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spk05: Good day, ladies and gentlemen, and welcome to the Continental Resources, Inc. First Quarter 2022 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 call over to Rory Sabino, Vice President of Investor Relations. Please go ahead, sir.
spk00: RORY SABINO Great. Thank you very much. Good morning, everyone, 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 President and Chief Executive Officer, and Doug Lawler, Chief Operating Officer and Executive Vice President, additional members of our senior executive team, including John Hart, Chief Financial Officer and Executive Vice President of Strategic Planning, 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. Burke. Bill?
spk07: Thanks, Roy. Good morning and thank you for joining Continental's first quarter 2022 earnings call. We have many compelling updates to share with you regarding our corporate returns-driven and opportunity-based investment value proposition. At Continental, we believe that consumer access to affordable and reliable oil and natural gas is and will continue to be the foundational determinant for the quality of life for mankind for decades to come, and that our ability to produce hydrocarbons in an ESG responsible and capital efficient manner benefits our society, our planet, and our shareholders. I'll start today's presentation by providing some comments on our outstanding first quarter results and 2022 full year guidance updates. And then Doug will provide insights on our operations, including the performance and activity of our recent asset acquisitions and exceptional operating results. I want to take this opportunity to recognize and welcome Doug to our earnings call conversation. He has already made significant contributions to Continental and we are delighted to have him on the team. To begin, I'd like to turn your attention to slides three and four, which describe who we are. A financially disciplined company with premier assets driving a unique investment value opportunity. I'm proud of the financially disciplined investment value proposition we outline on slide three. While a number of the key components are covered throughout our comments, I want to focus on the macro tenets of return on capital, return of capital to shareholders, and balance sheet strength. As you may have seen earlier this week, S&P has upgraded our issue level rating to triple B minus from double B plus, reflecting our strong, sustainable credit metrics. and supported by our prudent financial planning. We are now investment grade rated with all three major credit rating agencies. With an approximately 31% return on capital employed projected for full year 2022, Continental provides a distinct investment thesis that is highly competitive on a returns on capital employed basis against industry peers and across S&P 500. As shown on slide five, This is the case not only in 2022, but across many years. Continental has a deep, rich inventory, enabling strong financial performance, driving exceptional cash flows and return on capital employed. As you can see on slide six, we delivered outstanding first quarter 2022 results. Our first quarter free cash flow of $1.15 billion is another key output that strongly exceeded consensus estimates by approximately $100 million, driven by strong realizations and operating results. This sets the stage for our increased full-year 2022 free cash flow guidance of 4.3 to 4.7 billion, reflecting both current commodity prices and strong operational performance. With our projected 2022 free cash flow yield of approximately 22% at the midpoint in today's market cap, we are enhancing our balance sheet with our net debt to EBITDAX expected to be less than one by mid-year 2022 and net debt approaching $4 billion by year-end 2022. This is supportive of our mid-cycle price-based goal of having less than $3 billion net debt and less than one times net debt to EBITDAX at $55 oil and 275 gas. Our underlying financial capacity and focus on shareholder returns have driven five quarters in a row of exceptional dividend growth. This includes the 22 percent increase we announced a few days ago, increasing our quarterly dividend from 23 cents to 28 cents per share. Our dividend is now paying out about $400 million a year to shareholders. In addition to the dividend increase, our cash return profile is further complemented by our share repurchases. we repurchased $100 million worth of shares in the first quarter. Continental's competitive advantage is predicated upon the high quality of our sizable inventory based in our four world-class basins, the Bakken, Anadarko, Powder River, and Permian. In the past 18 months alone, we have added over 600,000 net acres to our portfolio in core areas of these key resource basins, while driving significant value accretions. This is coupled with the strong geologic capabilities and subsurface and operational expertise of our teams, allowing us to consistently produce low-cost, capital-efficient, and high-margin results. Continental is distinct from our peers in that we offer both geographic diversity and commodity optionality. This has enabled us to consistently deliver free cash flow, with this being our seventh year in a row that we are projecting to do so. especially in the current pricing environment for both oil and natural gas, we believe there is no better producer to invest in than Continental. Our cash flow and margins are fully participating in both oil and NGL's upward price movement, and we have approximately 50% of our gas heads in 2022 at an effective price that is 80% above the 10-year average. You can see the impact of this uplift in our updated gas differential guidance as we have increased our guidance to a $0.25 to $1 premium. Let me now discuss our 2022 shareholder return of capital priorities, which you can see on slide 7. This is essentially a summary of my earlier comments where, as part of our unique investment value opportunity, we are deliberately and thoughtfully returning capital to shareholders in the form of increasing our fixed dividend yield and repurchasing shares. Our recently updated capital investment rate is less than 40%. We also remain keenly focused on continued financial discipline and targeting significant debt reduction. In the first quarter, we saw a $264 million reduction in total debt, which places the company at less than one times net debt to EBITDA on an annualized basis and puts us on track to achieve the same ratio on a trailing 12-month basis mid-year. The next quarter fixed dividend of 28 cents per share represents an approximately 2% yield, which exceeds the S&P 500 average yield and is in line with our target of 2% or greater. As I mentioned previously, we have continued our share repurchase program at an active pace with, since 2019, over $540 million, representing 18.8 million shares, repurchased to date at an average price of $28.76. This is about 20% of our flow, and we have approximately $960 million left in our authorized program. Given our approximately $35 WTI cost of supply, we are committed to returning cash at a wide variety of prices. Finally, as you've heard from other operators, the industry is clearly seeing inflationary pressures. Doug will provide further color, but I do want to mention that should inflationary pressures continue to manifest itself, beyond what we have planned for, we have maximum operating flexibility, and they choose not to participate. With that, I'll turn the call over to Doug.
spk10: Thank you, Bill, and good morning. Prior to my operations comments, I'd like to share a few observations with you, having been a part of Continental now for three months. Like you, I have long known about the company's high-quality reputation, but now I've seen it from the inside. The strength of the assets is obvious. but I've been very impressed with the quality of the company's employees and leadership. The petrotechnical and operating strength of the company is outstanding, and these capabilities serve as a differential foundation for enhancing shareholder value in the future. The best example of these capabilities is the seamless integration of two additional major assets to the portfolio, where we are recognizing better-than-expected productivity, capital efficiency, and resource potential. The company's substantial and diverse resource base is uniquely positioned for outstanding returns and value creation for the next decade at an extremely competitive cost of supply. These attributes combined with a focused, dedicated culture gives me great confidence in the company, and I'm very excited to be part of the Continental team. Moving to the operating comments, please turn to slide 8, which provides a side-by-side summary of our current annual guidance versus our original guidance. As previously noted, we have increased our annual oil production guidance to 200,000 to 210,000 barrels of oil per day, inclusive of PDP volumes from our recent Powder River acquisition. Despite significant ice and snowstorm-related downtime in North Dakota, we are confident in our production guidance for the full year and sequential production growth each quarter. Due to the recent storms, our Bakken asset is currently producing approximately 85% of pre-storm levels, but we expect to be back to 100% by mid-May. This downtime has been offset through accelerated drilling and completion activity in the beginning of the year, increased work over activity, and through better than expected productivity from recently completed wells. We project a strong December 2022 corporate production exit rate of approximately 220,000 to 230,000 barrels of oil per day. Additionally, we have raised our natural gas production guidance to 1.1 to 1.2 billion cubic feet of natural gas per day, due to strong early performance from our 2022 gas wells in the scoop and stack areas of the Anadarko Basin. These additional volumes are benefiting our free cash flow and return on capital employed. We are maintaining our operating expense guidance for the year, including production expense, which was elevated in the first quarter due to the aforementioned increase in workover activity. These accelerated workovers are paying out in an average of two weeks. Absent these highly economic workovers, We are within our operating expense guidance for the quarter. Given strong pricing realizations, we are improving our oil and gas differentials and are projecting negative $2.50 to $3.50 per barrel of oil and positive 25 cents to $1 per thousand cubic feet for natural gas. These increased realizations are driven by the attenuated drilling activity in the basins where we operate, leading to strong in-basing pricing, strategic pricing with our refiner customers, and NGL pricing uplifts. Also, as noted previously, we have allocated an additional $100 to $125 million toward inflation, as we see inflationary pressure of up to 20% versus 2021. With the strength and year-over-year consistency of our operations, we have options when it comes to service providers and products we use to execute our program. We will continue to monitor inflation and respond accordingly, including the pursuit of further operational and technical efficiencies as well as adjusting our capital program up or down as economics dictate. Overall, we believe our strong results and forward-looking projections highlight the strength of our operations, our teams, and our assets, and how this performance translates to significant and sustainable corporate returns and cash flow generation. If you please turn to slide nine, Continental has acquired over 600,000 net acres across the Bakken, Anadarko, Powder River, and Permian basins over the past 18 months. through accretive bolt-on acquisitions and organic exploration. These acquisitions represent a 50% increase in our total net acres over this period for efficient future resource development at highly competitive acquisition prices. As we messaged last quarter, our expansion into the Permian and Powder River Basin has been exceptional. Our teams have done a great job on all fronts, assimilating the existing assets as well as standing up multiple drilling rigs in both basins to develop and explore these two high-quality assets. I am particularly proud of our continental teammates and our Casper and Douglas Wyoming field offices and our Monahans Texas field office for the great job they have done making successful large-scale transitions possible in a very short period of time. From a geologic, reservoir, and land perspective, our teams in both basins are operating at a very high level which is evidenced by the early time results. This is a product of many years of detailed and focused technical evaluation prior to entering these new basins and having an advanced understanding of the many stacked reservoirs available for commercial development in these areas. Slide 10 highlights our newly acquired position in the Delaware Basin. We have added new acreage to our total acreage position in the last 90 days, identified by a red outline on the northern portion of the highlighted yellow acreage map. We are excited about the initial results from a recently completed 10-well unit, which is meeting and or exceeding our expectations, flowing a cumulative 15,300 barrels of oil equivalent per day from 10 wells targeting the Third Bone Spring and the Wolf Camp A reservoirs. We currently have four rigs operating in the Delaware, and we are planning for one additional rig in the second half of 2022. Our focus will be full unit development of the Bone Spring and Wolf Camp reservoirs across our position in the Delaware Basin. As you look at slide 11, you will see why we are excited about the Powder River Basin. We are very pleased with the recent results from 19 new wells producing an average IP30 of 1,151 BOE per day. These wells span a 70-mile-long continuous fairway through our core acreage and were completed in three different reservoirs, including the Shannon, Niobrara, and Frontier. We're currently operating two rigs in the basin focused on development in the Shannon and Frontier, while further delineating the Niobrara across our position. Additionally, we plan to complete wells in four other reservoirs by the end of the year. We expect to drill more than 100 wells in the next two years in the powder, with roughly 90% of these wells targeting the Niobrara and Frontier slash Turner formations. Please turn to slide 12. You will see that another aspect of our differentiated ability to unlock opportunities is the continued positive rate of change to our capital efficiency and cost of supply. Our sustainable free cash flow generation is not only a function of the commodity price environment, but the strength of our operations and support teams. Since 2015, we have seen a 30% improvement to our company-wide cost of supply and a 50% improvement to our capital efficiency. Backing out inflation in the current year, the graphics show the sequential improvements in our operating capability and expertise over time. At present, our operating and subsurface teams have successfully mitigated inflation as demonstrated by the flat cost of supply in 2022 versus 2021. This achievement is due to improved drilling and completion efficiencies, as well as successful geotechnical evaluation resulting in outstanding performance. In summary, We're executing our program in a highly efficient, value-focused manner while maximizing our cash-generating capabilities. I'll now pass the call back to Bill.
spk07: Thanks, Doug. Finally, turning to slide 13, our commitment to ESG leadership continues to be front and center for Continental. Look for our 2021 ESG report to be published in July. As we have published in our previous ESG reports, we believe the existing frameworks do not adequately consider the contribution the energy industry makes to the security and well-being of the United States and the rest of the world. Our framework considers these contributions and presents a view focused on the societal contribution that oil and gas makes to modern life. The events, the unfortunate events unfolding in Europe in the first half of this year highlight this very issue. We remain committed to addressing the critical needs for society to access the secure, reliable, affordable, clean energy we produce. In addition to our focus on ongoing operational improvements, during the recent quarter, we announced a key strategic investment of $250 million in Summit Carbon Solutions, which is expected to be operational by 2024. Once completed, the project will be the largest carbon capture and sequestration project in the world. Expected to capture and sequester 10 to 12 million tons per year of CO2. By way of comparison, Continental's 2020 Scope 1 emissions were approximately 2.3 million metric tons. Summit is currently raising additional equity and once finalized, we expect to own approximately 25% of this enterprise as an equity investment. Our investment will be funded throughout 2022 and 2023. We're very excited about this project and encourage you to go to Summit's website for greater details. With that, we're ready to begin the Q&A section of our call, and I'll turn the call back over to the operators.
spk05: All right, thank you. And we will now begin the question and answer session. To ask a question, you may press star and 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. Please limit your questions to one question and one follow-up. Our first question today will come from Neil Dingman of Truist Securities. Please go ahead.
spk08: Morning, guys. Hope you can hear me all right. Impressive results. Both my questions are operational in nature. First, on the Permian position, I'm just wondering, specifically now that you've had the assets for a number of months, could you speak to the upside maybe you've experienced there, and do you have any concern for gas takeaway next year?
spk07: Yeah, a couple things on that. This is Bill, and I'll probably have Doug and Tony add to it as well. Everything we've seen so far, we have really liked coming in equal to or better than what our expectations are. You know, I think we're all seeing the same gas offtake issue that you've probably heard from other folks as well, that in the next 24 months or so that the industry is going to need additional offtakes for gas in that area. And we're We're drilling and developing at a pace commensurate with our expectation of what that offtake is going to be. But Tony and Doug, you may have some other comments on what we're seeing from the wells.
spk10: The only thing I'd add, Bill, is just the performance early time from some of the new completions is really strong and gives us further excitement from what we anticipated originally in our current plan in the next few years. The results that we were sharing on one of the new 10-well units is particularly exciting as it gives us confidence in the areas, particularly to the north, that can be fully developed here in the next few years that they're going to generate some serious volumes for the company. I think also, as noted in my comments, the Wolf Camp A, Bone Spring, our main target, but we see further opportunities in that stratigraphic section. So it's exciting. And what's really super cool about it, Neil, is that this company's hit the ground running really fast. And it's as if the asset has been a part of the company for five, 10 years.
spk08: Great details. And then my second is just, Doug, on the workovers. You mentioned prepared remarks. Do you all have a number of further workover opportunities either in the Bakken, Anadarko, or Permian as you see on the horizon?
spk10: This is another really powerful story. I'm really excited about it. When you look at what we've done, our base LOE runs a little bit less than $3 a barrel. And work over expense for the company was forecasted to be a little less than a dollar a barrel to add to that. So bringing us to what you see in our guides is a little less than four bucks a barrel. We have completed 301 work overs in the Bakken in the first quarter alone. That is 65 more than the company's ever done historically. just an outstanding job that they're executing in the field up there at tremendous economics, as I noted, at a two-week payout. These projects are bringing on anywhere from 50 to 55 barrels of oil net, and you can just see a tremendous runway there as we expect to continue a similar pace, but we'll be adjusting that through the year as we see what economically makes the most sense. Obviously, the Bakken has the most opportunities for those workovers. We will be continuing to look around the portfolio for opportunities. There will be some in the Permian, obviously some in the Anadarko. And as we turn our attention to what's possible in the powder, there are a more limited number, but opportunities there, too. So that's a really powerful part of our program that's improving our economics and, again, demonstrating the leadership of the company of how we can mobilize resource very cost-effectively.
spk06: Yeah, I might give you a couple of numbers just to help on your modeling. So last year, expense workovers averaged about $0.75 a BOE. First quarter, they were $1.13. So that $0.40 uplift there, that's the 301 projects that Doug referenced. And obviously, they paid out quickly, as he indicated. You back that out, we're comfortably within our guidance. We've modeled out for the year. We expect... Obviously, we retained and reaffirmed our guidance. We expect to be within our guidance for the year. So we're well positioned.
spk08: Thanks for that, John.
spk05: Our next question today will come from Derek Whitfield of Stiefel. Please go ahead.
spk09: Good morning, all, and congrats on a strong quarter and update. Thank you. With my first question, I wanted to ask it more direct. question on your long-term return of capital objectives and thinking about the free cash flow projections you're outlining on page eight. Is there a case to make for the institution of another return of capital means given the degree of free cash flow available at present, your float, and your net debt leverage?
spk07: Yeah, thanks, Derek. Appreciate it. Yeah, what we've said on the prior calls, and we'll go ahead and reemphasize it here, is that we We're looking at all the tools in the quiver, so to speak, and there's lots of different vehicles. One of the ones that is most important is the share buyback that's out there is another tool that can be used. We bought $100 million worth in the first quarter. The debt pay down, the balance sheet is still where we're trying to get to, and you've seen our target that $3 billion is where we've been. Obviously, as we continue to generate cash flow on a net debt basis, we're we may strengthen that by lowering that target even further below $3 billion. I think the point that, and I'll probably use this as a springboard to the question I know you guys will always have on this, but it builds into this dialogue, Derek, is M&A and what are you going to do on that. If you look at our opportunity, and I think Neil had a good comment in his comments last night on this, is that You know, described continental is materially undervalued. We see that as well, which is why, you know, we see a lot of focus on the share buyback. It's something that has an opportunity to add value to the shareholders. That's great.
spk09: And then as my follow-up, I wanted to shift over to your Summit Carbon Solutions partnership and certainly compliment you on your investment there. Our team covers both upstream and biofuels, so we can fully appreciate it. Regarding the partnership itself, could you perhaps share some context around its structure, and if you're expecting to receive some percentage of the IRS 45Q and environmental attribute uplift as a result of the equity stake you've taken?
spk07: Yeah, let me maybe do a high level, then John Hart may go into a little bit more detail. Some of the commercial terms have not been released publicly. We do have about 31 ethanol plants that are contributing ethanol, and I think there's another one or so in progress. And the structure is that the CO2 capture, there's two parts of it, the 45Q, and as you know, that's $50 a ton, and hopefully then legislation is going to move that to $85 a ton. And then also there's low carbon fuel credits for the ethanol as it actually gets sold into various states that have that. And so long-term, there is a commercial arrangement between the providers and us, but we haven't released the details on that. John, you've got some more.
spk06: Yeah, what I would add on the economics is ethanol is one of the lowest-cost sources of CO2. It's the emissions from ethanol plants are 97%, 98% pure CO2, and the remainder is largely water vapor. So that benefits the economics significantly. This is a project that we're attracted to for a number of reasons. Bill and his comments referenced it's, you know, our percentage ownership is greater than our scale point emissions, for instance. But we are looking at this as a very viable, strong economic project. And the participation in various contexts, that's something that Summit can discuss at the appropriate time. But it's a very attractive project to us. I think it lends to our expertise and our skill sets. And we're going to own about a quarter of it, as Bill referenced in his comments, going forward. And it's a very large project.
spk07: Yeah, Derek, just building on that, we're real excited about this and have had extensive conversations not only with the people involved in the investing side of it, but also with the government centers of all the states. So All the governors are very supportive of this. And, of course, this is a very significant opportunity for the ethanol producers in those states to have a chance to take their ethanol and put a much lower carbon intensity on it. So this is one that we're convinced is going to be a very good project for everyone concerned.
spk05: Our next question today will come from Neil Mehta of Goldman Sachs. Please go ahead.
spk04: Good morning, team. Congrats on the strong quarter here. My first question was related to the M&A environment. You guys have been more active on the A&D side with acreage acquisitions, PRB, obviously the deals in the Permian as well. As you look at the market going forward, do you still see an attractive opportunity set? And the nature of the transactions, to the extent that they continue to develop over the next year, do you see them more in the bolt-on type? that we saw so far this year.
spk07: Yeah, thanks, Neil. If you look at it from a high level, and you've heard us say this before, our preference is always bolt-on, that it provides an opportunity to go in and embrace an area that we already understand, already are working in. The things that we talked about when we got into the Permian, and I know that somewhat surprised people when we got in there, but I know you'll recall on the last call we discussed that actually the first time we looked at making an acquisition in the Permian was at the turn of the century. So we do a really thorough, disciplined, exhaustive job of looking at the rocks, looking at the economics, and before we get into any type of M&A activity, and I think we're all seeing where prices are right now, that you're going to be in a much more difficult bid-ask spread So bolt-ons are still going to be probably the thing that we prefer to do as we go forward, but I think even the ability to do that is going to be somewhat constrained with where we are right now in the price cycle. And, Doug, I don't know whether you've got anything else you want to add to that.
spk10: I may just add, Bill, that we'll continue to look at these opportunities, as Bill noted, that make strong economic sense and will provide opportunities for future investment that are competitive within our portfolio. And what's really significant to note is as we think about these acquisitions, we in many cases are seeing that average acquisition price of less than $10,000 per acre. And so as we think about opportunities to invest in the future, we will evaluate the economics closely. But this competitive price that we have added to our portfolio gives us a lot of confidence in what we have. And there should be other opportunities that we're able to pursue in the future.
spk07: Neil, I might throw out just one last perspective on that. And I know the question's always out there, you know, what are we going to do? And more importantly, what are you going to pay for it? If you look at the discipline approach we took in picking up that 600,000 acres and back in what we actually paid for undeveloped acreage, you'll find that it's a pretty low number. And that was based on our approach. And that's even before run-up and crude prices. But with the run-up, it's even a smaller number. But that's a reflection of who we are. We take a very disciplined approach as to how we're doing M&A. And we don't do a lot. But when we do, we think it's going to be beneficial to the shareholders.
spk04: That's great. Great perspective. The follow-up is on natural gas. If you look at the quarter, you had very strong realized gas prices versus, I think, what most of us had modeled. How does the strengthening of the gas forward curve change your activity expectations, where you want to deploy capital, what you prioritize in your footprint? And was there anything unusual in terms of the gas price realizations in the quarter, or are you just capturing the benchmark well?
spk07: Yeah, great question. Great question, and I'll probably share with you a little bit of some of the results we've seen from some of the wells. You'll recall that we actually started down a path in May of 2020 saying that we see that the natural gas fundamentals are going to be strengthening, and we probably ought to be shifting our drilling activity to reflect that. We did so, and it actually, of course, ran up a lot more than I think all of us anticipated But we're benefiting from some of that delivery decision at that point in time to move into that more gassy area. We're seeing great performance from the Anadarko wells, probably 19 of the 20 top wells we have in the county on BOE basis are in the Anadarko. Going forward, I think if you look at the numbers and probably calculate that from the exit rate that we described on the oil, We're going to be shifting a little bit more of that percentage to an oilier portfolio this year, but still have a lot of running room on the gas side.
spk06: Neil, you asked about whether there was anything unusual in the differential. Obviously, NGLs are benefiting significantly. Being a two-stream reporting company, our gas differential is inclusive of the NGL uplift. That is obviously significant and pronounced benefit. That's a reflection of what we're continuing to see in the market. So I think we expect to continue seeing strong uplifts there and the differentials. And as a result, we uplifted our gas differential guidance last week. We did oil as well because in basin pricing strong. So we're continuing to benefit.
spk07: Yeah, one of the things you see that manifests itself with our assets is the geographic diversity. And so as we talked about earlier, As pipelines start getting constrained in one area or services, we've got an opportunity to go somewhere else. We can move from basin to basin depending on what we think the optionality on their commodity is.
spk05: Our next question today will come from Janine Way of Barclays. Please go ahead. Hi.
spk01: Good morning, everyone. Thanks for taking our questions.
spk06: Thank you.
spk01: Our first question is maybe hitting back on the debt. You said that you plan to take out the 2023s and the 2024s by the end of this year. That totals about, call it, $1.6 billion. How aggressively are you thinking about the next tranche of debt that's due, which is the 2026 note? And then our follow-up, it's on cash returns and it's kind of related. So we know that you're committed to returning cash to shareholders. And just to be clear, does that over 40% of cash flow, does that payout level extend to 2023 and beyond? And I guess depending on your answer to our first question, does that percent of cash flow, does that just include dividends and buybacks going forward? Thank you.
spk06: So you got a lot in there. If I miss any, fire back at us, please. Yes, we are very focused on the 23s and 24s. We will continue to be on that. Obviously, we're generating a significant amount of free cash flow that enables that this year. So as we work through those, you referenced the 26 specifically. The 26s are a unique structure. They're a five-year non-call-to, which isn't a common piece of paper. But when we did issue those bonds back in November, we did a good job of walking through the why with that with potential investors. Why we did that is because it gave us near-term instruments that we could pay off. So they're not in the call window yet, but as we move forward, that would likely be one of the next pieces of paper that we would look to reduce. But I can't tell you that'll be this year. This year we'll likely build cash balances after we factor through those other two instruments and look towards a net debt type consideration. Great deal of optionality. We're really pleased with the progress we're making. And as we've talked about for a long time, debt reduction is very important to us. And just looking at the first quarter, on an annualized basis, we're nicely below one. But where we want to be is below one in a 55-275 type commodity environment. That gives a lot of insulation against price volatility. So I will continue aggressively pursuing debt reduction.
spk01: Great. And then on the 40% of cash flow extending officially beyond 2023 or 2022?
spk07: Yeah, the 40%, you're addressing the 40% commitment to return to shareholders. And, you know, you'll see that as a strong commitment that will continue on. Of course, it's price dependent, too. But, yeah, I think as you expect to see 23 and 24, when we get the guidance out in 23, you'll see us continuing to subscribe to a strong return to shareholders and all the vehicles we have a choice to use, dividends, shareable purchase, and also paying down the debt.
spk06: Yeah, we do consider debt reduction to be a component of that. We do believe it's a return to shareholders. Not all investors necessarily look at it that way. We do because we think a strong, prudent balance sheet is a benefit to shareholders. And I'll point out that our reinvestment rate, where it's at today, obviously is enabling a lot of that. But even in lower commodity price environments, we kept a reinvestment rate in line with that 40% return to shareholders.
spk01: Perfect. Thank you.
spk06: Thank you.
spk05: Our next question will come from Doug Leggett of Bank of America. Please go ahead.
spk12: Thanks. I appreciate your patience this morning, everyone, because as you know, there's multiple calls going on. So thanks for getting me on the queue. So, John, or Rory, Rory's going to beat me up for this one. I'm going to ask you to do our job for a second. You're just generating an enormous amount of cash. And even with the maturities you've talked about, what do we do with that? How do we How do we think about does Continental build cash to, given your comments, John, to a net debt zero type of position or even net cash position? So I wonder if you could address that first. And secondly, your timing on M&A has been fortuitous, strategic. It's certainly been terrific as it relates to what you've paid. There is a speculation of a very large package from a major oil company right in your backyard. I'm curious. If you could comment to whether or not that's something that Continental is aware of, might consider, and might build cash to accommodate.
spk07: Thanks, Doug. I might address the last part first, and you'll not be surprised by the answer. pretty much stay plugged in as best we can with the things going on and obviously don't talk about anything that we might be considering or may not be considering. To address the first one, and John will do a more articulate job than I will, but if you look at the cash that we're generating, yes, it's really strong, really robust. There's $6.5 billion of debt that we had coming into the year. We've got $400 million of dividend. and on the pace of repurchase, that's another $400 million of repurchase during the year, that kind of pace opportunity. So there's a lot of opportunity for return to shareholder with the cash that we're generating. John, I don't know if you've got anything to build on that or not.
spk06: I'm still focused on Roy's going to beat you up, but I don't think that's the case, so I'm not too worried there. We've got a lot of flexibility, Doug. We're very well positioned. Putting off 4.3 to 4.7 of free cash flow this year, one year after putting off well in excess of $1 billion in the first quarter relative to that $6.5 billion of debt. I mean, you can do the math. Clearly, we could execute our share buyback program, the rest of that, the remaining $960 million, pay off all of our debt. if we chose to. I'm not saying that's the optimal capital structure, but we've got a great deal of flexibility. So debt reduction is going to continue to be a part of that. This was the fifth quarter in the year. We've raised not only our stated dividend, but the yield on that. So we continue to have a lot of benefit and opportunity to do that. We do not have a variable dividend in place. I'm not sure that's the most appropriate way to do it. To be honest, we prefer a strong fixed dividend, but we've got some capacity and ability to be considerate across what we do there. We'll continue to look at what we're doing operationally with the company and where we're at. We're going to be appropriate and balanced in everything that we do.
spk07: Doug, I don't know whether you were on the call earlier when we had this conversation, but we talked about Neil Dingman put out a comment that I thought was very appropriately worded that we continental are maturely undervalued, which suggests that the incremental dollar, that's the best application of it, is to use it for the stock repurchase program that we have.
spk12: I don't want to elaborate, and I appreciate the answer, but I guess to be more specific about my question, we all know you could buy back the remaining free float, but clearly that's you know, a bit of an unrealistic scenario. So we're just trying to figure out, you know, what do we do with the cash? And if it's just in your balance sheet, John, I get your point about, you know, you could take that down or separate the net debt zero proposition, but it just seems a nice problem to have. I'm just trying to figure out how do we actually think about it from a practical sense.
spk07: Yeah, thanks, Doug. And I think you're talking about a 2023 type of discussion. And as we've talked about and we talked about in the script and John talked about it earlier, We really focus on mid-cycle and 55-275 type number and what type of cash generation we can generate at that level. We're still living in a pretty uncertain world if you look at what's going on with the COVID, with supply, with the Russian invasion. So you can argue a lot of volatility is going to be out there. And we think it's prudent for us to address the balance sheet. And we're happy to do that with cash on a net debt basis. Appreciate it.
spk12: That's a very clear answer I was looking for. Thank you. You bet.
spk05: Our next question today will come from Oliver Wong of Tudor Pickern and Holt. Please go ahead.
spk03: Good morning, everyone, and thanks for taking my question. Just had one quick one that I wanted to touch on from the service side of things really briefly with how material costs, labor, and inflation have trended higher, which we are all aware of. Just wanted to get a better sense for what Continental has in place from a contractual perspective and over what duration to kind of help mitigate any near-term moves towards spot rates on rigs and crews that we're seeing today as we kind of move into the back half of 22 and 2023.
spk10: Hey, Oliver. It's Doug. We have a number of services that are contracted for short periods of time. The bulk of our service providers are not under long-term contracts. It gives us – it gives us a lot of flexibility in how we execute our program. To your point, we do see continued pressure and potentially we'll see further pressure throughout the year. An example of that is for OCT tubulars, OCTG tubulars, just in the month of March alone, there was a roughly 6.5% to 7% increase in the pricing there. And we're seeing the continued increase in fuel costs as well as labor, and we'll be doing our best to offset and mitigate as best as possible. Pricing strategies for us, we've got a robust supply chain group that gives us a lot of opportunity with the number of providers and the consistency of our operations over the past several years to make sure that we get the best prices in a challenging inflationary environment. But I guess the way I would look at it kind of in summary to answer your question is that we will take advantage of any pricing structure, longer-term, shorter-term agreements that maximize the cash flow of the company. And at this point in time, there are some services that we've done that with. The bulk we have not. We'll continue to evaluate as we proceed through the next several quarters.
spk03: Awesome. Thanks for the call.
spk05: Our next question today will come from Leo Mariani of KeyBank. Please go ahead.
spk02: Hey, guys. I wanted to follow up a little bit on the Summit Carbon Capture Project. I know you all had kind of announced in conjunction with Summit a $250 million equity investment. Sounds like that's going to be paid over the next two years. I just wanted to confirm that that $250 million will give you the 25%, or there may be some other future equity calls that could come along with this project. And then additionally, does Continental view themselves as more of a passive financial player in this role, or do you think there's an active operational role here for Continental as well?
spk06: Okay, so you can see this out on the summit website, but it's a $4 to $4.5 billion project. Initial plans are to raise roughly $1 billion of equity and then use back leverage. they may or may not choose to utilize some incremental equity in there at some point at later stages, likely at a higher price of equity because it will be a more consummated project as it moves forward. So initially we will own roughly 24%, 25% of the outstanding equity, about 25%. We'll have two of eight board seats as it moves forward. You know, I don't know that there's any need to grow – the board size or anything of that nature if they do choose to raise equity as we go forward. We are a very active part of the board. We're not active in the management or the actual physical execution other than in our role as a significant shareholder and as an active board member, so there's obviously a lot of dialogue that goes on. We do have abilities that may benefit that venture, obviously. We may do some operational aspects at some point in the future, but that hasn't been determined as of yet. So it's a great project. It's, you know, as we've indicated, it's the largest announced carbon sequestration project in the world. We believe carbon capture and sequestration is an integral part of addressing climate change as you go forward, and we're very pleased to be a part of it.
spk02: Okay, thanks. And then also, y'all clearly mentioned some of the production downtime you're experiencing in the Bakken here in the second quarter. Would y'all be able to quantify that at all? You know, if you could throw out a number and say, hey, maybe it's 8,000 BWE per day or something, anything you could do to help us would be great.
spk10: It's kind of a moving number right now, just as we're ramping back up our production. I think I'd just point you to look at the fact that the efficiency of the operations and the quality of our investments, we did that. We increased our guidance and did that in the midst of that storm. So I think that's the thing I'd ask you to look at rather than focus on what we lost at a particular point in time in the last couple weeks. Think about the fact that this company is robust and powerful in its ability to continue to mobilize resources and the full-year guidance is unchanged. Or it was actually increased but unchanged from what we put out last week.
spk06: You know, our four-year guidance has also benefited from our incremental Powder River acquisition that closed right at the end of the first quarter. So there's a nice level of PDP volumes that come with that also. So we're in good shape on our guidance. Okay. Thanks, guys.
spk05: Our next question today will come from Paul Chang of Scotiabank. Please go ahead.
spk11: Thank you. Good morning, guys. The first question is that when you're looking at some of that deal, is there a defensive move so that you can manage your carbon intensity and exposure or that you look at it as a window, could be an offensive play that make carbon management as another part of a business center for the company? That's the first question.
spk07: Yeah, thanks, Paul. Let me repeat and make sure that I captured their question. So your comment was the rationale for us investing in Summit vis-à-vis carbon intensity. Is that correct?
spk11: Yeah, I mean, whether it really is that so that you can manage your own carbon intensity or you test your water and potentially you look at it as a window so that you can build it into a business as a proper center for you in the future.
spk07: Yeah, I'll build on John's comments about, you know, as we looked at what we have as far as our carbon intensity, and we put this number out that, you know, we in 2020 had about 2.3 million tons of CO2 emitted in the air. And we look every single day at what we can do to address that, you know, reduction in methane, reduction in greenhouse gas, you know, through our own activities. And one of the things that we looked to, and this is what John Hart was describing, is what is the most capital-efficient way to take carbon dioxide out of the atmosphere? And our conversation that we've had around the Summit Project, and we made this statement when we announced it in North Dakota, is that We think that the world should look at the most capital-efficient way to manage all type of emissions, and all forms of energy have some type of emission byproduct. It may be liquid, it may be solid. In the case of hydrocarbons, it's usually gas and greenhouse gas. And so our approach was, what is the most capital-efficient way to take carbon dioxide out of the atmosphere? And ethanol plants are the most capital-efficient ways way to do that, and that's why we looked at, you know, there's just a natural combination of skills. If you look at the really strong summit team from the agricultural side, you know, our skills from the transportation, from the North Dakota, from the subsurface sides, it was actually a very strong match of complementary skills that led us to saying this is the right thing to do. It is a project that we think is going to capture CO2 off the ethanol plants, going to capture CO2 off of other plants along the way that leads to a material reduction in carbon dioxide out of the globe. And that's, that's just part of who we are. Part of our ESG stewardship. That's the right thing to do. And that's why we're doing it.
spk11: But I mean, Bill, I guess my question is that do you view it as a future business profit center or that is really getting the credit so that you can manage your own carbon exposure?
spk07: Yeah, we, We've said that this project is economic at the proposals that are out there. If you look at the 45Q today, 50 going to 85, and the low carbon fuel credits, it's an economically viable project. And that's why we've said that these are the type of projects that we think are, and that's really the capital efficient comment that I was talking about, Paul. You're capital efficient, meaning that you're actually economically viable to make this project happen.
spk05: And ladies and gentlemen, at this time, we will conclude our question and answer session. I'd like to turn the conference back over to Rory Sabino for any closing remarks.
spk00: Great. I wanted to thank everyone for their time today. I know it's a busy day for everyone out in the financial community, and we certainly appreciate the efforts to be part of our call. And please reach out to the IR team with any further questions. Thank you very much.
spk05: The conference has now concluded and we thank you for attending today's presentation and you may now disconnect your lines.
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