is pervasive across most items putting upward pressure on budgets and pricing. Based on our current outlook, we are still confident in our full year capital guidance on a standalone basis, while recognizing subsequent quarters, we'll see increased capital spending due to our development plan being weighted toward the second half of the year. I look forward to discussing combined Oasis and Whiting guidance after the deal closes.

And speaking of Oasis and Whiting, work on the pending merger is going as expected, and we remain excited at the strategic, operational and financial benefits of the merger. We believe the combination will result in a company with enhanced scale, better operating efficiency and significant financial strength, which will deliver value across commodity cycles. Over the past couple of months, we've been on the road meeting with many of our shareholders and we're very appreciative of the support we've heard.

We're confident the combined company is stronger than either standalone entity and will deliver superior long-term value for our shareholders. As many of you are aware, the HSR waiting period ended April 18, and the S-4 was filed on April 28. Once the S-4 is effective, the companies will mail proxies and set dates for special meetings to approve the transaction. We currently expect to close sometime in the third quarter and look forward to announcing our new company name and ticker at that time.

In summary, it was a great quarter. I'm very pleased with our operating results and the progress we've made on transforming our organization. We remain committed to our core strategy, which revolves around return on and of capital, balance sheet strength and being a sustainable operator. In short, we strive to be responsible stewards and strong capital allocators through the cycle. I'll now turn it over to Michael for some financial updates.

[Michael Lou, executive]

Thanks, Danny. As Danny mentioned, we're expecting to close the merger with Whiting sometime in the third quarter. We're providing guidance for the second quarter of '22 for Oasis on a standalone basis, which reflects the impact of the winter storms. As a reminder, we do plan to move to 3-stream reporting for the combined company upon closing to make our operational and financial metrics more comparable to peers. The team at Oasis continues to do a great job managing LOE and minimizing downtime. E&P LOE averaged $10.07 per BOE in the first quarter, below the low end of our guidance. We expect per unit LOE to increase a bit over the course of the year as workover expenses pick up. Second quarter LOE will be a little above normal levels as we get -- as we work to get wells back online from the storm.

E&P cash G&A expense was $15.7 million in the first quarter, but excluding transaction-related items, the E&P cash G&A was $11.6 million. Both crude and gas realizations were strong in the quarter as markets are fairly tight around the Williston. E&P CapEx was $62.9 million in the first quarter, below initial expectations. The delta largely relates to timing, and we still expect Oasis' standalone capital to be in line with original projections or approximately $295 million over the course of the year. Currently, Oasis has 0 drawn on its borrowing base with elected commitments of $450 million. Cash was approximately $410 million as of March 31, exceeding our long-term debt of $400 million. We're working with our lenders to accommodate an updated credit facility post close, and we expect our borrowing base to be $2 billion, with elected commitments of $800 million.

Terms and conditions on the facility are expected to be in line with other companies of similar size and credit quality. Separately, consistent with the previously announced plan to return $70 million per quarter to shareholders, Oasis declared a base dividend of $0.585 per share payable June 1 to shareholders of record on May 20.

Additionally, Oasis declared a $2.94 per share variable dividend payable June 15 to shareholders of record as of June 1. Also consistent with what we said in -- with the merger announcement, Oasis still plans to declare a special dividend of $15 per share shortly before close. The record date for this special dividend will be prior to the merger closing. Also during the quarter, we closed the merger between OMP and Crestwood on February 1, resulting in a $160 million cash payment to Oasis and Oasis continues to retain 21 million shares of Crestwood units.

In closing, the team at Oasis is executing well from an operational standpoint, which puts us in a enviable position on the financial side to generate substantial and sustainable free cash flow.

With that, I'll hand the call over -- back over to Matt for questions.

[Operator]

[Operator Instructions]

Our first question will come from Derrick Whitfield with Stifel.

[Derrick Whitfield, analyst]

Congrats on your quarter. With my first question, I wanted to focus on the capital plan for 2022. As the majority of the sector has announced CapEx increases or is firmly messaging inflationary pressures, in some cases, greater than 15%. I wanted to ask you guys if you could speak to the self-help or operational initiatives that you are pursuing to offset some of those pressures.

[Daniel Brown, executive]

Yes, it's a great question, Derrick. I appreciate it, and I'll probably ask Taylor to weigh in as well on the operational side. What I can tell you is -- as we looked -- as we set our budget earlier this year, we really looked and tried to use a crystal ball as best we could to figure out where inflation was going. We thought we were being pretty conservative in that with the numbers we put in and 15%, of course, is the aggregate number. You've got certain line items that are higher than that, some that are trending lower than that, but on balance from 1Q to 4Q, what we're seeing and the projections we're getting in the -- and the bids we're getting back in are generally in line with our expectations.

Which again, we thought were probably conservative, but now seem pretty realistic relative to where we were at in February. To your point, as an organization, continuous improvement is a big focus for us. We are always trying to get better at both from an operational side for our expenses and from a capital perspective. And so I'll ask Taylor maybe to talk about some of those efforts we've got going on out in the field.

[Taylor Reid, executive]

Yes. Danny, just to add to what you said. A couple of things I think about. One, when you look on the supply chain side, seeing puts and takes, but we were able to lock in portions of our program, which has given us some protection from some of the run-up. But one example is on the tubular and caping side of the business, able to lock in a good bit of that pricing for the program for the year. So very helpful in an area where you're seeing really a ton of inflation.

And then the teams just worked really hard to find alternatives in some cases where we're seeing some products or services kind of take off. And so we've done a good job on that front. And then to what Danny said as well from an efficiency standpoint, a lot of good work last year through the downturn on really getting our efficiencies in a good place. And I think that work is paying off to really help make sure it can deliver on this 15% that we projected earlier in the year. So we feel like we're in good shape.

[Derrick Whitfield, analyst]

That's great. And then as my follow-up, I wanted to focus on ops. So staying with you Taylor. One of your Bakken peers this morning noted the exceptional economics associated with workovers at present. I wanted to ask if you could comment on the amount of those that you have scheduled for this year and if it's differentially higher than years past.

[Taylor Reid, executive]

You're talking about workovers?

[Derrick Whitfield, analyst]

Correct.

[Taylor Reid, executive]

Yes. We've got -- we talked about -- yes. So coming into the year, having more wells offline than we would normally have offline, and that was due to both a combination of weather and the availability of crews late in the year, as Danny talked about in his remarks, we've been able to really start to work that backlog down and the economics in all those projects are just tremendous. They're pretty low cost to get those wells back on in that production impact at a very low cost, just as you would expect, fantastic economics.

[Operator]

[Operator Instructions]

Our next question will come from Neal Dingmann with Truist Securities.

[Jordan Levy, analyst]

It's Jordan Levy on for Neal Dingmann. First, I just wanted to ask on 3-mile laterals you all have been working on. I'm just curious, first, if we should still anticipate those first 3-mile laterals turn to sales this summer. If there's been any timing changes there?

And second, I think last quarter, you spoke to a ratio of sort of 25% to 35% -- 30% incremental cost increase for a 3-mile and then versus a 50% increase in reserves. And I'm just wondering if that still holds true as we move through the year and if you still see that dynamic at play?

[Daniel Brown, executive]

So thanks for the question, this is Danny. I'll maybe start off, and Taylor may add some comments on the back end. I think the 3-mile laterals we're anticipating seeing those, maybe not quite, some are more like fall where we'll see those come online, and so we're excited about seeing the production performance of those. To your point, we have modeled about a 40% uplift. And so if you just look at the increased lateral length, you'd expect 50%. We've been a little conservative on this. And so we've modeled a 50 -- or a 40% uplift in production and ultimate EOR from those wells for about a 25% increase in CapEx.

So for the capital efficiency for that program is obviously going to be much better for us, and we're looking forward to seeing the results. I'll say the drilling performance has been -- on those has been good to date, and so we look forward to getting those online.

Taylor, I don't know if you've got anything else to add.

[Taylor Reid, executive]

No, I think you caught it, Danny, all those things are accurate.

[Operator]

Our next question will come from Noel Parks with Tuohy Brothers.

[Noel Parks, analyst]

I wonder if you could touch on a little bit as you look ahead to the acquisition and the integration, could you talk a bit about maybe what some of the lowest-hanging fruit operationally might be that you expect to benefit from the transaction?

[Daniel Brown, executive]

I think there's -- thanks for the question, Noel. Clearly, after we get -- after we close the deal, we'll really be able to get the teams together and dig in with both hands on how we may reshape the development plan, reshape timing around what we drill and where and as well really work through in a very systematic fashion, picking up best practices from both organizations to employ those moving forward.

In early days, we have noted a few notable differences in how we operate, which we'll need to -- which we'll need to come together on as we move forward, but I think it's some exciting opportunities for us. If we looked at the [ raw ] failure rates between the 2 organizations, there's a notable difference there, which has pretty significant implications on long-term LOE and workover expense. And so that's a pretty exciting thing to think that the combined company can benefit from that and those best practices. The -- Whiting has got some practices around how they look at stimulating wells, particularly in more densely drilled areas, which is pretty exciting and seems to bear good results. And so I think there are a number of these things across the board on both an expense and capital side that once we close the transaction, we're going to be able to really dig in and sort of extract these best practices and make sure they are the standard practice for the new organization.

[Noel Parks, analyst]

Great. And also if you could -- and this also might be a little early to have a real detailed handle on. But just on the infrastructure side, if any thoughts or obvious priorities that they're going to be post deal? Just thinking, of course, that combined now the addition of Sanish to the mix compared to Oasis further west is going to represent a new combined footprint.

[Michael Lou, executive]

Yes. Look, on the marketing side, obviously, the combined entity covers the whole basin. We've got a lot of long-term contracts on the gathering side that will we'll be looking at once we are closed and fully integrated. But there's certainly great opportunities overall to just as a larger player we'll look at that a little bit more as we get more fully integrated at post closing.

[Noel Parks, analyst]

Great. And just to clarify, are there any -- do you have a sense of the time horizon of -- I don't know, anything that might be rolling off as you might be in a position to revisit.

[Michael Lou, executive]

Yes. No, that's a good question. I mean, if you think about the basin as a whole, a lot of contracts that were entered into and when the basin kind of first started to bloom in kind of 2008 timeframe, we're on kind of 15-year contracts and in some instances, maybe a little bit longer than that or signed up just a little bit later than that in 2009, 2010. So as you think about a 15-year contract from that timeframe, you are seeing quite a bit kind of throughout the basin coming up and being renegotiated. So I think there are going to be some opportunities on that side. Once again, we'll certainly talk a lot more about that once we close and can fully integrate the companies together on that front.

[Operator]

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

[Daniel Brown, executive]

Well, thank you, Matt. And I'd also like to thank everyone on the call for their time today. I'm proud of the accomplishments we've made and look forward to leading the new company later this year. We're excited about the future opportunities for our shareholders, employees, communities and other stakeholders. Thank you for joining our call.

[Operator]

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