Comstock Resources Inc

NYSE:CRK

Earnings Call Transcript 2020-Q3

[Operator]

[00:00:05] Ladies and gentlemen, thank you for standing by and welcome to the third quarter Twenty twenty Comstock Resources Inc. earnings conference call. At this time, all participants are in listen only mode after the speakers presentation. That will be a question and answer session to ask a question during the session, you'll need to press star one on your telephone. As a reminder today's program may be recorded. I would now like to introduce your host for today's program, Mr. Jay Allison, chairman and Chief Executive Officer. Please go ahead, sir.

[Jay Allison, Chairman and Chief Executive Officer]

[00:00:35] Thank you. Thank you for your introduction this morning. And again, I want to thank everybody that's taking their time to listen to the story today. I know we have a lot of you. We know a lot of your really good friends that have been forever and ever and ever. So today is an important day in our in our early in our corporate life. We. We're all human, and we do understand the third quarter results were somewhat disappointing, quite frankly, and I can speak for me and for everybody else, the management team, we hate it. And, you know, they are disappointing for the reasons that you're aware of. I mean, they're all logical reasons. They're still disappointing shut ins, curtailments related to Hurricane Laura, Donna, curtailments. And there's a litany of other small reasons that, you know, I think our goal this morning is to share what we see for the fourth quarter Twenty twenty, as well as twenty twenty one and twenty twenty two to show you our stakeholders how we plan to deliver our balance sheet in those years by using our strength of our leading margins and low cost we've created in the Haynesville and a period of time, quite frankly, when the outlook for natural gas is extremely bullish, really the most bullish it has been in over ten years. Our job in the next forty five minutes really today is to avoid any disappointments in the future and show you how our margins in the Haynesville, coupled with the right size capital program over the next year, can deliver the balance sheet and expand our trading multiples so that we all are winners, all based on the commodity gas price outlook that we see today, you know.

[00:02:21] So thank you for trusting us. And if we have dented that trust in me, please know that the entire confort team will work hard to earn it back and even more by giving you one hundred percent of our best, as we always have. And I'll start into our third quarter results and then we'll get to the Q&A. It will answer any questions that you have and be accountable for it. Welcome to the Goshawk Resources. Third quarter twenty twenty Financial and Operating Results Conference Call. You can view a slide presentation during our after this call by going to our website at w w w cornstalk resources dot com and downloading the quarterly results presentation. There you'll find a presentation entitled Third Quarter Twenty twenty Results. I am Jay Allison, Chief Executive Officer of Gothika, with me as Roland Barnes, president and Chief Financial Officer, Dan Harrison, our Chief Operating Officer, and Ron Mills, our VP of Finance and Investor Relations. Please refer to Slide two in our presentation to note that our discussions today will include forward looking statements within the meaning of securities laws.

[00:03:28] While we believe the expectations of such statements to be reasonable, there can be no assurance that such expectations will prove to be correct. If you're following this, you can turn to slide three. On slide three, we discussed the highlights of the third quarter. November is the first month where we finally exited the period of very low natural gas prices brought on by the warm winter we had as the November natural gas prices closed at almost three dollars after hitting a low of a dollar fifty this summer. The low production levels brought on by the actions of disciplined natural gas producers, combined with a decline in associated gas resulting from low oil prices, have caused the Twenty twenty on future natural gas prices to improve substantially. Since January of this year, we have been focused on reducing our drilling activity and deferring completion activity. Those actions allowed us to generate free cash flow, even with the very, very low prices we were receiving for our production, the reduced activity we had in the first half the year, combined with the third quarter hurricane activity in our region, negatively impacted our production this quarter. As you see, with the stage set for higher prices later this year and into twenty one, we collectively decided that we would go back to work. In the third quarter, we added two additional operated drilling rigs to bring our working rigs back up to six, which is where we were to be ending the year and currently have three FRAC crews working to catch up on the backlog of drilled and uncompleted wells.

[00:05:13] Since our last report, we have put fifteen new wells on production which have a per well IP rate of twenty six million cubic feet per day. We did have a rocky quarter, as I mentioned, on the production from which partially was self-inflicted as the ramp up of activity drove our shut in percentage up to seven percent in the quarter. The higher spending in the quarter reflects restarting a program we put on hold in the second quarter. But it is the right move as we look forward to improved gas prices that we're in. We did achieve our goal of reducing Wolkoff to just under a thousand dollars per barrel foot, which is significantly lower. In any other Hayesville operator, with recent changes to our completion design, we expect will cost to increase a little bit as Barnhurst will go over later, while it makes sense to bring well costs down as low as we did with weak gas prices this year, with gas prices closer to three dollars plus now, it makes sense to invest in a little more profit as we believe the wells will have a higher return as we will discuss more today.

[00:06:23] We recently decided to increase our completion activity planned in the fourth quarter by running an additional frac crew, which moves up the completion of seven wells that we plan to complete in twenty twenty one. The additional investment will pay off in 2021 to allow us to have a little higher production to take advantage of the higher gas prices in the third quarter. We completed a follow on three hundred million dollar notes offering to further pay down borrowing's on our bank credit facility that reduced our outstanding bank borrowings from fifty seven percent of availability to just thirty six percent of our availability. By freeing up the bank credit facility, we increased our financial liquidity to nine hundred and twenty eight million dollars. The low oil and natural gas prices, combined with low production in the quarter, didn't impact the profits we generated in the quarter. Our oil and gas wells, including hedges, were two hundred and twelve million dollars from our just repeat ex came in at one hundred and forty eight million dollars and our operating cash flow was ninety three million dollars or 38 cents per share. We reported an adjusted net loss of thirteen point eight million or six cents a share with higher production and stronger natural gas prices. We anticipate returning to profitability in the fourth quarter, which is now I will have and go over the financial results in more detail rolling.

[Roland Burns, President and Chief Financial Officer]

[00:07:56] All right. Thanks, Jay. And slide four, we summarize our financial results for the third quarter of this year. Our production for the third quarter totaled one hundred and three Bcf of natural gas and three hundred fifty four thousand barrels of oil. Total production of one hundred five Bcf E was four percent higher than the third quarter of twenty nineteen. Our oil and gas sales, including the realized hedging gains, were two hundred and twelve million dollars, which was 15 percent lower than 2019. And this was all driven by the lower oil and gas prices we had in the quarter or prices in the quarter averaged thirty three dollars and fifty two cents per barrel. And that's what the hedging gains we had in the quarter and our realized gas price, including hedging gains with a dollar ninety five per Mcf. Our natural gas price realization overall was down 14 percent, which offset the production growth that we had in the quarter adjusted EBITDA came in at one hundred and forty eight dollars million, which was about twenty two percent lower than the third quarter of twenty nineteen. And operating cash flow of ninety three million dollars was about 35 percent lower. We did report a net loss of one hundred and thirty point nine dollars million for the third quarter or fifty seven cents per share.

[00:09:21] But most of that loss is attributable to the one hundred and fifty five point six dollars billion unrealized loss on the mark the market of our hedge positions, and that that is caused by a substantial improvement. The futures, the future, natural gas prices since the end of the second quarter, our adjusted net income, excluding the unrealized Mark-To-Market hedging loss and then certain other unusual items, was a loss of thirteen point eight dollars million or six cents per diluted share for the quarter. Slide five, we summarize our financial results for the first nine months of this year, production for the first nine months totaled three hundred and forty nine DCW, including about one point two million barrels of oil, which is 90 percent higher than our production for the first the same period in twenty nineteen. Of course, most of this increase is due to the acquisition of covid Park Energy, which we completed in July of twenty nineteen. Oil and gas sales, including realized hedge gains were seven hundred and sixteen dollars million, 40 percent higher than the same period in 2019. Oil prices so far this year have averaged thirty nine dollars and eighty four cents per barrel and our gas price is a dollar ninety six for MTF both including the hedging gains we had overall.

[00:10:47] This is 18 percent lower than the prices we had for natural gas in the same period. In twenty nineteen, our adjusted EBITDA came in at five hundred eleven dollars million, which was 35 percent higher than 2019. Operating cash flow was three hundred sixty seven dollars million and that's 31 percent higher than the twenty nineteen. We did report a net loss of one hundred and sixty point nine dollars million for the first nine months of this year or 77 cents per share. Again, this was due to the mark-to-market loss, the unrealized mark-to-market loss on our hedge book adjusted net income, excluding the unrealized hedging losses and other usual items, was twelve point nine dollars million, or a net income of six cents per diluted share. In the third quarter, production was adversely impacted by higher credit level than normal. As you can see on Slide six, seven percent of our natural gas production was shut in the third quarter as compared to four percent in the second quarter. Much of that shut in is due to offset frac activity either by our simultaneous operations or other heinzel operators. But we also temporarily shut out a portion of our production over the course of about a week due to the impact of Hurricane Laura that caused widespread power outages in our region and then also in September for a good part of the month of September and then carried over really into the first, you know, 12 to 14 days or so of October.

[00:12:25] We did experience wide differentials in the daily cash market at Perryville. And then other in an other index is in our kind of region, in the southern kind of Gulf region. And this was all due to concerns that the natural gas market had over the high storage levels. As we've been we've been as we exit the period of storage injections. So the only gas that's really impacted by these daily prices is what we call our sweet natural gas that was not sold, you know, during bad week and in that part of our baseload sales. So we chose to restrict some of the new wells that were coming on in September. And then given this very low price that the this extra suyin gas was getting in these high differentials in the month of September and also the declining overall index prices and that volatile month did caused our overall differential in the quarter to widen by 10 cents in the third quarter.

[00:13:27] You know, this situation did continue in October, really only the first couple of weeks of October, and then we took an action in that very first part of October to to actually curtail, for price reasons, 300 million a day of our production. And overall, we did this for about 11 days. That action, along with the startup of our energy facilities, is coming back after the hurricanes really helped reduce the concerns about storage, fill it up. And then we saw that the about mid-October, we saw the you know, the daily cash prices go back into normal relationship and differentials narrow. And then we put all that gas really back into the market. So I think as far as October has finished out and as we enter November, we've we've seen a very healthy situation which has been supported by, you know, very favorable kind of injections, the storage and even today withdrawal. We also saw that, you know, obviously our non-operated oil production, which is primarily located in the Balkan region, also has continued to experience substantial curtailments which carried through in the third quarter. We had about 12 percent of our oil production that was shut in by the operators that operate it due to the very low oil prices or other issues in the Balkan region.

[00:15:04] On slide seven, we cover our hedging program. You know, for the first nine months of this year, we had 50 percent of our gas volume hedged, which increased our realized gas price to a dollar 96 per AMCC from the dollar 60 that we actually received from selling our production. We also had eighty six percent of our oil volumes hedged, which increased our realized oil price to thirty nine dollars and eighty four cents versus the thirty dollars and 35 cents per barrel that we actually received overall during that period, we, we had realized, had gains of one hundred and thirty three dollars million. But with the improvement in future Alaska natural gas prices, we also took that opportunity to continue to add to our hedge book, but but really at higher levels than we'd had before. And then also using Koller's. So we've added about 10 billion a day of natural gas for the fourth quarter since we last reported earnings. And we added about 38 million a day of natural gas. Koller's in 2021 and about 12 million a day of Koller's in 2022, which gives us a good protection level but also gives us exposure to the higher prices. So as you look ahead for the fourth quarter of Twenty twenty, we have six hundred and sixty three million cubic feet of our gas and about two thousand eight hundred barrels per day of our oil hedged the weighted average for for price of our remaining Twenty twenty gas prices is two dollars and 61 cents.

[00:16:40] And for Twenty twenty one, we have natural gas hedges covering about eight hundred and thirty six million cubic feet of our Twenty twenty million production, so we're on target to having 60 to 70 percent of our Twenty twenty million production hedged and will also work as we have improving gas drip to work with to hedge our twenty twenty to volumes appropriately.

[00:17:06] On Friday, we detail our operating costs for Macfie produced. And overall, these were pretty comparable to the second quarter, so our operating cost averaged 55 cents in the third quarter as compared to our second quarter rate of fifty four cents, gathering costs for 21 percent production and valorem taxes averaged nine cents in field level cost were 25 cents. The one thing we did do this quarter, in order to improve the comparability to us that other producers was to to reclass our adva lowering taxes that used to be shown as part of just lifting cost and include those in production taxes.

[00:17:46] So you'll see that if you're kind of tracking the old numbers. And so it's really about one set so that a big change. But we think that this makes us more comparable to our peers on slide than we detail our corporate overhead from CDFI in our cash to at a cost were seven cents in the third quarter, which is slightly up in the second quarter, but that's mainly due to the lower production level in the quarter. Slide 10, we detail the depreciation, depletion and amortization per CFP produced an average 95 cents in the third quarter, which was about eight cents higher than the second quarter. And most of that impact is due to the much lower kind of sexy type prices that are kind of backward looking that we used to do amortization with. And slide 11, we recap our third quarter and the first nine months of Twenty twenty capital expenditure program, so we spent one hundred and ten dollars million on development activities in the third quarter, and ninety four million of that was related to our operated Haynesville shale properties for the for all of Twenty twenty.

[00:19:01] So far we spent three hundred and sixteen dollars million, including two hundred fifty nine million on the operated Haynesville properties. We've drilled thirty six or twenty eight point six net operated horizontal wells so far this year, and we also completed nine point six net wells that we drilled in twenty nineteen. We've spent fifty six dollars million on non-operated activity and for other activity so far this year, we generated three hundred and sixty seven dollars million in cash flow for the first nine months of this year, resulting in free cash flow.

[00:19:37] Thirty million after we paid the dividends on the preferred shares. After dropping their operated rig count, the four rigs in April, which was down from six back in January, we've increased our operating rig count back to six rigs. And in the fourth quarter, we expect to spend about 150 to 170 million dollars this year to drill seventeen or sixteen point four net operating Haynesville Wells and then to turn to sales 22 or seventeen point six net Haynesville wells. We made the decision recently to keep a third frac crew busy in the fourth quarter, which we originally planned to release and then bring back in early twenty twenty, this does add about 30 million dollars to our twenty twenty spending.

[00:20:22] But the reason for it was to accelerate the completion of seven wells that before we plan to complete in 2021.

[00:20:30] And this is in order to take advantage of the higher gas prices, especially that we see for the first quarter of twenty twenty one, and it was just a it was a it was a decision based on if we kept our original schedule, we could we compare that to to to keep in this third rig, which was performing well for us. And Operations asked us to look at that. And we said, you know, we actually make 15 million dollars more by accelerating that completion into kind of the prime of the highest gas price, much on the futures curve. And so we said that's the right thing to do. If you look at the full year for Twenty twenty, if you combine the fourth quarter with that, we now expect to spend about 450 to 500 million dollars this year, which would have drilled fifty three or forty five net operating Haynesville wells and turned fifty five or forty two point two net operated Haynesville wells to sales. We also participated. We also plan to participate in 18 or one point three net non-operated Haynesville wells and turn three point eight net wells to sales at the end of this year.

[00:21:48] We now expect to have about 16 or 15 for net ducts are drilled and uncompleted wells. So as you look ahead to 2021, we expect to increase spending a little bit over the Twenty twenty level and in response to these higher natural gas prices that we see and we expect to spend between five hundred twenty five to five hundred thirty five million and trail 70 or fifty six point five net operating Haynesville Wells in turn. Sixty five of those wells are fifty six point six net wells to sales in the year. Our initial plans right now are to add a seventh operated rig and we would do that in the second quarter of next year. Obviously, as we get to that point, we'll assess, you know, the natural gas market at our region and decide if that's still a great course of action. If not, as we've seen in the past, we don't have long term commitments for drilling or completion services or or any kind of volumes to me. So it's clearly an economic decision.

[00:22:56] And what happens when we spend the CapEx and and we can react as we did this year?

[00:23:03] We can we can we can react to the market and adjust our level of spending as is appropriate. But we still remain focused on generating significant free cash flow. And we see next year as having a bounty of that. You know, with the plans we have and we target to have a minimum of at least 200 million dollars of free cash flow as we plan for any future capital spending.

[00:23:29] On slide 12, we show our balance sheet at the end of the third quarter and during the third quarter, as Jay mentioned, we issued three hundred dollars million of new unsecured notes, the term out a portion of the borrowings outstanding under our credit facility. So we ended the quarter with about 500 million drawn on our credit facility. And we do expect to continue to pay that down with free cash flow generated during the rest of Twenty twenty and into the Twenty twenty one. With a quarter ending cash position of twenty eight dollars million, our current liquidity now stands at nine hundred and twenty eight dollars million. We have just over two point two five day and seen senior notes outstanding. And that's comprised of six hundred nineteen million of our seven and a half percent senior notes due in twenty twenty five and one point sixty five dollars tomorrow night and three quarters senior notes due in twenty twenty six. So I'll now turn it over to Dan to cover the third quarter. Early results in more detail.

[Dan Harrison, Chief Operating Officer]

[00:24:29] Ok, thanks. Rolling over on slide 13. This is just the updated outline of our current acreage position, which is increases this quarter up to three hundred nine thousand net acres. We control the majority of the acreage with the ninety one percent operating position and have an average working interest in the acreage of eighty one percent. We currently have one thousand nine hundred and forty three net future drilling locations and if I had only acreage with ninety six percent of the acreage is currently held by production. Since resuming our completion program at the very end of June, we have turned fifteen additional wells to sales. This now brings our total DNC count up to two hundred and fifty two wells since early 2015.

[00:25:17] What Roland mentioned, we have added two additional rigs since our last call, and we're now running a total of six rigs.

[00:25:24] Due to the break in the fracking activity in Q2, we started out the third quarter with a total of twenty one, but we've since worked that down to 16 wells.

[00:25:35] Currently, our go forward count should remain roughly at this level through year end and into next year.

[00:25:44] We started off the quarter with two frac crews and we ramped up to three frac crews in early September when we will continue to run these three frac crews through the end of the year based on our current six rig schedule to seven rigs next year, we anticipate running on average two point four frac crews in twenty twenty one. Over on slide 14, this is our latest Hayesville Bougere Atomize Drilling Inventory at the end of the third quarter, our gross operated inventory currently stands at two thousand four hundred one locations with our net operated inventory at one thousand seven hundred sixty three locations. This represents a seventy three percent average working interest on our operated inventory. Our non-operated inventory is at one thousand three hundred fifty two gross locations with a net non-operated inventory at one hundred and eighty wells. And this represents a 13 percent average working interest.

[00:26:46] For the gross operated inventory, we have four hundred ninety four short laterals and nine hundred and five medium laterals in one thousand and two levels.

[00:26:55] Breaking this down by the gross, the gross operated in the Twilight Zone, we have fifty four percent of our locations are in the Haynesville and forty six percent or in the Beaujon. We are focused on converting our short laterals to long laterals while the total number of locations is not growing, the number of 8000 foot and longer Haynesville laterals has increased to four hundred and twenty three hundred and eighty nine at the end of the second quarter. This inventory provides the company with over 30 years of drilling locations, both in our current activity levels. 15 is a map outlined in summary of the 15 new wells that we've tried to sell since the last call, the new wells were spread out fairly evenly across our Greenwood, Walsham, our Logansport and Elmaghraby number of acreage. The wells were tested, rates 16 million a day to 35 million a day, with the twenty six million per day average up. Wells were drilled with lateral length ranging from six thousand and forty nine feet, up to nine thousand eight hundred and sixty nine feet, and we averaged nine in eighty thousand eighty eight feet for the quarter. All of these completions were completed with twenty eight hundred pounds per foot. As I mentioned earlier, we have three frac crews working today and will maintain that level of completion activity through the end of the year. The current don't count as before stands at 16, and that should maintain through the end of this year and into next year. All of. Flight 16 is a chart, this illustrates the progress we continue to make driving down the onset of these results track only our medium to long term laterals, which have the lateral length greater than 7000 feet, or DNC calls continue to trend down in the third quarter and is starting to flatten.

[00:28:50] We again received our lowest all end DNC calls today at nine hundred ninety eight dollars a. Contributing to this low cost college record low cost wells that average less than nine hundred dollars, but. This the cost is 17 percent lower than the same quarter a year ago, and it represents the two percent cost reduction from the previous quarter. The is really the same. Our current service cost, coupled with our really high completion efficiency and the smaller jobs, has really been the driver for the low cost. Since the last call was generated, enough production history on the earliest wells completed with the reduced frac intensity to evaluate to evaluate performance, we have observed a slight reduction in our laws with respect to a small degree and which makes sense at the low gas price environment we're in. Earlier in the year, starting in September, we have shifted back up to our original job in the thirty five to thirty six hundred pound per foot range as we have entered a much better gas market. Based on our most recent whale calls, we're still aiming to keep our costs relatively flat and the one thousand to one thousand and 50 foot range going forward, the market demand on services will play a large part in our cost structure. With that being said, we do believe our current cost structure will maintain through the end of the year. But we acknowledge that us and the rest of the industry may be facing some upward pricing pressure in Twenty twenty one. That kind of recaps the operations, I'm now going to turn it back over to Jay for some final comments.

[Jay Allison, Chairman and Chief Executive Officer]

[00:30:28] Thank you, Dan and also Roland. Thank you. If everybody would go to slide 17. I'll go over this slide and turn it over to Ron for some guidance. I'd like to direct you to slide 17 where we summarize our outlook for the rest of this year and our initial thoughts on next year. For the first half of this year, we've remained primarily focused on free cash flow generation and managing the company through the low oil and natural gas price environment we've been in. While natural gas prices remain relatively low through October due to elevated levels of gas and storage. The outlook for natural gas has improved substantially for late Twenty twenty and twenty twenty one driven by expectations for significant declines in natural gas supply due to a continued reduction in natural gas directed drilling and completion activity, and less associated gas production from related activity in oil basins resulting from the collapse of oil prices starting in the third quarter, we went back to work and resume completion. Operating with three frac crews in order to work through the backlog of DUCs sat down and talked up. And we've added two additional drilling rigs to generate production growth late this year and more importantly, in twenty twenty one to coincide with improved natural gas prices.

[00:31:48] We also recently made the decision to accelerate well, completions originally planned in twenty twenty one. We're keeping a third front crew working in the fourth quarter, which moves about thirty million dollars to our Twenty twenty budget from twenty twenty one in order to complete seven wells three months earlier. The rationale is that we can produce the gas related to these wells earlier and twenty twenty one in the higher gas price months. The strength that we laid out this year is our industry leading low cost structure and well, economics. With all our focus on reducing activity and delaying start up of the new wells, we expect to have about a two percent pro forma production growth this year. Next year, we expect a balanced growth of probably six to eight percent while generating substantial free cash flow there will use to pay down our debt and reduce our financial leverage. Know we've hedged almost half of our production over the remainder of twenty, twenty and sixty four percent of our twenty twenty one production and have strong financial liquidity of nine hundred and twenty eight million dollars following our recent bond offering. So with that now we'll turn it over to Rob provides with specific guidance for the rest of the year. Brian.

[Roland Burns, President and Chief Financial Officer]

[00:33:06] Thanks, Jay. On Slide 18, we provide financial guidance for the fourth quarter of twenty twenty in our initial guidance for twenty twenty one. This guidance reflects the impact of the timing of our drilling completion schedule as well as the shut ins discussed earlier in this call. For the fourth quarter, we anticipate spending one hundred and fifty, two hundred and seventy million dollars on our drilling and completion activities, which will result in twenty twenty total spending being four hundred and fifty to five hundred million dollars. That's higher than we discussed in the second quarter call due to laterals getting longer, some additional work, overactivity, some non-operated activity and in some minor leasing costs.

[00:33:52] Fourth quarter twenty production is expected to average one point one five to one point to five Bcf per day. And our twenty twenty production is expected to average at the low end of our prior guidance of one point to five to one point three bucks a day. Despite the impact of the shut ins and hurricane impacts previously discussed. Looking ahead to the next year, we're providing initial capex guidance of five hundred and twenty five, five hundred and seventy five million dollars and production guidance of one point three to five to one point four to five Bcf and FKP a day, which anticipates the addition of the seventh rig by the middle part of next year. Allawi is expected to average twenty one twenty five cents, gathering in transportation costs are expected average twenty three to twenty seven cents. The production and even more in taxes are expected to average eight to 10 cents. Our DNA rate is expected to be 90 cents to a dollar and the cash DNA is expected to be in the five percent range, five to seven percent range on a unit basis for their call. We'll just we'll turn it over for questions and answers.

[Operator]

[00:35:06] Certainly. Ladies and gentlemen, if you have a question at this time, please, press star then one. Our first question comes from the line of Derrick Whitfield from Stifel. Your question, please.

[Derrick Whitfield, Stifel]

[00:35:16] Thanks and good morning.

[Jay Allison, Chairman and Chief Executive Officer]

[00:35:18] Good morning.

[Derrick Whitfield, Stifel]

[00:35:20] All right. With with regard to the Twenty twenty one outlook, would it be fair to assume you'll see minimal production from the seventh grade? You're adding in Twenty twenty million and the real impact will be felt in Twenty twenty to where that activity increase could sustain growth and not call it six to eight percent range?

[Roland Burns, President and Chief Financial Officer]

[00:35:39] Yes, yes. This is Roland Derrick. And that's a good observation. I think, really, if you look at the way that that shell companies, especially that how we're developing, you know, the shale you know, the capital that we spend today really doesn't generate production until four to six months later. And because we always drill on pads just because it increases the drilling efficiency. So much so you have two to three wells kind of waiting before they come on line.

[00:36:05] So and given that we're looking at so I think as we look ahead and, you know, into Twenty twenty to you know, we wanted to create some guidance that even though it didn't add a lot of production to 21 and probably the action we did to actually to spend additional dollars in the fourth quarter probably has a great impact on twenty one. But but adding an extra rig know really doesn't.

[00:36:37] There really isn't a lot of production that gets on in time to really move the numbers. But what it does, I think we have a we've set the stage for a very sustainable program in the twenty twenty to versus having a higher growth rate in 21 and then going back to hardly any growth in twenty two. So I think that given the outlook for gas and the company is kind of exiting this period of very low gas prices and be very defensive when it does that, kind of a more sustainable program out there that makes sense for the overall achievement of our goals, which is to get leverage below two and and use the strength, like Jay pointed out, of the very high margins that these wells can generate in this gas price environment that we do, we're sensitive. The fact that the market doesn't like, you know, additional spending and growth. But I think, you know, I think if you focus really on that, we're a natural gas company and the outlook is so much stronger next year. It's not the same case is that oil company that's looking at a more uncertain commodity and and not a favorable kind of future. So I think we're we think that we think it's the best action for the company as to how we achieve our goals. And it also sets expectations and to something that we think we can really outperform next year and also outperform in Twenty twenty, too, and that it's not overly short term focused on just getting the maximum results next year.

[Jay Allison, Chairman and Chief Executive Officer]

[00:38:07] Well, again, our goal is to figure out on a quarterly basis how we should spend our capital dollars.

[00:38:15] That's why we've looked at Twenty twenty one commodity prices. We've looked at, you know, fourth quarter twenty twenty. We should we we should keep a frac crew busy. We should lean in to twenty, twenty one. Because, again, if you if you look at the advantage we have, I mean we we have advantage access to the demand market of the Gulf Coast. We're favorably exposed to Henrico. Right. So when we look at that, we need to lean into that that market that we have. And you see the LNG exports, I mean, they're at an all time high right now. So we think we're the weather it is or where commodity prices really are, where our leverage where it is and our low cost. I mean, the other hand, is giving us low cost and high margins. We've got to give you an outlook for the fourth quarter as well as twenty one twenty two. So we don't have any disappointing quarterly results for you again, period. That's what we're doing today. We're correcting everything.

[Derrick Whitfield, Stifel]

[00:39:14] Thanks, General, and that certainly makes sense and my follow up referencing Slide six, you guys were clearly impacted by several uncontrollable events in Q3. As you look out to Q4 and then into twenty twenty one, how do you envision that shut in metric trending over that period?

[Roland Burns, President and Chief Financial Officer]

[00:39:35] Yeah, that's a good question. I mean, you know, a large impact is always is always the simultaneous operations, which is, you know, happens now because we do you have to protect your offset production from from offset frac activity. Either we created or one of our neighbors creates it. So, yeah, I think it's you know, it's probably, you know, realistically, you know, a five percent number, you know, pretty flat. I mean, especially as we if we keep a more consistent program, I think it stays more consistent and doesn't have the kind of gyrations that unknown is is their power issues or pipeline issues that are caused by other events. And then, you know, I think what what what for the first time ever, you know, really in this late September, October period, you know, as a major producer in the Haynesville Basin, we for the first time withheld gas from the market because of the market struggling with the storage levels before it became comfortable with that level. And it's the same thing that the large producers did at Appalachia. And it's our responsibility to do that. And our actions allow that market to recover pretty quickly. And it also allowed us to realize know instead of realizing a very low price for the gas to save it and then produce that, you know, a week later at a higher price. So I think we're also going to have to be mindful of that and, you know, controlling the, you know, the flow of gas, especially the switching gas that's open, you know, and into a market, you know, every year so far, you know, there has been a sensitive period for gas as it exits the injection period and storage fills up in this October is is just it's been that transition now that we had it last year in twenty nineteen, but not as severe and this year or two. But the good news is it seems like we've made the good adjustment through it. And operators like us, you know, have responded and very proactive to to keep in the you know, to keep in that situation workable.

[Jay Allison, Chairman and Chief Executive Officer]

[00:41:42] I think, you know, you won't see the impact of the private equity backed Haynesville players, but, you know, they'll have the same shot in issue. I think the good thing for Gulfport, you noticed, you know, we did add about 4000 or so acres to our footprint. So we've got three hundred nine thousand acres. We do spread our drilling program out to the north, south, east west, both in Texas and Louisiana. And when you you know, when you look at our drilling program, we kind of have a pool of information from the offset operators and we figure out when they're going to drill, when they're going to complete. And we would try to toggle all of our programs around because of our large footprint to not have quite as much exposure to these shut ins. But again, I think, you know, Dan will tell you that there's probably five percent to say five. And that's just kind of where we are right now. Even with our footprint, there will you know, we put out our modeling, our guidance from has done that. And he's going to start that type of handicap in the future.

[Roland Burns, President and Chief Financial Officer]

[00:42:42] And we didn't focus on it much, Derek, in our conversation earlier, like we normally do, but, you know, we do have initiatives going on in 2001 that we're going to be able to to really get less and less gas sold at Prairieville, which is, you know, that's that's more vulnerable to especially for gas coming out of Basen like it did, you know, in disrupting that basis. So we've always had a goal of removing ourselves from that market.

[00:43:06] And I think next year, you know, there's several initiatives. The big one, obviously, is the KTLA and opening up. But we also have we've also been working with our midstream partners to give us some other ways to bypass Perryville and get in, move gas or to the Gulf or at least have the flexibility to respond to that.

[Derrick Whitfield, Stifel]

[00:43:29] That's great. Extremely helpful. Thanks for your time, guys.

[Jay Allison, Chairman and Chief Executive Officer]

[00:43:32] Thank you.

[Operator]

[00:43:34] Thank you. Our next question comes from the line of Dan Macintosh. Susan Rice, your question, please, for Jack.

[Dun McIntosh, Johnson Rice]

[00:43:42] Thanks for joining us tonight. So far, I have a question and understand the pick up in activity and that attack and leverage can be a little easier from the EBITDA side sometimes to how, you know, under this new program, where do you see leverage over twenty one and twenty two and, you know, target in that, you know, we talked about in Afghanistan in the next year.

[00:44:04] But getting down at that two times, does this get you there faster or what does we all use some numbers I think, but we will deliver faster and it's all because of the market demand and the process. We get it Henry up now. We do deliver, you know. Well, we had all of our one on one conference calls. We said the only reason we would add Irig or complete wells earlier is if it allowed us to deliver quicker. But that's the reason you do it so wrong. You have a number here.

[Roland Burns, President and Chief Financial Officer]

[00:44:37] I think we get very close to getting down to our two times, but as we finish up twenty two with this plan, and I think by investing a little bit in the 21, it actually allows us to hit that goal there versus just being shy of it.

[00:44:53] If we let 20 to just have kind of an under and have a more of a flat production profile. Again, we're we're done. It's been it's been erratic for the company, obviously, to go from growing a thirty four percent rate, you know, back, you know, in twenty eighteen to two percent this year is probably what is going to end up in, you know, with all the and then you go back to more sustainable levels, you know, the six to eight percent and that. But we're really targeting to try to get to more of a five percent growth that to balance some growth, to improve the tax, to get that leverage ratio down faster. At the same time, though, also reduce the overall level of debt and keep keep a lot of free cash flow as a as a big target. And, you know, the strip today gives us that opportunity to achieve all of that, you know, with this program in this two year period.

[Jay Allison, Chairman and Chief Executive Officer]

[00:45:46] And then that gives us a growth in Twenty twenty to maybe five percent. So what our goal today, again, is to reset the program for the fourth quarter.

[00:45:55] Twenty and for twenty twenty one. Twenty, twenty two. That's exactly our goal. So that was a great question. It is all about delivering with where we are and the locations we have and the profits that we make.

[Derrick Whitfield, Stifel]

[00:46:09] All right, thank you. And then for my follow up on the you know, you mentioned in the call, maybe move into a little bigger, bigger profit where, you know what what kind of drivers behind that decision is that moving to your base or is that more to bring bring volumes on faster at the front of the curve to kind of try to capture this this higher price environment that we look like we're heading into?

[Dan Harrison, Chief Operating Officer]

[00:46:34] Yeah, it is a dance. So, yeah, you hit on it there at that first point and made us all even more driven, which basically is hand in hand with our performance. You know, when we come back, earlier this year when we went down to these smaller jobs, we were in the lower gas prices and we did anticipate maybe a five percent reduction in a year, which we ran the numbers. You know, that made sense to basically test that says we you know, we're seeing Eeyore's more like maybe eight to 10 percent smaller for and this is really for the oil maybe be are over in that state line area, the Greenwood, Walsingham area. And so when you run it at the higher gas prices, I mean, it's clearly, you know, you need to pump the the bigger jobs, which also means you're pumping more water.

[00:47:21] It's just you know, it's just a matter of the economics. I mean, the wells deliver a better PV 10 value when you do that at the higher gas prices.

[Jay Allison, Chairman and Chief Executive Officer]

[00:47:29] I think it's a good question, too, because we intentionally, you know, we set the book and we look at companies that use five, six, seven thousand pounds of profit, we we didn't think that would be what we needed to do. We dropped down to the lower book, down to this twenty four thousand six hundred pounds and water, like Dan said. And so we've kind of test at the bottom at a low gas price, then you should do that because you do save precious dollars right up front. But when you have a gas price, you know, two, ninety three, three, 10, three, 20 and you look to be value and you look at how quick this will pay out and the increased volume and it's easier to say, you know, the right thing to do is to spend a little bit more money. And we're still in that thousands of thousand fifty four complaints put to have a much better performance, which drives our leverage. So, you know, it's our job to tell you that, too. We didn't try to hide that.

[00:48:21] We should we should probably go back up there because we did test it and we know what we need to do.

[00:48:28] Great question.

[Derrick Whitfield, Stifel]

[00:48:30] Thank you.

[Operator]

[00:48:30] Thank you. Our next question comes from the line of Umang Choudhary from Goldman Sachs. Your question, please.

[Umang Choudhary, Goldman Sachs]

[00:48:40] Hi, good morning. You mentioned that gas prices are driving a decision to EBITDA to me deleverage because if philosophically talk to what would drive a shift to lower activity and spending in favor of more free cash flow. Is that a gas price point at which you would reduce activity? And how has that price point evolved, given recent reductions to lower cost?

[Roland Burns, President and Chief Financial Officer]

[00:49:06] Well, I think that it is definitely gas prices that that are a factor that and how we look at the whole picture. And obviously, gas prices are are not what the futures market is anticipating for Twenty twenty one and they underperform that. We would definitely reassess our spending because I think that free cash flow goal, you know, we're going to maintain it. And so I think that that is definitely a big factor. And I think we we think we've gotten the overall as the market seems to be fairly comfortable that at least in one, the stage is set for this three dollar kind of area gas price. And we'll certainly reassess adding a rig by midyear next year if it's not at that level anymore. So we're not we're not at all locked in to one strategy, but we wanted to present more of a balanced program that didn't just focus on twenty one and and absolutely maximum of twenty one, which the six week program really can do. But that comes at the expense of, you know, of twenty two. And you stop making the progress toward your, your leverage goals in twenty two if you don't make any investment for it. So that that was the goal day go on.

[Jay Allison, Chairman and Chief Executive Officer]

[00:50:27] And again the beauty is we don't, we don't have any palm transportation obligations at all just to drill. We don't have any minimum volume commitments to call, just to drill. Ninety six percent of our acreage is held by production. So our capex budget is just driven internally by, you know, what we need to do to to to improve our balance sheet and pay down our debt.

[Roland Burns, President and Chief Financial Officer]

[00:50:49] But we'll be very reactive to the change in environment. So, you know, we you know, as we were this year playing defense in the first half of this year, we can be very reactive because we don't have long term obligations that that drive us to have to drill any wells at all.

[Jay Allison, Chairman and Chief Executive Officer]

[00:51:10] Yeah, the other thing people forget, I mean, our denominator is the consistency of our wells. We have 30 years of inventory at this rate. I mean, we usually people worry about the quality of your locations. Now, nobody ever asked us about that. So we've taken that off the table. So I just say, how can you deliver? I mean, how can you deliver? And you know where we are? We're the only pure and full sized company this size. We say, well, again, our our advantage is this access to the Gulf Coast. And we we do have great gas prices. So let's use our strength. We can't act like another company in another basement. We've got to act like we are in our basement. And that's why we've got to tell you, we're going to reset the whole program for the fourth quarter of this year and twenty one twenty two. We also tell you that whatever we need to do, we need to shut in spewing gas because prices are low. You're now saying that we've done that. We demonstrate that we will do that again. If we need to go back to lower profit, prices are lower. We'll do that. We need to go back to higher profit and we'll do that again.

[00:52:19] Our goal is to be very transparent with you as a partner as we we create even a greater company.

[Umang Choudhary, Goldman Sachs]

[00:52:29] Thank you for the call. That's really helpful. Thank you, sir.

[Operator]

[00:52:33] Thank you for the time and the question that you. And as a reminder, ladies and gentlemen, if you do have a question at this time, please press star, then one. Our next question comes from the line of Kevin gurning from Citi. Your question, please.

[Kevin Cunane, Citigroup]

[00:52:47] Hey, good morning. Just a quick one on Twenty twenty one expectations. You know, obviously, as you and a few others increased growth next year in light of higher prices. What are you looking at as far as not off spending for the year? And, you know, are you seeing any of those private equity backed companies kind of gearing up for higher production growth next year as well?

[Roland Burns, President and Chief Financial Officer]

[00:53:11] Yeah, we don't see know. We have very limited touch points with other companies that are not part of our portfolio has always been fairly small. And basically that we we really like to do acreage trades to try to even make it smaller.

[00:53:28] And I think that we actually finished some really good acreage trades that you saw kind of come through the location numbers and acreage numbers this quarter with geos other than Indigo that really improved our overall lateral overall and reduced our not up potential activity in the future and also actually gave us more locations in our very, very best, you know, lowest transportation cost area. So it was really a big win. And I'm sure that we also met their goals, you know, and things they were trying to accomplish.

[00:54:03] And so, yeah, we still see not off as a very not a big part of our budget. And and frankly, if another project doesn't meet our high expectations, you know, we've we've now got good partners that want to buy those interest. And so we're we're very tuned on saying, hey, if we can't generate a really good return from that up, you know, we'll sell down the wellbore to people that are invested in that.

[00:54:26] So, you know, I think we probably always have budgeted I mean, you might say we have potentially 35 to 40 million dollars of nonstop activity that we kind of always expect to have.

[Dan Harrison, Chief Operating Officer]

[00:54:38] That's about right. But it is typically average and in that six to eight percent of the total budget.

[Roland Burns, President and Chief Financial Officer]

[00:54:44] But we're very proactive at trying to disarm that before it becomes a big number. Because nobody wants to be just never like being in properties, you know, generally.

[Kevin Cunane, Citigroup]

[00:54:58] Right. Understood. That's it for me. Thank you for the.

[Operator]

[00:55:02] Thank you. Our next question comes in a line, Phillip Johnson from Capital One, your question, please.

[Phillips Johnston, Capital One]

[00:55:08] You guys, thank you. I also wanted to ask about the twenty one program, I think it was only a month or two ago you guys were talking about running six rigs throughout next year and growing only by three to five percent for about 450 million in CapEx. Now, it sounds like you're you're talking about adding a seventh rig in the second quarter, spending closer to 550 million and growing by six to eight percent. Sounds like that the change in tack mainly relates to just the stronger gas prices that you're seeing on the strip. And obviously that that that helps your leverage ratio if the strip plays out. But, of course, that's that's only if the strip sort of holds true or if you actually hedge the strip. So I guess my question is, why chase those higher prices that you're sitting with, with higher activity? Why not just let the higher prices flow straight to the bottom line in terms of additional free cash flow? And if you if you like the prices and actually want to grow by that amount, why not just hedge the majority of your production for both twenty one and twenty two?

[Roland Burns, President and Chief Financial Officer]

[00:56:14] Well, I think it's because I think I think for 21 I think your your suggestion would be a way to optimize it. But we think that's very short term thinking. And if you're focused on twenty two is, I think the more people will become more focused on it as we get in the middle of 21 one, you know. Yeah. That underinvestment really means no growth in production in twenty two.

[00:56:39] And so I think that we're really making an additional investment really for twenty two and you know we can defer it if we, if so if, if the prices are weaker we won't add the seventh rig. We're not, we're not committing to it and we're in advance at all. But is to present you a more balanced program in twenty that's sustainable versus a program than twenty one.

[00:57:03] That's absolutely just maxed out to produce short term results because you know, before you know it, you'll be in twenty two and then all of a sudden they'll be like, well you know, you're no longer making any progress toward, toward deleveraging because you haven't made enough investments.

[Jay Allison, Chairman and Chief Executive Officer]

[00:57:20] So we thought we would level it out. Again, that's accelerating a little bit of capex in the fourth quarter to level out the beginning of twenty, twenty one and be really consistent when prices are high. Right now we have sixty four percent hedged in twenty twenty one and then propel you over into twenty, twenty two to five percent production growth. And at the same time we do think that, that we balance two things. We balance the growth properly and then we've delivered quicker at the same time. So it's not that we have to make a big correction sometime in the latter part of twenty twenty one to change what we're doing in twenty, twenty two. Because, you know, if you don't spend a decent amount of money drilling, your production will drop off any of these shell companies, whether they're Appalachian or oil doesn't matter. You do have to have a decent amount of spending. And where we're located, it tells us that we we need to we need to balance this budget today. And we said it today, Philip, and you've been very nice in your writings about what you expect us to do. And then we don't want to disappoint anybody and we want to make sure everybody knows why we're laying this out and knowing we can change it. We need to change it. We can change it. Processes go a little higher. We change it. It's like a law to change it.

[00:58:40] But we think this is the right this is the right way for the next two years and two months.

[Roland Burns, President and Chief Financial Officer]

[00:58:48] Yeah, the free cash flow is not being sacrificed, I mean, given these are the prices that we see, you know, we are still going to have have very substantial free cash flow at the same time, have a the right investment. So then you look up and say, you know what, 22 looks pretty good, too. It's not like this is a one year wonder.

[00:59:05] And and I think that's that's the opportunity. But like we as we answer the question before, we're looking at prices every day both and we're looking at the NYNEX prices and the future Stryper, you can't hedge. And then also, you know, the cash prices.

[00:59:22] And, you know, we will be very reactive to that and and not and and not end up, you know, accelerating capital expenditures and declining price environment, that that's something we definitely want to do.

[Phillips Johnston, Capital One]

[00:59:38] Yeah, I mean, I guess I guess the concern is it was only less than 30 days ago. We're shutting envie because of low spot price is right. And then we're talking about adding an additional rig next year. So I guess my my follow up would be, would you look to hedge more twenty one. I'm sorry. Twenty two volumes before you added that seventh rate.

[Roland Burns, President and Chief Financial Officer]

[00:59:59] Oh, definitely. And that's you know, by the time we add it, you know, that their hedge positions need to be more established for twenty two hour positions. We want to be between 50 and 70 percent and maybe 60 to 70 percent over the next 12 months. So the oil are not going to be going into on a hedge basis.

[01:00:18] So we will continue to deliver on the hedges and the time frame that we continue that we promise, which is that 12 to basically 12 months, but 12 to 18 months. So, yeah, and if we can't, we have to be able to establish those to support that rig. If not, it won't happen.

[Jay Allison, Chairman and Chief Executive Officer]

[01:00:34] Yes. For the leverage we have. I mean, we we have to hedge. We should do that. So, yes, that's a commitment to you.

[Phillips Johnston, Capital One]

[01:00:42] Ok, that makes sense, and then maybe just also, if I could just I guess there's there's been some obviously some large corporate mergers announced in the last 90 days or so. Just wanted to get your latest thoughts on this potential consolidation in the heinzel.

[Jay Allison, Chairman and Chief Executive Officer]

[01:00:58] Well, you know, our goal is we hopefully today we reset the program and our execution will be, you know, we'll be a happy meeting. I think that if we continue to execute, I think the stock price will perform. I think that you're going to have some stranded Haynesville producers that will need to do something. You know, hopefully what we've done, we've set ourself in the middle of kind of the square where to go to to exit. You got to talk to us to look at us and we can evaluate if there's an opportunity for us to grow and have our market cap and more size, but at the same time continue to deliver and to continue to have our high margins. And if we can't do that, then we're not interested in any of those opportunities. I think we've been smart enough to to say yes on the covid parts of the world and some others. And we we we're not going to lose that edge that we have because that edge is everything, but we're not going to lose it. And yet, you know, we're not we're not going to go sit in the corner and look at opportunities to expand that if, in fact, those make of the equity owners are stronger and the bond holders stronger than our bank stronger. So we're going to keep shopping all the time and we'll keep executing.

[Phillips Johnston, Capital One]

[01:02:23] Thanks, guys, appreciate it. Sir.

[Operator]

[01:02:26] Thank you. Our next question comes from the line of Cachay Henderson from Simmons Energy. Your question, please.

[Kashy Harrison, Simmons Energy]

[01:02:35] Good morning and thank you for taking my questions. Just one, one or two quick ones for me. So I was wondering if you could give us a refresher on how to think about, you know, corporate base declines. I'm assuming since you you pretty much shut down activity over the last few months, you have, you know, improved visibility onto what that corporate decline looks like and then maybe how we should think about that expectation, your corporate decline expectations over the next several years?

[Jay Allison, Chairman and Chief Executive Officer]

[01:03:08] Well, what we've what we've messaged in the past, that that the the corporate decline rate's about 40 percent up or 30 to 40 percent. You know, if we look out over the course of the the next year, it's around that 40 percent level in in then it'll improve kind of by five to 10 percent in the in the second year and and then continue to flatten out as as we have more of the established production base in at a at a lower decline. So that in terms of the first 12 months, kind of that plus or minus 40 percent going down to.

[01:03:52] I guess twenty five to 30 percent and then and then kind of flattening out there.

[Kashy Harrison, Simmons Energy]

[01:04:03] Got it, got it. That was it for me. Thank you.

[Operator]

[01:04:07] Thank you. And this does conclude the question and answer session of today's program. I'd like to hand the program back to Jay Allison for any further remarks.

[Jay Allison, Chairman and Chief Executive Officer]

[01:04:16] Yes. And again, everybody that stayed the whole hour on the call, I mean, we're you can't imagine how thankful we are that you spent that hour with us. And again, our goal is to reset the program for the fourth quarter of this year and then at twenty, twenty one Twenty twenty to give you something that we think we can can really beat. And we want to just his cap structure to maximize our advantage, to access this to this demand market that we have in the Gulf Coast. That's a great advantage we have. It's a it's a material geological advantage. We have we just have some great exposure to the enrichment process right now. We want to use that. If we if we need to change this budget, it'll be pulled back. But but it's real and it's reset and it's good. And again, we thank you for being a partner with us. And I think the brighter days are ahead of us in our rearview mirrors, pretty small. And the windshield is really big and gas prices look really good.

[01:05:18] And you've got a really good team here committed. And, you know, we take that there's a good day or bad day. We take whatever the day is and we're accountable to you. So thank you. Thank you. We'll give you our best.

[Operator]

[01:05:33] Thank you, ladies and gentlemen, for your participation in today's conference, this does conclude the program. You may now disconnect. Good day.