Crescent Energy Co

NYSE:CRGY

Earnings Call Transcript 2022-Q3

[Brandi Kendall, Chief Financial Officer]

Good morning and thank you for joining Crescent’s third quarter 2022 earnings call. Our prepared remarks today will come from our CEO, David Rockecharlie, and myself, Todd Falk, Chief Accounting Officer and Ben Connor and Clay Rynd both Executive Vice Presidents are also here today and available during Q&A.

Today’s call may contain projections and other forward looking statements within the meaning of the federal securities law. These statements are subject to risks and uncertainties, including commodity price volatility, the continued impact of Covid 19, geopolitical conflict, including in Russia and Ukraine, our business strategies and other factors that may cause actual results to differ from those expressed or implied in these statements and our other disclosures.

We disclaim any obligation to update any forward looking statements after today’s call. In addition, today’s discussion may include disclosures regarding non-GAAP financial measures. For reconciliation of historical non-GAAP financial measures to the most directly comparable GAAP measure please reference our 10-Q and earnings press release available on our website.

With that, I will turn it over to David.

[David Rockecharlie, Chief Executive Officer]

Great. Thank you, Brandi, and good morning. Next month we will mark our first anniversary of becoming a public company. A lot has changed in the market environment over the last year, but at Crescent, we continue to execute the same strategy that we have used successfully over the last decade through market cycles and volatility.

Number one, generating significant free cash flow. Number two, exercising prudent risk management, and number three, producing outsized returns on investment and thanks to the dedication, expertise and hard work of everyone of the members of our team, we are pleased to discuss yet another strong quarter and exceptional progress on our value creation goals.

Before moving to this quarter’s results, I would like to highlight some of the significant achievements from this past year, both operationally and financially, which add value to the company and keep us well positioned for continued long-term value creation for our shareholders.

To begin, we continued our successful acquisition track record with the highly accretive $690 million Uinta Basin acquisition closed earlier this year. We believe these assets add meaningful value for shareholders significantly increasing the scale of our production base with approximately $1 billion approved, developed PV-10, while also enhancing our margins and adding attractive oil weighted inventory.

The transaction exemplifies the power of our acquisition platform and we expect our deeply experienced team of investment and operational professionals will continue to deliver value through our acquisition strategy in what remains a capital constrained sector.

Next, we continue to demonstrate our commitment to balance sheet strength, free cash flow, and returns to investors. Our cash flow generation allowed us to achieve over $250 million of debt reduction post acquisition, and our leverage at 9/30 is in-line with our long-term target of one times debt to EBITDA.

We also announced $0.17 per share dividend again this quarter, which has expanded 40% over the course of this year from $0.12 per share in the first quarter. We continue to execute well operationally across the company, even as we face tougher market conditions and increasing scale of the business.

The Uinta acquisition marked our seventh transaction since the beginning of 2021, and our team continues to successfully integrate these assets into our portfolio while maintaining strong operations.

Crescent is an organization of scale with approximately 150,000 barrels of oil equivalent per day of production, and 1.4 billion of annualized adjusted EBITDA and 2.3 billion of adjusted EBITDA on an unhedged basis for the third quarter. We also have approximately 6.3 billion of proved developed PV-10 at [9.30] (Ph) strict pricing.

Additionally, we have continued to create value from our large reserve base, investing $600 million to 700 million in our development capital program, primarily concentrated across our operated positions in the Eagle Ford and basins, where we expect to generate an excess of two times our invested capital.

With our attractive drilling inventory and consistently low reinvestment rate, Crescent has been able to compound value through the drill bit while preserving the strength of our balance sheet. Importantly, we continue to prioritize our role as stewards of the environment through our ESG initiatives.

Joining the oil and gas methane partnership and publishing our second ESG report in September. I encourage you all to read our sustainability report, which includes tangible operational metrics and targets. Most notably, our goal to reduce absolute emissions by 50% relative to our 2021 EPA reported baseline.

Our team has identified a number of low cost projects that provide high confidence emissions reductions opportunities, and has increased efforts on detection and measurement of emissions, which are highlighted in the report. We will continue to update the market on our progress in this important area.

Finally, we have continued to execute on our capital market strategy into what has been an increasingly volatile broader market. In the high yield market, consistent with our strategy, we issued $200 million of tack on notes in February to term out the RBL debt we acquired through the Contango merger, and through good performance and support of our bank group, we increased our borrowing base and extended our term maturity to five years ensuring no near-term maturities.

In the equity capital markets, we completed our inaugural secondary offering in September, which was the first marketed deal in the EMP space this year, raising gross proceeds of $86 million.

The transaction progressed a significant goal for our organization, increasing public float by 15%, and taking a key step in continuing to build public awareness and broaden our institutional investor base.

Further, in connection with the transaction, we executed the concurrent buyback of over 2.5 million Class B private shares, reducing total shares outstanding by approximately 2% at what we believe remains an attractive valuation of our business.

Additionally, we significantly advanced our public presence through increased research coverage, adding four research analysts since the closing of our merger with Contango late last year.

And as a reminder, we describe our current investor base in three groups. One, our legacy private investors hold approximately 55% Pro Forma ownership post transaction down from 60%. Number two, KKR & Co, our manager did not participate in the offering and remains and aligned and supportive long-term shareholder retaining at 16% ownership.

And number three, the public Class A shares represent 29% ownership in Crescent up from 25%. We are pleased with our progress on these goals and will continue to execute our capital market strategy in a methodical way that is aligned with long term value creation for all shareholders.

In summary, the scale of our achievements year-to-date is a testament to the strength of our asset base and the quality and performance of our people and we do not take this for granted. Each of these accomplishments aligns with the broader goals we have set for ourselves and outlined to the market since becoming a public company late last year.

To put it plainly, we have done what we said we were going to do and we are confident we are well positioned to continue to execute on our strategy of creating long-term value for shareholders.

Now moving on to our third quarter results. As I briefly touched on, Crescent continues to perform in-line with our expectations in what we anticipate will be our most active quarter of well completions for the year.

We spent $190 million of capital in the third quarter, the bulk of which was attributable to our operated drilling program, having maintained two and a half rigs across the Uinta and Eagle Ford and brought online 13 gross operated wells for the quarter.

Additionally, we participated in another seven gross and one net wells brought online across our non-operated assets in the Permian, DJ Basin and Eagle Ford. Given the heightened completion activity, total production increased 6% from 142,000 to 150,000 BOE per day, and oil production increased 8% from 64,000 to 69,000 barrels per day.

On the financial side, the business generated 359 million in adjusted EBITDA and 144 million in levered free cash flow, delivering consistent cash flow despite the decline in commodity prices relative to the previous quarter.

Going forward, we expect our capital spend to be fairly flat quarter-over-quarter, while well completions in the fourth quarter will decrease ahead of increased completion activity in the first half of 2023.Across the A&D market we remain on pace to evaluate north of 150 transactions this year and would characterize the past two quarters as a more challenging period to be a buyer across the sector.

In the energy market more broadly this past quarter saw sustained commodity price volatility exacerbated by an increasingly complex geopolitical environment, all while ongoing inflationary pressures continued to create headwinds across our industry in the form of supply chain constraints and service company supply demand imbalances.

This combination of commodity price and cost uncertainty alongside an economy-wide shift in central banking policy and the implied cost of capital has continued to challenge the bid ask spread in the energy asset market even as an ever increasing volume of assets are coming to market, a significant portion of these processes remain on the sidelines. However, A&D activity has begun picking up recently, and we are expecting meaningful improvement in the A&D market over the coming months.

Fortunately for Crescent, our continued participation in the A&D market has kept our finger on the pulse all while the nature of our asset base with our low decline rate and multi-year inventory of high returning locations has permitted us to stay patient in evaluating new transactions.

That patience allows us to continue to adhere to the disciplined framework and investment criteria that guide our evaluation process. Our market presence and patience have also allowed us to find good value as we opportunistically divest non-core assets. Turning back to operations, over the course of the last quarter, we ran one and a half rigs in the Uinta Basin and one rig in the Eagle Ford.

And our development program continues to be underpinned by returns driven decision making, generating attractive returns on capital and short payback periods. We plan to run one rig in theta for the remainder of the year, a shift we made in August. This allows us to continue to validate our spacing and completions design optimization relative to the previous operator.

And while it is still early, our initial data suggests those changes are translating into a positive impact on overall performance. This process of validation and optimization comes at a good time as it corresponds well with managing our development cadence, while our midstream provider adds additional capacity to our infield gathering system to support future volume growth.

As we have said in previous quarters, we continue to see that the industry trend of deferred maintenance impacts and our assets and service providers are not immune. We will continue to do our best with planning and operations to mitigate the potential for future impacts on Crescent.

And while inflationary pressures continue to manifest, we expect to remain within our publicly stated capital guidance range, primarily due to increased drilling efficiencies across our Eagle for position, where our continuous acreage position allows us to extend laterals.

Most recently through a pad brought online this past quarter with average lateral length in excess of 16,000 feet, as well as through the continuous improvement as we implement our development strategy in the UTA, both of which we feel will continue to provide a tangible offset to costs as we work with service providers on establishing a consistent repeatable process.

Additionally, we have continued to see sustained inflationary pressures across our operating cost structure, approximately 10% year-to-date, primarily due to increase maintenance and commodity link costs, but also due to high returning elective work over activity, as well as non-recurring expenses related to our recent acquisitions and merger with Contango.

Looking ahead to next year, we expect we can see further inflation, particularly on the services side with a market remains anomalously tight, but we are confident our team will continue to find ways to achieve repeatable operational efficiencies. As we remain focused on operations in Q4 and beyond, we look forward to posting 2023 guidance over the coming months.

At a high level, we anticipate running a maintenance level development program over the course of next year as we are mindful of margin compression into stabilizing commodity prices with the potential for sustained capital inflation.

Our organizational focus on generating attractive returns on capital as opposed to growing production ensures will remain flexible, particularly as the A&D market continues to evolve and with it our view on the highest returning use of capital.

In short, we are happy with the progress we have made this year and remain optimistic about our value creation potential given Crescent current positioning and the unique opportunity set laid out before us.

With that, I will turn the call over to Brandi to cover our third quarter 2022 financial results in more detail and our remainder of the year outlook. Brandi.

[Brandi Kendall, Chief Financial Officer]

Thanks, David. Our third quarter results reflect yet another solid quarter for our business as we continue to prioritize shareholder returns in the balance sheets. To recap, we produce 150,000 net barrels of oil equivalent per day and 69,000 net barrels of oil per day, which reflected 6% and 8% increased quarter-over-quarter respectively, primarily due to a higher plane completion activity.

Additionally, we generated 359 million of adjusted EBITDA and 144 million of lever free cash flow maintaining consistent cash flow generation despite the fall off in commodity prices. Alongside earnings, we announced a quarterly dividend payment of $0.17 per share consistent with the previous quarter.

Part of our forthcoming 2023 guidance we intend to re-evaluate our base dividend within the confines of our 10% of adjusted EBITDAs framework and subject to Board approval look forward to declaring our 2023 dividend as part of our forward outlook early next year.

Diving into specifics, our oil differentials increased modestly quarter-over-quarter, primarily due to growing production from our Uinta Basin asset, which has been more than offset by the higher oil weighting of our production this quarter. Operating costs excluding production and other taxes for the quarter were $15.33 per BOE, a 4% increase quarter-over-quarter.

As David briefly mentioned, this increase is partially driven by inflationary pressures in certain commodity linked costs, but a meaningful piece of our overall increase was driven by increased maintenance activity and high return elective work over projects.

Additionally, we incurred certain non-recurring operating expenses over the course of the third quarter, primarily due to the expenses stemming from our first year as a public company as well as our most recent acquisition. Excluding those non-recurring expenses, our operating costs excluded production and other taxes would decrease to 14.87 on a per unit basis outside the high end of our prior OpEx guide.

Adjusted recurring cash G&A totaled a $1.40 per BOE, which is in-line with previous expectations. We continue to benefit from synergies associated with the Uinta Basin acquisition, which added significant scale to the broader business while contributing minimal incremental G&A.

I would note this calculation excludes certain non-recurring expenses associated with the Contango merger and the formation of Crescent Energy as a new public company. And we expect incremental three million to five million of one-time expenses for the remainder of 2022, including post merger integration and other transaction related costs.

For the full-year we anticipate 25 million to 30 million of non-recurring expenses to impact G&A and operating expenses due to these factors. On capital spend, we invested 190 million in the third quarter drilling five gross operated locations in the US and five in the Eagle Ford.

Additionally, we brought online another 13 gross operated wells in the Uinta. To-date, we have brought online 50 gross operated wells and 48 net operated wells this year as part of our 2022 program and continued to see high productivity and strong returns on capital.

We expect the significant majority of our programs to pay back in the range of 12-months and generate more than two times our investment at today’s commodity prices. Today we are continuing to operate one rig in both the Eagle Ford and Uinta Basin.

As we hit last quarter, we shifted to one rig to Uinta in August as we began to implement and monitor optimized spacing and completion design and manage volumes ahead of our third party gas gatherers planned expansion.

As David mentioned we expect the third quarter to be our most active this year for wells turned in-line and for this upcoming quarter our guiding relatively consistent capital spend to the second and third quarter, but lower production due to less completion activity. For full-year 2022 capital guidance our estimates are unchanged at 600 million to 700 million with approximately 80% allocated to operated development in the Eagle Ford and Uinta Basin.

As discussed on our call last quarter, we expect to end up between the mid to high end of our original guidance range, subject to timing adjustments associated with our operated program around the end of the year.

Similar to others across the industry we have continued to see inflationary pressures but have been able to successfully mitigate a portion of those pressures through increased drilling and completion efficiencies across our operated assets.

Given the rapid escalation and development cost couple with the significant task of integrating a 30,000 barrel of oil equivalent per day asset, we are pleased with the efforts our team has put forth to keep us within our guidance range set at the beginning of this year. On the balance sheet, we exited the quarter with LCM leverage of one times and 625 million in liquidity.

Since closing the [indiscernible] acquisition at the end of the first quarter, we have repaid 256 million in debt, and as we continue to generate significant free cash flow for the remainder of the year, we expect to maintain leverage at or below our target level of one times EBITDA by year end.

In September of this year, we completed our fall redetermination increasing our borrowing base from 1.8 billion to two billion in extending our term maturity in additional two and a half years, ensuring we have no near-term maturities for the foreseeable future.

Additionally, we successfully negotiated 50 basis point reduction in interest rate margin for amounts outstanding on our price facility. Taken together, we are pleased with the outcome of our determination process, which speaks to the relative strength of the business, the outlook for substantial cash flow, our growing proof reserves, and a strong balance sheet.

Additionally, last week we signed a purchase agreement to divest our non-cooperative Midland Basin position for total proceeds of 80 million subject to customary purchase price adjustments, the proceeds of which will be used to repay debt in the near-term, and we anticipate the transaction to close by year end 2022.

Year-to-date, we have divested over a 100 million of non-core assets, which will de decrease 2022 production by 1,500 to 2000 barrels of oil equivalent per day in EBITDA by 25 million to 30 million relative to our prior full-year guidance.

In the capital markets, as we hit on last quarter, we recognize that the current market positioning and awareness of Crescent is not yet at a level consistent with peers of a similar size and more nuanced aspects of the business, such as our lower decline rate and the impact hedges have on year term. Cash flows are still not fully appreciated and reflected in our current evaluation.

While some of these features will improve over time as we continue to post positive results complete accretive acquisition and legacy acquisition related hedges continue to roll off, we still de market visibility and education as a key piece of our strategic plan for 2022 and beyond.

We are committed to an active approach to building awareness of our story, which we intend to accomplish by engaging with the market to expand our followership, improve our flow, and increase equity research coverage.

This past quarter we took a tremendous step in doing just that through our inaugural public equity offering, which was the first EMP marketed equity offering of the year, initially marketed for five million shares.

We received significant enthusiasm for the offering from both existing and new investors in our business, allowing us to exercise our green shoe option and sell at additional 750,000 shares. The offering was complimented by the company’s concurrent purchase and retirement of just over 2.5 million Class B private shares at the same price per share received by the selling stockholders.

The compliant offerings were made pro rat across our legacy private investors, with the exception of the units owned directly by KKR & Co, who continues to retain its ownership in Crescent. Pro forma for the transaction or private investors own 55% of the business maintaining significant alignment with Crescent’s public float, while KKR retains its direct investment in Crescent as a supportive long term shareholder.

In addition to KKR retaining its stake, members of our management team and board of directors continue to increase their direct ownership and Crescent over the course of the quarter. Further promoting the alignment we believe is crucial to creating an optimal outcome for our shareholders.

In light of the offering, we want to reiterate that we do not intend to pursue a public share buyback program like many of our public company peers, which we believe would run counter to the creation of long-term value that increased flow and market presence would provide.

However, we may continue to conduct similar buybacks for our private shares and conduct connection with future secondary offerings. That is a tool available to us that does not compromise public float, which we will continue to evaluate based on the implied returns associated with that use of capital and impact to our balance sheet.

Looking forward to this upcoming quarter, we anticipate a slight decline in production given the increased completion activity in the third quarter of this year as a significant portion of our development capital will be driven by drilling activity.

For the full-year 2022, we anticipate to land near the midpoint of our production guidance range and due to the continued inflationary pressures impacting our operating cost structure at the low end of our EBITDA and free cash flow guidance when accounting for asset divestitures and decreased commodity prices.

As a reminder, our prior guidance was established alongside our first quarter earnings in May and provided at a hundred dollars per barrel oil and $6 per in BTU gas. We remain pleased with our results year-to-date and the progress we have made as operational results are continuing business as usual and Crescent has taken a significant step forward in expanding our public markets positioning through a inaugural secondary offering.

With that, I will turn the call over to David to provide the closing remarks.

[David Rockecharlie, Chief Executive Officer]

Thanks, Brandi. Before moving on to Q&A, I want to reiterate some of our year-to-date highlights, which we believe provide the foundation for sustained value and success. First, we completed the Uinta Basin acquisition, adding significant scale to the business and increasing our runway of high margin oil weighted inventory.

Second, we increased our dividend by 40%, passing through the accretive nature of the Uinta transaction while continuing to delever the business having repaid over 250 million of debt over the past six-months.

Third, we continue to post strong quarterly results while successfully integrating a number of new assets into our business, creating a business of scale with approximately 2.3 billion in unhedged, annualized adjusted EBITDA and approximately 6.3 billion improved developed PV-10 at 9/30 strip pricing.

Fourth, we have continued to create organic value across our 600 million to 700 million capital program, developing high returning locations and managing an inflationary environment with repeatable operational efficiencies. We have continued to prioritize our role as stewards of the environment, publishing our second ESG report, and committing to reduce absolute emissions by 50% by 2027.

And finally, we have continued to prioritize capital markets activities, raising incremental bank and high yield debt, completing the year’s first marketed EMP equity issuance, which increased our public float by 15% and adding research coverage from four analysts over the course of the year.

The achievements we have had in our first year as a public company continue to demonstrate Crescent’s differentiated business model is working and will continue to position the company for success into what remains an attractive market backdrop for our sector.

Thanks again for joining us today, and with that we will now be happy to take your questions.

[Operator]

Thank you. [Operator Instructions] We have a first question from the line of Neil Dingman with Truist Securities. Please go ahead.

[Neil Dingmann]

Thanks for the details. Could you talk maybe just a bit about more of your maintenance plan? I know you don’t have specific 2023, but just talk thinking about, you know, around maybe flat production, how you might think about cost -- and everything as it affect next year?

[Benjamin Connor, Executive Vice Presidents]

Yes, Happy to take that, Neil. It has been - what I would say is, as David and Brandi noted in their opening remarks, we expect to kind of be in maintenance mode next year and kind of thinking about running kind of the two rig program that we have been running more recently into next year.

We have talked about that in the past to maintain, to slightly grow our production, that is a two to three rig program. So I think that is what you should continue to see from us from an activity level. But we will be obviously coming out with guidance here on the near-term.

As it relates to cost inflation, look, we are seeing the same trends that everybody else in the sector is seeing, which is expected given the move and the commodity price and increased activity. And we noted that when we came out with our guidance coupled with the unit basin transaction of an increase of 10% to 15%.

We have done a good job combating that. Both through, enhancing laterals, links in the Eagle Ford and then also changing our completion design in theta, which is meaningfully below where the prior operator’s costs was before you take into account the inflation. But on the outlook, our view from here is that inflation’s really going to be tied to activity and continued activity in the sector.

And so, while we still see pressure, we certainly have seen the pace of increase in costs, moderate, and we think that our low decline asset base will continue to advantage us in an inflationary environment just given the relatively low amount of capital, that is required for us to invest back in our assets to maintain our production. So hopefully that answers your questions, but happy to expand upon that.

[Neil Dingmann]

I’m sorry. I was just wondering about the, if you are restimulating, what you are doing there to sort of revitalize that. Thank you.

[David Rockecharlie, Chief Executive Officer]

Yes, really, and it is in our investor presentation, I don’t have in front of me in terms of the exact page, but really what we have done in - is twofold. One, we have widened out spacing, which you would expect to deliver better results.

And then coupled with that, we have increased the completion intensity, both in terms of the amount of prop and fluid that we are pumping in the reservoir. And we have changed that in terms of the types of things that we are pumping into the ground, which ultimately is lowering the cost of, of that completion.

[Operator]

Thank you. We take the next question from lineup Lloyd Byrne with Jefferies. Please go ahead.

[Lloyd Byrne, Jefferies]

You talked about the A&B market and how you have scrutinized 150 transactions and the market might be getting better as you look out, so maybe you could address that. And then also you talked about when you sold Hector scale, and does that mean that you’d rather scale up, you went to the Eagle Ford, or it doesn’t really matter as long as the value is there?

[David Rockecharlie, Chief Executive Officer]

Yes, we can start on actor quickly. I think as we looked at the portfolio that was just an asset that it was going to be difficult to scale around, given where it was in the basin. And frankly, wasn’t going to be a place we were going to be committed to spending capital on.

The process and felt like we got good value. So I don’t think it is a direct statement on the broader Permian or anything like that. I think it was just that asset footprint and kind of how we felt about the capital opportunity relative to the portfolio.

In terms of the broader market, you know, obviously, you know, David hit a bunch of this, but you know, we were really active post the signing of the Contango merger, did over a billion dollars of transactions through Q1. And then in Q2 and Q3, a lot of commodity volatility. It was a tough time to kind of be a buyer at value.

I think what we are, you know, as we look out from here, we kind of remain in active dialogue on a number of conversations, see kind of the stability in the market a bit, although it continues to be volatile, providing an outlook where, we think we will be able to transact value as we look over the next six, six to nine-months.

[Todd Falk, Chief Accounting Officer]

Yes, and the other thing I would just say is like, we are even better positioned today, really coming out of all the accomplishments that, you know, we have completed over the last couple of quarters, we have successfully integrated Uinta acquisition that is going well.

We have continued to pay down debt on the balance sheet and completed, you know, an equity offering that was really well received. So just as a business, we feel really very well positioned going into next year where we do expect to see continued activity in the A&D market and the things that have gotten done have gotten done at very attractive values, we think.

[Lloyd Byrne, Jefferies]

Okay, great. And let me ask on the back of that, you talk about paying down debt and your balance sheet’s in great shape. What are the priorities for your levered free cash going forward? It is just building cash at this point, waiting for the right opportunity. How do you think about that?

[Brandi Kendall, Chief Financial Officer]

Hey Lloyd, it is Brandi. Good, good question. So cash flow priorities one A and one B continue to be the dividend and the balance sheet. So alongside earnings last night we announced another $0.17 per share for quarter dividend, which is in-line with our last quarter dividend equates to roughly a 5% yield.

We expect to continue to keep the dividend framework consistent in the near-term of paying out 10% of our adjusted EBITDA would expect next quarter’s dividend to be in the same range, the roughly $0.17 a share. And then we will look to reset it alongside guidance in 2023.

So it is really, you know, balance sheet strength, long term target of return, which we are at now, that the dividend will look, you know, organically into our capital program right where we are spending capital. And as Ben mentioned this earlier, we are spending capital in the Uinta and the Eagle Ford today. And then if there is excess cash, you know, we will continue to focus on debt repayment.

[Lloyd Byrne, Jefferies]

That is great. Thank you, guys. If I could squeeze one more in on the drilling efficiency side you guys did a pretty good job, obviously with the longer laterals and helping offset inflation. Is there more there going forward? I know Neil touched on it a little bit in the Uinta but just in general, how do you see efficiencies and maybe offsetting some of the inflation the industry is seeing?

[David Rockecharlie, Chief Executive Officer]

Yes, I mean, look, I think our teams have done a really good job today and we have done a good job combating it this year. There is always room for continued improvement. So don’t want to overpromise there, but you know, we are driving every day to reduce our cycle times and to, you know, do the things that we have done this year to reduce costs.

So I think you will see continued, you know, efforts on that. And then really, you know, it is I think as we noted earlier, it is really just how active is the sector going to be and ultimately where do we land there in terms of some of the supply chain constraints that we have seen. But again, like I said, it has moderated, but we do see continued pressure.

So, hopefully not to the same extent that we have seen over rate of change this year, but we are seeing pressure and we are constantly pushing back, trying to be creative to continue to lower our cost structure.

[Lloyd Byrne, Jefferies]

Great. Thank you.

[Operator]

We have next question from the line of Tarek Hamid with JP Morgan. Please go ahead.

[Unidentified Analyst]

HI this is [indiscernible] for Tarek. Thanks for taking our questions. So first you mentioned that you are planning to increase completion activity in the first half of 2023. Just wanted to see or get your thoughts on what you are expecting for production cadence entering 4Q but also through 2023 for any high level commentary you could provide.

[Brandi Kendall, Chief Financial Officer]

Hey, Evan, it is brandy. So as we hit on in the prepared remarks, we do expect production to decline slightly quarter on quarter, and that is just really driven by till activity. As we don’t provide quarterly guidance but would want you to what Ben mentioned earlier, just as we are thinking about 2023 and that is going to be more of a maintenance level. So would expect on an average for the year, we would be plus or minus 140,000 a day.

[Unidentified Analyst]

And then also I was wonder if you could provide a little bit more color on working capital in the third quarter, if there is any kind of carry forward into the fourth quarter.

[Brandi Kendall, Chief Financial Officer]

Good question. Again, it is Brandi. We would expect that to, to normalize into the fourth quarter. There is a little bit of noise just related to the Uinta transaction but would expect that to normalize going forward.

[Unidentified Analyst]

Great, thanks. That is all from us.

[Operator]

Thank you. Ladies and gentlemen, we have reached the end of the question and answer session, and I would like to turn the call back over to David Rockecharlie, CEO for closing remarks. Over to you, sir.

[David Rockecharlie, Chief Executive Officer]

Great. Thank you all again for your time and your support of the business. As you hopefully heard today, I think that the business is doing really well and we look forward to keeping you updated as we move forward. Thank you very much.