Ranger Oil Corporation

Good morning and welcome to the Ranger Oil Corporation fourth quarter and full year 2021 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Ranger Oil. Please go ahead.

Thank you, and good morning, everyone. I'm Clay Jeançon, Director of Investor Relations for Ranger Oil Corporation, and we're pleased today to discuss our fourth quarter and full year 2021 operational and financial results. as well as recent accomplishments. With me today, Darren Hinke, our President, Chief Executive Officer, and Director. Also joining us and available for our Q&A session are Rusty Kelly, our Senior Vice President, Chief Financial Officer, and Treasurer, and Julia Gwaltney, our Senior Vice President and Chief Operating Officer. Before we begin, I would note that today we will discuss certain non-GAAP measures Definitions and reconciliation of these measures to the most comparable gap measure are provided in the company's fourth quarter and full year earnings presentation and press release that can be found at www.rangeroil.com. Our comments today also contain forward-looking statements within the meaning of the federal securities law. These statements are subject to a number of risks and uncertainties that could cause actual results to materially differ from those forward-looking statements, including those identified in the risk factors of the company's annual report on Form 10-K. So with that, I will hand it over to Darren to discuss our results and recent events. Darren?

Thank you, Clay. We appreciate everyone joining us today. During the call, my comments will generally follow our earnings presentation that we posted on our website late yesterday. 2021 was a transformational year for the company, and I want to thank the entire Ranger employee team for their continued hard work and dedication. Their collective efforts allowed us to execute a number of strategic initiatives and transactions that further reinforced Ranger's position as an industry-leading operator. squarely focused on capital discipline and continuous improvement to drive top-tier cash-on-cash returns, further strengthening our financial position. Turning to page four, our company looks very different today relative to the beginning of 2021. Complimented by the closing of our highly accretive Lone Star and Rocky Creek acquisitions, we ended 2021 with a footprint of more than 140,000 net acres in the core of the Eagle Ford shell that produced more than 40,000 barrels of oil equivalent per day during the fourth quarter. This vast acreage position provides Ranger with an estimated 20 years of high quality drilling inventory. 14 years of that inventory projected to be profitable even at $50 per barrel WTI pricing. Our total approved reserves at year-end equal 241 million barrels of oil equivalent, with oil accounting for 68% of those reserves. 92 million barrels of our reserves are considered proved developed. Looking at the estimated value of those total proven reserves, we have a PV10 value of $4.7 billion, using $80 for oil and $4 for gas. Given that our enterprise value is approximately $2.2 billion, I believe our current equity represents a rather compelling value opportunity. We had many significant operational and financial accomplishments in 2021, as evident on slide five of the presentation. The initiation of our in-basin consolidation strategy resulted in the acquisition of Lone Star Resources, which we purchased at a discount to PDP in a much lower price environment. As mentioned, this contributed to expanding our estimated drilling inventory to approximately 20 years, assuming 50 wells drilled per year. In addition, our acquired acreage and the ongoing success of our targeted capital spending and operational improvement programs contributed to growth in total proved and proved developed reserves of 90% and 82% respectively. Using $80 flat pricing, a PV10 calculation of our approved developed reserves net of debt yields approximately $39 per share, and the PV10 of total approved reserves net of debt was estimated at $94 per share. Our success on the development and operational fronts helped drive performance in 2021, resulting in the top adjusted EBITDAX margin as compared to all other U.S. independents, contributing almost $110 million of free cash flow for 2021. As important, our leading position allowed us to materially transform our balance sheet by accessing the unsecured debt markets to term out and refinance a majority of our debt. We also reduced our debt under the revolver by more than $100 million in 2021. Further, we simultaneously enhanced our liquidity position via 90% increase in our borrowing base, which is currently $725 million, with less than $150 million drawn net of cash. Drilling, completion, and field operational efficiencies also contributed to our outperformance. On slide six, we list some of the highlights from 2021, including drilling efficiencies that resulted in the quickest rig move, the fastest mile drilled, the most vertical feet drilled in a day, and the fastest two-string and three-string wells drilled in our central area, spud to total depth. We increased our average footage drilled per day by 19% as compared to 2020. We also saw significant efficiencies on the completion side, including testing modified designs that utilize an increased casing diameter and higher injection rates, a design we will transition to for future wells. We were also achieving a record 8.4 frac stages per day and completing our longest lateral to date of 11,756 feet. The collective result of these efforts resulted in an average completion cadence of 7.2 frac stages per day, a 20% improvement versus 2020. Complementing the improvement seen in our drilling and completion activities, slide seven conveys how we also continue to drive down our field operating costs, where we are clearly seeing the cost synergies afforded by our consolidation efforts. We continue to prudently invest in proven technologies to drive further cost efficiencies, such as jump pump installations, annular gas lift, ongoing field compression upgrades, and other production management initiatives designed to bend the curve and decrease the natural decline rate of our wells. Referencing page 8, our relentless pursuit of further efficiencies in our operations has resulted in our ability to consistently report the highest adjusted EBITDAX margin of any publicly traded independent in the United States. Contributing to our results is our differentiated acreage position in the core of the Eagleford that provides a high oil cut and the ability to receive premium MEH pricing given our close proximity to key Gulf Coast markets. Slide 9 summarizes why we view Ranger as an extremely compelling investment opportunity. The combination of our industry-leading margins, multi-decade drilling inventory, and efficient capital development program provides us with significant runway to drive further strength in our balance sheet and the ability to use our expected significant free cash flow generation to provide increased value for our shareholders. In 2021, our capital program developed 19.9 million barrels of approved reserves and an attractive cost of only $12.27 per barrel of oil equivalent. Given the capital we spent on drilling those wells compared to the cash flow they generated in 2021 and the estimated cash flow from the future, we calculate and implied CapEx return on investment ratio of approximately 3.7 times at $70 flat oil price. Given our proven operational and financial success, and the outlook for ongoing substantial free cash flow generation, we expect to hit our one-times leverage target in the first quarter of 2022, ahead of schedule. At current commodity prices, we expect to generate over $250 million in free cash flow. We plan to deploy that free cash flow in several ways. First, we plan to authorize a $100 million share repurchase plan in the second quarter. Then we expect to continue deleveraging the balance sheet, providing the ability to pursue potential consolidation opportunities. Finally, we intend to initiate a fixed dividend of 25 cents per share annualized beginning in the third quarter. We believe these planned uses of excess cash flow provide investors with a highly compelling investment opportunity. On slide 10, we provide illustrative potential asset value based on SEC pricing as of December 31, 2021, and a flat price deck of $80 per barrel and $4 per MCF. Our current enterprise value of roughly $2.2 billion represents an approximate 35% discount to our total approved SEC PV10 value based on SEC pricing. Using a flat price deck of $80 per barrel and $4 per MCF, our market value is trading at an approximate 50% discount to the total approved PV10 of approximately $4.7 billion. The value potential increases even further when you consider additional probable and possible reserves shown here at PV20. We have considerable value potential, particularly relative to our current share price. It is important to note that these estimates do not include additional locations in other benches and formations, including more than 200 estimated locations in the Upper Eagleford and Austin Chalk that are in close proximity to industry activity. Turning to slide 11, as I mentioned previously, we currently have approximately 20 years of estimated drilling inventory, roughly 975 identified locations. We believe we have 10 years of inventory with each and every well generating an estimated well level internal rate of return greater than 100% at $80 per barrel flat pricing. And should commodity prices pull back, 70% of our inventory has an estimated break even at $50 per barrel or lower. We also display on this slide the third party reserve engineer type curves for our drilling plan for the next two years. We expect the wells in this program to also generate greater than 100% well-level rates of return, assuming an approximate $9 million of capital investment per well. We believe the quality and depth of our inventory competes very favorably with other E&P companies. Looking at slide 12, we are also seeing overall 15% outperformance from the wells we drilled in 2021 compared to our tide curves. Drilling and completion improvements and ongoing operating efficiencies demonstrate an approximate 10% increase in EURs per foot since 2019. On slide 13, we show three high potential inventory rich areas for Ranger. These consolidated positions allow for longer laterals with multi-well pads and shared facilities, which we believe will generate higher returns. Recent wells in these areas exhibit peak 30-day initial productivity rates over 1,000 barrels of oil per day, with the 90-day average IP rate equally impressive, ranging from 750 to 900 barrels of oil per day. Combined, we have almost 250 future drilling locations in these three areas. Turning to slide 14, we provide the details surrounding our low leverage and robust current liquidity profile. Supported by our targeted acquisition, development, and operational efforts over the past three years, we have seen a dramatic increase in our generation of free cash flow. We expect this to meaningfully accelerate in 2022. Combined with a debt maturity schedule that does not require repayment until more than three years out, we are very comfortable with our plan to begin returning meaningful levels of capital to our shareholders. Our continued success in 2021, as exemplified by our strong production and margins, combined with our robust inventory of high rate of return drilling inventory, supports our outlook of generating over $250 million of free cash flow in 2022. We will continue to allocate our free cash flow based on the most attractive risk-adjusted opportunities. As shown on slide 15, our investment strategy is multifaceted, including measured organic capital expenditures, further enhancing our financial position through continued deleveraging, returning capital to our shareholders through a fixed quarterly dividend, an opportunistic share repurchase program, and continued pursuit of accretive transactions that expand our operational footprint in the Eagleford. Our return of shareholder capital is targeted to begin following our achievement of a leverage ratio of less than one times, which we expect at the end of the first quarter. We plan to begin the company's first ongoing quarterly cash dividend program in the third quarter, targeting a quarterly dividend payout of 6.25 cents per share, or 25 cents per share annually. We also plan to return capital to our shareholders through a share repurchase program of $100 million, or approximately 6% based market cap, to opportunistically repurchase shares in the open market. Finally, we will continue evaluating opportunities to expand our market position through targeted acquisitions. Of course, and as in the past, our strategy continues to remain squarely focused on long-term shareholder accretion, rigorous capital discipline, balance sheet strength, robust cash on cash returns, and operating in an environmentally and socially responsible manner. On that last point, I am pleased to report that we look forward to releasing a comprehensive sustainability report in the second half of this year. We view protection of the environment as one of our top priorities and continue to advance our operating initiatives on multiple fronts, inclusive of minimizing flaring, reducing emissions and the potential for oil spills by transporting a significant portion of our production via pipeline, as well as conducting daily well inspections. We also will utilize multi-pad and longer laterals to reduce our environmental footprint. We also promote a work culture that treats all employees fairly and with respect, promotes inclusivity, and provides equal opportunities for professional growth and advancement, all based on merit. As a result of this culture, four of the six members of our executive team are women, including Julia Gwaltney, who was recently promoted to Chief Operating Officer. Turning to page 20, When we first announced the Lone Star acquisition, we projected over $20 million in annual synergies. I'm pleased to report we now estimate the synergies will actually be closer to $25 million per year over the next five years. We have already high-graded operations, increasing the combined companies per well lateral length, restructuring a number of Lone Star's marketing and midstream contracts, and consolidating much of the operations of the two companies. In conclusion, I could not be prouder of what the Ranger team has accomplished. Their continued hard work and dedication have resulted in a differentiated, Eagleford-focused exploration and production company, uniquely positioned for long-term success. I truly appreciate their efforts and look forward to working closely with them to take the company to new heights. So with that, we will open up the call to questions. Operator?

We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. Our first question is from Scott Hanold with RBC Capital Markets. Please go ahead.

Thanks. Good morning, all. Just a question on page 15. Obviously, you've pretty well defined, you know, what your strategy is. And you also previously talked about in this presentation, you know, the value disconnect that's in Ranger's stock. And as you step back and you think about, like, all the different levers and knobs you guys can pull and turn, like, what do you think is going to have the, you know, what is your target strategy? What is the targeted thing you're going to look to do to basically bridge that valuation gap? What do you think is going to have the most influence on it? Is it just executing and driving free cash flow, or do you think something like a stock buyback potentially could be a bigger opportunity for you to bridge that gap?

That's a great question. Scott, you know, I think it's really in all the above that we're showing here on slide 15. You know, the marketplace, boy, it's changing daily here. All around us looking at commodity prices and a lot of change going on in the world right now. And I think being flexible and pivoting to which one of these makes the most sense at the time when we have the free cash flow, that's the way we're going to look at things. We would love to see an increase in scale. You know, scale is relevant, so we'd like to see more consolidation. But, you know, we have with these other initiatives, shareholder-friendly initiatives that we've initiated between the dividend and share buybacks, you know, we have other options for investment over and above our capital program, over and above consolidation. So really an all-the-above strategy.

Okay. And my follow-up question is, you know, obviously on the ND market and the M&A market, you guys have been very proactive and Can you talk about what you're seeing in the market and how that plays into some of the uses of cash options like stock buyback? Is the bar a little bit higher on deals for you guys now that you plan to have a buyback authorization in place?

I don't think the share buyback authorization changes the way we're looking at acquisition opportunities or consolidation opportunities. We're going to use the same disciplined approach, looking for accretive acquisition opportunities. With the commodity price run, the price to do consolidation certainly is changing daily, and we have great options. We look at just about everything in the Eagleford that comes available. We're not going to win them all, and that's okay. We're going to do the smart, accretive deals, and And we're going to look at those opportunities relative to the intrinsic value of our company and our asset base. And does it make sense to do the consolidation or does it make sense to repurchase shares?

Got it. And could you just give us a color on that, the M&A market right now, what you're seeing?

You know, there's definitely deals in the marketplace and we're active. And I really can't say much more, I think, outside of there'll be transactions occurring. And hopefully we're a part of them, but we'll see.

Thank you. The next question is from Neil Dingman with Truist. Please go ahead.

Morning, Noel. Hey, Rusty, you guys talk a lot about there's a lot of potential efficiencies, so I'm just wondering, could you talk about in the guide and sort of things that you're seeing for the remainder of the year, how much of that are you already factoring in?

Are you talking about... drilling and completion or operational efficiencies?

Yeah, exactly right. No, exactly right. Given what I think you're going to have by the longer laterals, these pads, you know, Darren, you guys, you outlined a nice laundry list. I think you're going to actually have more than others. And I'm just wondering, with that, are you and Rusty already including that in, you know, kind of what you're thinking about? with the free cash flow guide for the year? If you are, can you just kind of talk about some of the things that's incorporated in that guide?

Yeah, so we're certainly, what we're really proud of this year relative to development is we're transitioning to materially longer laterals and over 30% longer laterals on average this year versus last year. And in fact, in the first quarter, some wells that we finished drilling them around the end of the year, then completed them here in the first quarter, They're actually average lateral length, 12,800 feet, but one of them's over 14,000 feet. So we've shown already this year that we can execute on these very long laterals, and we can get them fracked, plugs drilled out, and we're just turning those wells online as we speak. When you switch and transition to those longer lateral programs, it takes some time to get those first few pads drilled out, of course, and then Inflation timing is quite a bit longer when you're increasing the lateral length by 50%. So you've seen a little lull in our turning lines here in the first quarter, and that's impacted the first quarter production a tad. But you'll see the production ramping up later in the year. And, you know, we've built all that into our guide.

Okay, and then can you talk a little bit about – I know we talked last night a little bit about this, that third rig. Can you talk about if prices start to continue to escalate? I mean, can you just talk about plans around that, how flexible that is? Just give us some thought. I really like the upside potential that that could bring, especially with the free cash that you guys are bringing. So can you just talk about sort of the optionality around that there?

You bet. You bet on that. I'll take the opportunity to talk about why bring in a third rig. We hadn't talked about that previously. Via the Lone Star acquisition, we picked up some really high-quality acreage down in LaSalle County. It's quite a ways away from where our rigs are currently executing our plan today. Rather than move a rig all the way down there, what makes sense to us is to pick up a spot rig that's a hot rig that's active in the area. And we're seeing opportunities to do that. You know, it's not the easiest thing today to pick up a drilling rig, but we do think we'll be able to execute on that and drill some wells in the Horned Frog area. And they're going to be very high quality in the top decile of our inventory from a return standpoint. So very high quality acreage and drilling opportunities. So the way we've modeled that is that rig being picked up sort of middle of the year, and you don't see a lot of production opportunities. improvements this year or production gains this year. But, you know, Neil, it's all about cash-on-cash returns, and we don't get too fussed with the calendar or the quarters. We look at what's the right cash-on-cash investment decision, and that's what we'll do. That's why we continue to execute our completion program late in the fourth quarter. And we were able to save over a million dollars by executing that plan late in the year versus shifting it into early this year. And anyway, it's all about cash on cash returns. I hope I answered your original question in there.

No, you did. And I just hope the market keeps seeing that. I think your cash on cash return is phenomenal. So I'm hoping the market starts to recognize it. Thanks, guys.

Thank you. Again, if you have a question, please press star then one. The next question is from Charles Mead with Johnson Rice. Please go ahead.

Good morning, Darren. You and the whole team there. A couple of discreet ones for me. On the third rig, with respect to the CapEx guide that you gave us, how many wells or what duration of a contract do you have for a third rig that's implicit in that guide?

Yes, I want to be clear. We don't have that rig under contract at this point. We're certainly talking with our industry peers in working to get that rig under contract. It's a handful of wells is kind of how we're thinking about it, but we haven't landed on how many wells. It really depends upon what kind of window you can get on that rig. If we're borrowing a rig from one of our industry peers, they may allow us to drill two wells, four wells. They may allow us to drill more. Haven't been real specific or haven't given out any specific guidance to how many wells we'll drill there. It really depends what we can find in the marketplace relative to a hot rig.

Right. That makes sense. But as far as what's in your CapEx guide, we should think, you know, three to five or something like that. Yes, sir. Okay, great. And then going back to on the share buybacks, you mentioned that you're going to be opportunistic with their share buybacks. Can you talk about what your criteria may be, whether it be the criteria for where your balance sheet or your cash balance needs to be, or maybe your criteria, what you need to see as far as your share price relative to your view of your asset value? Sure.

The first, taking that into a couple parts, what our balance sheet looks like, we've talked about this is connected to us hitting our goal of one times, which we expect to hit earlier than originally anticipated. We told the market sometime in the first, before the end of the first half, we now anticipate that that will likely be by the end of the first quarter. And so that's really the catalyst to us beginning our free cash flow strategy and returning capital to shareholders. With regard to how we're going to judge that, we talked in the presentation about looking at being opportunistic relative to intrinsic value. The way we look at that may depend on a lot of market factors, but certainly to the extent that it's below PDP value in a way that we can lock that in. certainly qualifies for that, but obviously we believe that we're going to see significant value creation as we go forward in this environment, and so we're going to be looking at it a few different ways, but certainly looking across the spectrum on slide 15 of our different options for that free cash flow, we're going to be making a decision of what is the best use of that free cash flow, both strategically and accretively for shareholders.

Got it. That's helpful, Rusty, particularly when you look at what are the chances of getting a PDP deal in the A&D market right now versus your own valuation. That's helpful insight, and thank you for it.

This concludes our question and answer session. I would like to turn the conference back over to Darren Henke for any closing remarks.

Yeah, I really appreciate everyone calling in today and listening to the call. When you look at Ranger Oil Corporation, we've got the number one EBITDAX margin of all U.S. independents. Last year was rather transformative. We doubled our inventory, now have two decades at our current pace of development in future high-quality drilling inventory. We executed a very capital-efficient program last year, as I mentioned, delivering 3.75 times CapEx return on investment. We got a strong balance sheet approaching one times with tremendous demand. free cash flow optionality, and we're initiating shareholder-friendly strategies. Add all those things up, it's a very compelling value opportunity. Thanks for calling in today. Take care.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.