Chord Energy Corporation (CHRD) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to the Oasis Petroleum Business Update Conference Call. [Operator Instructions] Please also note today's event is being recorded. At this time, I'd like to turn the conference call over to Michael Lou, CFO. Sir, please go ahead.

Thank you, Jamie. Good morning, everyone. Today, we're providing a business update to discuss recent changes to our asset portfolio. And we're delighted to have [Audio Gap] and on Oasis Midstream Partners, including the answers to your questions, include statements that we believe to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks and uncertainties that could cause actual results to be materially different from those currently disclosed in our earnings releases and conference calls. Those risks include, among others, matters that we have described in our earnings releases as well as in our filings with the Securities and Exchange Commission, including our annual report on Form 10-K and our quarterly reports on Form 10-Q. We disclaim any obligation to update these forward-looking statements. During this conference call, we will make reference to non-GAAP measures, and reconciliations to the applicable GAAP measures can be found in our earnings releases and on our website. We may also reference our current investor presentation, which you can also find on our website. With that, I'll turn the call over to Danny.

Thank you, Michael. Good morning to all and thank you for joining our call. We sincerely appreciate your interest today and are pleased to be discussing the most recent strategic actions that we've undertaken. As you've likely seen in our press release, yesterday afternoon, we announced the divestment of our Permian Basin assets for total potential consideration of $481 million. When taken together, our Williston Basin acquisition and Permian Basin exit exemplifying our commitment to aligning our actions and core competitive strengths with the company's overall strategy. These transactions were attractively priced, position us to benefit from increased scale and focus in our core asset, the Williston Basin, where we have substantial running room and see great upside opportunity. They protect our balance sheet, deliver incremental return of capital to shareholders and are accretive to our cash flow per share, free cash flow per share and reinvestment rate, both individually and on a combined basis in the near and long term. Simply put, these transactions further our progress towards building a sustainable enterprise, which generates a significant free cash flow for the benefit of the company and shareholders. I wanted to take a moment to expand on our rationale for the divestment and touch on valuation both on this transaction from an absolute standpoint and comparably with the acquisition we recently announced in the Williston Basin. First, let me say that we continue to believe that the divested Permian position is a great asset. But opportunities for Oasis to build meaningful scale around the position have become quite limited as a lot of consolidation has happened around us since the asset was purchased in 2018. As we discussed before, we believe size and scale are extremely important as we need to drive more volumes over lower cost to improve operating efficiency and returns on capital. And unfortunately, we just did not see a reasonable pathway to build the scale and vision when we entered the Permian Basin. Given this difficulty, we explored alternatives and are happy with the valuation we are receiving at the conclusion of our sales process, which, on a flowing production-only basis, values the stream at $67,000 per flowing BOE. You can compare that with the $28,000 per flowing BOE that we're paying for low decline Williston production. Similarly, from a first quarter annualized EBITDA perspective, we're divesting this acreage at approximately 4.6x EBITDA, while we're picking up the Williston asset at 2.9x EBITDA, both of which are accretive to Oasis on an enterprise level. When you look at this in aggregate and net out the 2 transactions, we're picking up production for less than $15,000 per flowing barrel and EBITDA for 1.7x. Of course, there are many ways to look at the transaction, and another of those would be to apply specific value to producing barrels and ascribe the rest to inventory. So in that scenario, if you assume $30,000 per flowing barrel based on our Q1 production, that leaves $265 million for inventory. Recall also that we picked up 2 rig years' worth of Tier 1 inventory in the Williston transaction. So this inventory trade accelerated and de-risked up to $13 per share in value. Now to be fair, the numbers I'm quoting for the Delaware transaction do assume we will see WTI above $60 in 2023 through 2025. But if we find ourselves in a sub-$60 world, we'll be just as happy with the consideration we've received. So from an E&P perspective, after the transaction is closed, Oasis will be 100% focused on our core Williston position where we can drive value through our enhanced scale as one of the largest operators in the basin, long-standing subsurface expertise and basin knowledge and the exploitation of numerous upside opportunities that we see in the area. We have a strong track record of efficiently and responsibly developing our assets, and we look forward to integrating the new assets and working with our new stakeholders. Oasis is committed to running the new assets in an environmentally conscious and sustainable manner, consistent with Oasis' values. From an OMP standpoint, I think it's also very important to note that the midstream assets and Panther DevCo associated with our Permian position are retained by OMP. And because we anticipate increased activity in the Permian by the new operator in comparison with our stand-alone plans and because we will likely be shifting some of our internal capital previously anticipated to be invested in the Permian into the Williston, we believe these transactions will be accretive to OMP on both fronts. Pro forma for the sale, first quarter '21 revenue would have been 17% third party. So pro forma for both deals, we believe these transactions enhance our scale, focus our portfolio, drive significant accretion across multiple metrics, allow us to return more cash to shareholders, generate more cash and improve our reinvestment rate, all while having minimal impact on inventory and very modest impact on pro forma leverage. As you can clearly see, these combined transactions illustrate our willingness to be both a buyer and a seller if we believe doing so will make us a better company. We have now simplified our midstream ownership and announced 2 transformative transactions, all of which are highly accretive, positioning Oasis to take advantage of expanded scale while maintaining a best-in-class balance sheet. With that, I'll turn the call over to Michael for a few words before we open it up to questions.

Thanks, Danny. Just some quick housekeeping items before we turn it over to questions. We have updated our 2021 guidance for volumes, CapEx and costs pro forma for the 2 deals. The Permian divestiture consisted of the primary transaction combined with a couple of smaller deals. In aggregate, proceeds approximate up to $481 million consisting of $406 million at closing and up to 3 $25 million contingent earn-out payments in '23, '24 and '25 if WTI averages over $60 per barrel for each respective calendar year. The primary Permian transaction is expected to close around June 30, 2021, subject to customary closing conditions. And we have adjusted our 2Q volume guidance lower by about 500 BOE per day to account for the impacts of the smaller transactions, which have already closed. We intend to use the proceeds to finance the Williston acquisition. And pro forma for the 2 deals, our leverage stands at about 0.3x, well below our 1x leverage target. At strip pricing, Oasis is on a path to have 0 net debt by mid-2022. Additionally, our cost structure remains strong, and our fourth quarter '21 E&P cash G&A guidance is expected to range between $1.25 to $1.35, which is highly competitive. We have assumed that the Williston acquisition closes June 30, 2021, for guidance purposes. However, it is likely that the Williston purchase closes sometime in late July. We plan to update third quarter volume guidance with our second earnings results in early August to true-up for the actual close date. Note the effective date of the Williston purchase is April 1. So any downward impact to third quarter volumes will be completely offset by an upward adjustment to the purchase price. As we noted earlier, we have fully committed bridge financing totaling $500 million, which we expect will be taken out with a notes offering. We also had approximately $106 million of cash as of 3/31, and we'll have generated $406 million of cash with the Permian divestiture. So we're in good shape to finance the $745 million acquisition. And as I mentioned, pro forma for the deals, based on first quarter '21 annualized EBITDA, we'd be at about 0.3x net debt-to-EBITDA. You'll also note that we layered in hedges for the deal. You'll see that this is primarily in collars, which balances our overall portfolio between collars and swaps. And this gives us a great free cash flow protection, along with upside oil participation. And then combined with the deal, along with the fees and the hedges that we did, we'll be at about 0.5x net debt-to-EBITDA but continuing to trend down -- trending down by the end of the year. So overall, we'll have great liquidity under our revolver and an increased ability to return cash to our shareholders, net for the 2 deals. And as a reminder, we recently announced that we plan to increase our fixed quarterly dividend by 33% to $0.50 per share after the Williston acquisition closes. We also recently announced a $100 million share buyback program, and we'll continue to explore more ways to get cash returned to our shareholders. With that, I'll turn the call over to Jamie for questions.

[Operator Instructions] Our first question today comes from Scott Hanold from RBC Capital Markets.

I guess you all made a point of, obviously, in the Permian, you couldn't scale things up, and you see the advantages of scale to drive efficiencies. And when you step back and look at it, do you all have -- do you feel you have the scale you need in the Williston? I mean it's pretty -- Michael, you pointed out the fact that you'll be at 0 net debt in mid-2022. And obviously, that [ questionably ] may not be, from a capital structure, the most efficient place to be. So do you envision on scaling more up in the Bakken at this point considering that you see that is an advantage to efficiencies going forward?

Scott, this is Danny. Thanks for the question. I think as we look at Williston, clearly with the acquisition of the QEP assets, that'll put us at about 500,000 acres and with a pretty good production profile to go with that. And at that level, we feel like we've got reasonable scale in the Williston as it stands. But certainly, if opportunities present themselves to make additional accretive acquisitions, we'll be looking at those. They'll have to fit in well with the organization, they'll have to make us a better company and they'll have to be competitive with other calls on capital. Clearly, we're going to be looking at -- with -- whether it be with our overall capital structure or with the free cash flow that we're generating, we're going to be looking at how best to employ to make our -- make ourselves a better company and, most importantly, to create value for shareholders. And so whatever form that takes is what we're going to be looking at, but we feel like we've got pretty good scale currently. But bolting on additional scale into that position, if it makes us a better company and is accretive to us, it might make sense as well.

Okay. And as my follow-up, and you obviously talked about some development options that you're evaluating going to 2022. Can you tell us strategically, what are some of those options at a high level as you look at the path going forward?

So I think from a high level, clearly we picked up some inventory with the QEP assets. We really like the inventory. We think it's very, very high quality and highly economic. As we look at our overall production profile within the Williston, we anticipate, obviously, increasing pretty significantly toward the latter part of this year as we close the QEP acquisition. We'll probably -- our production profile will likely slow down a little bit from that initial level as we put development plans together and move forward, and then we're going to probably maintain a somewhat smaller level. Consider -- we talked about, after the QEP acquisition, being around 80,000 barrels a day and probably holding flat around there. With the Permian divestiture, you can probably knock around 10% off of that number. But again, we're working through our development plans currently, and we'll be coming out with guidance in the future. But generally, we'll be holding a production profile, we anticipate, sort of flattish as we move forward. We've got good inventory with the legacy Oasis position, and we think we've picked up some good inventory with the QEP position. We also have opportunities to drive additional value through looking at operating practices that we currently have that we think we may be able to employ over with the new assets that may streamline and pull some more costs out of the system and things along those natures, marketing contracts, that sort of thing. So again, when we made the QEP acquisition, we talked about the fact that none of that was priced into our models and acquisition price, but we do see some value there, and we'll be working, as we get this closed and incorporated into the organization, to make sure we're getting full value out of all those opportunities.

So do all those developments scenarios you're looking at contemplate sort of flattish production growth going forward? Or is there any semblance of the ability to have a small amount of growth, whether it be 5-ish percent? And again, I'll point to the fact that you all are going to be extremely underlevered by the time you get into 2022, I mean, 0 net debt. I mean does it make sense to think about a scenario where you have a little bit of growth to continue to improve the operational efficiency and scale while still producing a lot of free cash flow?

Yes. I think if we wanted to generate some growth, we've got the inventory set to do that. I think the question will be as we look at where we best invest our money and where we best create value for shareholders, what's the right thing to do. And so is that going to be to provide more organic growth? Is that going to be to do potentially an accretive bolt-on acquisition? Or would that be to return more capital to shareholders? And so those decisions -- those are the types of decisions we felt we've laid out before in our capital allocation framework, and that's what we'll be looking at. The good thing is, with the free cash flow we've got and with the balance sheet position we've got, we're going to have the ability to do those things. And sort of shareholder value creation is going to be a high priority for us.

And our next question comes from Derrick Whitfield from Stifel.

Congrats on your rapid progress in such a short period of time. With my first question, I wanted to focus on the synergies and upside you noted in your earlier response to Scott's question. Referencing Slide 3, where do you see the greatest upside on the synergy front now that you've consolidated operations within the Williston?

So I think as we -- the biggest upside we've got is probably the undeveloped inventory there that we didn't -- that we feel like we didn't really value in the acquisition price. And so that's -- again, we think this is highly economic inventory, 2 to 3 rig years' worth of that inventory that we picked up with the acquisition. So that's a great potential value uplift for us. In addition, as we look through the overall opportunity, we recognize that we've been working internally very hard with the third-party group as well as our own teams to try and really streamline our operating process, and we've been very pleased with the results we've seen from that. We anticipate that we'll be able to take some of those same processes over into the new assets and see similar benefit there. And we're also open to the fact that it's going to give us a great opportunity to look under the hood and see how another party was doing things, and we may find things there that we can incorporate into our way of doing business, either of which will hopefully allow us to streamline our operations and lower cost. And so we'll be looking very focused on that. And so between that -- between opportunities to look at additional sort of purchasing power from increased scale with working with our vendors, with increased volumes flowing through the basin to get better deals from that standpoint, I think that's really where we're looking at wringing some value out.

And Derrick, there's also -- maybe adding on that a little bit on the midstream side, we see good opportunity on that front as well. So one, with the exit in the Permian, we now have a great third-party kind of anchor tenant there from an OMP perspective that will likely drill faster than what we had planned. So that's a great place for us to be from an OMP perspective. And then in the Williston, it gives us an opportunity to take some of the cash flow from the kind of the outspend that we had in the Permian and reallocate back to the Williston and potentially even accelerate a bit on the OMP dedicated acreage in the Williston. So really positive from that perspective from the midstream side as well.

And perhaps staying on OMP with my follow-up. Clearly, step 1 was simplification. As you think about the current market environment for midstream assets, how should we think about your next likely steps?

Well, I think we've -- as we've talked about on some previous calls, we're continuing to evaluate a whole array of options for our midstream position. We recognize that there is -- it's difficult to get the full read-through value of our holdings in OMP in our E&P operations back to Oasis shareholders. And so that's a value disconnect we recognize, and we'll be working hard to try -- and try and sort of close that gap. And so we're really evaluating a whole host of different options there. Can't comment on which option we're ultimately going to take. I'll just tell you that we're working that hard internally and that value disconnect is something we look at daily and want to do -- want to correct that as quick as we can, but we also want to make sure we make the right decision when we do correct it.

[Operator Instructions] Our next question comes from David Heikkinen from Heikkinen Energy Advisors.

One thing that we've been thinking about, and it's definitely a longer-term question beyond the 6, 7 years of inventory you have now that you can sustain, there's been some private companies in Montana, there's other companies -- you have that long-term asset over there. Can you talk about any small amounts of capital that you might put into your longer-term assets, whether or not that's Montana or Red Bank, that -- and then when you might actually think about doing that? Or if you're already doing that, can you give us an update on how you're thinking about the assessment of those longer-term assets?

Yes. Great question. As we look at -- you look out in terms of the inventory, one of the great benefits we've got is the third-party activity around us. So you've got, depending on where you are in the acreage, a number of private companies that have been pretty aggressively drilling out around our position and using bigger fracs and longer laterals. Both techniques with a high-capacity lift has really improved the economics in those areas. So we look forward to -- and we're still very focused on, as you said, the core middle part of the basin, but a lot of activity outboard to that, that is super encouraging. So we've got, we think, increased and improving path in that acreage that we're not including in that 10 years right now.

Okay. So you don't have any testing plans or the longer than 2-mile laterals or anything along those lines or that, like you said, lift changes that seem to be yielding some -- much improved economics?

It's really improving the economics, as you said. We're actually going to be employing those techniques on our inboard more core acreage. And so we're moving to 3-mile laterals in Indian Hills probably later this year. We've been using high-capacity lift and optimizing stimulation along the way. So it's going to just -- as we do employ those techniques in the core, it's going to continue to boost returns in those areas. And then as we look outboard, we'll continue to monitor what some of the other guys are doing. But as you said, really continues to improve results.

And then the -- on the OMP side, and I know this isn't necessarily always the focus, but it clearly does seem like you've got a new operator, and you talked about it some that's going to have more activity in the Delaware. How will you guys think about providing an outlook now for a private company that's going to be operating? And your third-party volumes going up, it should actually increase the value of that asset overall. But how do you think through providing us perspective on OMP now that you have a third party operating that asset?

Yes. David, that's a good question. Obviously, as our third-party volumes grow, we're going to continue to kind of guide those assets. The Permian asset overall from an OMP perspective is still not really large. It's only 3% of kind of the revenue. So it's not like it's massive, but it's a growing asset, which we think is fantastic. And we'll continue to give guidance kind of into the different DevCo entities and kind of show where we think those are coming out. And that's including all the third parties. So even prior to the asset sale, we were having some good third-party success there in the Delaware as well as in the Williston that we had added really since the beginning of the year. So it's not only this kind of new third party who acquired our position but really other third parties that we're continuing to add to the system. So yes, we'll continue to give guidance on how we think those are going, but it's overall a positive situation from an OMP perspective.

And ladies and gentlemen, with that, we'll be concluding our question-and-answer session. I'd like to turn the conference call back over to Danny Brown for any closing remarks.

Thanks, Jamie, and thanks to everyone for their time today. The Oasis team is really excited to announce these transactions as they support our strategy of building a sustainable enterprise, generating significant cash flow for the benefit of shareholders. As always, please don't hesitate to contact us for any follow-up questions you might have. Thanks for joining our call.

Ladies and gentlemen, with that, we'll conclude today's presentation. We do thank you for joining. You may now disconnect your lines.