Continental Resources, Inc.

Q3 2021 Earnings Conference Call

11/2/2021

spk03: Good day, ladies and gentlemen, and welcome to the Continental Resources, Inc. Third Quarter 2021 earnings 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, sir.
spk00: Good morning, everybody, 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, John Hart, Chief Financial Officer and Chief Strategy Officer, and Jack Stark, President and Chief Operating Officer. Additional members of our senior executive team, including Mr. Harold Hamm, Chairman of the Board, will be available 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?
spk09: Thank you, Rory, and good morning, everyone. I hope moving the earnings date was not an inconvenience for any of you. We did this to be able to share several exciting things with you today. First is our record free cash flow for the quarter of $669 million. Clearly, 2021 is going to be a record year for us in terms of free cash flow generation. We have expanded both our shareholder capital and corporate returns. This includes increasing our dividend by 33% from 15 cents to 20 cents per share, with our return on capital employed increasing to approximately 21%. Third is the exciting news that we now have strategic positions in four leading basins across the lower 48, with a $3.25 billion acquisition of Delaware assets from Pioneer. providing our company and shareholders with material, geologic, and geographic diversity. Like our first quarter Powder River Basin acquisition, this transaction is accretive on key financial metrics, and the acquired assets will complement our existing deep portfolio in the Bakken, Oklahoma, and Powder River. And fourth, we are now, post this transaction, we have been fully returned to fully investment grade. And as we've indicated on previous calls, we believe Continental has more alignment with shareholders than any other public EMP company. We focus every day on maximizing both shareholder and corporate returns. The Permian Basin acquisition will be an integral contributor to these shareholder return plans. This is an outstanding asset with 92,000 acres, over 1,000 locations, 50,000 net royalty acres. The acquisition also comes with about 55,000 BOE per day from PDP and anticipated volumes from Wells in Progress. And finally, and possibly most importantly, this Permian transaction is projected to add up to 2% to our return on capital employed annually over the next five years. The acquisition of these assets strongly supports the tenets of continental shareholder return on investment and return of investment. dividends, and share repurchases. These are all driven by continued commitment to strong free cash flow. Our plans for low single-digit production growth are the foundation for being able to deliver strong free cash flow. During the third quarter, we took additional steps to increase returns to shareholders with our third dividend increase in as many quarters and executing on $65 million in share repurchases. While we will be taking on some additional debt to pay for the transaction, our net debt to EBITDA target remains the same, less than one. We expect to exit this year at a quarter annualized net debt to EBITDA of about 1.3 and expect to be below 1.0 by year end 2022, assuming $60 and strip gas pricing. We are unwavering in our commitment to reduce debt. Our 2021 cash flow generation remains very competitive versus our peers in the broader market, as shown on slide 7. This is even after our stock has nearly tripled year-to-date. We see the potential to generate $2.6 billion of free cash flow this year, which equates to about 14% free cash flow yield at current prices. This is significantly above the majority of our industry peers in the broader market, indicating further upside in the value of our stock. As we look to 2022, we expect to provide updates on capital budget and operations, including the pending integration of our newly acquired permanent assets early next year. We are confident this acquisition will further enhance our free cash flow generation. Our ESG performance is top of mind for me, and I want to update you with regards to our ESG performance year to date. In the third quarter, we achieved a 98.9% gas capture rate, up from 98.3% in 2020. In support of our industry-leading ESG gas capture stewardship, we have deferred approximately $45 million in revenue in 2021. Additionally, we have achieved zero reportable injuries among our employees through the third quarter of 2021. Congratulations to the team on outstanding performance. We're proud of our teams and their exceptional commitment to continuously operate with integrity in a safe and environmentally responsible manner. We'll spend the remainder of the call discussing some of the specifics on our recently announced and highly accretive expansion into the Permian Basin. John will highlight the compelling financial aspects of our expansion, and Jack will provide details regarding the outstanding geologic attributes and fully integrated nature of the deal. Our new position in Permian, as shown on slide four, was driven by our geology-led corporate strategy and is built on a strong foundation of geoscience and technical operation skills, coupled with a management team fully aligned with shareholders. This transaction increases Continental's operational footprint in the area, with our current acreage position across the Permian now approximately 140,000 net acres. Later on the call, Jack will provide details regarding this expanded Permian footprint, along with the tremendous success our teams have had growing our top tier portfolio of lower 48 assets. Approximately 75% of the price of this asset is covered by PDP value and wells in progress at current strip prices, leaving significant upside value in undeveloped acreage. On a pro forma basis and at current strip prices, we expect to generate at least $3 billion of cash flow in 2022. Our pro forma free cash flow in 2022 is projected to be about 17 percent. This compares very favorably to our 2021 projected free cash flow yield of about 14 percent. Like our other assets, the fully integrated nature of this asset offers a multifaceted value proposition, including minerals and water infrastructure that we control and provides tremendous optionality and upside in the future, as shown on slide four. The transaction has been unanimously approved by the company's board of directors and is effective as of October 1st, with an expected closing date in the fourth quarter. I'll now turn the call over to John and Jack for more texture on the acquisition. Thank you, Bill.
spk08: As Bill mentioned, today's acquisition is immediately financially accretive on cash flow and free cash flow per share. Earnings per share, return on capital employed, and cash margin. This transaction has a number of benefits to continental shareholders. Let's discuss a few of those items. This transaction is credit enhancing due to projected cash flow and rapid debt pay down, benefiting our credit metrics while enhancing our commodity optionality and geographic diversity. It is beneficial to the ongoing trajectory of our credit rating. I will discuss agency views momentarily. This transaction includes a healthy amount of PDP, benefiting our EBITDAX by approximately $900 million per year at current strip prices, enhancing our credit metrics. Additionally, we are projecting an incremental $500 million of free cash flow from the acquired asset in 2022 at current strip prices, based on estimated 2022 production and capital spending. Combined with our legacy assets, we expect 2022 free cash flow of at least $3 billion at strip prices for Continental. We have significant flexibility in how we plan to finance the transaction. As of September 30th, we had approximately $700 million of cash on hand with expectations for strong free cash flow moving forward. Our revolver remains fully undrawn. On October 29th, we extended our revolver maturity to October 2026 and increased available commitments to $1.7 billion. We intend to utilize available cash and our revolver to fund a significant amount of this transaction. Remaining acquisition financing will be derived from debt capital markets and or bank term facilities. We will not issue additional equity as a means to fund this deal. This financing approach amplifies the accretive nature of this transaction on a per share basis. Our credit metrics also remain strong. With net debt to EBITDAX projected to increase only slightly from 0.9X in the third quarter to 1.3 times initially with the transaction, but is expected to drop below one times during 2022 at current strip prices. Our target is to reduce net debt back to current levels or approximately four billion by year end 22. We plan to utilize 2022 cash flow to pay off the revolver funding, rebuild our cash position, and pay off our 23 and 24 bond maturities at the earliest possible opportunity. As you may have noted, The rating agencies have been supportive of this transaction and our plans. Fitch has upgraded us to BBB. Moody's has upgraded us to BAA3. And S&P has maintained a positive outlook to upgrade to IG. This positions us with two agencies at investment grade, making us fully investment grade eligible, and one agency with a positive outlook to investment grade. We are pleased with this progress, as our objective is three investment grade ratings. Before I turn the call over to Jack, I would like to note some of the key financial highlights from the quarter. As we have discussed in previous quarters, and as you will note in the Form 10-Q, with the rise in natural gas prices, the company is elected to lock in a portion of associated cash flows through natural gas hedges at attractive prices. Subsequent to September 30th, we have continued to layer in natural gas hedges for the second quarter of 2022 through year-end 2023. We've utilized a combination of swaps and callers with an average swap of 371 and an average put of 325 and an average call of 496. These positions are summarized in our 10-Q along with our prior positions. We are largely unhedged for oil as we believe market fundamentals are supportive of price participation due to supply and demand rebalancing. We have remained capital disciplined with a projected reinvestment ratio of approximately 40 percent. Reflecting back on our original guidance in February, we were projecting at that time $1 billion of free cash flow with a reinvestment rate of 58 percent. With our free cash flow now up approximately 160% from our original guidance, we have decided to reinvest a modest amount of additional capital this year, or just under 10% of that incremental cash flow figure. This is due to the associated CapEx from the pending Permian acquisition, additional leasehold acquisitions, and incremental gas-focused activity in order to meet domestic and global natural gas consumer demand given an undersupplied market outlook this winter. I would now like to turn the call back over to Jack to discuss some of the key operational highlights of the deal.
spk10: Thank you, John, and good morning, everyone. I'll start out by saying that the Permian assets we acquired are an excellent addition to our existing portfolio. They contain the key strategic components common to all of Continental's assets, including the right rocks, excellent economics, a significant contiguous acreage position with high working interest and net revenue interest, mineral ownership, surface ownership, operated water infrastructure, and significant upside potential through continued operating efficiencies, technology, and exploration. I'll touch on each of these briefly here. First and foremost, it's all about the rocks. Referring to slide four, these assets contain proven stacked oil-rich reservoirs as well as other high potential reservoirs we intend to explore and develop in the future. We estimate that these assets contain an inventory of over 650 gross wells targeting three primary reservoirs, including the Third Bone Spring, the Wolf Camp A, Wolf Camp B, and we think there are over 1,000 locations when you consider other known producing reservoirs that underlie this acreage. On an economic basis, these assets complement our existing inventory very well. delivering rates of return from 50% to well over 100% at $60 WTI and $3 NYMEX. The 92,000 net leasehold acres being acquired are largely contiguous, as you can see on slide four, and highly concentrated. The Continental will operate 98% of this acreage with an average working interest of approximately 93% per well, and over 90% of this acreage is held by production. The acquisition also includes 50,000 net royalty acres. Approximately 70% of these royalty acres directly underlie our leasehold, which raises the average net revenue interest for wells drilled on this acreage to around 80%. The acquisition also includes significant water infrastructure and surface ownership, including 31,000 surface acres, approximately 180 miles of pipeline, water facilities, and disposal wells that can be expanded to accommodate growth. This will provide immediate operating efficiencies and cost benefits to our operations. The acquisition also includes approximately 55,000 BOE per day of production, which is inclusive of 10 wells in progress on a pro forma basis, and approximately 70% of this production is oil. The last point I'll make on these assets is that they are in the early stage of development, which is exactly what we like. The initial phase of testing and reservoir delineation is complete, and the properties are teed up for full field development. And as in all of our plays, we see significant opportunity to improve well performance and financial returns through optimized density and wellbore placement, operational efficiency gains, and asset growth through exploration. I'll stop there, but before I turn the call back to Bill, I want to close by pointing out how impactful our strategic moves over the past 18 months have been for Continental and its shareholders. Most importantly, we've expanded our operations into two additional world-class oil-weighted basins, the Powder River Basin and Permian Basin. Through grassroots leasing, trades, and strategic acquisitions, we now own or have under contract approximately 140,000 net acres in the Texas portion of the Permian Basin and approximately 215,000 net acres in the Powder River Basin. During this time, we also expanded We also added approximately 47,000 net acres in the heart of our springboard assets in Oklahoma. Combined, these assets have tremendous resource potential, adding well over a billion barrels of net resource potential to our industry-leading assets in the Bakken and Oklahoma, providing Continental Energy shareholders a deep and geologically diverse oil-weighted inventory that will drive strong returns and profitability for decades to come. With that, I'll turn it back over to Bill.
spk09: Thank you, Jack. This company has a long, well-established track record of having the exceptional capability of transferring our unique geologic and operational expertise to new and existing basins. We have created significant inflection points for the company in the past with our entry into the Bakken and Oklahoma positions. We now see our position in the Permian and Powder River as an additional inflection point representing significant complimentary step changes to the company's portfolio. With that, we're ready to begin the Q&A section of the call. I'll turn the call over to the operator.
spk03: Thank you. To ask a question, you may press star then 1 on your touch-tone phone. If you're using a speakerphone, we ask that you please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. Today's first question comes from Neil Digman at Truist. Please go ahead.
spk13: Morning. Congrats on a nice deal, guys. Maybe my question, Bill, for you is just curious to know how maybe the deal came to be. And maybe this is too early to ask, Jack, one of you guys, but just early thoughts on all the infrastructure associated with the deal.
spk09: Yeah, thanks, Neil. Appreciate the question. Yeah, I know this might have caught some of our investors and some of you guys by surprise. But actually, if you look at our involvement in the permit, we actually – looked at putting something together about the turn of the century out in the Permian. So we've actively been pursuing things out there. We've looked. We've been pretty deliberate in our process, very disciplined. Never thought the time was right or the economics were right to enter the basin. Obviously, it's a great basin, and we're happy to be there. But this is something that we have a really strong, active Geologic New Ventures team. We actually like the diversity of geography and the markets, and this brings that to us. And this is, as I know you run the numbers on this, it's very accretive with our operating capabilities, and we'll compete with anything in the country. So that's a little bit of the history. It started probably 20 plus years ago, maybe started 50 years ago when Harold started the company, but the Permian specific was about 20 years ago, and we're just delighted to have this really, really good asset as part of our portfolio.
spk13: Okay, and then question for John, maybe on the potential on share buybacks. Obviously, the new property to me adds nicely to the pre-cash flow, as you all pointed out, for next year. So just thinking, John, is it too early to say just how you guys are thinking about sort of the timing of buybacks or anything you'd say about maybe the timing of shareholder returns next year?
spk08: Thank you. Absolutely. Our commitment to shareholder returns remains solid and strong. We are more aligned than any company in the industry with shareholders with our ownership. Buybacks are an important part of that. They remain in place. We bought about 2 million shares this quarter. That will continue ongoing. Debt reduction has been a part of it. That is achievable as well. And obviously, we increased the dividend. We're generating a significant amount of cash flow. So that gives us the ability to add resource here and fund it while continuing with share buybacks. you know, strong competitive dividends.
spk13: Thank you, guys.
spk03: Thank you. And our next question today comes from Scott Hanold at RBC Capital Markets. Please go ahead.
spk02: Yeah, thanks, all. You know, just, you know, going back to the Permian transaction, you know, and I think it did give some color. You've been looking at it quite some time. Obviously, the seller had indicated it was unsolicited interest. But can you give us a sense of, You know, what did you do from a geological standpoint to kind of get comfortable with that position? Did you, you know, was there, you know, some actual drilling you've been able to, you know, get out there and do yourself on some adjacent acreage? Or, you know, was it just based on, you know, geological data that was available?
spk09: Well, I'll let Jack and Tony probably weigh in on this as well. But if you look at, you know, the capabilities of the company, you know, and there's a lot of similarities. geologically from the Oklahoma area and this area out in the Delaware. And so, you know, the transference of that geologic understanding is a pretty easy thing for us to do. And the basin's fairly well understood, but there's also a lot of capabilities that we think we can bring operationally to it. You know, we are the largest three-mile driller, lateral driller in the country. And so, that plus some other skill sets that we think we've got the unique ability to bring to the value proposition, I think it's going to you know, transfer a lot of value to this property with continental operating it. And Jack and Tony, I want you to maybe highlight a little bit more on the geology side.
spk10: Tony, you may have some things to add here as a follow-up to me. But, you know, when we look at this, obviously we study the geology and we know the rocks really well. And so one of the big components of this, obviously, is well performance and how wells have been completed. And we look at this, we, you know, we see that there's a big opportunity here to essentially improve performance and and enhance the asset here through, you know, more optimized density and well placement. And, of course, our operating efficiencies. Everywhere we're at, we're the lowest cost operator, and we'll be bringing that to the table here and just really continue to see the opportunity being something that is just right up our alley. I mean, this asset, when you look at it, it's got all the components that we look for in assets. And when you consider The concentrated acreage position, large, I mean, 93% average working interest, 98% operated, 90% HPP'd, all contiguous acreage. I mean, we have the ability to go in here and just develop this at our pace and with really with an infrastructure in place already with this gathering system that's in place for water and the facilities there. I mean, as I said in my comments here, it's just teed up for development and You know, a lot of people will look in the rearview mirror at results, and you've got to look ahead. You've got to take a look at technology and where it's taking you, not where it's been. And so when we look at these assets, we see where they're going, and we see that there's a lot of opportunity here to really generate a lot of future value for the continental shareholders in these assets.
spk09: Yeah, the one other thing I might add on this that maybe is not apparent to everyone is that we've got a really talented team here. a lot of which have really deep operational skill sets from this basin. So it's not like it's something that we've never operated in. There's several sitting around this table that have actually had a lot of experience out in the Midland area. The other one that I know won't escape your attention is that this is an asset deal versus a corporate deal. So a lot of times the integration and efficiencies that come with the big dollar type of asset acquisition through a corporate we're not going to have that difficulty here. It's just an asset, and so it's a real quick and seamless integration into the company.
spk02: Okay, great. And as my follow-up, in the 10Q, it did highlight that there was, I think, about another $375 million of A&D activity. You all are looking to close in the fourth quarter. Can you give a little color on that and maybe help me square the circle on your acreage position in the Texas Permian? I think this deal was you know, 90,000 acres, and, you know, I think you said 140 that you have. Is the transactions you're looking to close in the fourth quarter adjacent to, you know, some of this, and that's the variance?
spk10: Yeah, you know, it's a great question, and I'm not surprised you'd like to get more details on that. But, you know, for competitive reasons, we're not going to share a whole bunch about that right now. We've got some things in the works here from that we're following up on based on our geologic understanding. But yes, a lot of this would be right and adjacent to and contiguous to, but others not.
spk02: Thank you.
spk03: And our next question today comes from Derek Whitfield in Steeple. Please go ahead.
spk04: Good morning, all, and thanks for taking my questions. Certainly. With my first question, I wanted to ask a more direct question on your longer-term corporate objectives. Specifically, in thinking about the transaction, how does it change your $3 billion debt target, if at all, and then your ability to more aggressively pursue return of capital objectives once that debt objective is achieved?
spk08: Great question. You know, we expect to be back to roughly $4 billion by the end of 2022. That's where we're at here at 930. And with that, we're projecting for multiple years in the future, multi-billion dollar cash flows coming back, free cash flows. So we have a lot of ability to continue that trajectory. It's important to us, and we will continue that. We've been able over the last couple of years to balance a number of things. We've bought roughly, I don't have the exact number in front of me, but Corporately, we bought roughly 15 million shares through our share buyback through 2020 and into 2021. Additionally, we've obviously reduced debt by in excess of $1.5 billion during that time, and we reinstated our dividend and have sequentially increased it quarter upon quarter in a material way. Our models, our views looking forward show us not only being able to achieve the $3 billion, We chose to go substantially below that. We have the ability over the next five years to go to zero debt. So we've got a lot of cash flow, a lot of ability, and adding resource that is accretive and adding to that cash flow as this is is very beneficial to that trajectory.
spk04: Terrific. And then as my follow-up, I really wanted to ask a question to build on some of your earlier comments. And that's specifically with the transaction. Where are you seeing the greatest opportunity for well-performance improvement and value uplift?
spk10: Well, it's a combination of things. I mean, it comes down to, as I said, you know, well-bore placement, density, and, you know, and just our operational efficiencies, simulations, you name it. We've got a lot of ideas. And then on top of that, you know, there's a lot of – we highlighted the three – main targets here, the Third Bone, Wolf Camp A and B, but there's a lot of other reservoirs out there that we know are known producers in there, in the basin, and we have them underneath our leasehold and we'll surely be able to harvest those down the road. You know, add to it long laterals. I mean, shoot, we could be looking at this acreage position, the contiguous nature of it, we could be looking at three-mile laterals in here to more efficiently even develop this. And so just a lot of benefits here just from our experience that we're bringing to the basin. We obviously know there's things we can learn from others down there, and I have been paying attention to that. But I think that everywhere we go, we seem to be able to raise the bar on performance in all of our assets. That's very helpful. Thanks, guys.
spk04: Thank you, Derek.
spk03: And our next question today comes from Philip Johnston of Capital One. Please go ahead.
spk12: Hey guys, thanks. I think Pioneer started the year with zero rigs on these properties and I think at one point in September or so had about three or four rigs running and is now back down to one rig. My question is, you know, as you look to next year, how many rigs would you expect to run on these properties and what sort of capex would you anticipate spending?
spk09: Yeah, it's a great question. You're right. They did have about four rigs running actually at the discussion with them on this. They were running about four rigs and they're dropping that down. But our expectation is that based on our development plan right now in 2022, and we're not giving, obviously, guidance on 2022, but probably be running a couple of rigs in this area in 2022.
spk12: Okay. And what sort of capex would that imply?
spk09: Yeah, that's one that we're just putting the numbers together on total 2022 on that. So we're not really giving the numbers at this point in time.
spk12: Okay, fair enough. And then, John, if I heard you correctly, the additional $150 million of CapEx for 21 versus your prior guidance includes some CapEx on these properties as well as some additional leaseholds. Would the $375 million of other property acquisitions that you disclosed in the queue be in addition to that?
spk08: I don't know the timing on those closings. They're factored into our cash flow projections if they do, but yes, they would be incremental for the most part. Okay. It's a mixture, so a bit of both.
spk12: Okay, sounds good. Thanks, guys. Thank you.
spk03: And our next question today comes from Doug Liggett with Bank of America. Please go ahead.
spk11: Thanks, guys, for getting me on. I appreciate the opportunity.
spk09: Thanks, Doug.
spk11: I wonder if I could start with a bit of a random question on the water infrastructure that you acquired. It's not that long ago that you decided against doing a transaction on your legacy infrastructure, but it seems to me there's, you know, am I thinking too deeply about this, that maybe there's another layer of value in this acquisition that we might be overlooking just on the production coming out of the basin?
spk09: Yeah, Doug, you're absolutely correct. The water assets, about 180 miles of system that's there, you know, add significant value to this, you know, just because of the integral nature of it, and And so that is a value proposition that we've looked at and actually one of the things that we considered when we were interested in this property because of the facilities they had in place. It makes us able to hit the ground running.
spk11: But just to be clear on my question, would there be a monetization opportunity at some point?
spk09: Well, that's always an option. Just as you saw as we talked about up with our
spk11: position in the Bakken we looked at that last year and earlier this year and at some point in time you know that could be a monetization opportunity right now we have no plans to do that okay all right appreciate the answer my follow-up is is John is so I'm afraid it's a mechanical question on cash taxes um obviously you know the NOL situation if you just give it a quick refresh or not but what I'm really interested in is that when you're in a kind of a low no growth mode a level of sustaining capital with a large amount of IDCs that you essentially get to write off instantaneously against your tax burden. Should we expect at any point in the future you're going to have any meaningful cash tax exposure?
spk08: So we've done a lot of analysis on that. I think we've got a good hold on it with and without this acquisition. We've looked at it. Don't expect any – the NOL, as you focused on, is an important part and driver. You're also correct when you're investing at the levels that companies are investing at that you do transition to cash taxes. It's mechanical, I think, as you said. So we see that, but the NOL defers that into the future. 2021, I don't see us paying cash taxes. We use a portion of the NOL. The NOL will largely cover us in 22. We could have less than $100 million of cash taxes in 22. Looking longer term than that, it varies by year and timing of different things coming on, et cetera. But I would say it's $100 to $300 million on the upside through that 23 through 26. NOL, obviously, is a big, significant component. That's federal. Tax level in states is different and would be lower than that, obviously, and in some states wouldn't come into play.
spk11: Thanks, Kevin. I appreciate the clarity. Sure.
spk03: And our next question today comes from Arun Jayaram at J.P. Morgan. Please go ahead.
spk01: Yeah, good morning. I wanted to... to see if you guys could elaborate a little bit on the expansion in the Permian Basin. And just wanted to see if we could get a little bit more thoughts. You've now added a third leg to the stool in the PRB, and now you're in the Permian. But what is the longer-term – how is the longer-term strategy evolving? And do you look to be a consolidator – in the Permian, just given the number of private operators in the basin?
spk09: Yeah, there's a couple parts to that question. Obviously, the Permian's a great big basin with a lot of significant players there. I think what you'd probably look to us to do in the Permian is what we've done elsewhere, as was mentioned earlier, that everywhere we go, we have a demonstrated track record of being the low-cost, most efficient operator, and we anticipate being able to deliver that in the Permian as well. So that would probably be the primary focus I think you'd be looking at us pursuing in that area. There is, as was described by Jack, there's some geologic opportunities that we're considering out there and for competitive reasons that we're not talking about right now.
spk01: Great. And one for John Hart. John, you got upgraded by Moody's this morning, so congratulations there. And I just wanted to see if you could talk about some of the benefits, cost of capital, et cetera, from getting back to IGG.
spk08: You know, the move to IG can be 25 basis points to 3.8. So I think that's a positive, possibly more. We have a long-term track history in the debt and equity markets of delivering on what we say we're going to do. You know, we've obviously paid down debt. We've obviously been a, this will be the sixth year in a row of positive cash flow. Obviously, it's the The largest in this, you know, the projections looking forward are significant free cash flow as well. All of that factors into our cost of capital and gives us a very attractive and improving cost of capital. So that's important. And, you know, Fitch upgraded us as well to a triple B. So that's important as well. And S&P is right there on the cusp with the positive outlook. So it makes it very attractive. Thanks a lot, John. Thank you, everyone.
spk03: And our next question today comes from Neil Meda at Goldman Sachs. Please go ahead.
spk07: Hey, thank you very much. And I apologize if this has been asked and answered. But the first question is about how you evaluated this transaction relative to repurchasing your own shares where you have been aggressive. And as you think about the share repurchase program, will you be able to both execute the transaction with cash and still be aggressive around share count reduction?
spk09: No, I think the easy answer on that is both. When we go into these type of acquisitions, we look at what the impact is going to be, the balance sheet, the impact is going to be to the shareholder return. At the end of the day, we are balancing two things, value creation and cash distributions. And so Those are things that are equally important to us and that if you look at the second, cash returns to the shareholder, that's driven by the former value creation. And this is what I think John was alluding to earlier. This is actually going to create value, create ability for us to make larger distributions in the future.
spk07: And the follow up is just where do you think we are in terms of Bakken maturity and your runway in the Bakken? Is this a opportunistic transaction to diversify the portfolio, or does this in some ways reflect your view that the Bakken part of the portfolio is mature?
spk09: I think there's two parts to that. One, you're talking about the geologic side of things and what's the running room there, and there's still significant running room. The other is the consolidation that's been going on in the area, and it's a value correction question I think you're asking. You know, there are things in the Bakken we think that has additional significant running room. There's actually been transactions up there that could have been considered that would have fit well with us. However, you know, on a value proposition, they just weren't the right things to do. This is one that, you know, all value creation to the company is really strong for us. But the Bakken, we've got eight rigs running there now. So quite a bit of inventory that we're still pursuing, developing up in that area. And I think we're a long, long way from seeing anybody saying the Bakken's going to be falling off. So, Jack, you probably got some comments as well.
spk10: No, I'd just point to some color on that, too. You know, here we are way down, you know, from what Bakken was actually kicked off out in Montana back in early 2000s and Phil Kleisler- Here we are in 2021 and if you take a look at say that on page eight you look at the you know our performance here went over since 2018. Phil Kleisler- See all the basically the performance on average of the wells during those drilling program years and take a look at the long creek wells, I mean we've got 11 wells in there, the first 11 we've completed. And they are substantially outperforming, you know, the statistical average we've had over the prior years. And it just shows that there's still a lot of horsepower out here in the Bakken that remains to be tapped. And we've got 56 wells in this Long Creek unit to drill. And we've got five more that will get completed here probably by year end. And then the rest, 50% of those will be completed next year and another 20% the following year. So, I mean, this is a bellwether for the type of performance you can expect out of a unit. And to me, that doesn't look like a play that's reached full maturity.
spk09: Yeah, and to build on that, if you look at almost every year, and that's what Jack's highlighting, we're drilling our best wells in the Balkans. So, you know, this year is better than last year, better than previous years, and next year is going to be better than this year. And so I think you'll see that trend continue.
spk10: Yeah, and I think you've got to keep in mind the leasehold position is key. For some operators, definitely, they've reached maturity or they have no inventory to drill. Because of our large and basically industry-leading footprint out here, we've just been able to continue to develop the Bakken here and deliver these type of results. So it's It's proportionate to your position in the play, and we were early in the play and built a dominant position in the play, and it's continuing to deliver. Well said. Thanks, guys.
spk03: Thank you.
spk10: Thank you, Neil.
spk03: And our next question today comes from Paul Chang. It's Scotiabank. Please go ahead.
spk06: Thank you. Good morning, guys. Good morning. Just curious that if we're looking at with Delaware Basin, From an inventory backlog standpoint, is there something that you can share? What's the number of locations that is economic for you at $40 WTI and $250 hand-me-up by region or total?
spk10: When I look at it, you're asking... Almost like a break-even question. Is that what you're asking? That's correct.
spk06: And also that, I mean, we're trying to understand that, I mean, you certainly improved your inventory backlog a lot with this deal. So we're trying to understand that, I mean, how many years of the during inventory with this deal now we're talking about if you just want to sustain your operations.
spk10: Yeah. Well, I mean, if you look at 650 wells and assume, what, guys, we're going to get about 18 wells a year per rig. So, I mean, what that gives you is 30-plus rig years of inventory there. So, I mean, that gives you an idea. You can put however many rigs you want in there and get an idea of the sustainability of that inventory. And your other part of the question was how this competes. Is that it? Is that what you're asking?
spk06: Yes. Well, we're basically looking at, say, some of your competitors will give the inventory backlog based on, I think, a lot of people that would be looking at $40 WTI and $250 is pretty conservative. And so based on this kind of conservative pricing, what is your inventory backlog that we are looking at?
spk10: Yeah, well, this inventory that we're looking at here is, you know, it's got break-even below $40. And so And what you've got to keep in mind here is that this acreage here, remember, we've got 70% of our minerals underlie our leasehold position. So our net revenues here are very strong. They're 80% on average across this acreage. And so you're benefited from that. You're benefited from the water infrastructure, the surface ownership, you name it. That's why I say this thing has got all the component parts that are basically continental assets have. This is like going to springboard. We own basically the infrastructure. We have 360 square miles of basically acreage we control in there. I mean, that's the size of the project there, 75% average working interest. I mean, it is carbon copy of the type of projects that Continental likes to put together. And that's why this we saw as a unique opportunity to grab a hold of. And then we can take our geologic and operational expertise and apply it and take this asset basically to the next level.
spk06: Mm-hmm. My second question is that, yes, a two-part one. Bill, I know it's early, but for next year, on a performance basis, do you expect oil production will grow compared to the fourth quarter level, or that you think it's going to remain relatively flat? And also, when we're looking at the dollar base, and once you get the offset, Can you tell us that most of the oil and gas currently selling is under existing customer contract you also inherit? If not, do you plan to mostly sell them in the basin or that you would try to ship it to the Gulf Coast? And whether that you have existing kind of relationship for you to do that? Thank you.
spk09: Yeah, thanks, Paul. So two questions, the production versus this year and then the other is the ability to be able to market the product out of it to Yeah, I think you've heard us say on previous calls, and we're still in that exact same position. You know, the oil market is still pretty fragile. We're thinking, you know, maybe Q1, Q2, it's going to be close to getting balanced, but it's still pretty fragile. And so I don't think it's appropriate for anyone in the industry to be overproducing into that potentially fragile, oversupplied market. And so for next year, we're going to be low single-digit growth rates, I think is what you'll see from us. As far as market offtake, the opportunity is there to be able to produce at levels that we are producing and to grow that in the Permian. Obviously, there's been some tight gas in the past with Waha differentials and blowing out. But that's one of the things that we factored into the analysis is the ability to ship the crude and to ship the gas as well. And that's what you're seeing with our approach to come in with a couple of rigs, and that's what's driving that.
spk03: Thank you. And ladies and gentlemen, this concludes today's question and answer session. I'd like to turn the conference back over to Rory Sabino for any closing remarks.
spk00: Great. Thank you very much for your time today, and please feel free to address any additional questions to the investor relations team. Have a great day. Thank you.
spk09: Thanks, everyone.
spk03: And thank you, sir. This concludes today's conference. You may now disconnect your lines and have a wonderful day.
Disclaimer

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