Mach Natural Resources LP

NYSE:MNR

Earnings Call Analysis

Mach Natural Resources Targets Growth with Increased Rig Count and Strategic Acquisitions

In Q3 2024, Mach Natural Resources reported a production rate of 82,000 Boe per day, generating total revenues of $256 million and adjusted EBITDA of $134 million. To enhance growth, the company plans to increase its rig count from 2 to 3 by 2025, focusing on drilling deeper and more efficient wells. Their average completed well cost decreased from $248 to $231 per foot in Q3. The firm aims to maintain a reinvestment rate below 50% to optimize distributions, promising a distribution of $0.60 per unit in December. They also successfully closed two acquisitions, adding about 5,000 Boe per day, further supporting future production enhancements.

Mach Natural Resources: A Robust Path Ahead

Mach Natural Resources recently shared its financial and operational results for the third quarter of 2024, indicating a solid foundation for growth driven by strategic acquisitions and disciplined operational execution. The company's strategy focuses on maintaining financial strength with an aim for a long-term debt-to-EBITDA ratio of 1x or less, as well as ensuring returns remain robust even in fluctuating price environments.

Solid Quarterly Performance

In Q3 2024, Mach Natural Resources produced approximately 82,000 Barrels of Oil Equivalent (Boe) per day, consisting of 23% oil, 53% natural gas, and 24% natural gas liquids (NGLs). The average realized prices were $74.55 per barrel for oil, $1.73 per Mcf for gas, and $22.61 per barrel for NGLs. Total revenues reached $209 million, contributing to adjusted EBITDA of $134 million. The company's proactive cost management led to a lease operating expense (LOE) of $44 million or $5.85 per Boe, which aligns with the low end of its guidance range.

Growth Through Acquisition and Rig Expansion

Mach is set to increase its operational capacity in 2025 by expanding its rig count from 2 to 3, with plans for more aggressive drilling in key areas like the Ardmore Basin. Two of the three rigs will focus on deeper wells, while the remaining rig will drill shallower Oswego wells. The anticipated completion of 40 gross wells stands out, reflecting the company’s strategy to enhance production while leveraging recently acquired properties.

Strategic Positioning with Controlled Risk

The management emphasized a disciplined reinvestment strategy, targeting a reinvestment rate below 50% of operating cash flow. This approach enables Mach to return substantial cash to its unitholders, with a recent distribution of $0.60 per unit confirming their commitment to return cash in a variable manner aligned with prevailing commodity prices. The use of hedging also positions the company to mitigate risks associated with price volatility, with 50% of the next 12 months' production hedged.

Navigating Challenges with Financial Discipline

Despite achieving positive results this quarter, the company foresees a higher LOE in 2025 due to the flush production from newly acquired assets. However, this is not expected to negatively impact overall guidance, as the company remains committed to upholding its low leverage profile. The recent acquisitions have enabled Mach to maintain financial flexibility while targeting further growth, with total cash reserves at approximately $184 million as of the last earnings call.

Looking Ahead: Opportunities and Investments

Mach Natural Resources continues to explore new acquisition opportunities focusing on undervalued assets that can drive production growth and potential increases in distributions. The company targets synergies from its assets while keeping an eye on market conditions for both gas and oil, adapting its strategy to capitalize on favorable pricing dynamics. Notably, the operational strategy is flexible enough to pivot according to market shifts, allowing for an agile response to changing economic conditions.

Steady Revenue Projections

The company remains optimistic regarding its revenue guidance. The increasing rig count and planned drilling activities in the Ardmore Basin and neighboring regions are expected to enhance production capacity. Additionally, management anticipates maintaining their distribution rates, confirming their ongoing commitment to shareholder returns while navigating the energy market landscape strategically.

Earnings Call Transcript 2024-Q3

[Operator]

Good morning, everyone. Thank you for joining today's call to discuss Mach Natural Resources Third Quarter 2024 Financial and Operational Results. During this morning's call, the speakers will be making forward-looking statements that cannot be confirmed by reference to existing information, including statements regarding expectations, projections, future performance and the assumptions underlying such statements.

Please note, a number of factors will cause actual results to differ materially from their forward-looking statements, including the factors identified and discussed in their press release and in other SEC filings. For a further discussion of risks and uncertainties that can cause actual results to differ from those in such forward-looking statements, please read the company's annual report on Form 10-K, which is available on the company's website or the SEC's website.

Please recognize that except as required by law, they undertake no duty to update any forward-looking statements, and you should not place undue reliance on such statements. They may refer to some non-GAAP financial measures in today's discussion. For reconciliation from non-GAAP financial measures to the most directly comparable GAAP measures, please refer to their press release, which is available on Mach's website, and their 10-Q, which will also be available on their website when filed.

Today's speakers are Tom Ward, CEO; and Kevin White, CFO. Tom will give an introduction and overview. Kevin will discuss Mach's financial results, and then the call will be open for questions.

With that, I will turn the call over to Mr. Tom Ward. Tom?

[Tom Ward, executive]

Thank you, Daryl. Welcome to Mach Natural Resources Third Quarter Earnings Update. As a reminder to anyone listening who might not know too much about Mach, we are an upstream energy MLP. We like the attributes of the MLP model for unitholders, the tax benefits and the focus on returning cash. We also remember and acknowledge the misgivings that others made during the previous period, now a decade ago due to chasing growth with runaway leverage and fixed distributions along with misalignment between the unitholders and the general partner.

Our strategy from the beginning was to buy distressed cash-flowing properties when others were seeking growth through leasing and drilling and outspending cash flow. We were certain the growth model was flawed. And as a result of their failure, we were able to purchase the bulk of our cash-flowing assets at steep discounts to PDP PV-10.

It was not the assets that were bad, but the execution of the asset. We feel the same way about the upstream MLP model. Therefore, we came up with 4 pillars to build a successful company as follows. Number one, maintain financial strength. Our goal is to have a long-term debt-to-EBITDA ratio of 1x or less. By maintaining a low leverage profile, we give ourselves opportunities when the markets experience high volatility.

Number two, disciplined execution. We acquire only cash-flowing assets at a discount to PDP PV-10 that are accretive to our distribution. Number three, disciplined reinvestment rate. We maintain a reinvestment rate of less than 50% of our operating cash flow. By keeping our reinvestment rate low, we optimize our distribution to unitholders. Number four, maximize cash distributions. We target peer-leading distributions. This pillar drives all decisions.

In order to maintain the 4 pillars of our company, we also need to emphasize that our distributions are variable. Therefore, we distribute more cash to our unitholders in times of rising prices. We want exposure to energy for the long term and like being invested in a company that has upside to commodity pricing. We believe that the poor 7 billion people on earth want to achieve the same standard of living as the wealthy 1 billion. Energy will be the key catalyst for them to do so. Over time, this shift will drive demand for our products, not to mention the increased demand for power generation that's already widely discussed.

However, in quarters of lower pricing, our distribution will also be lower. To offset large risk to falling prices while maintaining exposure to gains, we have chosen to hedge 50% of our next 12 months' production and 25% of the second 12 months. Since 2018, Mach has invested $1.9 billion by raising $520 million of equity. We have $600 million of net debt, and we will have distributed $962 million to unitholders. This results in an actualized MOIC of 1.9x and an average CROCI over the last 5 years of 31%.

We did all of this without selling any producing properties and built a company that has $2.3 billion of enterprise value. In the third quarter, we realized average prices of $74.55 per barrel of oil, which is 6% lower than Q2 and $1.73 per Mcf of natural gas.

If crude prices or natural gas prices were to deteriorate even further, we are positioned to make acquisitions that ultimately will be accretive to our distribution due to maintaining low amounts of leverage. If prices move up, we are positioned to use more than -- our more than 1 million acres of land across the Anadarko Basin to drill more aggressively while staying within our 50% reinvestment rate.

This ability to pivot is one of our unique strengths and will continue to underpin our success regardless of which stage of the commodity cycle we are in. Another point of pride is the ability to assimilate acquisitions into our company at very low cost. Our lease operating expense for the third quarter was $5.85 per Boe, which is at the low end of guidance.

For the third quarter, we drilled and brought online 11 gross and 9 net wells while running 2 rigs. We also had 5 gross and 4 net operated wells in various stages of drilling and completion. Our guidance for 2025 increases our rig count to 3 rigs with 2 drilling deeper wells and 1 drilling the shallow Oswego wells.

We plan to expand our drilling in 2025 to locations in the Ardmore Basin on our recently announced acquisition lands in Stephens County, Oklahoma, drilling the Mississippian Sycamore formation and Woodford wells, plus in previously held Custer County, Oklahoma drilling [ Deep Miss ] and Red Fork locations, along with the locations in Canadian County, Oklahoma.

Drilling is important to us, generating attractive returns and offsetting natural production declines while keeping the reinvestment rate at or below 50% However, acquisitions will be the primary driver for production growth and associated growth in future distributions. As I mentioned, in Q3, we had 2 rigs running. We continue to find ways to drill more lateral length while spending less per foot.

In the Oswego, we averaged spud to total depth, time of 7.43 days while spending $204 per lateral foot. This compares to an average of 10.1 days and $206 per lateral foot in Q2. We also increased our lateral length from 6,123 feet to 6,536 feet in Q3. Our overall cost per completed foot fell from $248 to $231 from Q2 to Q3. In the Woodford, the average completed length was 10,222 feet compared to 10,122 feet in Q2, while the cost per completed foot moved down from $368 to $357. The average drilling and completed -- completion cost was $7.7 million compared to our predecessors $9.7 million.

In both areas, our service costs have remained constant, except for a small reduction in [ casing ] prices during the quarter. In the third quarter, we completed a follow-on public offering, generating proceeds of $129 million to fund the 2 acquisitions announced. We continue to use equity as a useful tool to keep our leverage low while adding to our distribution per unit. As a large unit owner, I'm pleased to fund acquisitions in this manner while increasing our distribution per unit, all the while maintaining our leverage at or below 1x.

During the quarter, we have noticed that our pipeline of deals continues to improve. We have more interest from parties willing to sell at prices that are moving into our range and also parties that are willing to engage in discussions regarding trading producing assets for our units. We will see if this materializes into deals that create higher distributions per unit in the coming year.

With that, I'll turn the call over to Kevin to discuss our financial results.

[Kevin White, executive]

I would like to open with a quick reminder that the comparative income and cash flow statements for both the third quarter and year-to-date for last year reflect only the results of the predecessor entity Mach III, whereas the 2024 reported results capture all of the entities and assets of Mach Natural Resources.

For the quarter, our production of 82,000 Boe a day was 23% oil, 53% natural gas and 24% NGLs. Our average realized prices were $74.55 per barrel of oil, $1.73 per Mcf of gas and $22.61 per barrel of NGLs. Of the $209 million in total oil and gas revenues, the relative contribution for oil was 60%, 20% for gas and 20% for NGLs.

On the expense side, our LOE of $44 million or $5.85 per Boe, again, came in at the low end of guidance. Cash, G&A was approximately $8 million or only $1.08 per Boe. We ended the quarter with $184 million in cash, a bit elevated since we did not close the Ardmore Basin acquisition until October 1. Our $75 million revolver was undrawn and our first-lien term loan principal was approximately $784 million.

Total revenues, including our hedges in midstream activities totaled $256 million. Adjusted EBITDA of $134 million, and $111 million of operating cash flow. After CapEx of $53 million, we generated $52 million of free cash, which we used to pay $21 million of principal on the first-lien term loan and the remainder plus excess balance sheet cash results of the $62 million or $0.60 per unit distribution for this quarter. As we announced, this will be paid on December 10 to holders of record as of November 26.

Darryl, I'll now turn the call back to you to open the line for questions.

[Operator]

[Operator Instructions] Our first questions come from the line of John Freeman with Raymond James.

[John Freeman, analyst]

First question. So the 2025 plan, you said assumes a [ 3-rig ] program, just given you all highlighted the improved cycle times and lower cost per foot, what is the 2025 program assumed for turning lines?

[Tom Ward, executive]

For turn ons, how many wells we're turning on. I'll get that for you in just a second. I hear it's -- John, it's -- kid says it's a little over [ 40 ] gross wells.

[John Freeman, analyst]

Perfect. And then just sort of a tack on to that. I know like the 2024 program, it was a lot heavier front-end program. Obviously, 1Q was dramatically bigger sort of activity for you all for the year. Is the '25 program a little bit more smoothed out? Is there any lumpiness that we need to be aware of in that program.

[Tom Ward, executive]

Well, that's not set up to be so -- as the '24 program really wasn't when we we first went into it. It all depends on pricing and the 50% reinvestment rate. Right now, we plan to have the third rig coming in February, and that will go to the Ardmore Basin to start drilling. So we anticipate keeping that rig in Southern Oklahoma basically throughout the year. And then having a rig working between Canadian County in Central Oklahoma to Western Oklahoma, the Red Fork sand play that's being developed.

They're currently in some of our other Mississippian -- deeper Mississippian wells in Custer County. So I don't foresee anything being lumpy, but if crude prices were moved down or natural gas prices further and it looks like we'll be -- it would be over our 50% reinvestment rate, then we would move back on CapEx.

I guess the opposite would be true if we made an acquisition or we had more operating cash flow through higher prices, we'd add a rig.

[John Freeman, analyst]

That definitely makes sense. And then if I could just sneak one more in on LOE. Obviously, for the year, you all have averaged well below that full year guidance. I think you're right around a little over $5.5 of Boe relative to the guide of $5.8 to $6.10 obviously implies kind of a step-up, a fairly meaningful step-up in 4Q. Just any sort of color around that would be helpful.

[Tom Ward, executive]

You go ahead and answer, Kev. Kevin is going to answer.

[Kevin White, executive]

John, this is Kevin. I think the higher guide for LOE per Boe in '25 is driven mainly by flush production this year. With the newly acquired Paloma assets and that steeper decline profile, it drove down our LOE per Boe metric this year a little bit.

[Tom Ward, executive]

Yes, the Paloma wells that we inherited were very high producing, a lot of gas with them, too. So that had low lifting costs.

[Operator]

Our next questions come from the line of Charles Meade with Johnson Rice.

[Charles Meade, analyst]

My first question might be for Kevin, but obviously, you guys will decide. You guys closed the most recent 2 acquisitions, I guess you closed the latter of the 2 on October 1. Can you give us some sense of how the early days are going there and what we should be thinking about for the incremental volumes from that acquisition, which is, I guess, maybe a roundabout way of asking, what should we be thinking about for fourth quarter production?

[Kevin White, executive]

Yes, for both the Ardmore Basin and the Kansas assets, the grand total of the combined production, I think, was about 5,000 Boe a day when we acquired them. And that really wasn't high enough to push us in the fourth quarter to expect to be out of the guidance range.

[Tom Ward, executive]

Yes, Charles, Whenever we made guidance originally, we had 3 rigs running in the quarter -- first quarter of last year, and this kind of brought back up into the higher end of guidance.

[Charles Meade, analyst]

That makes sense. That's helpful. I didn't see it that way before. And then Tom, you mentioned drilling in Custer County, the Red Fork and the deeper Mississippi. And I think that that's further west in the Anadarko than you've drilled at least as Mach. And I wonder if you could put that -- tell me if that's the right read and put those -- put that planned 2025 Custer drilling in context of what we should expect from those targets?

[Tom Ward, executive]

Yes. We have -- we participated in several Continental wells in Custer County over the past few years, and had a nice block of acreage. We purchased from [ MEP ] in 2021, I believe. And that acreage has been sitting there. And now with the deeper rig that we have operating, it is capable of drilling those types of wells. So we just incorporated really -- all as we look forward is rates of return and the Red Fork area for carry that's being developed by Mewbourne in Western Oklahoma has been good, all up and down [ due ] to Custer and on out the Turkey shale that they have in, in Ellis and Roger Mills is being developed also.

So all in all, as we're not usually and really don't pride ourselves on being first movers. But once somebody establishes an area around our locations, if it can compete from a rate of return with our existing units to be drilled, we put it in our drilling plan.

So that -- you might see a little more gas coming out of those locations also. The 2025 program is probably a little more lumpy from production just because of more pad drilling from actually even going 2 different directions in the Ardmore Basin. We will drill Sycamore or the Mississippian and the Woodford, 2 different locations, but bringing them on at the same time and in the same basic unit.

So we'll have from 2 to 5 locations at once coming online. And with the 2-rig program that we have at the Oswego, we'll continue to be a well at a time in 2025. But that's -- as you kind of look at the oil guidance, it it is deferred some out into 2026 from the actual -- the drilling delays that take place in 2025 from pad drilling.

[Operator]

Our next questions come from the line of Neal Dingmann with Truist Securities.

[Unknown Analyst]

Tom, would love to hear just your thoughts again you guys have been great on some of the accretive M&A deals. I'm just wondering what you're seeing out there. What -- how -- when you're looking at deals out there right now, I'm just wondering gas versus oil deals or I certainly -- I know it depends on the play. I guess let me ask it this way. If you look at an area like just Barnet gas or something like that, it's a little bit off track versus maybe like Mid-Con, I'm just wondering how sort of prices compare when you're looking at sort of gas over oil assets.

[Tom Ward, executive]

Sure, Neil. We are looking all around both for gas and oil now more outside of the Mid-Con than we have in the past. We're working on a couple of small acquisitions that are -- one inside the [ Mid-Con ], one just outside of it, that we'll see if they come across the finish line in the next couple of months. But we see some kind of stranded areas that are not Tier 1, wouldn't be considered Tier 1 Marcellus.

We see some areas even like ArkLaTex that you can find some other good potential acquisitions. On the gas side, maybe Southern Delaware and some other areas in and around the Permian. Or from an oil perspective, we love to buy 60 -- the oil in the [ 60s ] and have it backwardated in the curve. So we continue to look for oil opportunities also.

[Unknown Analyst]

No, you guys have certainly done some nice deals. And then just secondly, I would be curious to know, I don't -- I know you haven't drilled a ton of them yet, but just wondering how do -- you mentioned some of the deeper Mississippi wells and just wondering when it comes from a -- to generate a return, how does -- what's your thought on how those wells compete with some of your other [ leading ] wells?

[Tom Ward, executive]

Yes. Our Custer County deep gas wells are extraordinarily good. So I think they -- I mean, from a rate perspective, so we look at these as being highly competitive to virtually anywhere in the lower 48 from a rate of return perspective. I'm -- also, as -- my guess, fairly bullish longer-term natural gas prices. So if we can make a north of 50% rates of return here at these prices, we feel like we have a good chance to bring those on into a higher gas market.

[Operator]

Our next question has come from the line of Michael Scialla with Stephens.

[Michael Scialla, analyst]

I want to see how the market looks now for potentially refinancing the term loan. I know that was something you guys were contemplating.

[Tom Ward, executive]

Sure. We look at it. We're always interested in having lower financing. The RBL high-yield market, as you might guess, is fairly robust. So we look at that. The -- we still have 101 on the term loan, so that plays into what our timing would be. And then covenants that come along with the RBL high yield versus the term loan, and fees that you might incur to put those in place.

So everything that -- when we're reviewing whether we want to move towards an RBL high yield or keep our term loan for another year or refinance it, a term loan, they all play -- it all comes into play. So it's not quite so easy is just to look at the yield -- excuse me, the interest rate and say that basically SOFR plus some number higher than a high-yield RBL is a better deal.

So that's a long-winded way to say we are looking, and we'll be making some decisions soon. I think one of the things we probably would like to do is not have the amortization in place for 2025 and something we'll probably focus on.

[Michael Scialla, analyst]

I appreciate that detail. Tom, you mentioned your ability to pivot pretty quickly, you've been kind of watching the Cherokee shale play. You mentioned the 3-rig program you're thinking about for 2025, and that's really not part of it at this point. But what would you need to see there to start putting some dollars to work in that play? Or are you more likely to continue to sell more acreage there?

[Tom Ward, executive]

Yes. Really, it's just rates of return that we look at. So the -- right now, we just have so many potential locations to drill that -- and we want to see other people continue to drill more wells there near our acreage before we put any dollars to work. So that has not yet been done in a way that I feel comfortable -- that would be development wells instead of more exploratory.

And they would have -- I think, the Cherokee shale wells in particular there, I guess, would be challenged to have the same types of rates of return as the Southern Oklahoma or Ardmore Basin wells.

[Operator]

Our final question will come from the line of Geoff Jay with Daniel Energy Partners.

[Geoff Jay, analyst]

Really quick for me, just a point of clarification. Is the addition of the rig funded at strip from the recently closed deals? Or is there some increase in oil and gas prices kind of contemplated in that addition.

[Tom Ward, executive]

It's just strip. We view it as strip. And this, the actually -- strip pricing in natural gas increased enough year-over-year to bring the rig back on and still stay within the 50% reinvestment rate.

[Operator]

Thank you. That does end our question-and-answer session. And with that, that does conclude today's teleconference. We do appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.