Continental Resources, Inc.

Ladies and gentlemen, and welcome to the Continental Resources, Inc. first quarter 2021 conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Rory Sabino, Vice President of Investor Relations. Please go ahead.

Good morning, and thank you for joining us. Welcome to today's earnings call. We will start today's call with remarks from Bill Berry, Continental's Chief Executive Officer. Bill will be joined by additional members of our senior executive team, including Mr. Harold Hamm, Executive Chairman, Jack Stark, President and Chief Operating Officer, John Hart, Chief Financial Officer and Chief Strategy Officer, and other members of our team for Q&A. Today's call will contain forward-looking statements that address projections, assumptions, and guidance. Actual results may differ materially from those contained in forward-looking statements. Please refer to the company's SEC filings for additional information concerning these statements and risks. In addition, Continental does not undertake any obligation to update forward-looking statements made on this call. Finally, on the call, we will refer to certain non-GAAP financial measures. For a reconciliation of these measures to generally accepted accounting principles, please refer to the updated investor presentation that has been posted on the company's website at www.clr.com. With that, I will turn the call over to Mr. Berry. Bill?

Thank you, Rory. And good morning, everyone. Thank you for taking the time to join us on the call. I hope you're all doing well. We've all seen a shift in investor expectations for E&P companies over the past several years to one appropriately focused on free cash flow and competitive returns to shareholders. The industry, as you know, has probably been a bit slow in recognizing and responding to this new investment paradigm. We at Continental have fully embraced this with our investor return efforts focused on free cash flow and moderate growth plans. In support of this, we're intentionally shortening the scripted portion of our earnings call to primarily focus on continental strong cash flow and shareholder capital returns and allow for more Q&A time. The first quarter results and our uses of free cash flow serve as an example of our continued commitment and capability to deliver competitive shareholder returns with strong free cash flow driven by asset quality, cost control, and capital discipline. During the first quarter, we generated $606 million of cash flow, of free cash flow. That's versus analysts' consensus estimate of approximately $450 million. We reduced debt by $560 million to end the quarter with a debt level of $4.97 billion, or below $4.9 billion, considering $95 million of cash on hand. This is three to six months earlier than our previous target. And additionally, we reestablished a dividend that was suspended during the pandemic at twice the level prior to the pandemic. This quarter will serve as the foundation to meet or exceed all of our guidance for the full year and highlights the unique value opportunity of investing in Continental. There are four key elements of Continental's outstanding value proposition to investors. Free cash flow commitment, capital discipline, strengthening the balance sheet, and cash returns to investors. I'd like to briefly discuss each of these. We have a consistent commitment to free cash flow. 2021 is projected to be our sixth consecutive year of positive free cash flow. We are one of only a very few unconventional EMP companies to have accomplished this. In support of delivering strong free cash flow, we're demonstrating our capital discipline stewardship with an expectation that, at current prices, our capital reinvestment rate will be less than 50% for the full year. With respect to our balance sheet We are accelerating our pace of debt reduction and now expect debt at year end to be below $4 billion, down by $1.5 billion year over year. And we are well on our way to achieving our goal of being a leader in shareholder capital returns as we reinstated our dividend with the first distribution scheduled for May 24th. All this financial performance and return of capital to shareholders is underpinned by our high quality and expanding assets, low operating costs, and the ingenuity and tenacity of our employees that have continued to stay focused on creating opportunities and efficiencies company-wide over the past 12 months. Production remains on target to meet or exceed annual guidance, with production as planned becoming more oil-weighted in the second half of the year. Additionally, we are projecting an approximately 12 percent return on capital employed in 2021 in line with our historic norms. So now let me go into a little bit more of the details. We are now projecting to generate $1.7 billion of free cash flow at $60 WTI and 275 Henry Hub in 2021. This equates to an approximately 18 percent free cash flow yield, which underscores our unique value proposition relative to the S&P 500 and all its sectors, as evident on slide four. Included in this update of free cash flow projection is our updated second quarter to fourth quarter 2021 crude oil differentials guidance per barrel of oil to a negative 375 to 475, and our updated second quarter to fourth quarter 2021 natural gas differentials of zero to a negative 50 cents per cf. We reinstated a quarterly dividend of 11 cents per share, which translates to an approximate Well, it was 1.7% when I wrote this yesterday. It's probably down around 1.5% dividend yield at current prices. As I mentioned earlier, this is double our previously issued dividend, which has been temporarily suspended at the onset of the global pandemic. We believe this is both competitive with our peers, the S&P 500 index yield of approximately 1.4%, and importantly, is expected to be sustainable given our strong cash flow generation and interest expense savings from our significant debt reduction. The dividend will be payable on May 24th to stockholders of record of May 10th. We're forecasting material debt reduction to continue with our $4.5 billion debt target by year end 2021 that we provided in February is now projected to be achieved by the end of July and positions the company to meet are updated year-end target of $4 billion or below by year-end 2021, a $500 million improvement versus our previous guidance. Our ultimate long-term debt target of under $3 billion would support our goal of maintaining a debt to EBITDAX ratio of one or below to enable us to successfully weather adverse commodity price cycles. We have accelerated our debt pay down goals by a full year due to our robust and protected cash flow generation, and a focus on returning to full investment grade. I'd like to talk a little bit about the ESG goals and highlight the ESG stewardship at Continental. As is shown on slide nine in 2020, we reduced our greenhouse gas intensity and methane intensity by 23% and 31% year over year respectively. From 2016 through 2020, we have cumulatively reduced those levels by 35% and 58% respectively. Our goal is to strive for a similar year-over-year greenhouse gas intensity reduction range in 2021. Notably, based upon our current operation program, we anticipate achieving as much as a 45% reduction from 2016 to 2021, and we aim to continue with additional methane intensity reductions as well. We'll be out with our 2020 ESG report by mid-year 2021, and look forward to continuing our constructive dialogue on the positive role the U.S. oil and gas industry is playing in responsibly sustaining America's energy future. As I switch gears to our operational performance, we're on track to deliver on our second quarter production guidance of 160 to 165,000 barrels of oil per day and 920 to 940 million cubic feet per day and plan to meet or exceed our annual production guidance for the year. As we stated in our April 12th update, Continental only saw a modest adverse impact to full-month production due to the cold weather in February. As a result of our long experience in the northern Rockies winter regimes, significant pre-planning efforts by our operational teams, and active support and interaction with government regulators, utilities, and pipeline companies, we were able to keep a large portion of our production flowing during these extreme conditions. Their operating teams were literally working 24-7 during absolutely miserable conditions to keep as much gas flowing as possible. My thanks to each and every one of them. We're on track to deliver approximately 143 gross operated wells in the north this year, inclusive of Bakken and the Powder River, with Bakken production already ramping up in the second quarter. In Oklahoma, in the first quarter, we brought online 14 wells, the majority of which were gas. This will shift to all weighted wells in the second half of 2021. Company-wide, we're on track with projections to see growth in the second half of the year versus the first half. Operational advancements in 2020 have carried over structural savings in 2021. Improvement in design processes and execution are driving costs down. We are implementing new equipment, technologies, and methodologies, and everything from drilling to stimulation to work over. These advancements are showing great results and demonstrate the potential for additional structural savings. Our employees are never satisfied with where we are in our performance, and it shows in our drive for continuous improvement. We're seeing our completed well cost trend lower in our asset areas. thanks to a significant step change in cost performance by our teams during the recent downturn. By keeping our teams intact, they have been able to optimize our operations over the past year to be more efficient than ever before. Turning to slide seven, our block and well cost continues to trend lower, thanks to structural improvements and enhanced operational design. In 2021, we are targeting well cost 7% below 2020 at $641 per lateral foot. Combined with our projections for consistent year-over-year performance from our Bakken wells, our 2021 Bakken program is projected to deliver a composite of more than 70 percent rate of return at $60.275. In Oklahoma, our oil and gas assets continue to afford us commodity optionality, which is a significant attribute as it provides great flexibility in various commodity environments. Just as the gas commodity fundamentals last year suggested we should switch to gas weighted drilling, which we did, we see the fundamentals this year supporting more oil weighting for our Oklahoma assets. This is expected to be realized in the second half of the year. And as I mentioned, we'll expect to see oil growth in the second half of the year. We're seeing strong repeatable performance from our condensate assets across the basin. And 2021 results year to date are no exception. Our average condensate unit well continues to improve year over year. We're also seeing significant cost savings in these wells. In 2021, we are targeting condensate well costs 17% below 2020 at $891 per lateral foot. Savings are being driven by structural efficiency gains through execution and translates to over 50% average rate of return for our wells at 60 and 275. Combined with strategic gas hedges where approximately 264 million cubic feet per day of our company's second quarter to fourth quarter 2021 natural gas is hedged with the midpoint of swaps and collars at 293 and market optionality to various markets. We are very pleased with the results from our condensate assets. Last quarter, we announced our strategic entrance into the Powder River Basin. We closed on this transaction on March 4th and we'll begin drilling with two rigs in the powder in the second quarter with our first well expected to spud in the next few days and the second rig to spud in early June. We're looking forward to sharing more details with you later this year. In closing, our investment case is driven by repeatable asset performance and accelerated capital returns to shareholders through both our reinstated dividend and exceptional progress on debt reduction. Time and time again our teams at Continental have been able to transform challenging market environments into opportunities to deliver organic growth, operational efficiencies, and cost savings that are structural in nature. These accomplishments underscore the strength of our team, our assets, and our operations. Our first quarter results reflect our organization's capability. Our asset technical expertise and unrivaled management alignment come together to deliver an investment opportunity uncommon in the oil and gas sector. Our management team acts like owners because we are owners. This unique alignment with shareholders drives our innovative and sustainable approach to delivering our corporate goals on behalf of all stakeholders. With that, we're ready to begin Q&A section. I'll turn the call back over to the operators.