Chord Energy Corp

NASDAQ:CHRD

Earnings Call Analysis

Chord's Strong Q3 Outperforms, Boosts Shareholder Returns

Chord delivered an impressive third quarter in 2023 with production volumes notably exceeding expectations due to accelerated well delivery and superior performance. They brought 45 wells into production, a significant leap from the first half of the year, supporting robust adjusted free cash flow generation of $207 million. Aligned with their return of capital framework, 75% of this free cash flow will be distributed to shareholders, including a variable dividend and a 70% increase in share repurchases compared to Q2. Capital expenditure is estimated to hit the upper range of the $850 million to $880 million guidance. Moreover, they announced a new $750 million share repurchasing program, signalling confidence and commitment to investors. For 2024, Chord projects maintaining production volumes with slightly higher capital expenditures expected to be just over $900 million, focussing on developing three-mile laterals, anticipating a decline rate reversal by the end of 2024.

Chord's Strong Q3 2023 Performance Underpins Increased Production Outlook and Robust Shareholder Returns

In the third quarter (Q3) of 2023, Chord exceeded expectations with impressive production and financial results. The company, led by CEO Danny Brown, managed to put 45 wells online during the quarter, which is a substantial increase over the first half of the year. This has propelled Chord to raise its full-year production outlook and continue delivering strong free cash flow. The quarterly financials reflected robust generation of adjusted free cash flow, amounting to $207 million, enabling a significant return of capital to shareholders through base dividends per share and share repurchases.

Elevated Commitment to Shareholders Demonstrated Through Increased Share Repurchase Authorization

Chord has reaffirmed its commitment to its shareholders by ramping up its share repurchase efforts. With a new $750 million share repurchase authorization that supersedes the former $300 million program, Chord is demonstrating confidence in its value proposition. This move also represents a 70% increase from the previous quarter in the aggregate value of share repurchases. The aim is to leverage the company's position in the market and its perceived discount to intrinsic value, underlining a solid return of capital framework.

Progress in Long-Lateral Drilling Indicates Potential for Enhanced Recovery and Efficiency

Chord's operational initiatives have shown significant progress, especially with three-mile lateral drilling. With more than half of the newly activated wells being three-milers, Chord continues to meet and sometimes exceed production expectations. These wells have shown promising performance and are expected to bring an uptick in extraction efficiency and cost-effectiveness over time. The company projects that, with effective completion and clean out practices, the volume response from these extended reach wells could proportionally increase, contributing positively to Chord's production strategy moving forward.

2023 Guidance Update Reflects Strong Productivity and Incremental Capital Investments

Chord is steering towards the higher end of its 2023 full-year capital expenditure guidance, ranging between $850 million to $880 million. This adjustment considers improved cycle-times and slightly higher working interests than anticipated. Further, the company's recent acquisition and midyear reserve adjustments due to lesser SEC pricing are expected to influence the depreciation, depletion, and amortization (DD&A) rates, contributing to a sequential rise in costs. Chord's strategies align with efficient use of capital and scrutiny over expenditures, ensuring sustainable growth and operational accomplishments.

Enhanced Liquidity Position and Strong Corporate Governance

Chord completed its fall borrowing base redetermination with the borrowing base and committed amount remaining stable at $2.5 billion and $1 billion, respectively. The financial discipline is evident with zero borrowings against this base and a cash position of approximately $265 million as of September 30, 2023. The company also reported that merger integration costs are not anticipated to affect future financials significantly, illustrating a completed transition and streamlined operations post-merger.

Outlook for 2024: Stabilizing Production and the Promise of Three-Mile Wells

Looking forward into 2024, Chord anticipates a maintenance capital program with full-year volumes expected to be flat compared to 2023, which equates to about 99,000 barrels of oil per day. However, capital expenditures are expected to surpass the 2023 amounts, targeted just above $900 million. Chord foresees its corporate annual decline rate to increase slightly in the short term with a predicted reversal by the end of 2024 as three-mile wells begin to significantly contribute. Activity is planned to be heavier in the spring and summer, causing a pattern of higher production volumes in the second half of the year. The forward-looking approach is built on maintaining a strong performance with a keen eye on shareholder returns and sustainable free cash flow profiles.

Earnings Call Transcript 2023-Q3

[Operator]

Good morning, and welcome to the Chord Energy Third 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, sir.

[Michael Lou, executive]

Thank you, Laura. Good morning, everyone. Today, we are reporting our third quarter 2023 financial and operational results. We are 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 may 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, executive]

Thank you, Michael. Good morning everyone, and thanks for joining our call. I noticed a very busy morning and in that vain, I plan to briefly recap our third quarter performance and touch on some of our key organizational initiatives before passing the call on to Michael Lou. He'll give a little more detail on the financials, some additional color on a few other topics and a small preview of our thoughts for 2024. We'll then open it up to Q&A.

So with that, yesterday, Chord reported third quarter 2023 results and raised our full year production outlook. I'm pleased to announce that third quarter volume significantly exceeded original expectations driven by both scheduled acceleration and continued strong well performance. The entire Chord team worked together to bring 45 wells online in the third quarter which was ahead of our original expectations and higher than the 37 wells brought online in the entire first half of the year.

This accomplishment is even more impressive when evaluating on a 2-mile equivalent basis which amounts to a 42% increase in well delivery in half the time. So to our team, I'd like to say thank you, and I'm very proud of all the hard work that went into executing the program. Underpinned by the strong production, Chord's quarterly financial performance supported robust free cash flow and high shareholder returns.

We generated $207 million of adjusted free cash flow during the quarter and in accordance with our return of capital framework, we returned 75% of this free cash flow to shareholders. To that end, given our base dividend of $1.25 per share and our share repurchases of $52 million as part of our recurring return of capital program, we declared a variable dividend of $1.25 per share. As a reminder, the variable dividend is designed to make up any difference between our targeted free cash flow payout and the amount distributed through base dividends and share repurchases.

Finally, with respect to share repurchases, you may note that the aggregate value of share repurchases associated with our return of capital program is up nearly 70% as compared to the second quarter. In addition, we saw incremental repurchases occurring in Chord are sourced from proceeds received through warrant exercises, and I've asked Michael to discuss that topic more in a few moments. As I've said before, we believe our capital return program is peer-leading and demonstrates our commitment to both capital discipline and shareholder returns and to the investment opportunity that Chord represents.

Accordingly, we have announced a new $750 million share repurchase authorization, which replaces the old $300 million program and gives Chord additional flexibility to take advantage of our discount to peers and to intrinsic value. Rotating from the quarter to the full year, we've increased production guidance, reflecting the strong third quarter volume performance and modest schedule acceleration I previously discussed.

Full year capital is expected to be at the high end of our $850 million to $880 million guidance range, reflecting the acceleration of activity and also higher working interest we're seeing from some of the wells in our program. Operationally, we continue to be encouraged by the progress we're making on 3-mile laterals. Over half the wells we brought online in the third quarter were 3-milers. In total, we've executed about 50 to date and the performance is meeting our expectations. You can clearly see contribution from the furthest portions of the lateral, and we're observing an uplift over time versus 2-mile analog wells in each development area.

You can find additional details on Slides 9 and 10 of our updated investor presentation, where we provided performance data on Chord wells in Fort Berthold and Foreman Butte. In both of these areas, you can see a meaningful uplift in 3-mile cumulative production versus the 2-mile analogs. And Foreman Butte specifically, early time production from 3-mile wells was affected by the Tracer study we discussed on Slide 10.

Once the top portion of the lateral was cleaned out in the 3-mile wells, they began to outperform the 2-mile wells, and we expect that degree of outperformance to increase as the wells continue to produce. Chord also continues to make good progress with respect to our operational performance, drilling, completing and cleaning out these wells. As Slide 9 of our presentation shows we have materially reduced drilling times for 3-mile wells over the past year to approximately 11 days per well, representing an improvement of over 35% in drilling times as compared to the third quarter of 2022.

On the cleanout side, we've also made steady improvement and have generally been able to stimulate and access the vast majority of the third mile in our most recent wells. During the third quarter, we achieved full TD on substantially all of the 3-mile wells we brought online. As a reminder, for 3-mile wells, we are assuming a 40% EUR uplift for 50% longer lateral and about 20% more drilling and completion cost. Said another way, we're assuming the third mile is only 80% as productive as the first 2 miles. However, with effective completion and cleanup practices, we believe the volume response could be nearly proportional to the percentage of the third mile that's cleaned out.

And finally, Chord published its first full sustainability report as a combined company in September, which reflects our commitment to delivering affordable and reliable energy in a sustainable and responsible manner. Thank you to the team for putting this together as it does a great job providing transparency onto our business and highlighting our efforts on emissions reductions, workforce health and safety and corporate governance among other things.

We welcome feedback from our stakeholders on our progress and look forward to building upon our ESG efforts to shape and even stronger future for Chord and the communities we serve. To sum things up, we executed well in the third quarter, which sets us up nicely to deliver strong free cash flow and high shareholder returns for the remainder of the year. Our asset base is meeting or exceeding expectations and we will work to drive further improvements going forward.

I'll now turn the call over to Michael.

[Michael Lou, executive]

Thanks, Danny. I'll highlight a handful of key operating and financial items for the third quarter and discuss our updated 2023 guidance. As Danny mentioned, oil volumes were strong in the third quarter, about 4.5% over midpoint guidance. Total volumes were about 3.8% above midpoint guidance. Our fourth quarter midpoint oil guidance of [ 103,500 ] barrels per day is in line with our August expectations.

And on a full year basis, we increased oil production guidance by over a 1,000 barrels per day. I want to echo Danny's comments on the extraordinary achievement by the core team in the third quarter. This was an exceptional amount of effort, and I'm really proud of everyone involved. Oil realizations remained strong at a modest premium to WTI and were slightly better than our midpoint guidance.

Looking to the fourth quarter, we expect Bakken oil pricing to weaken slightly due to higher basin production and an unexpected refinery turnaround. But pricing is still expected to remain a slight premium to WTI. NGL realizations as a percent of WTI were in line with our midpoint guidance while residue gas pricing as a percent of Henry Hub was a touch below midpoint. We expect pricing for both NGLs and residue gas to improve modestly in the fourth quarter.

Turning to operating costs. LOE was $10.94 per BOE in the third quarter and GPT was $3.16 per BOE. Both were within our guidance expectations, but LOE trend towards the high end mostly due to higher workover expense. We view workover expense as an investment to reduce downtime and enhance revenue. We've seen a meaningful improvement in that downtime over the course of 2023, and we remain focused on lowering the cost side to improve the efficiency of the program. Production tax as a percent of revenue was 8.6% in the third quarter, and we expect a similar rate in the fourth quarter.

Chord cash G&A expense was $13.7 million in the third quarter and we lowered our full year guidance slightly to reflect our latest forecast. At this point, the merger integration is substantially complete, and we don't expect significant merger-related costs going forward. DD&A averaged $9.90 per BOE in the third quarter, an increase of almost $1 sequentially. The increase to DD&A reflects the July 1st closing of the XTO bolt-on acquisition as well as midyear reserve changes, mostly due to lower SEC pricing.

Chord paid no cash taxes during the third quarter. And in the fourth quarter, Chord expects cash taxes to be approximately 0% to 10% of the fourth quarter EBITDA at oil prices between $70 and $90 per barrel. Danny mentioned that we expect capital to be towards the high end of the full year guidance of $850 million to $880 million given a couple of items.

First, improved cycle times have led to incremental lateral feet drilled during the year versus original expectations. Second, working interest is slightly above expectations, and these working interest increases accounts for approximately $10 million of incremental capital. Danny discussed our return on capital for the quarter and wanted to give you a few more details on our share repurchases. During the third quarter, Chord repurchased $112 million of stock including $52 million related to third quarter return of capital, with the remainder funded by cash proceeds from warrant exercises.

We received approximately $73 million of cash from warrant exercises in the third quarter and we're able to use roughly $60 million of this for incremental third quarter repurchases. And with the remaining $13 million of repurchases that were at the beginning of the fourth quarter. This $16 million and $13 million in the third and fourth quarters, respectively, are not included in the calculations for return of capital. Going forward, in a similar fashion, we generally expect to use cash received from warrants to offset dilution. Turning to liquidity. Chord recently completed its fall borrowing base redetermination. The borrowing base and elected commitment remains unchanged at $2.5 billion and $1 billion, respectively. As of September 30th, there was nothing drawn and cash was approximately $265 million.

Finally, turning our attention briefly to 2024. Given the strong growth in oil production in the second half of 2023, as we look into 2024, our corporate annual decline rate increases slightly. As we start to see the benefits of the shallower declines associated with our growing proportion of producing 3-mile wells, we expect this increase in decline to reverse towards the end of 2024 and into 2025. Overall, for 2024, we're expecting a maintenance capital program with full year volumes flat to 2023. On a pro forma basis, this is around 99,000 barrels of oil per day with expected capital a little over $900 million.

Additionally, activity is expected to remain concentrated in the spring and summer months next year. This means that TILs will be focused towards the second half of the year and that 2024 volume should follow a similar pattern to 2023 with the second half of the year higher than the first half. In closing, the Chord team continues to drive to strong performance with a focus on returns. This directly leads to sustainable free cash flow profile and our peer-leading return of capital program.

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

[Operator]

[Operator Instructions] And our first question will come from Scott Hanold of RBC Capital Markets.

[Scott Hanold, analyst]

Danny, you were talking about seeing some good things coming out of that last mile on the 3-mile wells, and -- can you give us a sense of where your confidence level is seeing -- to see that you're going to get the full contribution on an EUR basis? Like how much more information do you need? And is that kind of performance applicable across different parts of your acreage?

[Daniel Brown, executive]

So maybe I'll start with the second part first, Scott, and then I'll flip it over to [ Chip ], who may have -- any real differences in one area of the field versus another with respect to how much we're expecting to see in that third mile. So we do think it's applicable across the whole position. From a confidence level standpoint, I think we're -- we've got growing confidence, but that's obviously going to require production over time.

And so like any of these unconventional wells, we produce flat for some period of time as we were making facility constrained, we go on decline and then that decline we go through our B factor and we turn and we level out at a sort of a terminal decline rate. And so it's just -- it's hard to know exactly what you're going to get until you go through that process and get through that B factor and hit that terminal decline rate to know what your ultimate recovery is going to be.

What I will say is we are very encouraged with where we're at right now with the wells we have both that we've done and the wells we've seen across the basin that our underwriting at 40% is we feel very confident with that, but we're having growing that we're going to see more of that but we need to -- we just need to see the production data over time. The pressures look good. The production looks good. This is all giving a strong -- we know we're seeing a contribution from the very furthest part of the lateral because we have Tracer data that shows us that we're seeing that.

And so I think all of these are -- it's all a growing level of confidence that we're going to be something above this sort of 80% efficiency in the last mile. I think too soon to know exactly what that's going to be, but we're really pleased with what we're seeing. Chip, I don't know what incremental comments you have.

[Charles Rimer, executive]

Yes, Scott, thanks for the question. Just a couple of other things. The team has done a fabulous job of cleaning out these 3 milers. We were probably in the 25% in the first half, and now we're close to 95%, 90% clean out, and so they're doing a fabulous job cleaning up the wellbores. As Danny said, I expect that we're going to see the contribution completes the back half, the last mile or so. Also, we're about 5 or 6 different areas throughout the basin. So we're testing that right now. So I would assume sometime in the first quarter, we'll have a lot more data to be able to tell you. But I'm feeling really strong about where we are. The operations and the way the team is cleaning out. So really proud of what they've done.

[Scott Hanold, analyst]

Great. And Danny, just to maybe pin you down a little bit here. You talked about waiting to see that, get more into the terminal decline past the B factor, like generally, how would you define that? Is that more of a kind of post 2- to 3-year type time frame?

[Daniel Brown, executive]

I think 2 to 3 years is probably a little long. I don't think we need that long, but with where we're at right now, call it maybe a year plus of data and you start to really get past that factor and we get a much better idea.

[Scott Hanold, analyst]

Got it. My follow-up is on M&A. I mean, obviously, a lot going on here over the last several months on the M&A side. And look, you guys have obviously participated in that over the last number of years. Can you give us your thoughts on as you look forward, what do you -- how does M&A fit into the Chord strategy? And if you can give some context around in-base and Auto basin being a consolidator and a consolidatee.

[Daniel Brown, executive]

Yes. I think maybe I'd sum it up broadly, Scott, by saying, we're believers in consolidation. We're a product of consolidation. That's how Chord was formed. We plan to participate in consolidation as we move forward. And whether that means we are the consolidator or the consolidatee either way is okay. We believe in being part of a larger equity story, and we'll look for sensible opportunities to do that. I think along those veins, as we think about participating in consolidation where we're consolidating. I think in-basin consolidation is obviously a very natural thing for us to look at.

We have a very significant acreage position in the Bakken. We really touch all aspects of the basin with that sort of slightly over 1 million-acre position we've got. So lots of synergies from an operational standpoint and from -- whether it be sort of our subsurface knowledge, our operational capability, the routes we run, just converting DSUs from 2-mile to 3-mile in-basin consolidation makes a lot of sense.

We are also -- we are open and have and look at out-of-basin consolidation opportunities, but we're also very clear and recognize that the risk associated with out of basin consolidation is higher than the risk associated within basin consolidation due to all the factors I talked about a moment ago. And so it's just a higher bar to add a basin consolidation versus in-basin. And so -- but thematically, big believers in consolidation. And when you're in a commodity business, I think that's just an important thing to recognize to be focused on.

[Scott Hanold, analyst]

Yes. And if I could just ask a little tweak to that question, too. Like when you look at in-basin opportunities, how have -- like these higher interest rates impacted like some of the PE players or the smaller players to be willing sellers and the price to pay. Does that have any influence? Are you seeing any kind of impact from the higher interest rates?

[Daniel Brown, executive]

Yes. I think maybe too early to say specifically on that topic is you got to have a number of transactions to see what kind of effect you're seeing, et cetera. Generally speaking, I'd say if you're thinking about cash-based deals [ where ] debts on the backside, higher interest rates probably aren't very helpful to that. And I'd say big swings in commodity prices are also aren't very helpful to M&A in general. And so we'll see where that goes. Michael, I'll invite you to make any further comments.

[Michael Lou, executive]

No, I think that's exactly right. I mean, obviously, the capital markets, the lending markets, all of them are much tighter than they have been across history. And so that financing cost obviously is increasing for both the buyers and as well as maybe forcing sellers to think about exiting earlier just because that financing cost is higher. So it puts pressure on both sides. It also makes obviously, buyers a little bit more disciplined, I would say, with that higher interest cost and how they think about valuations.

[Scott Hanold, analyst]

Yes. No, I appreciate that. And yes, that's exactly what I was pointing to is more of the latter part of that answer where a seller is more motivated and if you have -- you're in a better position as a potential buyer.

[Michael Lou, executive]

I totally agree with that.

[Operator]

And the next question comes from John Abbott of Bank of America.

[John Abbott, analyst]

Yes. So I recognize it's still early with the Tracer tests and you're looking at 3-mile laterals. But what do you think the implications could potentially be for 4 miles? I mean, are you ever thinking -- are you considering actually testing a 4-mile lateral with the sort of similar test?

[Daniel Brown, executive]

I think the short answer to that, John, is yes. We've seen 4 miles in other basins. We have -- there's certain least geometries we've got that would really lend themselves to doing 4-mile laterals. You're right, it is early from a 3-mile standpoint. I'll tell you if you sort of rewind the clock and we would have thought at some point moving into 3-mile laterals was a big step into the unknown, and we would have had lots of concerns about it.

But certainly, the 3-mile program to date we think has been very successful. We're excited about it moving forward. And I think the opportunity for 4-mile laterals is absolutely out there and something we're investigating.

[John Abbott, analyst]

Very good Danny. And then for our follow-up question, you gave some color on 2024. You talked about -- your current underlying decline rate is a little bit elevated at this point in time. You suggested that could reverse by the end of next year. You indicated that for 2024, that CapEx could be roughly around in the low $900 million range. So when you think about that potential reversal in the underlying decline rate at the end of 2024. When you think about your -- you spent in 2024, what do you think about the potential implications to 2025 CapEx given the change in the underlying decline rate versus the $900 million for 2024.

[Daniel Brown, executive]

I think with -- as you'd expect, with the lower decline rate, it should be helpful from a reinvestment rate perspective. And so if we're running a maintenance program, all else being equal, you'd expect lower CapEx needed to maintain whatever production you're trying to hold. And so I think it's not beneficial as we see the contribution of these -- as these 3-mile laterals grow in proportion to our existing base and we see that contribution of the shallower decline. It's going to be helpful to us as we march forward in maintaining a production base for better capital efficiency, if you want to look at it that way, but certainly a lower CapEx to maintain or achieve any sort of production level.

[John Abbott, analyst]

So if I can squeeze a quick one in there. So what do you think long-term maintenance CapEx for you gives you at this moment, if you take -- if you think about that sort of deduction, that's changing your underlying decline rate?

[Daniel Brown, executive]

Yes. I think if you think we're thinking it's going to be something in the low [ 900s ] next year. We should reverse off of that a little bit. Of course, lots of things can change between here and there with service costs, et cetera. And so we'll have to see when we get to that time frame. But I think with where we're at right now, what we've seen in 2023 and where we're going in 2024, you would expect it to be something more capitally efficient than the anticipated '24 program. And so probably trending back towards what we saw this year.

[Operator]

[Operator Instructions] That will conclude 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]

Thanks, Laura. Well, to close out, I just want to thank the employees of Chord for their commitment and dedication to our company. It was a really strong quarter from an execution standpoint, and the team did a fantastic job. And I know -- also know, we all have a relentless drive to improve, so we'll continue to work as a team to make Chord an even stronger company for all of our stakeholders. We're proud of a great third quarter, excited about the setup for the remainder of 2023 and plans for 2024 and beyond.

And with that, thanks to everyone for joining our call.

[Operator]

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