Sabinal Energy, LLC (MNR) Earnings Call Transcript & Summary

Good morning, everyone. Thank you for joining today's call to discuss Mach Natural Resources, Permian and San Juan Basin acquisitions announcement. 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 the forward-looking statements, including the factors identified and discussed in their press release and in other SEC filings. 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. Today's speakers are Tom Ward, CEO; and Kevin White, CFO. They will provide their remarks, and then the call will be opened for questions. With that, I will turn the call over to Tom Ward. Tom?

Thank you, Donna. This morning, Mach announced 2 acquisitions, totaling approximately $1.3 billion. These acquisitions are transformative and combined are the largest addition to our portfolio in our history. Mach will nearly double our production while increasing our exposure to natural gas from 53% to 66%. Furthermore, these assets both have less than 10% annual production decline and both were acquired in our traditional fashion of buying producing assets at an attractive price. With the addition of these assets, we'll move our base decline rate down to 15%. We did not pay for any upside regarding the HBP acreage and the drilling locations and bought the assets at less than PDP PV-10. As you might know, if you've ever heard one of our conference calls, our 4 pillars are to maintain a leverage ratio of 1.0x debt-to-EBITDA or less, reinvest less than 50% of our operating cash flow, purchase assets at bargain prices below PDP PV-10 while focusing on increasing our cash available for distribution. We're thankful that our 2 new partners recognize these traits and want to be part of a company that emphasizes cash returns. In fact, Mach has what we believe is an industry-leading CROCI of more than 30% per year over the last 6 years. At the current strip, Mach will expand its current operating cash flow, giving us the ability to increase drilling investment in our assets and use free cash flow to distribute back to unitholders. We plan to move the current 2 rig schedule to 5 rigs working in 2026, while maintaining our reinvestment rate of less than 50% of operating cash flow. One of these rigs is scheduled to be drilling the Dry Mancos Shale in Northwest New Mexico starting in the spring of '26, while the remaining 4 is scheduled to be drilling our existing locations in the Anadarko deep gas, the Red Fork sand and Oswego formations of the Mid-Con. These transactions allow Mach to open anchor positions in 2 additional basins that are ripe for further consolidation. At the same time, we have 2 additional partners who have taken meaningful equity positions to allow Mach to make the purchases while maintaining our commitment to low leverage. Also, both companies come with robust hedge books that protect our near-term cash flows. We've been indicating over the last several quarters that we were seeing increased competition in the Mid-Con, especially for larger deals. We chose to move outside of the Mid-Con to other areas, where we did see the ability to buy large free cash flowing assets at attractive prices and to help give us additional cash flow to develop our existing 2 million acre land position in the Mid-Con. We chose the Central Basin Platform of the Permian Basin and the San Juan Basin because the assets are large, free cash flowing, low decline production that also have upside potential. Both Sabinal in the CBP and IKAV in the San Juan have rigs currently running, and we see upside in the San Andres and Clearfork formations in the CBP and the Dry Gas Mancos Shale in the San Juan. In our past 22 acquisitions, we've been able to lower LOE by 25% to 35% in each acquisition. We believe we'll have ample opportunity to lower LOE in these acquisitions also. We keep a close eye on G&A. As in our past acquisitions, we expect our G&A per BOE to have a notable decrease as our team has consistently been able to integrate acquisitions with nominal increases in G&A. Our development CapEx program will also grow. Historically, we have actualized at least 50% rates of return on drilling with limited amounts of cash going to leasing programs. One of our hallmarks has been that we're able to acquire high potential drilling locations at no cost to us, and those locations are held by production, thus available for us to drill many years into the future. These 2 assets also have upside potential. The area that IKAV is working is especially intriguing. The Dry Gas Mancos Shale is prolific with the potential to add more than 20 Bcf per 3-mile lateral. The San Juan also has the ability to send natural gas to the West where we anticipate a very dynamic market. We like the idea of adding to our natural gas position. Post closing, our natural gas exposure will increase to 66% from the current 53% of our volumes produced. However, buying oil in the Permian, while the forward strip is $63, is also quite compelling where we have prospered in the past. All in all, these acquisitions continue our mission of adding free cash flow that transferred directly to our unitholders through increased distributions on a per unit basis with both being accretive to our cash flow for distribution immediately. I'll now turn the call back over to Donna to open the line for any questions.

The floor is now open for questions. [Operator Instructions] Today's first question is coming from Charles Meade of Johnson Rice.

Congratulations on what looks like 2 really good deals for you. You covered a bit of this in your prepared comments, and forgive me if I missed some of the details. But I believe I heard you say you're going to -- the plan is to go from a current 2 rigs to 5 rigs on the combined asset base. And I'm wondering if that -- does that mean that we're going to see kind of a 150% increase in CapEx and that's really what I'm trying to get to is -- and I recognize this early, but just in broad terms, where you think '26 CapEx will shake out and whether that will be above or below maintenance CapEx for keeping volumes flat?

Yes. Charles, keep in mind that we are already in our budget, we're planning to add another rig in the fall. Another deep gas rig in the Anadarko. So that was already baked in. So that was going to 3 rigs. The increased 2 rigs into '26, if we do that, it's all predicated on operating cash flow. So everything we do is -- has to be under 50% of operating cash flow. So you tell me if the oil and gas strip go up, we can increase our drilling. And if it doesn't or if it go down, I will decrease CapEx. So everything ties to being under a 50% reinvestment rate. And really, our goal is to stay flattish. We're not trying to grow the company and production necessarily. Our goal is to send back as much cash as we can to our unitholders.

Okay. That's helpful, though, Tom. It's not really 2 to 5, it's 3 to 5 and that -- again, to your point, I understand that it's all going to depend on the way the prices actually shake out, but that is -- would roughly be flattish. The questions -- my second question or follow-up. The -- you mentioned some of the interesting activity that's going on in these assets. And I think in the Central Basin Platform, you mentioned the San Andres and I think the Clearfork and I wonder if you can talk -- are the opportunities you see are there? Are those horizontal opportunities? And also on the San Juan Basin, there's a lot of interesting stuff going on there. And I'm wondering if you could maybe tell us how much or how many wells IKAV has drilled to date targeting this Mancos Shale?

Sure. First, with San Andres is, I believe, that Sabinal had a vertical rig there and in the Clearfork, it's a horizontal rig. We don't have plans yet to expand anything in the Permian, but we do in the San Juan. So -- what the Mancos Shale has is a tremendous amount of gas. That's been proven. The question mark and the problem is same as the Deep Anadarko is that if you're going to drill a $15 million well, you need to have a 3-mile laterals. First of all, the -- I guess, the technology to do that has just come around in the last few years. The gas has always been there. But getting that done at a cost and having a price deck that allows you to get the gas out was what we needed. Now the forward strip, both of these areas are going to have north of 50% returns at today's strip. So that anytime we look at all of these different hundreds of locations we have, they're all IRR driven. That's how we've had success in the past. We're very quick to move around rigs where the wells make the most money. And so we keep -- we don't have long-term drilling contracts, and we can shift our drilling fairly quickly. And so the Mancos right now looks to us to be incredibly interesting and an area that does compete with anywhere else we have in our company. So with that, to answer the final part of your question is that IKAV has a 5-well program that's currently drilling, and we'll finish by the time that we have closed, and we will then move to complete those 5 wells. Three of those are 3-mile laterals and 2 are 2-mile laterals. But there is that -- let's say there's -- and I'm not going to get that's exactly right. But in our area that we're looking at, we had approximately 80 locations that we looked at for our type curve. And so it has been drilled but not extensively.

That is a lot of helpful detail.

[Operator Instructions] Our next question is coming from Derrick Whitfield of Texas Capital Bank.

Congrats on the acquisitions. At a high level, could you offer color on the expected EBITDA run rate of the acquired assets, just to give us a better feel for the accretion potential?

Yes, Derrick, we'll intend to cover that when we close the transaction. So at this moment in time, we're not really updating any guidance on either us individually or combined. Sorry about that.